Health & Human Services

State Medicaid Programs Face Millions in New Fees

States are trying to figure out how to budget for a new Affordable Care Act fee that varies based on how much they rely on managed-care companies.
by | March 4, 2014
Tennesse Medicaid Director Darin Gordon, right, said it’s hard to draw a distinction between this new fee and others that the state already covers, so they'll be paying all of it. AP/Mark Humphrey

As states prepare their budgets for the next fiscal year, many are facing millions of dollars in new Medicaid fees under the Affordable Care Act.

Starting this year, the health insurance industry will pay an $8 billion annual fee, which will grow to $14.3 billion in 2018 and keep pace with premium growth thereafter. Private insurers pay their part of the fee based on the size of the market they control. But states that contract with private insurers to manage their Medicaid programs are shouldering those fees as well -- at least according to some of the states that stand to pay the most. They say the actuaries that set premium rates for the private contractors typically consider fees a burden that states have to pay to ensure there's enough money to cover the needs of patients.

There's no official ruling from the federal government on whether states are required to cover the fees, and officials from the Centers for Medicare & Medicaid Services don't plan to issue guidance. States are just beginning to consider how they'll handle the fee and what they'll do to offset any added costs, said Matt Salo, the executive director of the National Association of Medicaid Directors.

"They’ve talked about it, but I don’t think that many have budgeted for it," he said. "The plans are asking, 'Hey, how do we do this?'"

If they completely cover the fee for their Medicaid plans, states will pay at least $15 billion over the next decade, according to a recent report from actuarial firm Milliman, which prepared the study for Medicaid Health Plans of America (MHPA), a trade group. Exactly how much a state pays will depend on how heavily its Medicaid program relies on private managed-care companies, which are paid a lump sum per patient to handle every claim and are incentivized to stay under budget.

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As of 2010, 36 states contracted with managed-care companies, accounting for 50 percent of all Medicaid patients, according to the report. The Kaiser Family Foundation, though, puts the number at 74.2 percent nationwide because it includes managed-care organizations that don't bear full financial risk. Nearly every state uses managed care in at least some capacity.

States where most managed-care organizations are not for profit will face a far lighter burden because of an exemption in the Affordable Care Act. In Minnesota, for example, where 75 percent to 100 percent of managed-care premiums go to nonprofits, the fee will cost only $128 million over the next decade. Florida, by contrast, faces $1.4 billion.  

MHPA maintains that states should cover the full cost of the fee as part of their obligation to serve the Medicaid population.

“If the plans were to be forced to pay some or all of it, they’d probably be in violation of their [agreements with the states],” said Jeff Myers, president and CEO of MHPA. "The Centers for Medicare & Medicaid Services require the state to have a third-party expert validate that the plans they’re contracting with are ‘actuarially sound’ and the amount of money paid to plans is sufficient to pay expected claims.”

Myers said he hasn’t yet heard about a state refusing to cover the fee. Even the states facing the highest burdens --  including Florida, which is still developing a plan to handle the new costs -- agree that it's their bill to pay. State insurance officials point to a 2005 memo from the Academy of Actuaries that says rates have to provide for “reasonable” costs of business, specifically taxes and fees.

Tennessee faces $56 million in added costs this year and $335 million through 2019. Offsetting those costs will take money directly out of the state's general fund, which covers a broad range of state services. Darin Gordon, the state’s Medicaid director, said it’s hard to draw a distinction between this new fee and others that the state already covers, so they'll be paying all of it.

“If I were not to incorporate that into [the budget] as I do other taxes, it would create a question of why this is different and potentially underpaying my plans in total dollars of over $150 million [when including federal fees as well],” Gordon said.

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