Memorandum: Lanier Cansler On DHHS Cuts

Secretary of Health & Human Services Secretary Lanier Cansler’s January 7 memo to members of the General Assembly.

As we end the 2009 year, and prepare for the continued challenges of 2010, I thought it might be helpful to provide you with an update on our efforts to accomplish many of DBMS’ budget reductions required by the General Assembly.

Without a doubt, the effort to achieve the required budgetary savings is among the most difficult efforts I have ever attempted. Every decision we make at DHHS impacts a provider or consumer in some way. We are not taking these decisions lightly, nor are we making these decisions without input from providers, advocates, and consumers. But it remains a fact that we simply cannot take almost $1.5 billion dollars out of the State’s health care programs, especially in a time that the Medicaid program and demand for services are growing rapidly, and expect no changes in what we do, how we pay, or how we manage. Every decision reduces provider revenues. Every decision changes the way a consumer accesses services. Our focus has to be on doing everything we can to maintain quality in the services we deliver, maintain access to those services that are critical to the health of our state’s citizens in need of these services, and maintain the highest level of program integrity to ensure the services delivered are clinically appropriate.

As you may know, approximately 85% of the DBMS budget relates to health care with about 60% related to Medicaid, 15% to mental health, developmental disabilities, and substance abuse services, and the remainder to public health and other health activities. The reduction in state appropriations set forth in the budget passed last year resulting in required reductions in total spending of almost $1.5 billion in the health care arena creates an unprecedented challenge for the Department. Accomplishing this reduction without inflicting severe damage on the State’s health care delivery system is needless to say, extremely important.

Meeting the budget reductions challenge has been complicated by a number of factors, most outside the control of DHHS. Most of our budget reduction limitations fall within the Medicaid program where substantial reductions are required to comply with budget mandates.

• The State is experiencing a significant growth in the Medicaid program as a result of the economy and unemployment. We now project that enrollment in the State’s Medicaid program will grow by 18,000 more consumers than estimated when the budget was under development. In addition, we are experiencing a growth in the average consumption of services by Medicaid consumers of over 4%, where the budget considered consumption growth of only 1/4%. This enrollment growth and consumption of services is projected to require an additional $85 million in state funds in excess of the current appropriations.

• Many of the budget reduction efforts in Medicaid generally require changes in our state Medicaid plan for which we must submit State Plan Amendments (SPAs) to the federal Center for Medicare and Medicaid Services (CMS) and gain their approval prior to implementation. While we have submitted numerous amendments, to date we have only received approval for rate adjustment amendments from CMS. This does not indicate that approval is not forthcoming, but the normal process can take months. Lack of approval from CMS has caused a delay in implementing over $90 million in required reductions in state appropriations by the General Assembly effective September or October 2009.

• DHHS is limited as to its abilities to control the Medicaid budget. The federal government will not allow any changes in enrollment eligibility, thus eliminating any ability to control enrollment. As for DIMS’ ability to eliminate categories of services, this decision is not with DIMS’ authority. While the General Assembly has the authority to determine what, if any, optional Medicaid services will be covered and has so determined in the State’s budget, some services are considered mandatory by the federal government and must be covered.

• A significant amount of the budgetary savings required by the State’s budget is placed upon Community Care of North Carolina (CCNC), a network of primary care physicians that work with DHHS and its Medicaid consumers. While CCNC has been very successful in its management of the Medicaid population consisting of women and children, the management of the aged and disabled population is significantly more complex and CCNC does not yet have all of the necessary infrastructure to accomplish the budgetary goals for the current year. We are working with CCNC to help them achieve these budgetary goals.

Accordingly, the Department has a limited number of tools available to accomplish the required budget reductions. DHHS can only modify how or by whom the services are delivered, and to some extent, the quantity of services that may be delivered, and we have limited ability to adjust rates. We are concerned that additional rate reductions may affect access to critical services for Medicaid consumers. In addition, the Department must also do everything it can to minimize fraud, waste, and abuse within the Medicaid system and must take new actions to help ensure program integrity.

So what are some of the efforts being implemented to gain control of the Medicaid budget and move toward accomplishing the required budgetary reductions?

• We have reduced provider rates to accomplish the budget reduction as instructed by the General Assembly. These rates were adjusted in a way to help protect primary care providers. We are vigilantly monitoring access to services and will do everything we can to avoid reductions in critical areas of health care access such as OB-GYN services.

• We have submitted the necessary SPAs to CMS to make changes in the State’s Medicaid program in accordance with legislative instructions that will help better manage the program’s services. We are in constant contact with CMS, answering questions and providing requested information to obtain necessary approvals. With the exception of provider rate adjustments, DIMS cannot implement these changes until such time as approvals are obtained. I visited members of our congressional delegation as well as US DHHS officials in Washington in December to encourage rapid approval of these amendments.

• We have utilized the authority you granted DIMS to fasttrack certain contracts that will assist in new oversight and management of certain services as well as enhance our technological abilities to identify and correct issues of fraud, waste and abuse within the system. Even with the fasttrack capabilities, it is taking months to select vendors, complete contracts, and implement our efforts to better control Medicaid expenditures. These contracts have included contracts for services and technology, as well as contracts to purchase certain supplies from a single source, which substantially reduces the State’s cost. As you know, this effort has resulted in a number of concerns and protests from some vendors, providers, advocates, and some legislators. The fasttrack contracts were necessary to begin achieving the required savings and will be effective for no more than two years. The contracts will be put out for bid within the next two years in accordance with the State’s contract process.

• We work daily to evaluate all Medicaid services to determine how we might better manage unnecessary utilization of services and what additional changes we might make to better accomplish the required budgetary savings.

• We have proposed a new provider classification for mental health services referred to as a Critical Access Behavioral Health Agency (CABHA). This concept is designed to both place a greater emphasis on a solid clinical basis for services as well as make certain that services subject to abuse and overutilization are better controlled. This approach will help ensure we do not see another financial fiasco as was experienced with the Community Support Services program over the past several years. This is a controversial decision, however, as it places limits on who can provide certain services and the professional clinical oversight that must be in place to provide certain services.

The concept is probably less an issue than the time line for implementation. We have received numerous comments in support of the concept. However, the budget requires us to move more rapidly than what we might in better budget times.

Every day we receive many emails and letters asking why we are cutting this service or that service, and how it will impact providers, jobs, and care for consumers. I tell them that:

• We are trying to avoid cutting services by managing services so that the only services paid for are those that are appropriate and based upon a solid clinical need

• It would be much easier on me and DHHS not to make changes in the system, but the budgetary reductions made necessary by the State’s economy and loss of revenues gives us no choice but to substantially reduce spending.

• While we have great concern about providers that may fail and the jobs that may be lost, the primary focus of DHHS must be to do everything we can to manage in a way that keeps critical services in place with the reduced dollars we have available.

When they ask about cutting administrative costs, I tell them that if we were to dismiss all of the Department’s almost 19,000 employees at all offices and health care facilities operated by DHHS, it would not achieve the budget reductions placed on the Department this biennium. Therefore, we have no choice but to reduce spending on services.

With the changes we have made and the efforts underway, we may still face Medicaid expenditures that exceed our State appropriations by over $200 million. Through the first five months of the fiscal year, Medicaid expenditures equaled 50% of the year’s budget. We are doing everything we can to achieve budget goals, but many factors outside our control are making the effort increasingly difficult.

Last year was fiscally challenging for DHHS and I look forward to continue working with you in the new year to meet our State’s budget challenges. You are welcome to contact me with any questions,

Wishing you the best in this New Year.