Medicaid Cost Pressures Intensify on States; Negative for Hospitals and the Drug Trades

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Despite a slow improvement in general economic conditions, states’ fiscal problems intensify in FY2012, due largely to expiring federal subsidies and declining general and rainy-day fund balances.  As a large component of state spending, Medicaid is likely to face more cuts in FY2012 than in FY2011

At currently forecasted rates of GDP and employment growth, and assuming a continuation of ’08 – ’10 per-person spending growth for both Medicaid and non-Medicaid services, on average states must either increase general revenues by more than 7 percent (thru higher tax rates), reduce per-person non-Medicaid spending by 2 percent, or reduce per-beneficiary Medicaid spending by 32 percent, on top of significant actions that have already been taken

States cannot reduce eligibility for Medicaid, and can only narrowly reduce the range of benefits offered, though most of these reductions have already been taken. This suggests states must reduce the cost of providing a given amount of care, i.e. states must cut input costs

Hospitals are an almost certain target; unlike many other providers (e.g. physicians) not-for-profit hospitals must accept Medicaid patients in order to remain not-for-profit, and so have little choice but to accept whatever Medicaid payments are offered.  These payments have already fallen substantially since ’08, and Medicaid : commercial payment ratios are at a trough – but we see payments falling quite a bit further nonetheless

Drug benefits are a large state Medicaid expense, and generic dispensing mark-ups are a well understood source of potential savings.  Intensifying state fiscal pressures increase the likelihood that the HHS Secretary publishes, and the states quickly use, generic acquisition costs.  In turn, states’ reliance on these data should assure commercial plan sponsors that the data will be available over the longer term, facilitating the transition of commercial drug plans to generic acquisition cost benchmarks, instead of AWP.  Generic dispensing margins would fall substantially as a result; PBMs are most at risk, followed by drug retailers, followed by drug wholesalers

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