Raleigh, N.C. — State Department of Health and Human Services leaders had some good news for lawmakers Tuesday: Medicaid is expected to stay within budget this year. But the agency still faces other money woes.
At an oversight committee hearing Tuesday morning, consultant and acting Medicaid Finance Director Rudy Dimmling rolled out budget projections for fiscal year 2014-15 based on the first quarter's spending.
According to Dimmling, the forecasting model developed by his employer, Alvarez and Marsal, shows Medicaid staying within its certified budget for the first time in years.
"As of now, our base case assumes we’ll be $68 million lower than budget," he said.
First-quarter spending was $528 million higher this year than last, Dimmling said, but most of that is due to timing quirks that will resolve as the year goes on. About $144 million of the difference was due to increased enrollment of 5.8 percent over last year, a figure well within the expected growth lawmakers budgeted for. Only $74 million of the difference was a surprise: increased spending on prescription drugs.
"That is quite alarming. We need to be aware of that," Dimmling warned lawmakers.
In past years, higher prescription spending has been mostly due to rising drug prices. Some of this year's increase is, too, specifically some expensive new drugs for hepatitis C. But most of the $74 million jump is due to higher drug utilization.
“Physicians are writing more prescriptions," said DHHS Secretary Aldona Wos. “We are forming a SWAT team on this issue.”
Reps. Donny Lambeth, R-Forsyth, and Marilyn Avila, R-Wake, urged Wos to be careful about attempts to crack down on the increase.
Avila pointed out that current trends in medicine favor prevention and management of conditions, often through prescription drugs, instead of acute care responses such as surgeries or more expensive therapies.
"Let’s look at cost avoidance," she urged Wos. "We’ve got to do a deep analysis of why these doctors are writing these prescriptions."
"There is a lot of pressure on the medical community to keep patients out of the hospital," Lambeth said. "I think you'll see some things there that are saving money in other categories."
Dimmling also warned lawmakers that the forecast is "constantly evolving" and could change if there's an outbreak of disease this year, such as flu or enterovirus D68, or if the state has to spend money on potential emerging threats like Ebola.
Mental health shortfall
Not all of the DHHS budget news was good, though. Legislators also learned that the Division of Mental Health has been operating under a structural deficit since 2008.
According to DHHS Budget Director Jim Slate and State Operated Healthcare Facilities Director Dale Armstrong, Medicaid rule changes at the federal level in 2007 increased the operating costs of the state's mental hospitals.
In addition, Broughton and Cherry hospitals lost their certifications at points in 2007 and 2008, making them ineligible for Medicaid reimbursement for care. That meant the state had to pay the entire cost for those periods, far more than its budgeted share.
Tens of millions more were needed from 2009 to 2011 to keep the doors of Dorothea Dix Hospital open while the transfer of patients to the new Central Regional Hospital was delayed. That, too, was money not included in the division's operating budget.
Those shortfalls and overruns snowballed from one year to the next, leaving the division with a structural shortfall that has ranged from nearly $38 million in June 2011 to $13.5 million in June 2014.
As a result, Slate said, the division has run out of cash before the end of each fiscal year, delaying end-of-year payments into the next budget year, perpetuating the shortfall.
Pam Kilpatrick with the Office of State Budget and Management, said state budget officials have helped out where they could by adding lapsed salary and other funds to shore up the division's bottom line. In addition, Armstrong said better budget management, consolidation and efficiencies have helped shave about $14 million off its operating costs to date, and more changes this year should save another $9 million.
Still, Slate said, the agency will need about $11 million more this year to resolve the structural deficit, and more ongoing funding will be needed to make the agency financially stable.
Slate said several changes have cut into hospital revenue in recent years. The state hospital system cares for about 3,000 patients "with significant disabilities," most of whom have no insurance and no ability to pay, he said. The increased acuity of their illnesses also requires higher staffing levels.
"I still think we’re going to have an issue that needs to be addressed," he told lawmakers. "We've got to be able to adjust these facilities for inflation and payer-mix changes."
Legislators expressed "disappointment" that the division had not been able to save more money through cuts and efficiencies.
Armstrong said he'll continue to look for further savings.
"It gets to the point where you can't cut any further, and if you do, it begins to affect services that are rendered," he said. "The only way to look at additional cuts is to look at changing the array of services we provide, and we hope we don't get to that point."
Hiring still a problem
DHHS is also still facing trouble with job vacancies and turnover, officials said Tuesday.
The turnover rate at the agency has declined from 21 percent in 2009 to 16 percent in 2014. But vacant positions aren't being filled quickly. Out of 18,509 positions statewide at DHHS, 2,441 are currently unfilled – a vacancy rate of 13.2 percent.
DHHS Human Resources Director Mark Gogal thanked lawmakers for giving the agency more salary flexibility and additional money to attract and retain key employees, such as physicians and information technology professionals, who could make much more money in the private sector.
Gogal urged lawmakers to extend DHHS' salary flexibility and to consider giving the agency more hiring flexibility as well. He said regulations requiring outside approval of some hires can delay the hiring process by as much as six weeks – a real problem in a field as competitive as health care services.
"When approval takes longer, we lose candidates," he said. “We have lost people because of that turnaround time.”