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Anticipated Impact of COVID-19 Treatments on State Medicaid Budgets

Summary

Compared to other drivers of state budget pressures during the COVID-19 pandemic—including higher Medicaid program enrollment due to increased unemployment and lower state tax revenues as a result of economic shutdowns—the relative financial impact of COVID-19 therapeutics on state Medicaid budgets will likely be minimal.

To date, 2 products have received emergency use authorizations from the Food and Drug Administration (FDA) for treatment of COVID-19 in hospitalized patients: Veklury (remdesivir) and convalescent plasma. Existing FDA-approved products, including corticosteroids, are also being used to treat hospitalized patients.  Additionally, more than 570 new or existing products are being studied for the treatment of COVID-19. As states face increased financial pressures due COVID-19, Avalere examined implications of these therapeutics on state Medicaid budgets.

Current Payment Mechanisms Will Likely Limit the Impact of COVID-19 Therapeutics on State Medicaid Programs

The impact of COVID-19 therapeutics on state Medicaid budgets is likely to be dampened by current reimbursement mechanisms, which are designed to mitigate the financial shock to states.

Inpatient Settings

Current COVID-19 therapeutics are used in the inpatient setting, where drugs are reimbursed as part of a predetermined bundled payment. In both Medicaid managed care and fee for service (FFS), inpatient hospitalizations are reimbursed as part of a bundled payment that is inclusive of the entire patient stay including any drugs or procedures. The bundled payment for a stay is determined based on the Diagnosis-Related Group (DRG), a classification system that standardizes payments based on the complexity of the patient’s case. As a result, the cost of COVID-19 therapeutics in the inpatient setting are included as part of pre-set DRG payment rates and therefore should not directly impact Medicaid spending.

Medicaid reimbursement for an individual claim may be greater if the costs are high enough to qualify for an outlier payment. In some cases, COVID-19 hospitalizations may warrant an outlier payment to reflect the case complexity and expenditures associated with treating these patients. All elements of inpatient treatment, including therapeutics, factor into hospitals’ costs for determining outlier payments.

However, the extent to which therapeutics reduce inpatient lengths of stay (LOS) and/or ventilator use could result in a downward shift to a lower acuity DRG and reduced hospitalization costs. According to an Avalere analysis of hospital inpatient claims, average payments for COVID-19 hospitalizations were estimated to be $23,489 overall and $11,370 for Medicaid from March to May 2020. The average LOS for admissions requiring ventilator support was 13.97 days, nearly 6 days longer than the average LOS (8.04) for hospitalizations that did not require ventilator support. For context, the average amount paid in Medicare for hospitalizations requiring ventilation was approximately 3 times higher ($31,174 vs. $12,140) than the average amount for non-ventilated hospitalizations among Medicare patients.

Managed Care Plans

Many states use Medicaid managed care plans, which are reimbursed a set per-member per-month (PMPM) rate regardless of costs for inpatient stays or outpatient therapies. States have increasingly shifted to Medicaid managed care, with over three-quarters of all Medicaid beneficiaries now enrolled in a Medicaid Managed Care Organization (MCO). Because states pay MCOs on a PMPM basis using capitation rates that are set in advance (usually for a 12-month period) instead of for each item or service separately, states with higher proportions of their Medicaid population enrolled in MCOs have greater budget stability even when healthcare service use patterns change. Therefore, overall payment rates for MCOs will remain unchanged even if costs for inpatient treatments trigger additional outlier payments to hospitals.

As capitation rates are already set for 2021, payments to MCOs will likely not reflect COVID-19 related changes until 2022. When setting rates for 2022, spending for COVID-19 therapeutics and expenditures for the relatively small number of high-cost COVID-19 cases compared to the larger Medicaid population is likely to have minimal impact on MCO capitation rates. Although MCOs have sought to adjust capitation rates mid-year in select circumstances, increases in 2020–2021 are unlikely given current medical loss ratio requirements and reduced spending attributable to deferred care and reduced utilization of non-COVID-19 services (e.g., temporary reduction in nonessential procedures, routine doctor visits).

Outpatient Therapies

States that use FFS or carve out drugs from managed care may be exposed to costs for outpatient therapies. While currently available therapies are all used exclusively in the inpatient setting, future outpatient therapies for COVID-19, if approved by the FDA, could produce Medicaid cost avoidance depending on the cost of the therapeutics and the extent to which they help avoid hospitalizations. States using FFS will be responsible for the direct costs of therapies administered in the outpatient setting. Additionally, as more states have moved to carve out pharmacy benefit drugs from Medicaid managed care, these states will be at risk for the costs of any pharmacy benefit therapeutics that become available.

Although potential outpatient therapeutics for COVID-19 treatment covered under Medicaid FFS or carved out of MCO contracts could expose states to unpredictable short-term costs, deferred care, and lower utilization of non-COVID-19 services, as well as reduced COVID-19 hospitalizations due to treatment of less acutely ill patients may offset state Medicaid spending.

Other COVID-19 Factors Are Likely to Have Larger Impacts on State Medicaid Budgets

Other factors, such as increased Medicaid enrollment and decreased tax revenues, are likely to have more significant impacts on state Medicaid programs and create budget pressures amid the COVID-19 public health emergency (PHE) and beyond.

  • Medicaid enrollment growth: The magnitude of the impact of the COVID-19 PHE on state Medicaid budgets will likely be proportionate to the increase in Medicaid enrollment and the extent to which individuals remain on Medicaid over time. As individuals lose their jobs and associated private health insurance, many will turn to Medicaid for coverage. According to the Centers for Medicare and Medicaid Services, Medicaid enrollment increased by 7% from March to May 2020, with increasing enrollment likely through the summer.
  • Lost tax revenue: States continue to lose tax revenue due to physical distancing requirements and economic recession. Many states have significant revenue shortfalls for fiscal years 2020 and 2021 driven by substantial declines in sales and income tax, which make up the majority of total state tax revenues.1,2

Impacts of COVID-19 on state budgets—and particularly on state Medicaid programs—will vary by state depending on several factors, including:

  • State medicaid expansion status: States that have expanded Medicaid to those with incomes up to 138% of the federal poverty level are likely to have proportionally more newly eligible enrollees, which can result in greater total Medicaid spending. Conversely, states that have not expanded Medicaid are likely to see more individuals become uninsured, and as a result those states may need to appropriate additional Disproportionate Share Hospital payments, which are tied to each state’s standard federal medical assistance percentage (FMAP).
  • Additional federal support: Congress has approved some financial support to states, including a temporary 6.2% increase in the FMAP for Medicaid via the Families First Coronavirus Response Act, which is partially offsetting negative budget impacts. Under current law, the funding increase will expire at the end of the quarter in which the PHE ends. The PHE is currently renewed through October 23, meaning the enhanced FMAP would expire December 31 without subsequent extension. Expiration of the PHE would increase state budget concerns and enrollment churn as states resume eligibility redeterminations and consider potential restrictions to Medicaid eligibility.
  • Makeup of state workforce: States that rely on industries that have been the most impacted by economic shutdowns and physical distancing requirements (e.g., tourism, hospitality, retail) may have more severe long-term downward pressure on employment, wages, and tax revenue.
  • Demographic characteristics: States with a higher proportion of individuals with risk factors associated with severe cases of COVID-19 (e.g., patients diagnosed with obesity, diabetes, heart disease, chronic obstructive pulmonary disease) may face a proportionately higher volume of hospitalizations.

Conclusion

Given existing Medicaid inpatient reimbursement mechanisms, the use of Medicaid managed care capitated payments, and other spending offsets (e.g., deferred care), costs associated with the emergence of potential COVID-19 pharmacological treatments are unlikely to have significant impact on state Medicaid budgets. Overall impacts may be further dampened depending on the extent COVID-19 therapeutics can lower costs (e.g., by reducing inpatient LOS, decreasing the need for ventilator support, and averting hospitalizations). However, Medicaid enrollment growth and lost tax revenue will continue to create financial strain on state budgets, particularly in geographies with high incidence rates. As a result of these financial pressures, states policymakers may look to control rising costs by making changes to Medicaid eligibility, benefits, or drug management.

Funding for this research was provided by Gilead Sciences. Avalere retained full editorial control.

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Notes

1. Center for Budget and Policy Priorities. States Grappling with Hit to Tax Collections. August 2020.

2. United States Census Bureau. 2019 State Government Tax Tables.

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