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Lean Medicaid Administration

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Kate McGovern
May 12, 2021

As a practitioner of Lean process improvement techniques, I evaluate healthcare policy through a lean lens. The privatization of state Medicaid management deserves scrutiny, as the majority of state governments have added a layer of insurance companies to manage the publicly funded program. The increased administrative complexity is counter-intuitive to a lean operation which seeks to minimize hand-offs.

A lean evaluation of a privatized Medicaid program would consider the time, effort and cost of contracting out services, and the capacity to assure contractual compliance by multiple managed care organizations (MCOs), as well as the fees charged by those entities. This would be compared to the cost of administration by the state. A lean review would assess the cost-benefit of failing to build internal capacity.

The extent of the gap between payment for medical care and total program spending varies widely. Based on data from 2016-17, Health Affairs reported, “A five-fold variation in the amount of administrative overhead among states’ managed care plans, and a 37-percentage-point spread in the percentage of MCO revenues that are spent on actual care.” In 2021, the Office of Inspector General reported that many of the 39 states using MCOs had, “Incomplete or inaccurate information for the amounts paid, allowed and billed.”

Consider the experiences of two New England states that share a common border:

Connecticut Leans Medicaid

In 2009, an audit found that Connecticut overpaid MCOs by nearly $50 million. In 2012, the state discontinued using MCOs for its Medicaid program, saving in excess of $40 million. The gains were not solely financial. Moving from three MCOs to a common administrative entity consolidated patient data, allowing primary care doctors access to information about their patients’ prescriptions, hospital admissions and treatment by specialists. That knowledge would, “Help doctors reduce duplication, avoid errors and ensure patients follow through with their treatment plans,” according to (then) Social Services Commissioner Roderick Bremby.

Will Rhode Island Lean Medicaid?

In 2009, the RI Auditor General recommended that the Department of Human Services, “Should consider implementing independent audit requirements into managed care agreements to validate the total cost of services provided to Medicaid eligible individuals…” Subsequent annual reports repeated the recommendation, including a notation in 2015 that, “Approximately $208 million was estimated as overpayments to MCOs of which $133 million remained due to the State at June 30, 2015.”

In 2018, Health Affairs reported that Rhode Island’s MCO contracting overhead was the second highest of the 32 states and D.C. using MCOs. Last year, legislation to require an audit stalled when the General Assembly adjourned due to COVID. In the 2021 session, legislators are again seeking an audit, with the potential of de-privatization if the findings support it. Timing is important here—the MCO contracts are due for renewal next year.

Lean principles apply to Medicaid management:

  • The core tenet of Lean integrates efficiency with quality for the purpose of delivering value. Does contracting out drive cost without adding value to Medicaid recipients or medical providers? Does the privatization unnecessarily divert program funds to MCOs? Could Rhode Island achieve savings similar to those in Connecticut and reallocate funds to enhance quality?
  • Hand-offs are unlean.As Rhode Island physician Mark Ryan explains, MCOs are not actually health care providers. Rather, they are inadequately monitored middlemen ‘payers’ who take money from patients and tax payers and pay some of that money to actual healthcare providers (hospitals, physicians, etc.).” 
  • Administrative complexity is unlean. Is the state’s administrative burden of issuing and managing contracts factored into the cost of the Medicaid program? What additional resources would be required for the state to properly oversee these private entities, as recommended by the Auditor General’s report? How would that compare to building appropriate internal capacity?

A Lean HealthCare System

Notably, former DHS Commissioner Bremby was a leader in Connecticut’s Lean initiative who believed that, “LEAN is helping to transform the way we do business. LEAN is a key to our success as an agency.” I had the opportunity to hear Commissioner Bremby address a Lean conference where he explained that the public service mission is at the core—that process improvement tools alone would not bring the transformation. The agency’s commitment to Lean principles of quality and customer service was essential in the successful transition from the MCOs. By 2016, the state was able to reduce costs and improve quality, increasing the number of providers willing to take Medicaid patients and reducing the use of emergency rooms for routine care.

Lean practitioners understand the value of system design to achieve quality and efficiency. Healthcare in the United States is not a system. It is a market. Since markets are not capable of producing universal access to public goods, such as healthcare, substantial gaps occur. State and federal governments attempt to plug the gaps. The result is a dysfunctional patchwork of public and private administrative entities, neither universal nor efficient. Eliminating the complexity of multiple payers as intermediaries is an important first step. Following Lean principles could ultimately bring the United States to a healthcare system. We can start with Medicaid.


Author: Kate McGovern, MPA, Ph.D. is a Lean trainer and practitioner in the public sector. Formerly a professor for the State of NH, Kate is a consultant with Daniel Penn Associates and instructor at College Unbound. She is the author of A Public Sector Journey to Lean: Fighting Muda in Times of Muri. [email protected] @KateMcGovern_

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