SD29 - Medicaid-Financed Physician and Pharmacy Services in Virginia

  • Published: 1993
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 180 (Regular Session, 1991)

Executive Summary:
The Virginia Medicaid program is a joint federal-state program authorized under Title XIX of the Social Security Act. It is the largest of the State's health care programs for indigent persons. Total program expenditures for medical care were about $1.2 billion in FY 1991, representing a 30 percent increase from the previous fiscal year. In FY 1992, expenditures continued to grow, increasing by 16 percent to about $14 billion. The number of persons receiving Medicaid services has also increased significantly. In FY 1991, the number of recipients grew by 17 percent to 428,650. Growth continued in FY 1992, when the number of recipients grew about 16 percent to 495,516.

The 1991 General Assembly passed Senate Joint Resolution SJR 180 in response to concerns about rapidly escalating costs of the Medicaid program. The resolution directed the Joint Legislative Audit and Review Commission (JLARC) to conduct a comprehensive review of the Virginia Medicaid program.

This report is the one in a series on the Virginia Medicaid program. It presents an analysis of Medicaid-financed physician and pharmacy services. It also overviews other ambulatory care services provided through the program. In addition, the report provides an assessment of Medicaid efforts to contain program costs for services through two specific mechanisms: (1) post-payment review of program expenditures and (2) activities to pursue third-party liability for services provided through the program.

Medicaid reimbursement for ambulatory care services (excluding hospital outpatient services) in FY 1991 represented about one-quarter ($280 million) of total Medicaid expenditures for medical care. Of this $280 million, 80 percent or about $225 million was spent on physician and pharmacy services.

In recent years, Medicaid expenditures for physician and pharmacy services have increased dramatically. These increases have been largely the result of growth in the number of program recipients due to recent federal mandates to expand Medicaid eligibility. The U.S. Congress has incrementally extended Medicaid coverage to larger numbers of uninsured citizens by linking eligibility for certain categories of individuals to the federal poverty income level. Consequently, the Medicaid program has become a de facto national health care program for many indigent persons.

Despite these large increases in recipients and their attendant costs, coverage through the Medicaid program is cost effective. In FY 1991, the Medicaid program spent, on average, $688 per recipient to provide reimbursement for ambulatory care services. The average cost per recipient to provide Medicaid reimbursement for physician and pharmacy services was $406 and $322, respectively.

The Medicaid Program Has Experienced Rapid Increases in Expenditures for Physician Services

Medicaid expenditures for physician services have more than quadrupled over the past ten fiscal years to $168 million in FY 1992. The increases in expenditures for physician services have outpaced increases in total Medicaid expenditures for medical care and annual rates of inflation. Most of the growth in expenditures for physician services, however, coincided with program changes implemented between FY 1989 and FY 1991.

For example, much of the recent growth in physician expenditures is due to federally-mandated eligibility expansions, particularly those targeted at increasing Medicaid enrollment of indigent pregnant women and indigent children. In addition, recent reimbursement rate increases account for a portion of the growth in expenditures for physician services.

The Medicaid Program Employs a Conservative Reimbursement Methodology for Physician Services

States have broad discretion in determining fee levels and payment methodologies for physician services. Federal regulations for physician reimbursement require that payment be consistent with principles of efficiency, economy, and quality of care. The Virginia Medicaid program employs a conservative reimbursement methodology for physician services. Recent increases in Medicaid physician reimbursement rates were necessary to maintain physician participation in the Medicaid program.

The Virginia Medicaid program reimburses physician services on a fee-for-service basis, according to a fee schedule. This reimbursement is based on charges from a past claims year. Consequently, reimbursement may not keep pace with inflation in physician practice costs and charges for services.

Medicaid reimbursement of physician services is generally lower than reimbursement by other third party payers. Studies conducted by the U.S. Physician Payment Review Commission and responses to a 1992 JLARC survey of Medicaid-enrolled physicians support this conclusion. In addition, physician associations reported that other third party payers generally reimburse between 60 and 80 percent of charges or more.

Patient Cost-Sharing Does Not Appear to Meet Its Intended Goal

Physician reimbursement is further reduced relative to actual charges because many providers cannot collect patient cost-sharing amounts. Virginia requires some Medicaid beneficiaries to share the costs of their care by making a copayment for services. Theoretically, a copayment should discourage unnecessary utilization by Medicaid recipients, thereby reducing program expenditures for physician services. However, providers cannot deny services if a recipient does not pay the copayment, even though their reimbursement is reduced by the copayment amount.

In FY 1991, the total amount of reimbursement reductions due to required copayments for physician services was about $56,000. Although some physicians responding to the JLARC survey support the concept of copayments to control utilization, these copayments do not appear to be effective in controlling recipient utilization. About one-third of the physicians who responded to the JLARC survey indicated that they do not generally collect copayments from their Medicaid patients, because the recipients are unwilling or unable to pay their share.

Recommendation. The General Assembly may wish to consider abolishing the copayment requirement for physician services.

Addressing Physician Concerns Regarding Recipient Education May Maintain and Improve Physician Participation

Low Medicaid reimbursement has a negative effect on physician participation in the program; however, other factors such as recipient behavior also appear to negatively influence participation rates by physicians. Physician concerns about recipient behavior point to the need for recipient education through the Medicaid program on patient responsibilities. This is especially important as Virginia implements statewide managed care for Medicaid recipients.

Recommendation. The Department of Medical Assistance Services should design and implement a recipient education program on patient responsibilities and appropriate utilization. This program should receive high priority so that it may be implemented in conjunction with expansion of the managed care program statewide.

Further Expansion of Medicaid Managed Care Could Enhance Physician Participation and Improve Recipient Access

Virginia has implemented a managed care program called "Medallion" which currently operates in four pilot localities. Recipients participating in Medallion can only access certain services through an assigned primary care physician. The General Assembly directed that the Medallion program be expanded statewide during FY 1993.

Even though average costs for other ambulatory adult recipients such as aged, blind, and disabled recipients are relatively high, the Medallion program will only cover recipients who are classified as ADC-related, indigent pregnant women, or indigent children. Inclusion of these other adults in the Medallion program could help address what may be an access problem for aged and disabled recipients.

Currently, local health department clinics are not required to serve elderly and disabled patients. Also, physicians who practice general internal medicine (those who are likely to treat these patients) reported lower participation rates than other physicians who responded to the JLARC survey. Inclusion of these recipients in the Medallion program could encourage greater physician participation among these physicians because they would receive greater reimbursement, without a rate increase, through the monthly Medallion case management fee.

Recommendation. The General Assembly may wish to consider directing the Department of Medical Assistance Services to expand the Medallion program to include all ambulatory recipients. This expansion should be undertaken in 1994 after the program, as currently defined, has been implemented statewide and additional waiver authority has been obtained.

Expenditures for Pharmacy Services Have Increased Rapidly

Like physician services, expenditures for Medicaid pharmacy services have been growing at a faster rate than total Medicaid expenditures for medical care and annual rates of inflation. In FY 1991 alone, pharmacy expenditures increased by 34 percent to almost $103 million. Between FY 1989 and FY 1991, average pharmacy costs per recipient and per claim increased by 15 and 20 percent, respectively. In comparison, during this same period, the rate of inflation was 11 percent for all goods and services and 20 percent for prescription drug prices.

Also similar to physician services, much of the growth in pharmacy expenditures has taken place in conjunction with growth in recipients due to federally-mandated program expansions between FY 1989 and FY 1991. The largest increases in recipients who received pharmacy services were in the indigent pregnant women and indigent children eligibility categories. Pharmacy expenditures for these two groups increased by rates much higher than rates of growth for other eligibility categories.

Recent Growth in Pharmacy Expenditures May Be Slowing

Examination of FY 1992 data indicates that the recent growth rate in pharmacy expenditures is slowing. This appears to be related, in part, to the implementation of a prescription drug rebate program required by federal legislation. In FY 1992, the Virginia Medicaid program received almost $16 million in drug rebates for drugs dispensed to program recipients since January 1, 1991.

Nevertheless, the Virginia Medicaid program may not be receiving the entire savings to which the program is entitled. Assessment of Department of Medical Assistance Services (DMAS) data revealed that for FY 1991 and FY 1992, Virginia received about 22 percent less in total rebates than was invoiced due to disputes with pharmaceutical manufacturers. According to staff at the Office of the Inspector General within the U.S. Department of Health and Human Services, this is consistent with experiences of other states.

At this time, complete resolution of these disputes appears to be dependent on additional action from HCFA. The Office of the Inspector General is currently completing reports for action in this area. In the meantime, DMAS has adopted an internal policy to facilitate the dispute resolution process and track the accounts receivable for the disputed rebate amounts.

The State Has Options for Modifying Pharmacy Reimbursement

The current reimbursement system for Medicaid pharmacy services is based on a fee-for-service, retrospective methodology which contains several expenditure controls. Provisions in the Omnibus Budget Reconciliation Act of 1990 do not allow the federal government or states to lower their current reimbursement for pharmacy providers or the upper limits imposed on Medicaid Payments for drugs until January 1, 1995. Nevertheless, some options do exist for modifying pharmacy reimbursement to allow the Medicaid program to more prudently purchase pharmacy services.

Recommendation. The Department of Medical Assistance Services should begin planning for pharmacy reimbursement changes to be implemented January 1, 1995. Consideration should be given to revising the calculation used to establish the estimated acquisition costs of drug products and the dispensing fees for pharmacy providers because the estimation currently used by DAMS was derived from data which systematically excluded certain providers' acquisition costs.

Recommendation. The Department of Medical Assistance Services should pursue obtaining a waiver from the U.S. Department of Health and Human Services to provide pharmacy services to recipients through selected pharmacies chosen through a competitive process. If assessment of this arrangement indicates that the Medicaid program can obtain cost efficiencies without jeopardizing recipient access to pharmacy services, the department should implement this type of contractual arrangement for the provision of pharmacy services.

Recommendation. The Department of Medical Assistance Services should explore the impact of imposing limits on reimbursement for pharmacy services in the Medicaid program in conjunction with the implementation of the prior authorization program for high-cost drugs. These limits should be developed with the assistance of the prior authorization program's advisory panel.

Recommendation. The Department of Medical Assistance Services should explore the feasibility of expanding pharmacy coverage to include reimbursement for limited over-the-counter drugs in the Medicaid program for specific recipients.

Medicaid Utilization Review Activities to Control Fraud and Abuse Meet Minimum Requirements But Could Be Improved

After payments have been made by the Medicaid program, DMAS staff analyze claims data as one means of controlling program expenditures. This "post-payment utilization review" function is done to determine if recipients or providers have developed patterns indicative of excessive use, medically unnecessary use, or unsound billing practices. Although DMAS post-payment utilization review activities meet federal minimum requirements, more could be done to achieve additional cost savings. To address these concerns, the following recommendations are made:

Recommendation. The Department of Medical Assistance Services should consider expanding staff resources for provider reviews to attain additional cost savings. In addition, the Department should maintain and use data from past provider review cases to select providers for review.

Recommendation. The Department of Medical Assistance Services should place high priority on recipient fraud activities to ensure the Division of Program Compliance maintains adequate staff to detect and control recipient fraud and make additional monetary recoveries. DMAS should track the impact of this function, including the amount of program costs avoided, and assess if the current level of staffing is adequate to perform this function.

Recommendation. The Department of Medical Assistance Services should strengthen its drug diversion activities by entering into a new interagency agreement with the Department of State Police to conduct drug diversion investigations on behalf of DMAS. The department should continue to support these investigations by providing referrals and any necessary information or records to conduct them, including regularly produced reports from the Medicaid Abusable Drug Audit System.

The State Police should be allocated additional staff who are dedicated to Medicaid drug diversion investigation. To the extent possible, federal financial participation through the Medicaid program should be used to fund these investigations.

Development of a New Third-Party Liability System Should Include Evaluative Components to Assess Cost Effectiveness

Federal law requires that Medicaid be the payer of last resort. Consequently, any other parties which have a liability to pay for services for Medicaid recipients must be pursued. During FY 1992, DMAS estimates its third-party liability (TPL) activities saved at least $95 million.

DMAS is in compliance with federal regulations affecting State TPL operations. DMAS is in the process of acquiring a new TPL system which will automate many of the manual tasks performed by TPL staff. The new system will allow TPL staff to select cases for research based on their cost-effectiveness, conduct in-house data matches with insurance companies and State agencies to identify other resources, and pursue more TPL cases.

The new TPL system meets most of the criteria established for a model TPL system. However, as the new system is developed, there are additional evaluative components that DMAS should consider to better assess the cost effectiveness of certain TPL activities.

Recommendation. As development of the third-party liability system begins, the Department of Medical Assistance Services should consider incorporating additional TPL practices that other states have found to be successful. For example, other data matches, TPL training and evaluation of social service workers, and estate liability functions could be included in the design of the new system.

Recommendation. When the new third-party liability system is operational, the Department of Medical Assistance Services should undertake tests, such as adding or deleting trauma codes, to identify the most cost-effective third-party liability cases to pursue.