By John Reichard, CQ HealthBeat Editor
September 18, 2012 -- Can Oregon Gov. John Kitzhaber nudge his fellow Democrats closer to embracing an approach that caps Medicaid spending growth? One might think so judging by his remarks last week at a forum sponsored by the left-leaning Center for American Progress, which showcased his state's new law to tackle runaway Medicaid spending by retooling its health care delivery system.
Kitzhaber, who is a doctor, was outspoken and impassioned in a way few of his fellow Democrats are right now about the moral imperative to chop Medicaid and Medicare spending growth and to not pour money into a broken health care system. He said fixing health care costs is something baby boomers must take on and get done for future generations.
A cap on Medicaid spending growth is how Oregon is addressing rising costs, he said. His speech drew warm applause from the CAP audience—surprising perhaps in light of fierce Democratic opposition to the Republican efforts to block grant Medicaid.
Center officials touted the effort as a way to use the Medicaid program as a driver to broadly reduce health care costs. They hailed it as one of a handful of promising state-based cost control efforts.
Under Kitzhaber's leadership, Oregon has passed a law that caps yearly per person Medicaid spending growth over five years to reduce federal and state Medicaid outlays in Oregon by $11 billion.
The law, which Kitzhaber signed early this year and federal officials approved this spring, delivers savings not through cutting provider payment rates or dropping people from the Medicaid rolls, but by trying to get at the real underlying problem, which is the rising cost of care, Kitzhaber said.
Without getting at costs, state and federal officials can simply shift the costs of care onto the private sector, Kitzhaber noted. "Unless our efforts at health care reform address this cost-shifting cycle, we're not going to be able to solve this problem in the long term," he said.
The fiscal crisis besetting state and federal governments creates an opening to make fundamental changes in health care delivery, that's what happened in Oregon, and that's the way it can work on the federal level too, he said.
The 2009 economic stimulus law (PL 111-5) was a "lifeline" that injected badly needed education and Medicaid funds into his state's budget, but it did so with "absolutely no incentives" to change the health care system, he said. Kitzhaber said when he took office early last year the state was looking at a $2 billion shortfall in Medicaid funding. State officials had to balance the budget. They could have fixed the hole in Medicaid funding by cutting provider payment rates 40 percent but elected instead to cut costs with a plan to retool health care.
New Business Model
Oregon state lawmakers passed legislation in June 2011 to design a new business model around "community care organizations," or "CCOs." Kitzhaber described them as organized around "natural" health care communities, such as counties or hospital referral areas.
The business model calls for these local health care delivery entities to comply with four central elements. "The first one is service integration, care coordination, and a focus on wellness, prevention, and the community-based management of chronic conditions," the governor said. Second, these provider entities must connect with community-based programs that try to improve public health, and the governance structure of the CCOs must reflect this emphasis on the health of the local population.
Third they must manage the utilization of health care resources using a global budget that grows at a fixed rate, with adjustments made to compensate in areas that have a sicker population. Fourth, they must meet standards for access to health care and for clinical outcomes.
In February, Oregon adopted legislation that implemented the design called for in the 2011 law. In May, Kitzhaber said he negotiated with federal officials the final details of a federal waiver allowing these changes in the state's Medicaid program. The waiver also provided for "a significant infusion of up-front federal money to allow us to stabilize the delivery system" during the transition to a new health care model, he said.
Medicaid officials have agreed to provide $1.9 billion in federal dollars to Oregon over the next five years "to help us transform the delivery system." In return, Oregon agreed to reduce the per member inflation rate in Medicaid by two percentage points and to lock in that rate of growth over five years.
"These cost savings will fully pay back that $1.9 billion investment in five years and will save the state and federal government $11 billion over the next ten years," Kitzhaber said.
If every state stuck to that same limited inflation rate, the nation would save $1.5 trillion over the next decade, he added.
How exactly will this money be saved? As an example, Kitzhaber cited the CCOs' use of community care workers who would do innovative things to keep people with chronic conditions from having to go to the hospital. Kitzhaber noted that people at risk of chronic heart failure can be tipped over into that condition and into costly hospitalizations if they get too hot during heat waves.
CCOs, paid to keep patients well, can do things like buy people a $200 air conditioner, which could be sufficient to keep a congestive heart failure patient from incurring a $50,000 hospitalization. "The difference is $49,800. Benefits aren't cut and quality of life improves, he added.
"That's essentially what we're trying to do – to change the care model and the business model and to realign our organizations and our financial incentives to focus on prevention and wellness," he said.
Still an Experiment
But Kitzhaber admitted that the system is experimental, and said CCOs will have to be continually experimenting and learning from each other how to control costs. Kitzhaber said he's meeting regularly with the CEOs of the CCOs. "We just have to learn from the mistakes," he said.
How will Oregon spur retooling of health care to reach state residents more broadly with the new model? The state's Medicaid program has about 600,000 enrollees. And beyond those Medicaid patients, Kitzhaber said the state also pays for health care for another 300,000 state employees and public school teachers. That means 900,000 people—or one of every four state residents—is covered through the state. That gives the state considerable leverage in dealing with providers to get them to adopt the new care model.
Kitzhaber says the model could save another $5 billion on care delivered to the 300,000 non-Medicaid people whose health insurance is under state control. That plus the $11 billion in Medicaid brings the savings to $16 billion.
He explained that providers facing less revenue from the public programs could then try and cost-shift the losses to the private sector that could insurers to increase their premiums. "To avoid that, we have started conversations with the private sector because we believe it's imperative that private employers begin to take steps to align their purchasing power with that of the state and to demand the same kind of care model that grows at a lower rate of inflation."
That's all well and good, and the CAP audience seemed energized by the presentation. But aren't Democrats in general opposed to fixed allotments of Medicaid funds to the states? Kitzhaber told reporters after his remarks that "the problem with just a cap is it penalizes you if your population grows." He said his understanding is that block grants wouldn't adjust for Medicaid enrollment changes.
"So we're saying it makes more sense to have a per capita rate, and that rate grows at a fixed amount," he said. "We picked three and a half percent, which is a two percentage point reduction. In order to grow at that rate, you've got to fundamentally change the delivery model in order to make that happen."
So what if Congress capped growth per capita? That wouldn't be enough, Kitzhaber said. Delivery system changes would "absolutely" have to be a part of that.
How would that 3.5 percentage growth gap be enforced? What happens if Medicaid spending rises faster than 3.5 percent? Does Oregon just not get money above the 3.5 percent rate?
"The discipline is. . . we've got $1.9 billion spread over five years" the federal government will give Oregon to retool the system. If say after the second year Oregon isn't limiting Medicaid spending growth to 3.5 percent per capita, "we lose the rest of the money," Kitzhaber said, referring to the remainder of the $1.9 billion, which is being spread out in payments to the state over five years. Also, "we're back to the old Medicaid program."
That's a pretty big disincentive, the governor said. "We'd have to drop people, because providers would get about a 40 percent cut." Providers "are highly motivated to change the system."