State Medicaid Cost-Containment Strategies Before and After COVID-19

October 28, 2024

AUTHOR
Shihyun Noh

 

Introduction

As a public insurance program, Medicaid plays a pivotal role in addressing health inequities among low-income populations who often grapple with poverty, unemployment, substandard housing, and other socioeconomic challenges. Medicaid provides access to healthcare and other related services for low-income populations including low-income children and their parents, pregnant women, people with disabilities, and those who are dually eligible for Medicaid and Medicare programs; while Medicare covers individuals aged 65 years and older, individuals with end-stage renal disease (ESRD), and certain younger individuals with disabilities.1

Medicaid spending has important implications for a state’s budget at all times, as well as for providers and local governments within the state’s boundary. In Fiscal Year [FY] 2021, for example, Medicaid accounted for 17.3 percent of state spending on average in the US, with the federal government funding 70 percent ($513 billion) of the total Medicaid spending.2 In times of economic downturn, state Medicaid enrollment and spending tend to increase, more significantly impacting state budgets.3 Medicaid works as a social security net in such times of hardship, operating countercyclically to a state’s economy. The program provides essential support for health services and other related services to the increased number of individuals in need, as occurred during the COVID-19 pandemic.

Considering COVID-19, the subsequent rise in Medicaid enrollment and spending, and the fiscal challenges faced by states, it is important to examine what Medicaid cost-containment strategies states have designed and implemented both before and after the onset of the public health emergency. Despite the substantial economic strain that health spending places on various government levels and the depletion of financial resources across states, there appears to be a lack of attention devoted to systematically documenting and categorizing Medicaid cost-containment strategies.

This policy brief compares the Medicaid cost-containment strategies employed by states between 2019 and 2022, allowing for an analysis of both before and after the onset of COVID-19. This brief focuses on two groups of states: (1) three states in the US Census Middle Atlantic division, including New York, New Jersey, and Pennsylvania due to their geographic proximity, and (2) five states with the highest Medicaid enrollees such as California, Florida, Illinois, New York, and Texas. By considering both region and the size of Medicaid enrollees, this research can enable state policymakers to consider the similarities and differences among states in the region and other states with high Medicaid enrollees in their efforts to manage Medicaid spending.

Background

The Medicaid program is jointly funded by the federal government and states, and the state share of Medicaid comes from state general funds and other state funds, provider taxes, and local contributions to Medicaid. Prior to COVID-19, Medicaid as a share of state budgets was highest in State Fiscal Year [SFY] 2018 with 29.3 percent of all federal and state funds, 20.3 percent of state general funds, and 16.5 percent of all state funds.4 Moreover, Medicaid is an entitlement program, requiring states to provide all people eligible for Medicaid with program benefits. Since states are also required to maintain a balanced budget without a deficit, increased Medicaid enrollment and spending can at times lead to reductions in funding for other critical areas such as education and transportation when there isn’t increased revenue to offset that spending.5

During the public health emergency, the size of Medicaid enrollment increased by 27.3 percent, from 73.9 million in 2019 to 94.1 million in 2022. Furthermore, Medicaid spending has experienced a significant escalation, increasing by 31.4 percent from $627 billion in 2019 to $824 billion in 2022. Annual growth rates for enrollment and spending in the interim years were: 1.9 percent and 8.9 percent (respectively) in 2020, 14.6 percent and 9.6 percent in 2021, and 9.1 percent and 10.2 percent.6

This surge is attributed to steep job losses in 2020 and the Families First Coronavirus Response Act (FFCRA) of 2020. First, the public health emergency and the subsequent economic downturn dealt a severe blow to the US labor market, resulting in a peak unemployment rate of 13 percent in the second quarter of 2020, leaving over 10 million individuals unemployed (though the US labor market did make notable strides in recovering from the economic downturn in 2021).7 Moreover, the Families First Coronavirus Response Act (FFCRA) led to a 6.2 percentage point increase in the Federal Medical Assistance Percentage (FMAP), augmenting the federal share of Medicaid.

To receive this increased funding from the federal government, states were required to maintain Medicaid eligibility and procedures that were not more restrictive than those before COVID-19. Additionally, states were mandated to continue coverage for current enrollees without disenrolling individuals deemed ineligible and others who were eligible but did not complete the renewal process, impacting the increased Medicaid enrollment during the crisis.8

During the COVID-19 pandemic, state budgets faced a significant burden, despite the increased federal share of Medicaid spending. The surge in Medicaid enrollment during the pandemic, as mentioned above, led to state Medicaid spending reaching its highest proportion of total state spending since the program’s inception, standing at 29.6 percent estimated in State Fiscal Year (SFY) 2023 in all 50 states. Moreover, the state share of Medicaid spending was projected to have risen by 16.6 percent in SFY 2023, preceded by increases of 9.5 percent in SFY 2022 and 0.2 percent in SFY 2021.9 The Consolidated Appropriations Act (CAA) implemented cuts to the enhanced Federal Medical Assistance Percentage (FMAP) and allowed states to initiate the processes to redetermine eligibility and disenroll people who no longer met eligibility criteria.10

Historically, state efforts to curb the escalation of Medicaid expenditures have centered around traditional measures such as budgetary controls, price regulations, and volume controls related to constraining health services demand and supply, since government health expenditures are linked to both the volume and prices of healthcare services.11, 12

However, as reflected below, states have paid more attention to policy interventions aimed at influencing market structure, conduct, and performance. Such policies include those pertaining to payment reform, reducing administrative costs, care coordination through Medicaid Health Homes,13 and the promotion of health information technology—including the Statewide Health Information Network for New York14 to create an interconnected New York healthcare system. These policies also include tort reform to reduce lawsuits and defensive medicine practices, exemplified by capping damages awarded in lawsuits and specifying statutes of limitations, price transparency through all-payer claims databases, as well as state efforts to negotiate pricing and strategies to enhance price transparency.15

COVID-19 and State Medicaid Cost-Containment Strategies16

Budget Controls17

Medicaid Global Budget Cap

A Medicaid global budget cap strategy sets up broad overarching caps on Medicaid spending or ones that are more sector-specific.18 For instance, states may establish a 2 percent cap on overall Medicaid spending and/or a 4 percent cap on Medicaid drug expenditures within the Medicaid global budget cap. According to California’s Department of Health Care Access and Information, key elements for the effective implementation of budget controls like this involve (1) benchmark performance setting and reporting, (2) cost driver analysis, and (3) enforcement.19 Benchmark performance setting and reporting enable states to establish healthcare cost growth targets and monitor their achievement. Through cost driver analysis and enforcement, states can identify and track the primary factors contributing to cost growth and guide healthcare entities toward compliance with these benchmarks.

As outlined in Table 1, California and New Jersey enacted legislation to implement a Medicaid global budget cap to control the growth of Medicaid spending during the COVID-19 public health emergency. However, as of April 2024, only New Jersey has operated its budget cap. New York, on the other hand, has continued to operate a Medicaid global cap since 2011, but with a change to its benchmark.

These three states—California, New Jersey, and New York—exhibit variations in both benchmark setting and enforcement mechanisms. With respect to benchmark setting, both professionals and stakeholders play a role in developing a Medicaid budget cap methodology and setting a benchmark or cost target in California20 and New Jersey.21 In contrast, New York’s current benchmark, put in place in 2022, calculates the five-year rolling average of annual healthcare spending projections by the Centers for Medicare and Medicaid Services (CMS). Prior to that, New York based its cap on the 10-year rolling average of medical inflation.22

Table 1. Medicaid Budget Controls
Medicaid Global Budget Cap—Key Elements Present Medicaid Accountable Care Organizations (ACOs)
State Enacted/In Operation Benchmark Performance & Reporting Cost Driver Analysis Enforcement 2019 2022
Californiaa Yes/No Yes Yes Yes No No
Florida No No No No No No
Illinois No No No No No No
Texas No No No No No No
New York Yes/Yes Yes Yes Yesb Yes Yes
New Jerseyc Yes/Yes Yes Yes No Yes No
Pennsylvania No No No No Yes No

SOURCE: Author’s analysis using diverse information such as California Department of Health Care Access and Information (2022), Pew Charitable Trusts (2018), State of New Jersey (2022), and KFF (2023b).
a Medicaid global budget cap has been enacted during COVID-19, but this budget control has not yet been in operation.
b Only for Medicaid drug cap. New York State Department of Health negotiates with pharmaceutical companies with Medicaid prescription drug spending cap exceeded.
c New Jersey governor adopted Medicaid global budget cap via executive order in 2021, which has been in operation since 2023.

While their benchmarks may be set differently, all the three states have cost driver analysis in place. However, each state has taken a different approach to enforcing stakeholder compliance with its cost target: New Jersey does not currently have enforcement plans and is relying solely on public reporting;23 California utilizes a combination of technical assistance to healthcare entities not in compliance with its targets, performance improvement plans, and financial penalties; New York has chosen to focus its enforcement efforts primarily on the Medicaid drug cap. When the Medicaid drug cap is exceeded, the New York State Department of Health (DOH) will identify specific drugs contributing to the excess spending and negotiate supplemental rebates with the manufacturers through cost driver analysis. If negotiations fail, DOH will refer these drugs to the Drug Utilization Review Board (DURB) to set target rebate amounts. DOH will then negotiate the required target supplemental rebates. If no satisfactory agreement is reached, the manufacturer must report the actual cost of the drug. For manufacturers not agreeing to the target supplemental rebates,24 DOH can impose restrictions on drug utilization.25

An Alternative Payment Model: Medicaid Accountable Care Organizations (ACOs)

A Medicaid Accountable Care Organization (ACO) is an alternative payment model to incentivize providers for quality and cost-efficient care in which a network of healthcare providers is jointly responsible for delivering and improving health services for a specified group of Medicaid enrollees. Participation in a Medicaid ACO is voluntary, as it is formed by providers seeking government incentives, and the organization can be dissolved at their discretion. An ACO receives a global budget, an overall cap on healthcare spending for a defined patient population over a defined period, based on criteria such as prior spending levels and annual updates for inflation and population covered.26

When an ACO achieves cost savings below the global budget while meeting established quality standards, the ACO is allowed to share the savings among health providers within the ACO, incentivizing them to save costs and improve quality of care. These savings represent the difference between the global budget and actual spending.27 According to a 2019 systematic review, ACOs have contributed to a decrease in emergency department visits, enhanced preventive care, and improved the management of chronic diseases.28

During the COVID-19 pandemic, the number of states reporting active Medicaid ACOs declined. For example, in 2019, three of the states considered here had active ACOs—New Jersey, New York, and Pennsylvania. But in 2022, only New York reported having Medicaid ACOs in place. This shift is also reflected across all 50 US states, with only nine states reporting active Medicaid ACOs in 2022, down from fourteen states in 2019.29

The decline in the number of states with Medicaid ACOs may be attributed to challenges in effectively delivering coordinated care and integrating essential services such as social services and long-term care services for cost-saving and quality services due to public health restrictions and challenges during the public health emergency.30 These challenges may have made it difficult for ACOs to keep costs below predetermined benchmarks while meeting established quality measures to qualify for shared savings.

Price Controls31

Medicaid Provider Rate Restrictions

Provider rate restrictions, referring to rate cuts or freezes for providers, are expected to curtail Medicaid costs by reducing the expenses associated with Medicaid health service provisions. These restrictions target various health services, including inpatient hospitals, outpatient hospitals, physicians, dentists, nursing facility services, and home and community-based services (HCBS). Given the limited prevalence of provider rate restrictions for outpatient hospitals, physicians, dentists, and HCBS services across states, this research is focused on provider rate restrictions for inpatient hospital and nursing facility services.32

Table 2. Provider Rate Restrictions
Inpatient Hospital Nursing Facility
2019 2020 2021 2022 2019 2020 2021 2022
# of US states with provider rate restrictions 24 14 19 17 10 6 8 4
California N N Y N N N N N
Florida Y N N N N Y N N
Illinois N NR Y N N NR N N
Texas Y N Y Y Y N N Y
New York N NR N N N NR Y N
New Jersey N N N N N N N N
Pennsylvania Y Y Y Y N N Y Y
NOTE: Y = Yes | N = No | NR = Not Reported

SOURCE: Author’s analysis using data from the Kaiser Family Foundation.

Provider rate restrictions as a healthcare cost-containment strategy gained traction among states following the Great Recession (December 2007—June 2009). While 20 states implemented any provider rate restrictions in 2007, that escalated to 39 states in 2011. However, the number of states with such restrictions then dwindled to 26 states in 2019. As indicated in Table 2, the onset of the COVID-19 pandemic was associated with the further decline of states with provider rate restrictions, with 17 states imposing such restrictions in 2020. However, 21 states had restrictions in 2021. Among the seven states of interest in this research, in 2020, just one state had rate restrictions for inpatient hospitals, and one state had them for nursing facilities. While in 2021, three of the seven states had restrictions for inpatient hospitals, and two had them for nursing facility services.33 Thus, the onset of COVID-19 led to even fewer states with provider rate restrictions. However, an increase in the number of states with the restrictions was observed in 2021.

It is noteworthy that while the strategy of provider rate restrictions can directly reduce the cost of Medicaid health services, it may also have adverse effects on health providers’ willingness to accept Medicaid patients. This, in turn, can hinder Medicaid enrollees’ access to care, given providers’ reluctance to accept Medicaid patients due to low reimbursement rates. Some researchers34 have observed that where Medicaid payments to physicians are higher compared to Medicare payments (above the median fee ratio), doctors are more likely to accept new Medicaid patients. In contrast, in states where Medicaid payments are lower compared to Medicare payments (below the median fee ratio), doctors are less likely to accept new Medicaid patients. In line with this, other scholars35 have reported that, nationally, only 74 percent of physicians accepted new patients with Medicaid, compared to over 95 percent accepting new patients with private insurance during the period of 2014–17. Thus, states may not want to employ provider rate restrictions at the expense of the number of providers accepting Medicaid, and therein restricting Medicaid enrollees’ access to care.

Volume Controls36

Managed Care Organizations (MCOs)

Medicaid managed care is a healthcare delivery system that allows states to pay a capitation rate, typically on a per member per month basis for a defined set of services and provider networks. Medicaid managed care payments enable states to manage Medicaid budgets more predictably. In contrast, under a fee-for-service payment model, states directly reimburse providers for each service rendered. MCOs are a managed care model that aims to mitigate the impacts of changes in service volumes by placing financial risk on Managed Care Organizations (MCOs), as they are responsible if their spending on services and administration exceeds preset payments per enrollee from the state. MCOs can also retain any savings achieved through cost-effective management within this model.37

Medicaid managed care incentivizes MCOs to focus on cost containment by delivering preventive, appropriate, and coordinated care for enrollees through a limited number of providers within the network. Three main types of Medicaid managed care delivery systems include comprehensive-risk managed care, primary care case management, and limited-benefit plans. Comprehensive-risk managed care plans, covering over 74 percent of total Medicaid enrollees, provide all or most Medicaid-covered services. While the other two systems concentrate on primary care or specific benefits such as mental health, oral health, and disease management.38

Despite the economic incentives for healthcare cost-containment by MCOs, consumers and providers highlight certain drawbacks of this delivery system. These include the limited size and scope of the network, low payment rates for providers, and subsequent provider attrition.39 potentially resulting in negative health outcomes.40 To enhance the quality of care and performance of MCOs, states have implemented various Medicaid managed care quality initiatives, such as performance bonuses, capitation withholds, quality performance measures, and the provision of comparable data about MCOs.41

In addition to provider networks and low payment rates, it is crucial to consider that states have the authority to determine what benefits are to be included in their managed care plans. This decision encompasses various services such as behavioral health, pharmacy drugs, non-emergency medical transportation, community support, transplants, and others. These carved-in or -out services can affect the health outcomes of individuals enrolled in managed care plans.

Table 3. Medicaid Enrollees in Comprehensive Managed Care
2019 2020 2021 Change 2019–21
Total Medicaid Enrollees Enrollees in Comprehensive Managed Care Percent of Medicaid Enrollment (%) Total Medicaid Enrollees Enrollees in Comprehensive Managed Care Percent of Medicaid Enrollment (%) Total Medicaid Enrollees Enrollees in Comprehensive Managed Care Percent of Medicaid Enrollment (%) Total Medicaid Enrollees (%) Enrollees in Comprehensive Managed Care (%)
United States 78,737,936 55,162,437 70.1 80,814,842 58,521,930 72.4 90,519,895 67,561,426 74.6 15.0 22.5
California 12,780,305 10,394,126 81.3 13,016,208 10,650,549 81.8 14,150,266 11,663,813 82.4 10.7 12.2
Florida 3,813,067 2,969,638 77.9 4,210,849 3,281,271 77.9 4,871,362 3,812,042 78.3 27.8 28.4
Illinois 3,001,288 2,122,611 70.7 3,143,105 2,337,395 74.4 3,467,588 2,616,074 75.4 15.5 23.2
Texas 3,878,840 3,578,633 92.3 4,222,317 4,007,391 94.9 4,928,655 4,024,322 81.7 27.1 12.5
New York 6,140,117 4,466,540 72.7 6,458,770 4,765,561 73.8 7,145,884 5,377,127 75.2 16.4 20.4
New Jersey 1,612,863 1,499,339 93.0 1,683,987 1,588,936 94.4 1,892,091 1,821,033 96.2 17.3 21.5
Pennsylvania 2,827,289 2,442,251 86.4 2,984,420 2,759,465 92.5 3,292,313 3,090,783 93.9 16.4 26.6

SOURCE: Author’s analysis using CMS’ Medicaid Managed Care Enrollment Reports from https://www.medicaid.gov/medicaid/managed-care/enrollment-report/index.html.

As depicted in Table 3, COVID-19 affected the growth of Medicaid enrollment with states witnessing a notable increase in enrollees covered under the comprehensive managed care setting. This figure rose from 55 million enrollees, constituting 70.1 percent of the total Medicaid enrollees in 2019, to 67 million enrollees, representing 74.6 percent of the total Medicaid enrollees in 2021. Among the top five states with the highest Medicaid enrollees, California, Florida, Illinois, and New York experienced an increase in Medicaid enrollees under the comprehensive managed care setting. Texas also witnessed a reduction in program beneficiaries opting for this setting. Notably, the three Mid-Atlantic division states, New Jersey, New York, and Pennsylvania, actively enrolled a higher percentage of their beneficiaries in comprehensive managed care, surpassing the US average of 74.6 percent in 2021. New Jersey and Pennsylvania had over 90 percent enrollment in the comprehensive managed care setting, while New York had 75.2 percent.

Table 4. Managed Care Spending Per Full-Year Equivalent Enrollee (FYE) by Eligibility Group, FY 2019-2021
2019 2020 2021 Change 2019–21
All Managed Care Enrollees $4,211 $4,731 $4,932 17.1%
Child $2,184 $2,333 $2,465 12.9%
New Adult Groupa $4,760 $5,511 $5,771 21.2%
Other Adultb $3,062 $3,513 $3,739 22.1%
Disabled $8,459 $9,538 $10,299 21.8%
Aged $6,904 $7,714 $7,793 12.9%

SOURCE: Author’s analysis using MACStats: Medicaid and CHIP Data Book published between 2021-2023.
a Includes both newly eligible and not newly eligible adults who are eligible under Section 1902(a)(10)(A)(i)(VIII) of the Act. Newly eligible adults include those who are not eligible for Medicaid under the rules that a state had in place on December 1, 2009. Not newly eligible adults include those who would have previously been eligible for Medicaid under the rules that a state had in place on December 1, 2009; this includes states that had already expanded to adults with incomes greater than 100 percent of the federal poverty level as of March 23, 2010, and receive the expansion state transitional matching rate.
b Includes adults under age 65 who qualify through a pathway other than disability or Section 1902(a)(10)(A)(i)(VIII) of the Act (e.g., parents and caretakers, pregnancy).

However, it is important to highlight that state initiatives aimed at containing Medicaid spending through increased enrollment in managed care did not seem to realize the promise of cost containment. As illustrated in Table 4, the growth of spending for all managed care enrollees was 17.1 percent between 2019 and 2021, exceeding the 16.1 percent growth of total Medicaid spending.42 Given that managed care spending for the new adult group, disabled individuals, and the aged (65 years or older) surpassed the average spending for all managed care enrollees, researchers, and policymakers may want to further consider how to continue delivering quality services to these groups while simultaneously containing costs.

State Strategies to Influence Market43

Price Transparency Strategy: All-Payer Claims Databases (APCDs)

Price transparency in healthcare functions as a cost-containment strategy, aimed at tracking and analyzing health costs and service quality data by mandating insurers or hospitals to disclose the data. It has long been argued that a lack of information on claims data has exacerbated information asymmetry among health policymakers, consumers, insurers, and providers. This information asymmetry prevents policymakers and consumers from accessing comparable data on health costs and quality of care.44 State All-Payer Claims Databases (APCDs) enacted by legislation mandate payers, including Medicaid, Medicare, and private insurers, to submit claims data, which allows state health policymakers to obtain and analyze comparable price and quality data, serving as valuable tools for quality measurement and improvement. In addition, APCDs can aid state policymakers in understanding patients’ financial burdens and prompting legislative actions such as surprise billing legislation and proposals to reduce insulin prices.45

As of 2024, 18 states have established and operated all-payer claims databases (APCDs) by legislation, requiring insurers, including Medicaid, Medicare, and commercial payers, to submit and disclose claims data. As indicated in Table 5, five states have enacted APCD legislation and are in the process of establishing their databases, and seven states have had voluntary submission of claims data from payers.46 In line with these state initiatives, the federal government has also required hospitals to provide “clear, accessible pricing information online” since 2021.47

Table 5. State Operation of All Payer Claims Databases (APCDs)
2019 – 2022
United States 18 states with mandatory and operating APCDs; five states with APCD legislation enacted and in the process of establishment; seven states with existing voluntary effort
Californiaa,b Existing voluntary effort and mandatory effort in implementation
Floridac Yes
Illinois No
Texasd Existing voluntary effort and mandatory effort in implementation
New Yorke Yes
New Jerseyf No
Pennsylvania No

SOURCE: Author’s analysis using data from APCD Council (https://www.apcdcouncil.org/state-efforts/).
a California has both voluntary and mandatory efforts to collect claims data. The California Healthcare Performance Information System Collaborative has collected data through voluntary data submissions from commercial payers, third-party administrators/self-funded, and Medicare. California has begun its mandatory data collection since 2023. Please see the following: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB1810
b California has collected data such as medical claims, eligibility, pharmacy, and others from commercial payers, third-party administrators/self-funded, and Medicare.
c Florida operates an online comparison tool to help consumers use and compare APCD data: https://price.healthfinder.fl.gov/#!
d Texas has both voluntary and mandatory efforts to collect claims data. The University of Texas Center for Healthcare Data has collected medical and pharmacy claims data from commercial, Medicaid, and Medicare. The statute to create a statewide, mandatory APCD was enacted in 2021
e New York APCD has currently collected data from Medicaid and Medicare, not from commercial payers and employer-sponsored plans.
f New Jersey has enacted legislation to enhance consumer protection, transparency, and cost containment in 2018, not directly related to the creation of an APCD.

Among the five states with the highest Medicaid enrollees, Florida (since 2016), New York (since 2014), and California (since 2023) have operated APCDs and mandated a variety of payers to submit claims data to their databases. On the other hand, Texas, despite enacting legislation to create its APCD in 2021, is still in the establishment phase. Among the three Mid-Atlantic States, New York is the only state operating an APCD, while New Jersey enacted legislation related to healthcare price transparency and cost containment during the 2018–19 legislative session, showing its strong interest.48

APCDs can further allow state policymakers to develop online comparison tools for consumers to easily access comparable prices for their diseases and treatments of their interests, as exemplified by New Hampshire’s NH HealthCost. Among the seven states in this analysis, only Florida has developed and operated an online tool to help consumers compare data specific to their county. Moreover, APCDs have the potential to aid in the investigations of Medicaid fraud and abuse by facilitating related data analyses. Medicaid Fraud Control Units (MFCUs) can use APCD data—which includes individuals’ diagnoses, services, prescriptions, service providers, payment details, population characteristics, insurance plans, and provider information49 to help effectively identify Medicaid fraud and abuse cases.

Despite the advantages mentioned above, there are a couple of potential challenges for state policymakers to consider. First, state APCDs may lack complete claims data due to variations in the submission requirements of different payers. Notably, employer-sponsored plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA) and are not mandated to submit claims data to APCDs under state APCD legislation.50 Thus, collaborating with plans that are subject to ERISA is crucial for obtaining more complete data for APCDs. Notably, while New York’s APCD collects data from Medicaid and Medicare, it lacks data from commercial payers and employer-sponsored entities. In contrast, California’s APCD collects a broader range of data though it does so voluntarily—including from commercial payers, third-party administrators/self-funded entities, and Medicare. Second, policymakers should be aware of data limitations within existing APCD claims data including varying data quality among payers, limited clinical detail, and challenges in data collection and maintenance. Varying data quality among payers can arise from inconsistencies in data fields and the accuracy of claims data, making it difficult to create a uniform dataset. APCDs often suffer from limited clinical detail, which can impact their effectiveness. Additionally, it is challenging to standardize data across multiple payers, integrate data from various payers, and maintain the database as completely up-to-date and accurate across them.

Medicaid Fraud and Abuse: The Role of Medicaid Fraud Control Units (MFCUs)

Medicaid fraud and abuse are unnecessary costs to state Medicaid programs, which can be committed by Medicaid enrollees and providers. Examples include sharing a Medicaid ID card, selling items provided by Medicaid, improper billing for medical procedures, and reimbursement claims for fictitious services or patients.51 Medicaid fraud and abuse are types of improper payments, but specifically involve the intentional act of providing false information, while improper payments more broadly refer to any payments made in an incorrect amount often due to unintentional issues such as insufficient documentation, eligibility issues, or administrative mistakes.52 While CMS does not report how much money has been lost due to Medicaid fraud and abuse, it does report improper payments.53, 54

State Medicaid fraud and abuse investigations reduce and recover lost funds resulting from “the intentional providing of false information to get Medicaid to pay for medical care services”55 and the resulting direct or indirect costs to Medicaid. These investigations are crucial for protecting essential resources to provide access to healthcare services and other related services to low-income populations. Medicaid Fraud Control Units (MFCUs) are the primary state entities involved in the investigation and prosecution of such cases. MFCUs are jointly funded by federal MFCU grants and state funds.

The size of Medicaid improper payments was $57.4 billion in FY 201956 and $80.6 billion in FY 2022,57 indicating over 40 percent surge during the period. However, the amount in FY 2022 was smaller than the $98.7 billion in FY 2021,58 indicating the impact of the severity of COVID-19 on the size of Medicaid improper payments as FY 2021 saw significant surges in cases and deaths.59 Notably, nearly 87 percent of the 2022 Medicaid improper payments were due to insufficient documentation.

However, although the total amount of federal MFCU grants increased from $302 million in FY 2019 to $343 million in FY 2022, the total number of investigations declined from 19,153 cases with $1.9 billion recoveries in FY 2019 to 17,708 cases with $1.05 billion recoveries in FY 2022.60 This decrease in Medicaid fraud and abuse investigations and the reduction in recovery amounts are, however, concerning, particularly given the surges in Medicaid enrollment (27.3 percent increase) and spending (31.4 percent increase) observed during the public health emergency. The relative stability in the number of MFCU staff, ranging from 2,051 in FY 2019 to 2,081 in FY 2022 raises questions about the adequacy of resources allocated to oversee the growing number of enrollees (20.2 million increase) and heightened spending ($179 billion increase) between 2019 and 2022. With only 30 additional MFCU staff members managing this substantial rise in enrollment and spending, a more robust and adaptive approach to addressing Medicaid fraud and abuse may need to be considered.

Table 6. Medicaid Fraud and Abuse Investigations, 2019-2022
Medicaid Fraud and Abuse Investigations (in 100,000 Medicaid enrollees) # of Medicaid Fraud Control Unit Staff (in 100,000 Medicaid enrollees)
2019 2020 2021 2022 2019 2020 2021 2022
California 14.5 14.6 10.8 9.4 1.6 1.5 1.4 1.6
Florida 21.9 20.6 17.0 13.7 4.0 3.3 3.1 2.9
Illinois 17.7 18.9 16.3 10.0 1.7 1.5 1.6 0.9
Texas 34.3 34.0 29.5 24.9 4.0 3.6 3.0 2.6
New York 11.8 13.1 11.6 9.2 4.8 4.2 3.6 3.6
New Jersey 18.9 21.8 12.1 7.2 1.9 1.7 1.6 1.4
Pennsylvania 18.3 19.3 17.3 12.6 2.4 2.4 2.2 1.9

SOURCE: Author’s analysis using data from the US Department of Health and Human Services Medicaid Fraud Control Unit (https://oig.hhs.gov/fraud/medicaid-fraud-control-units-mfcu/).

The public health emergency significantly impacted the rate of state investigations into Medicaid fraud and abuse cases, potentially reflecting the intersection of increased enrollment and stable staffing. All MFCUs in the five states with the highest Medicaid enrollees experienced a substantial reduction in the number of total investigations per 100,000 Medicaid enrollees as depicted in Table 6. In line with this trend, the three Mid-Atlantic states experienced a marked decline in the investigations, necessitating state policymakers’ attention to how this decrease impacts the MFCU’s capacity to oversee effective and efficient utilization of state Medicaid spending. The changes observed between 2019–22 range from -22.0 percent in New York, -27.4 percent in Texas, -31.1 percent in Pennsylvania, -35.2 percent in California, -37.4 percent in Florida, -43.5 percent in Illinois, to -61.9 percent in New Jersey.

Despite these significant shifts, the drivers influencing Medicaid fraud and abuse investigations and their impacts remain somewhat unclear. Surprisingly, only a few published studies have explored the role of MFCUs with respect to cost containment.61 As indicated in Table 6, five of the seven states considered in this research have observed a decrease in the ratio of MFCU staff relative to the size of Medicaid enrollees. As mentioned above, this may contribute to the challenges in investigating the growing number of improper spending cases. Further investigations are necessary to examine the factors affecting a state’s capacity to detect and correct Medicaid fraud and abuse cases.

Recommendations

Medicaid is a crucial public insurance program to provide access to healthcare and other related services for low-income populations. It also plays a significant role in state budgets, especially during economic downturns when enrollment and spending increase, as seen during the COVID-19 pandemic. This piece provided an overview of policy options available to state policymakers for containing Medicaid spending. It further examined the measures adopted by states during the pandemic—with a focus on strategies related to budget controls, price controls, volume controls, and market influence between 2019 and 2022. The findings related to the use of different state strategies point towards several suggestions and areas for further consideration by policymakers and researchers with respect to containing the growth of Medicaid spending. These include that:

  1. Policymakers should consider designing and adopting enforcement plans to ensure providers, as well as pharmaceutical companies, comply with state Medicaid budget caps. Under the current enforcement plan for New York, enforcement actions may also need to be extended and could include various measures, as outlined by California, such as technical assistance, performance improvement plans, and financial penalties.
  2. State policymakers may want to consider implementing Medicaid Accountable Care Organizations. They have the potential to improve the quality of care and reduce costs. However, the number of states with active Medicaid ACOs declined during the pandemic, with only New York having active ACOs in 2022 among the seven states considered.
  3. Policymakers might consider how a state’s reliance on provider taxes to finance Medicaid can pose a challenge to implementing Medicaid rate restrictions. In doing so, they should also weigh the extent to which provider rate restrictions can themselves negatively affect health providers’ willingness to accept Medicaid patients.
  4. Further research is needed to understand the relative increase in spending for Medicaid Managed Care Organizations (MCO). States significantly increased the number of Medicaid beneficiaries enrolled in MCOs in 2020 and 2021. However, the growth rate of Medicaid spending for all MCO enrollees surpassed that of total Medicaid spending. MCOs provide contracted health services for enrollees at a capitated rate per person, which should allow state policymakers to more easily predict Medicaid budgets.
  5. States with all-payer claims databases (APCDs), like New York, should consider broadening their data collection to include commercial and employer-sponsored plans. Additionally, there is value in developing an online comparison tool to help consumers conveniently access and compare prices for various treatments and conditions.
  6. Finally, state policymakers might consider the relative allocation of human and financial resources to Medicaid Fraud Control Units (MFCUs) with respect to recent enrollment in order to effectively investigate and prosecute Medicaid fraud and abuse cases. Despite the surge in Medicaid enrollees and spending during 2020–22, the resources allocated to these units have not increased accordingly.

ABOUT THE AUTHOR

Shihyun Noh is an associate professor in the Department of Public Administration at SUNY Brockport.


NOTES

[1] “Medicaid 101,” Medicaid and CHIP Payment and Access Commission [MACPAC], 2023a, https://www.macpac.gov/medicaid-101/.

[2] “Budget Basics: Medicaid,” Peter G. Peterson Foundation, August 21, 2023, https://www.pgpf.org/budget-basics/budget-explainer-medicaid.

[3] Elizabeth Williams and Robin Rudowitz, “The Impact of the COVID-19 Recession on Medicaid Coverage and Spending,” March 1, 2022, https://www.kff.org/medicaid/issue-brief/the-impact-of-the-covid-19-recession-on-medicaid-coverage-and-spending/.

[4] “Exhibit 13. Medicaid as a Share of State Budgets Including and Excluding Federal Funds,” Medicaid and CHIP Payment and Access Commission [MACPAC], 2022b, https://www.macpac.gov/publication/medicaid-as-a-share-of-state-budgets-including-and-excluding-federal-funds/

[5] Shihyun Noh and Ji Hyung Park, “Why Are Some States Reluctant to Implement the ACA Medicaid Expansion? Focusing on State Fiscal Capacity,” Public Performance & Management Review 47, no. 3 (November 3, 2023): 761–83, https://doi.org/10.1080/15309576.2023.2270974.

[6] “Exhibit 10. Medicaid Enrollment and Total Spending Levels and Annual Growth,” Medicaid and CHIP Payment and Access Commission [MACPAC], 2023, https://www.macpac.gov/publication/medicaid-enrollment-and-total-spending-levels-and-annual-growth/.

[7] “US labor market shows improvement in 2021, but the COVID-19 pandemic continues to weigh on the economy,” US Bureau of Labor Statistics, 2022, https://www.bls.gov/opub/mlr/2022/article/us-labor-market-shows-improvement-in-2021-but-the-covid-19-pandemic-continues-to-weigh-on-the-economy.htm.

[8] Rachel Dolan, et al., “Medicaid Maintenance of Eligibility (MOE) Requirements: Issues to Watch,” Kaiser Family Foundation, December 17, 2020, https://www.kff.org/medicaid/issue-brief/medicaid-maintenance-of-eligibility-moe-requirements-issues-to-watch/.

[9] “State Expenditure Report,” National Association of State Budget Officers (NASBO), 2023 and 2022, https://www.nasbo.org/reports-data/state-expenditure-report.

[10] Elizabeth Williams, et al., “Medicaid Enrollment and Spending Growth Amid the Unwinding of the Continuous Enrollment Provision: FY 2023 & 2024,” Kaiser Family Foundation, November 14, 2023, https://www.kff.org/medicaid/issue-brief/medicaid-enrollment-and-spending-growth-amid-the-unwinding-of-the-continuous-enrollment-provision-fy-2023-2024/#.

[11] Niek Stadhouders, et al., “Effective healthcare cost-containment policies: a systematic review,” Health Policy, 123, no. 1 (January 2019): 71–9, https://doi.org/10.1016/j.healthpol.2018.10.015.

[12] Budget controls cover macro-level and sectoral budget controls, while price controls include price limits, fee schedules, reference prices, price negotiations, generic substitution, profit controls, wage controls, and capital controls. Volume controls encompass reducing overtreatment, capacity controls such as Certificate of Needs, access control restricting patients’ physical access to care, labor restrictions restricting the health care labor force, cost sharing such as high-deductible health plans, coinsurance, and copayments, benefit restrictions including prior authorization and drug utilization review, prevention, and patient education.

[13] “Medicaid Health Homes—Comprehensive Care Management,” New York State Department of Health, updated September 2024, https://www.health.ny.gov/health_care/medicaid/program/medicaid_health_homes/.

[14] “SHIN-NY Organization Infrastructure,” New York State Department of Health, updated December 2023, https://www.health.ny.gov/technology/infrastructure/.

[15] Shihyuh Noh, Christian L. Janousek, and Ji Hyung Park, “State strategies to address Medicaid prescription spending: negotiated pricing vs price transparency,” Health Economics, Policy and Law 16, no. 2 (April 30, 2020): 201–15, https://doi.org/10.1017/s1744133120000080.

[16] The focus of this research on Medicaid budget controls lies in Medicaid global budget caps and Medicaid Accountable Care Organizations (ACOs), while the examination of Medicaid price controls includes the analysis of provider taxes and restrictions on provider rates. Within the scope of Medicaid volume controls, this research explores Managed Care Organizations (MCOs), while excluding cost sharing, benefit reduction, and adjustments to eligibility criteria due to data unavailability. State strategies to influence Medicaid pharmacy volumes are, however, excluded because over 40 states have adopted and operated since the 2010s. Finally, this study investigates state strategies to influence the market such as the operation of All-Payer Claims Databases (APCDs) and Medicaid fraud and abuse investigations. The Certificate of Need (CON) and other strategies to affect MCO’s performance are excluded from the analysis respectively due to minimal variation observed both before and after the COVID-19 pandemic and the unavailability of comparable data.

[17] The surge in Medicaid enrollment and spending during COVID-19 prompted states to explore policy interventions for Medicaid budget controls. The states included in this research employed strategies for Medicaid budget controls that include implementing a Medicaid global budget cap and Medicaid accountable care organizations (ACOs).

[18] Stadhouders, et al., “Effective healthcare cost-containment policies: a systematic review.”

[19] “Get the Facts About the Office of Health Care Affordability,” California Department of Health Care Access and Information, October 25, 2022, https://hcai.ca.gov/get-the-facts-about-the-office-of-health-care-affordability/.

[20] Ibid.

[21] “New Jersey Health Care Cost Growth Benchmark Program FAQs,” New Jersey Department of Banking and Insurance, 2024, https://www.nj.gov/dobi/division_insurance/HART/Benchmark_Program_Highlights_and_FAQs.pdf

[22] State Fiscal Year 2022-23 Enacted Budget Analysis (Albany: Office of the New York State Comptroller, May 2022), https://www.osc.ny.gov/reports/state-fiscal-year-2022-23-enacted-budget-analysis.

[23] “Get the Facts About the Office of Health Care Affordability,” California Department of Health Care Access and Information. “New Jersey Health Care Cost Growth Benchmark Program FAQs.” “General Medicaid Drug Cap FAQs,” New York State Department of Health, accessed October 18, 2024, https://www.health.ny.gov/health_care/medicaid/regulations/global_cap/docs/general_faqs.pdf. “New York’s Medicaid Drug Cap: A look at the state’s new effort to manage pharmaceutical spending,” Pew Charitable Trusts, April 2, 2018, https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/new-yorks-medicaid-drug-cap.

[24] Under the ACA, the federal government mandates rebates on Medicaid prescription drugs for both fee-for-service and Medicaid managed care settings. Besides these federal rebates, states can also negotiate supplemental rebates with pharmaceutical companies. See Noh, Janousek, and Park (2021).??

[25] “New York’s Medicaid Drug Cap: A look at the state’s new effort to manage pharmaceutical spending.”

[26] Maximilian Pany, Jeannie Fuglesten Biniek, and Tricia Neuman, “Price Regulation, Global Budgets, and Spending Targets: A Road Map to Reduce Health Care Spending, and Improve Affordability,” Health Costs, Kaiser Family Foundation, May 31, 2022, https://www.kff.org/health-costs/report/price-regulation-global-budgets-and-spending-targets-a-road-map-to-reduce-health-care-spending-and-improve-affordability/.

[27] “States that Reported Accountable Care Organizations In Place,” Kaiser Family Foundation, 2023b, https://www.kff.org/medicaid/state-indicator/states-that-reported-accountable-care-organizations-in-place/?currentTimeframe=0&selectedRows=%7B%22states%22:%7B%22all%22:%7B%7D%7D,%22wrapups%22:%7B%22united-states%22:%7B%7D%7D%7D&sortModel=%7B%22colId%22:%22SFY%202019%22,%22sort%22:%22desc%22%7D

[28] Brystana G. Kaufman, et al., “Impact of Accountable Care Organizations on Utilization, Care, and Outcomes: A Systematic Review,” Medical Care Research and Review 76, no. 3 (June 2019): 255–90, https://doi.org/10.1177/1077558717745916.

[29] “States that Reported Accountable Care Organizations In Place,” Kaiser Family Foundation.

[30] Adam L. Beckman, et al., “Accountable Care Organizations during Covid-19: Routine care for older adults with multiple chronic conditions,” Healthcare 9, 1 (December 14, 2020), https://doi.org/10.1016/j.hjdsi.2020.100511.

[31] In the investigation of state initiatives for Medicaid price controls, this research looked at provider taxes and provider rate restrictions. While a negotiated pricing strategy, aimed at negotiating additional rebates with drug companies, could also play a role in containing Medicaid prescription spending, it is not included here because there is a lack of comparable data for the negotiated pricing both before and after COVID-19.

[32] “States Reporting Provider Rate Restrictions,” Kaiser Family Foundation, 2024, https://www.kff.org/medicaid/state-indicator/states-reporting-provider-rate-restrictions/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D.

[33] Ibid.

[34] Kayla Holgash and Martha Heberlein, “Physician Acceptance of New Medicaid Patients,” presentation, Medicaid and CHIP Payment and Access Commission, January 24, 2019, https://www.macpac.gov/publication/physician-acceptance-of-new-medicaid-patients-new-findings/.

[35] Robert Hest, “Assessing Physician Acceptance of Medicaid Patients Using State Health Compare,” State Health Access Data Assistance Center, August 25, 2022, https://www.shadac.org/news/14-17-physician-Mcaid-SHC.

[36] As indicated before, volume controls can contribute to the containment of the growth of health expenditures by constraining health service demands and supply. The strategies for volume controls include cost sharing, benefit reduction, prevention and education, overtreatment reduction, and provider capacity controls. This research is focused on MCOs, which allow state officials to control for demands and supply.

[37] “Managed care’s effect on outcomes,” Medicaid and CHIP Payment and Access Commission (MACPAC), September 12, 2023, https://www.macpac.gov/subtopic/managed-cares-effect-on-outcomes/.

[38] Ibid.

[39] Holgash and Martha Heberlein, “Physician Acceptance of New Medicaid Patients.” Michael Sparer, “Medicaid managed care: Costs, access, and quality of care,” Policy 1, no. 6 (2012).

[40] Sparer, “Medicaid managed care: Costs, access, and quality of care.” Jungwon Park and Keon-Hyung Lee, “The association between managed care enrollments and potentially preventable hospitalization among adult Medicaid recipients in Florida,” BMC Health Services Research 14, no. 1 (2014): 1–12, https://doi.org/10.1186/1472-6963-14-247.

[41] “Medicaid Managed Care Quality Initiatives,” Kaiser Family Foundation, 2019, https://www.kff.org/medicaid/state-indicator/medicaid-managed-care-quality-initiatives/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D.

[42] “Exhibit 10. Medicaid Enrollment and Total Spending Levels and Annual Growth.”

[43] State strategies influencing the market considers states’ operation of All-Payer Claims Databases (APCDs) and the role of Medicaid Fraud Control Units (MFCUs). An APCD is a database to gather comparable claims data and enhance price transparency and is in operation in 18 states including Florida and New York. A MFCU’s goal is to address Medicaid fraud and abuse with respect to reducing wasteful costs.

[44] Noh, Janousek, and Park, “State strategies to address Medicaid prescription spending: negotiated pricing vs price transparency.” John D. Freedman, Linda Green, and Bruce E. Landon, “All-Payer Claims Databases—Uses and Expanded Prospects After Gobeille,” The New England Journal of Medicine 375, no. 23 (December 8, 2016): 2215–7: https://doi.org/10.1056/nejmp1613276.

[45] Katherine Grace Carman, et al., The History, Promise and Challenges of State All Payer Claims Databases, Document Number: PR-A1396-1, prepared for the US Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (Santa Monica, CA: RAND Health Care, June 2, 2021), https://aspe.hhs.gov/sites/default/files/migrated_legacy_files/200696/apcd-background-report.pdf.

[46] “State Efforts,” APCD Council, 2024, https://www.apcdcouncil.org/state/map.

[47] “Hospital Price Transparency,” Center for Medicare and Medicaid Services (CMS), updated September 10, 2024, https://www.cms.gov/hospital-price-transparency.

[48] “State Efforts,” APCD Council.

[49] Kevin Casey McAvey, “Realizing the Promise of All Payer Claims Databases: A federal & State Action Plan,” Manatt, December 5, 2022, https://www.manatt.com/insights/white-papers/2022/realizing-the-promise-of-all-payer-claims-database.

[50] Freedman, Green, and Landon, “All-Payer Claims Databases—Uses and Expanded Prospects After Gobeille.”

[51] “About Medicaid Fraud, Waste, and Abuse,” New York Office of the Medicaid Inspector General, accessed October 2024, https://omig.ny.gov/medicaid-fraud/about-medicaid-fraud-waste-and-abuse.

[52] “Improper Payments and Fraud: How They Are Related by Different,” GAO-24-106608, US Government Accountability Office, December 7, 2023, https://www.gao.gov/products/gao-24-106608.

[53] 2022 Medicaid & CHIP Supplemental Improper Payment Data (Washington, DC: US Centers for Medicare and Medicaid Services, 2022), https://www.cms.gov/files/document/2022-medicaid-chip-supplemental-improper-payment-data.pdf-0

[54] “2019 Estimated Improper Payment Rates for Centers for Medicare & Medicaid Services (CMS) Programs,” Centers for Medicare & Medicaid Services, November 19, 2019, https://www.cms.gov/newsroom/fact-sheets/2019-estimated-improper-payment-rates-centers-medicare-medicaid-services-cms-programs.

[55] There Are Many Types of Medicaid Fraud (Washington, DC: Centers for Medicare & Medicaid Services, 2023), https://www.cms.gov/medicare-medicaid-coordination/fraud-prevention/medicaid-integrity-education/downloads/infograph-there-are-many-types-medicaid-fraud-%5Bmay-2016%5D.pdf.

[56] “2019 Estimated Improper Payment Rates for Centers for Medicare & Medicaid Services (CMS) Programs.”

[57] “Fiscal Year 2022 Improper Payments Fact Sheet,” Centers for Medicare & Medicaid Services, November 15, 2022, https://www.cms.gov/newsroom/fact-sheets/fiscal-year-2022-improper-payments-fact-sheet.

[58] Medicare and Medicaid: Additional Actions Needed to Enhance Program Integrity and Save Billions, Testimony Before the Subcommittee on Oversight and Investigations, Energy and Commerce Committee, House of Representatives (Washington, DC: Government Accountability Office, April 16, 2024), https://www.gao.gov/assets/gao-24-107487.pdf

[59] Jackie Powder, “COVID-19 in 2022: A Year-End Wrap-Up,” Bloomberg School of Public Health, John Hopkins University, December 15, 2022, https://publichealth.jhu.edu/2022/covid-year-in-review#:~:text=In%202022%2C%20COVID%2D19%20illness,a%20major%20wave%20of%20cases.

[60] “Medicaid Fraud Control Units,” US Department of Health and Human Services Office of Inspector General, 2023, https://www.oig.hhs.gov/fraud/medicaid-fraud-control-units-mfcu/.

[61] Victoria Perez and Julio A. Ramos Pastrana, “Finding fraud: Enforcement, detection, and recoveries after the ACA,” International Journal of Health Economics and Management 23, no. 3 (May 15, 2023): 393–409, https://doi.org/10.1007/s10754-023-09357-w. Victoria Perez and Coady Wing, “Should We Do More to Police Medicaid Fraud? Evidence on the Intended and Unintended Consequences of Expanded Enforcement,” American Journal of Health Economics 5, no. 4 (Fall 2019), 481–508, https://doi.org/10.1162/ajhe_a_00130.