Putting Medicaid in the Larger Budget Context: An In-Depth Look at Four States in FY 2014 and 2015


Economic and Budget Outlook


Michigan endured a dramatic shift in its economic strength between 2001 and 2010, largely attributed to declines in manufacturing employment that hit the state particularly hard. For over a century Michigan’s economy has been heavily dependent on manufacturing employment, primarily manufacturing associated with motor vehicle and parts production. In the past decade the “Big Three” US auto manufacturers (Ford, General Motors and Chrysler), headquartered in Michigan, shed manufacturing capacity as US automotive sales declined and their share of the automotive market dropped. Since 2010, increases in motor vehicle sales have driven a moderate recovery in Michigan employment and a significant drop in the unemployment rate, which has fallen from 13.2% in April of 2009 to 7.7% in July of 2014, still one of the highest state unemployment rates in the country.1 After hitting bottom in 2009, employment and state revenues began slow improvement in 2010. State revenues did not regain actual 2008 levels until 20132, and in 2014 total employment has not yet regained 2008 levels.3

State Budget

The economic downturns that began in March 2001 and in December 2007 affected all states, but hit Michigan’s state budget especially hard, as state revenues dropped and spending for Medicaid increased, leading to a period of persistent budget deficits. Addressing these deficits since 2001 largely focused upon reduced support for the state’s higher education system, diminished and delayed investment in the state’s transportation infrastructure and less support for local governments through revenue sharing payments and tax and fee increases4.

Like most states, Medicaid spending accounts for a significant and growing percentage of Michigan’s state budget. While the appropriation process in Michigan devoted a great deal of energy to identifying General Fund savings in the Medicaid program, Michigan largely avoided significant structural reductions in Medicaid coverage, services and reimbursement since 2000. This was possible in significant part due to the enhanced federal Medicaid matching during these periods and also due to increased use of provider taxes as a source of the non-federal revenue for the Medicaid program. Michigan began with a tax on nursing facilities in FY 2002 and expanded the program to other provider groups in FY 2003. Provider taxes represented nearly $900 million in Medicaid revenues by FY 20075 and exceeded $1 billion by the end of the decade.

For the past four years, Michigan has enacted annual budgets without significant General Fund program reductions and has allocated some surplus revenues to program enhancements and to restoring the state’s Budget Stabilization Fund.6

For FY 2015, which begins on October 1st, the Michigan Medicaid budget is largely a continuation of the FY 2014 budget, with two major adjustments. The most significant adjustment was the full-year 100 percent federal funding of the Healthy Michigan Plan (Michigan’s Medicaid expansion implemented April 1, 2014.) The second adjustment provided additional funding ($111.6 million total / $25.0 million General Fund) to support partial retention of enhanced physician primary care reimbursement rates. (Increases in primary care rates to Medicare levels were fully federally funded through the Affordable Care Act in calendar years 2013 and 2014.)7

ACA Implementation

The 2010 Affordable Care Act (ACA) has the potential to extend coverage to many of the 47 million nonelderly uninsured people nationwide, including the 1.1 million uninsured Michigan residents. The ACA establishes coverage provisions across the income spectrum, with the expansion of Medicaid eligibility for adults serving as the vehicle for covering low-income individuals and premium tax credits to help people purchase insurance directly through new Health Insurance Marketplaces serving as the vehicle for covering people with moderate incomes (100-400% FPL).8 Many of these provisions became effective during SFY 2014 with significant implications for state budgets and Medicaid programs across the country, including Michigan.

Marketplace Coverage

As written under the law, states have the option of establishing their own Marketplaces or relying on the federally-facilitated Marketplace, www.healthcare.gov. Michigan was one of seven states that opted for a partnership model, where the state would perform plan management functions and defer other Marketplace management, including consumer assistance, to the federal government.9 The state’s Department of Insurance and Financial Services (DIFS) performs plan management functions for health insurance products offered both inside and outside the Marketplace. Ten insurance providers are offering 106 Qualified Health Plans in Michigan’s Marketplace.10 As of April 19, 2014, over 272,500 Michigan residents had selected a Marketplace plan (approximately 38% of the estimated 725,000 individuals eligible for Marketplace coverage11) over 87 percent of whom qualified for financial assistance.12

All funding for outreach and enrollment efforts for the Marketplace has come from the federal government and private organizations. Entities providing outreach and enrollment for Michigan’s Marketplace include 31 of Michigan’s Federally Qualified Health Centers as well as four organizations that received federal Navigator grants to provide consumer assistance for the federal Marketplace; additional consumer information about Marketplace coverage can be obtained from volunteer certified application counselors as well as licensed agents and brokers who sell coverage in the Marketplace. The DIFS website details the consumer assistance available.

Healthy Michigan Plan – Michigan’s Alternative Medicaid Expansion

The Medicaid expansion, as written in the ACA, was designed to fill in existing gaps in Medicaid coverage, largely for adults. Under the Medicaid expansion, nearly all individuals with incomes under 138% FPL would be covered. However, the June 2012 Supreme Court decision effectively made the Medicaid expansion optional for states to implement. Michigan is one of the 28 states (including DC) that have adopted the Medicaid expansion as of September 2014. However, the path the state took to implementing the Medicaid expansion differs from those of other states.

In February of 2013, Michigan Governor Rick Snyder made public his support for implementing the Medicaid expansion authorized through the Affordable Care Act in his FY 2013-2014 Executive Budget Recommendation. The initial concept proposed by the Governor would be an expansion of the Medicaid program through a state plan amendment. Those newly eligible for Medicaid would be enrolled in the state’s contracted Medicaid managed care organizations.13 The proposed expansion was considered by the Michigan Legislature, controlled in both houses by Republican majorities. The House agreed to the Medicaid expansion,

but the Senate did not concur, notwithstanding strong support and advocacy from the Governor (also a Republican), and the Medicaid expansion was not included in the final FY 2013-2014 enacted budget.14

Following the FY 2013-14 budget process, representatives from the Executive branch along with legislative leadership began to discuss an alternative Medicaid expansion plan. If a Medicaid expansion were to be approved, legislative leadership was interested in achieving policy goals over and above improved access to coverage. The result of this process was the Healthy Michigan Plan (HMP). The HMP makes Medicaid eligibility available to uninsured adults with income below 138 percent of the FPL. Additional policy goals articulated by legislative leaders and included in the HMP proposal included:

  • Recipient Cost-Sharing: The HMP includes provisions that require beneficiaries to make monthly payments to a managed “healthy behavior incentive account.” The monthly payment requirements for all enrollees will be generated using incurred co-payment cost over the first six months of HMP enrollment. Persons with income over 100 percent of the FPL are required to additionally pay a premium equivalent to two percent of their income.
  • Healthy Behavior Incentives: Cost sharing requirements, detailed above, are to be reduced if enrollees demonstrate positive healthy behaviors. Enforcement of the healthy behavior requirements is the responsibility of the MCOs, with MCO incentive funding tied to enrollee health outcomes and a new requirement that all HMP enrollees have an initial appointment with their primary care provider scheduled within 60 days of initial enrollment.15 Enrollees can also reduce their recipient cost-sharing amounts when they complete an annual health risk assessment.
  • Delivery System Structure: HMP, like Michigan’s base Medicaid program, relies on contracted Medicaid managed care organizations (MCO.) Nearly all HMP enrollees are required to be enrolled in an MCO.16 Additionally, services not typically provided through MCOs (like dental) are the responsibility of MCOs for HMP enrollees.17

After lengthy and contentious debate, legislation authorizing HMP was passed by the Legislature and signed by the Governor in September of 2013.18 HMP was implemented in April 2014. In addition to the provisions noted above, the HMP statute included provisions that will require a future waiver, which are described below.

Federal Authority for HMP

A Medicaid expansion program with the policy elements detailed above could not be approved by CMS through an amendment to Michigan’s Medicaid state plan. The authorizing language for implementing HMP requires Federal approval of two separate 1115 waivers, one of which has been submitted and approved while the other is to be submitted in the future. The changes under these waivers are discussed below:

  • The State of Michigan submitted an amendment to an existing 1115 waiver that authorized the operation of the state’s Adult Benefit Waiver (ABW) program. The ABW used Medicaid funding to support a limited benefit physical and mental health program for uninsured adults with income below 35 percent of the FPL. Enrollment in ABW was capped. Michigan shifted individuals enrolled in ABW to the more comprehensive HMP and expanded coverage for adults up to 138% FPL. The waiver was restructured to provide Michigan the authority to administer healthy behavior savings accounts, impose cost-sharing requirements on HMP enrollees over the “nominal” levels in Medicaid programs and to create financial healthy behavior incentives for HMP enrollees. The waiver amendment was approved by CMS on December 30, 2013.19
  • The legislature also included a provision that calls for enrollees with income above 100 percent of the FPL who have been enrolled in HMP for greater than 48 months to either purchase subsidized coverage through Michigan’s Marketplace or remain in HMP with an increase in cost-sharing. Premiums would increase to 3.5 percent of income, with a limit on total cost-sharing (premiums and copayments) to a maximum of 7 percent of income. An additional 1115 waiver will be necessary to allow the state to implement this provision. Language in the legislation authorizing HMP requires approval of this waiver by December 31, 2015.20
HMP Enrollment

The State projected enrollment in HMP over the first year of the program of 370,000, with enrollment ultimately stabilizing at around 500,000 individuals. Enrollment in HMP, since the program’s launch in April of 2014, experienced a much more dramatic ramp up of program participation. As of October 6, 2014, enrollment in HMP is 405,743.21

Delivery System Reforms

Patient Centered Medical Home Initiative

Michigan is one of eight states (along with Maine, Minnesota, North Carolina, New York, Pennsylvania, Rhode Island and Vermont) that were selected to participate in the Multi-Payer Advanced Primary Care Practice Demonstration where states administer a three-year, multi-payer patient-centered medical home (PCMH) initiative across Medicaid, private payers and Medicare (which began participating in Michigan’s demonstration in October 2011.) The goal of this initiative is to evaluate whether advanced primary care practices reduce “unjustified utilization and expenditures, improve the safety, effectiveness, timeliness, and efficiency of health care, increase patient decision-making and increase the availability and delivery of care in underserved areas.”22

Michigan’s initiative, called the Michigan Primary Care Transformation Program (MiPCT), is the largest PCMH project in the United States with over 400 participating primary care practices. Enrollees through Blue Cross Blue Shield of Michigan, the Blue Cross HMO (Blue Care Network), west-Michigan based HMO Priority Health, Medicare and Medicaid are included in the demonstration. MiPCT requires participating primary care practices to achieve designation as a PCMH, either through BCBSM or the National Committee for Quality Assurance (NCQA).23

State Innovation Grant

The Innovation Center was created by the Affordable Care Act to test innovative payment and service delivery models. One of the opportunities for states offered by the Innovation Center is the State Innovation Models initiative (SIM). The SIM initiative provides “financial and technical support to states to design or test innovative payment and service delivery models that will improve health, improve care and lower cost for Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) beneficiaries.”24 In February of 2013 Michigan, along with 15 other states (California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, New Hampshire, Ohio, Pennsylvania, Rhode Island, Tennessee, and Texas), was awarded a Model Design Grant through CMS to support the development of the state’s health care innovation plan. In January 2014, the State submitted their “blueprint” for changes in the state’s health delivery system. The blueprint includes the following components:

  • Patient-Centered Medical Homes (PCMH): The State would expand the Michigan Primary Care Transformation Project to additional medical practices, payers and patients. This will include new requirements for contracted Medicaid MCOs to participate in the PCMH initiative and new rules to permit safety net providers to participate in the pilot project.
  • Accountable Systems of Care: Michigan intends to support the creation of a new healthcare service delivery system by developing new organizations, described as Accountable Systems of Care. Accountable Systems of Care are legal entities built to support a network of providers who are accountable to collectively coordinate the medical, behavioral and social services provided to their patients. The entity would be financially accountable for the performance outcomes of this population but would not be fully at risk like a licensed insurer.
  • Development of Community Health Innovation Regions: Michigan intends to support the development of local consortiums of community organizations, state and local agencies, business entities, providers and citizens with the goal of increasing local capacity for improving population health.
  • Value-Based Payment Reforms: Michigan detailed a number of payment reforms that would allow the state to move closer to a “payment for value” structure across payers. Initial payment reforms detailed in the blueprint document include expansion of the PCMH infrastructure in the state, pay-for-performance and shared savings strategies. Michigan established a longer-term goal of making care management payments through the state’s new Accountable Systems of Care. These payments would be structured to account for continuity of care and a shared savings component with provider upside and downside risk.25

The blueprint identified infrastructure cost associated with implementing the reforms detailed above at $13.0 million with full dissemination of the model in 2019. Based on this blueprint, Michigan submitted an application to CMS for additional funding to test this model. CMS anticipates awarding up to $700 million to fund up to 12 Model Test grants across the country, which will provide financial and technical support four years for states to test and evaluate their models. Round two of the Model Test grants will be awarded sometime in the Fall of 2014.26

Health Homes

As part of the state’s budget, Michigan committed to pilot Medicaid Health Homes, a new ACA state plan option that provides enhanced matching funds (90 percent for the first 8 quarters) for Medicaid programs to establish person-centered systems of care that facilitate access to and coordination of the full array of primary and acute physical health services, behavioral health care, and community-based long-term services and supports, for beneficiaries who have at least two chronic conditions, or one and at risk of a second or a serious and persistent mental health condition. Michigan implemented health homes in three regions for individuals with a serious and persistent mental health condition beginning July 1, 2014.27 Community mental health service providers (CMHSP) are designated as health homes.28

Integrated Care for Dual Eligible Beneficiaries

In 2011 the State of Michigan was successful in accessing funding through CMS for a Design Contract for the Integrate Care for Dual Eligibles (ICDE) program. Michigan will pilot a new care and supports coordination program for residents enrolled in both Medicare and Medicaid in four markets throughout the state (Michigan’s Upper Peninsula, eight counties in Southwest Michigan, Wayne County, and Macomb County.) Dual eligible beneficiaries who participate in the pilot project will be enrolled in an Integrated Care Organization (ICO). ICOs are responsible for all Medicaid and Medicare funded physical health services and supports necessary to meet the needs of the enrollee, including both acute care and long term care. In addition, the ICOs must coordinate care with the Prepaid Inpatient Health Plans (PIHPs) which are the entities responsible for behavioral health care for all Medicaid enrollees, including the dual eligible beneficiaries.29

Michigan issued a Request for Proposals in August of 2013 for the state’s ICO network; in November of 2013 the State of Michigan identified the organizations that will serve as ICOs during the pilot project period. In April 2014, the State signed a Memorandum of Understanding (MOU) with the Federal Centers for Medicare and Medicaid Services outlining the structure of the state’s ICDE. Contracted ICOs are now undergoing a state readiness review process and services will be provided through the ICDE program beginning in January of 2015. The demonstration is estimated to include 100,000 dual eligible beneficiaries.30 The first phase includes two regions (the Upper Peninsula and Southwest Michigan.) Services for voluntary enrollees in those regions will begin January 1, 2015. Services for passive enrollees in these two regions will begin April 1, 2015. For phase 2 (which includes Wayne and Macomb Counties) services for voluntary enrollees are set to begin May 1, 2015 followed by services for passive enrollees on July 1, 2015.31

Additional policy actions the state either implemented in FY 2014 or planned to implement in FY 2015 are detailed in the table that follows:

Michigan Medicaid Policy Changes in SFY 2014 and 2015
Eligibility, Application and Renewal Policies
  • The Healthy Michigan Plan was implemented April 1, 2014. The Adult Benefits Waiver (with limited benefits and capped enrollment) for childless adults ended on 4/1/14. On that date current enrollees (about 50,000) were converted to the Healthy Michigan Plan.
  • Eliminated Family Planning Waiver. (However due to litigation, FP waiver cases are not closed until eligibility for other Medicaid programs has been explored.)
Premium and Cost-Sharing Changes
FY 2015 for Healthy Michigan Plan:

  • A two percent premium will be charged to Healthy Michigan enrollees with incomes between 100% and 138% FPL when they have been enrolled in the plan for six months. The state estimated that during the last half of FY 2014 (the period ending September 31, 2014), a total of 320,000 individuals will be enrolled in Medicaid (beyond the ABW conversions).
  • After six months in the plan, all members will pay a monthly cost-sharing amount based on their historical copayments from the prior six month period.
  • Enrollees can reduce their annual cost-sharing by participating in healthy behaviors, including completion of an annual health risk assessment.
Provider Rates and Provider Fees/Taxes
  • In both FY 2014 & FY 2015: Michigan increased MCO and nursing facility rates.   All other rates were flat.
  • Effective January 1, 2015, when the ACA primary care rate enhancement to 100% of Medicare rates ends, Michigan will fund half of the value of the enhancement.
  • Hospitals and nursing facilities have small provider tax increases in both FY 2014 and FY 2015.
Benefits and Pharmacy
  • No changes in FY 2014 or FY 2015.
Managed Care and Care Coordination
  • In FY 2014:
    • Enrolled the Healthy Michigan population in Medicaid HMOs in FY 2014.
    • Continued existing Patient Centered Medical Homes initiative.
    • Implemented the new Health Homes (ACA Section 2703) initiative for individuals with both severe mental illness and a chronic physical health condition in FY 2014.
  • Dual eligible beneficiaries financial alignment demonstration (MI Health Link) in four regions of the state. Phased enrollment begins in December 2014, with initial enrollments effective on January 1, 2015.



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