Under Title XIX of the Social Security Act (the Act), state Medicaid programs are required to cover institutional long-term care for qualifying children and adults. However, states have flexibility in covering home and community-based services (HCBS), designing the LTSS program, and determining whether to use Medicaid managed care organizations (MCOs) to administer the benefit.
Thoughtful implementation of a state’s LTSS program is important and has implications for states, MCOs, providers, and beneficiaries, including significant state and federal budget implications. In this paper, we discuss the potential short-term and long-term savings for the state from transitioning an LTSS program from fee-for-service (FFS) to managed care.
There are two broad types of Medicaid LTSS delivery systems: FFS and MLTSS. Both FFS and MLTSS programs provide institutional room and board, nursing care, personal care, and therapy services in an institution for low-income and/or low-asset individuals who need assistance with activities of daily living (ADLs). States may also choose a hybrid approach, where some services and/or members remain the responsibility of FFS and others are the responsibility of MCOs. States may also choose whether to provide home- and community-based services (HCBS), which allow a beneficiary to receive assistance with ADLs while continuing to reside at home or in the community.
The growth of HCBS originally stemmed from the U.S. Supreme Court decision in Olmstead v. L.C. in 1999, which ruled that states have an obligation to ensure that individuals with mental disabilities live in the least restrictive, most integrated settings possible. This meant that state Medicaid agencies were required to provide health services to beneficiaries who chose to live in the community or at home.
The growth of HCBS has been compounded by:
- Additional guidance that ruled the Olmstead Act applied to all disabilities, not just mental disabilities.
- Beneficiary preference to live at home or in the community.
- The growing population of seniors needing assistance with ADLs.
- The lower cost of HCBS compared to institutional care.
- The Obama administration’s initiatives to facilitate and advance community integration, including the “Year of Community Living” and increased Department of Justice enforcement of the Olmstead decision.1
- The additional flexibility provided under the Patient Protection and Affordable Care Act (ACA) for states to expand HCBS programs
As HCBS has expanded, so too have MLTSS programs. They have been fueled by state interests, including increasing the predictability of state expenditures, aligning Medicare and Medicaid incentives in coordinated programs for Medicare-Medicaid eligibles, and improving care coordination.2
Through MLTSS, states pay one or more Medicaid MCOs fixed per member per month (PMPM) capitation payments to provide LTSS and potentially other services. There are two common ways for structuring the capitation payment:
- Individual LTSS rate cell approach: PMPM payments are based on the actual LTSS rate cell distribution for enrolled beneficiaries. LTSS rate cells can vary for any combination of the following:
- The long-term care setting of the beneficiary (e.g., in a nursing facility, at home, etc.)
- The healthcare status and the level of need of the beneficiaries
- Region and eligibility status (e.g., if the beneficiary is dually eligible for Medicare or only has Medicaid)
- Blended LTSS rate approach: PMPM payments are determined based on a targeted LTSS rate cell distribution for enrolled beneficiaries.
Under the blended approach, MCOs are incentivized to keep the member in their home or community due to the higher cost associated with the nursing home setting of care compared to other care settings. This act of delaying beneficiaries from entering into a nursing home could over time result in program savings. In the following sections, we provide illustrative savings that a state may achieve from transitioning from FFS to MLTSS.
Illustrative savings definitions
In order to model the potential changes in costs due to transitioning LTSS from FFS to an MLTSS program, we define the following items:
- Nursing home (NH) PMPM: The monthly nursing home costs for members located in a nursing home.
- HCBS PMPM: The average monthly costs for members receiving home- and community-based services. This may include costs for short-term nursing home stays.
- LTSS mix: Out of all nursing home and HCBS members, the percentage of beneficiaries receiving care in a given care setting. If, for example, 70 of 100 members reside in a nursing home, and 30 members are receiving HCBS, then we would say the LTSS mix is 70% nursing home/30% HCBS.
- Transition percentage: One of the goals in an MLTSS program is to keep members in their homes or community. The LTSS mix should shift away from nursing homes and toward HCBS over time. This shift (or transition percentage) is sometimes explicitly defined in a program. To highlight the significant impact of the transitions, we modeled 1%, 2%, and 3% annual transition assumptions (i.e., a move from 70% nursing home to 69% nursing home in a year for a 1% transition assumption).
- Administrative costs: The costs an MCO incurs to administer and manage LTSS benefits, generally including taxes and fees incurred by the MCO. The expectation is the MCO would use this funding to actively manage the transition percentage.
- Margin: MLTSS capitation rates are required to include targeted margins to account for service cost risk, contributions to reserves, and other items. This value varies from program to program and from state to state.
Figure 1: Illustration assumptions
|LTSS Mix||70% nursing home/30% HCBS|
|Transition Percentage||Scenarios for 1%, 2%, and 3% annually|
|Administrative Costs||NH 2.0% of revenue
HCBS 6.0% of revenue
|Margin||2.0% of revenue|
Illustrative savings calculation
At the core of the calculation, the cost impact of moving from a FFS delivery model to an MLTSS program is the offset of additional costs paid to the MCO(s) to administer the program in exchange for the cost savings the MCO(s) are able to achieve. Unlike a managed acute care program, the impact of cost reductions come about gradually. The main driver is transitioning the LTSS mix from nursing home to HCBS. Given that it is often difficult to move a patient from a nursing home and serve them at home or in the community, this transition process takes time and is achieved primarily by delaying patients from progressing to a nursing home.
We show the illustrative yearly impact of changing from a FFS delivery model to an MLTSS program by the average PMPM of the LTSS beneficiaries (Figure 2) and the cumulative savings incurred (Figure 3). Depending on the transition assumption, MLTSS costs become less than or equal to FFS in years 2 to 6, and cumulative savings start being realized in years 4 to 12.
Figure 2: Illustrative average LTSS PMPMs
Figure 3: Cumulative program savings
These illustrative calculations make a few assumptions:
- MCOs are able to contract with providers at the same level of reimbursement that FFS Medicaid paid.
- To simplify the illustration, annual service cost PMPM trend assumptions are set to 0%. Modest trend assumptions do not materially impact cost savings and timing results.
- Administrative costs paid to the MCOs are modeled as additive costs and do not consider the potential shift of administrative costs from the state to the MCOs.
- Continual improvement in the LTSS mix is achievable. However, there is an upper bound to what proportion of members can safely receive HCBS as opposed to residing in a nursing home. Some programs serve more than 70% of nursing home eligibles in the community.
- The calculations illustrate the following financial impacts to the state:
- Short-term impact: Considering only costs to the state, the up-front impact of adding MCO administrative and margin costs outweighs the savings achieved through transitioning the LTSS mix for all illustrated transition scenarios.
- Long-term impact: Time needed to achieve savings is dependent upon how quickly the LTSS mix is shifted toward HCBS, as shown in the differences between the 1%, 2%, and 3% transition scenarios. However, under all illustrated scenarios long-term cost savings for the state are eventually achieved.
While we have modeled the potential short-term and long-term savings for the state from transitioning to MLTSS, it is important to acknowledge the importance of program design, incentive alignment, funding, performance measurement and management, and other key considerations in achieving savings. Key factors for success in achieving savings in MLTSS include, but are not limited to, the items discussed below. These considerations are not intended to be exhaustive, and each state will need to review its specific population, benefits, and other program parameters to find the delivery system that best meets the LTSS needs of its population.
There are many important questions to consider when designing the LTSS program. For example, does the state include community members not receiving HCBS? Some community members could be at risk for needing nursing home care if additional services are not provided. Thinking beyond managing only those currently qualifying for a nursing home level of care may allow states and/or MCOs to manage the health of community members, keeping them out of nursing homes longer.
Another design consideration is the scope of services provided by the program. Is the program taking an integrated approach and managing all of the beneficiary’s costs, including acute care and LTSS, or is the program focused on managing just the LTSS components for these beneficiaries?
Managed care vs. FFS
It is important to acknowledge as part of the design discussion that managed care is not the only way savings can be achieved. States using FFS models can also achieve savings by transitioning members from the nursing home setting to HCBS. To do so, the state could use many of the same tools as an MCO, such as case management and benefit education, to help members who have recently entered a nursing home to return to the community.
Administrative costs must be considered for both the state and the MCOs if an MLTSS program is used. The complexity of the program, the eligible population size, and the number of MCOs, among other factors, will all impact the ability of the state and the MCOs to effectively manage administrative costs. If selecting an MLTSS program, the state must also consider administrative redundancies between the state and the MCOs. Some redundancies are necessary to address Centers for Medicare and Medicaid Services (CMS) requirements and properly oversee the program. However, states may be able to reduce their own total administrative duties and make design decisions to manage total (state and MCO) administrative costs of the program.
States with insurance carrier premium taxes can use premium taxes to increase the share of services funded by the federal government. This is a tool used by some states in capitated programs to effectively increase the federal match on Medicaid services and increase savings in the short-term and long-term for a new MLTSS program.
Beneficiaries, beneficiary stakeholders, providers, legislators, CMS, and taxpayers, among others, all have interest in the design, cost, and effectiveness of the LTSS program. It is important to engage stakeholders early and often to design an LTSS program that meets the needs of all stakeholders.
Many Medicaid beneficiaries in LTSS programs are also eligible for Medicare. Medicare generally covers medical costs, pharmacy costs, and limited nursing facility costs while Medicaid is responsible for the majority of LTSS costs. However, improved management of costs and member health for dual eligible members can lead to savings in costs covered by Medicare.3 As such, it is important to consider whether there are other vehicles a state may be able to tap into to improve care coordination and maximize savings. Some examples include financial alignment initiatives (FAIs), fully integrated or highly integrated dual eligible special needs plans (FIDE or HIDE SNPs), and the MCO direct contracting model recently released by CMS. Additionally, Medicare Advantage plans can cover supplemental benefits that may further reduce HCBS costs borne by the state. Dual Medicare and Medicaid programs have been evolving over time to meet CMS, MCO, and state needs and to address the growing area of concern that dually eligible Medicare and Medicaid individuals may be better served through integrated care. It also means there may be savings opportunities available to the state if it designs a program in coordination with Medicare and MCOs.
Because the program's ability to transition members from an institutional setting to the home or community is a key driver in achieving savings, it is important to consider community provider availability. For example, restricted HCBS provider availability may limit the ability to transition members out of the nursing home. In estimating savings, a state must be realistic in setting goals for transitioning members to HCBS and may need to consider provider incentives or enhanced reimbursement to ensure sufficient provider capacity.
Urban vs. rural
Provider capacity, provider reimbursement, service utilization, and savings will also be influenced by member location. For example, provider capacity for HCBS may be more limited in rural areas, or such providers may require higher reimbursement to offset transportation time and costs. A state may choose to design its LTSS program such that members in some areas are enrolled in MLTSS while others remain in FFS to maximize program effectiveness.
According to the U.S. Census Bureau, the over-85 population in the United States is expected to grow by over 35% from 2020 to 2030,4 putting increasing pressure on federal and state funds. Additionally, nursing home and HCBS provider networks will need to grow quickly to keep up with the increasing demand for services. It is important to consider how this will impact provider capacity, provider reimbursement, and overall savings in designing the LTSS program.
During the 2020 U.S. presidential campaign, Joe Biden called for the elimination of the current waiting list for HCBS under Medicaid.5 More recently, President Biden called for a $15 minimum wage, which would impact nursing home and HCBS labor costs. Similar efforts have already been implemented on a state level, impacting LTSS costs. It is important for states to understand the potential likelihood and impact of legislative changes, such as elimination of waiting lists or an increase in the minimum wage, to understand how nursing home and HCBS provider costs may change over time.
This report was developed to help readers better understand the potential cost and savings implications for transitioning to MLTSS. This information may not be appropriate, and should not be used, for other purposes. Milliman does not endorse any specific policy or regulatory action on matters discussed in this report.
The authors of this paper developed certain models to estimate program savings under illustrative assumptions. We reviewed the models, including their inputs, calculations, and outputs, for consistency, reasonableness, and appropriateness to the intended purpose and in compliance with generally accepted actuarial practice and relevant actuarial standards of practice (ASOPs).
The illustrative calculations of short-term and long-term financial impacts included in this paper are not specific to any one state and should be adjusted based upon any given state’s population and program designs.
The authors are actuaries for Milliman, members of the American Academy of Actuaries, and meet the qualification standards of the Academy to render the actuarial opinion contained herein. To the best of our knowledge and belief, this information is complete and accurate and has been prepared in accordance with generally recognized and accepted actuarial principles and practices.
This report outlines the review and opinions of the authors and not necessarily those of Milliman.
1 Musumeci, MB, & Claypool, H. (June 18, 2014). Olmstead’s Role in Community Integration for People With Disabilities Under Medicaid: 15 Years After the Supreme Court’s Olmstead Decision. Kaiser Family Foundation. Retrieved January 30, 2022, from https://www.kff.org/medicaid/issue-brief/olmsteads-role-in-community-integration-for-people-with-disabilities-under-medicaid-15-years-after-the-supreme-courts-olmstead-decision/view/print/.
2 Lewis, E. et al. (January 29, 2018). The Growth of Managed Long-Term Services and Supports Programs: 2017 Update. Truven. Retrieved January 30, 2022, from https://www.medicaid.gov/media/3406.
3 Washington State Health Care Authority (September 17, 2021). Washington receives $17.9 million in shared savings for sixth year of Health Home demonstration. Retrieved January 30, 2022, from https://www.hca.wa.gov/about-hca/apple-health-medicaid/washington-receives-179-million-shared-savings-sixth-year-health.
4 U.S. Census Bureau. 2017 National Population Projections Tables: Main Series. Retrieved January 30, 2022, from https://www.census.gov/data/tables/2017/demo/popproj/2017-summary-tables.html.
5 Biden Harris. The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce. Retrieved January 30, 2022, from https://joebiden.com/caregiving/.