Putting Medicaid in the Larger Budget Context: An In-Depth Look at Three States in FY 2015 and 2016


Economic and Budget Outlook


In many ways, Alaska is a unique state, with its vast size, sparse population density and richness in natural beauty and natural resources, on which its economy relies heavily, specifically oil. In 2014, the oil industry was responsible for one-third of all employment and 38 percent of all wages.1 The federal government also plays a significant role in the state’s economy, with an active military presence, a substantial portion of land in the state owned by the federal government, and high per capita federal employment in the state.2  Due to these influences, Alaska’s economy has taken a trajectory different from the one seen at the national level. Going back almost a decade, Alaska’s economy was negatively affected by the economic downturn – the unemployment rate increased to 8.0 percent for several months in 2009 and 2010 and the state’s GDP declined during this same period – but the impact was comparatively less and shorter in duration, as the economy was bolstered by increased oil production, higher oil prices and increased revenues to support the state budget.

However, the recent decline in oil prices and federal deficit reduction actions have had a negative effect on the state’s economy. Oil production in the state fell from 729,000 barrels per day in 2008 to 544,000 per day in 2013,3 depressing the state GDP.4 Additionally, job growth slowed, driven in part by declines in federal employment in the state; 2015 was forecast to be the 5th consecutive year of decline in federal employment.5 These economic forces have presented major challenges to state lawmakers in enacting state budgets.

State Budget

Alaska funds its budget unlike any other state in the nation. It is one of seven states without a personal income tax, one of five states without sales tax, and the only state that has neither. Alaska relies almost entirely on revenues from oil taxes and royalties to fund the state portion of its expenditures – about 88 percent of 2014 general fund revenues were derived from oil revenue.6 Recent reductions in oil production and prices have negatively affected the state’s economy and in turn state revenues; according to a Pew Charitable Trust analysis, 2014 4th quarter revenue in Alaska was over 80 percent lower than the 2008 peak.7 This has resulted in a state budget crisis.

Alaska has experienced general fund budget deficits since 2013 that have grown each year.8 In FY 2015, the state ended the year with a deficit of $2.7 billion, which was covered by drawing down funds from the state’s Statutory Budget Reserves Fund.  The Statutory Budget Reserves Fund was created to build a “rainy day fund,” setting aside surplus revenues during earlier periods of economic growth and investing for periods of economic downturn.9

When the FY 2016 budget was being developed, the state again faced a multi-billion dollar general fund deficit. The Statutory Budget Reserves Fund had been largely depleted. The Governor’s proposal included a series of spending cuts as well as exploring new sources of revenue and tapping into the Constitutional Budget Reserve Fund (a second rainy day fund which requires three-fourths majority approval to use). The Governor, fulfilling a campaign promise, also proposed adopting the ACA Medicaid expansion, highlighting new federal revenue and potential savings within the state budget. (More detail on this is provided in the next section.)

After two special sessions and much debate, the legislature passed a budget that was signed into law by the Governor.  For FY 2016, Governor Walker used his line item veto authority to reduce operating appropriations by $200 million for a total annual budget of $4.95 billion. This represents a 19 percent reduction ($1.1 billion) from FY 2015 budget levels. In spite of the reduction, the state expects a spending deficit of $3.7 billion, partially offset by a $1 billion transfer from the Public Education Fund, reserves used for advance funding of school districts. The remaining $2.7 billion will be covered from the Constitutional Budget Reserve Fund.10

While the state’s reserves can sustain the current expenditure trends until sometime in FY 2018,11 the state recognizes the need to make fundamental shifts for long-term viability. The spending imbalance has prompted the administration to engage state policymakers in a discussion about strategies to return the state to long-term fiscal stability.

Alaska’s Medicaid Expansion

Governor Bill Walker, in keeping with a central campaign promise he made while running for governor as an independent, proposed adopting the Medicaid expansion. In his state of the budget speech, the Governor noted that by expanding Medicaid, the state would be investing in the health of Alaskans and that the expansion would have positive effects on the economy as well as provide additional federal funds and direct general fund savings for budget.12 The Governor’s proposal received support from a number of stakeholders, including the Alaska Chamber of Commerce.13 However, there was much debate between the Governor and legislature over the Medicaid expansion. The Governor put forward the proposal as part of his budget amendments14 and as separate legislation.15 Legislative leaders expressed concerns with expansion related to systems issues as well as a desire to implement additional Medicaid reforms ahead of implementing the expansion.16 After the two special sessions, the legislature reached a budget compromise in June that funded the budget deficit but did not include the Medicaid expansion. The Governor signed the budget into law in June, avoiding a government shutdown.17

In July 2015, Governor Walker moved to expand Medicaid by executive action since Alaska’s legislature had not done so. In an attempt to block the Governor’s actions, the Alaska Legislative Council comprised of House and Senate legislators, voted to sue the governor for exceeding his executive authority and asked the judge to temporarily halt the expansion pending the outcome of the litigation.18 On August 28, the Superior Court judge rejected the Council’s request, and the Alaska Supreme Court concurred on August 31.19 The court rulings cleared the path for the “Healthy Alaska Plan” and for enrollment to begin as planned on September 1, 2015.20

The Healthy Alaska Plan expands coverage to approximately 42,000 uninsured adults, aged 19 to 64, in families earning up to 138 percent of the federal poverty level.21 The Healthy Alaska Plan originally put forward by the Governor and the Alaska Department of Health and Social Services in February 2015 estimated that over half (55 percent) of eligible individuals have incomes below 100 percent of the federal poverty level, and thus would not qualify for premium subsidies to purchase health insurance through the ACA Marketplace. It projected that approximately 21,100 would enroll in FY 2016 with enrollment climbing to 26,500 by 2021.22 In addition, the expansion was expected to provide economic benefit to the state by adding $1.1 billion in new federal revenue, creating 4,000 new jobs; adding $1.2 billion in wages and salaries; and stimulating $2.49 billion in economic activity throughout the state. The Healthy Alaska Plan also noted that the Medicaid expansion was expected to exert downward pressure on the cost of health care and health insurance by reducing the amount of uncompensated care provided by hospitals.23 Additionally, the Healthy Alaska Plan noted that the Medicaid expansion would provide additional federal funds that would facilitate reform efforts to increase cost-effectiveness bend the cost-curve and improve value.24

Delivery System Reforms

Growth in the state’s Medicaid expenditures is reflective of factors affecting the cost of healthcare in general within the state. With 16 percent of the United States’ land mass but only 0.2 percent of its population, Alaska’s vast size, rural/frontier nature and arctic climate add a unique level of complexity in providing health care services to its state residents. In its 2011 “Findings on Health Care Cost, Pricing and Reimbursement in Alaska,” the Alaska Health Care Commission found that physician reimbursement was 60 percent higher than in other highly rural/frontier Western states, commercial reimbursement for private sector hospital services was 37 percent higher, and commercial insurance premiums were roughly 30 percent higher.25 Higher prices are driven in part by the state’s higher cost of living (20-30 percent higher than in the comparison states), higher salaries for health care workers, and by the limited number of providers, particularly in some specialties, resulting in a lack of competition.26  These structural challenges make it difficult to implement cost-effective ways to deliver coordinated care. In fact, Alaska is one of only three states (along with Wyoming and Connecticut) that does not use a comprehensive managed care delivery system for any of its Medicaid enrollees. However, Alaska has embarked on a number of Medicaid reform initiatives to enhance access to care, improve population health and moderate cost growth.

Alaska Medicaid Coordinated Care Initiative

The state has initiated the Alaska Medicaid Coordinated Care Initiative (AMCCI), a voluntary program providing one-on-one case management services including care coordination, scheduling appointments, addressing barriers, and referrals to specialists and social service supports.27 The initial focus of the program will be on decreasing the inappropriate use of emergency rooms. “Super utilizers” account for about three percent of Alaska’s Medicaid population, but about 22 percent of all Medicaid hospital emergency room expenditures. Around 6,000 enrollees had five or more emergency room visits within a one year period.28 The state contracted with MedExpert International, Inc. in December 2014 to provide case management services for participants.

Medicaid Redesign Initiative

In July 2015, Alaska’s Department of Health and Social Services launched the “Medicaid Redesign” initiative with the goals of developing recommendations for reform, by January 2016, that will optimize enrollee health outcomes, drive increased value in the delivery of services and contain costs in the Alaska Medicaid program.29 During the recommendation development process, the state is exploring a variety of delivery system and payment reform options (e.g., managed care models, patient centered medical homes, accountable care organizations and other shared savings models).

Tribal Health System Partnership

Work is currently underway with the Tribal Health System on the development of two Section 1115 waiver initiatives. Initially, the Alaska Department of Health and Social Services intended to develop two Section 1115 waiver initiatives. The first, with a target implementation date of July 2016, would develop medically necessary transportation case management services to facilitate timely and efficient delivery of health care services to Alaska Natives and American Indians (AI/AN) with a 100 percent federal match if the services are coordinated by a Tribal provider. The second waiver, with a target implementation date of July 2018, would expand the scope of Medicaid-reimbursable services available to AI/ANs, and enhance referral coordination.30 Alaska is seeking approval for 100 percent federal match when a Medicaid beneficiary, who is also an IHS beneficiary, is referred by a Tribal Health Provider to a non-tribal health provider. However, U.S. Secretary of Health and Human Services Burwell recently indicated in a letter to Governor Walker that DHHS is pursuing a policy change and 1115 waivers would not be necessary.31  Currently, the State is awaiting further policy clarification before implementing these initiatives.

Other Medicaid Initiatives

DHSS, in collaboration with multiple state agencies, released a request for proposals in July 2015 for assistance with developing a 1915(i) HCBS benefit and 1915(k) Community First Choice Medicaid State Plan option. The initiatives would serve eligible individuals with physical, cognitive, intellectual and behavioral health needs whose income qualifies them for Medicaid and who have functional needs, but who may or may not meet institutional level of care requirements. The state expects the design phase to be completed by July 2016 for implementation in July 2017.32

The state is also engaged in a feasibility study to examine various health care provider tax methodologies, and the fiscal and economic impact of such taxes in Alaska. The study is expected to result in recommendations for a specific health care provider tax for implementation, which will be the basis for health care provider tax legislation in the 2016 legislative session.33

Alaska Medicaid Policy Changes FY 2015 and FY 2016
Eligibility Changes
  • Implemented the ACA Medicaid expansion on September 1, 2015.
Provider Rates and Provider Taxes/Assessments
  • Increased rates for inpatient and outpatient hospitals, specialists and nursing facilities in FY 2015.
  • Froze rates for all providers except specialists in FY 2016.
  • Continued primary care physician payment levels at or above Medicare rates (state is one of a handful that did so prior to the ACA required primary care increase). 
  • Transitioned from using a state Maximum Allowable Cost to using the NADAC as the basis for maximum allowable cost for both brand name and generic drugs in FY 2015.
  • Reduced the pharmacy ingredient cost reimbursement in FY 2015, with a corresponding increase in dispensing fees.
Delivery System and Payment Reforms
  • Implemented Medicaid Coordinated Care Initiative (AMCCI) in FY 2015 with an initial focus on decreasing the inappropriate use of emergency rooms.
Introduction California

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