Governor Deval Patrick unveiled his budget for FY12, and we have talked about some of the ramifications of his recommended cut in local aid as well as his proposal on municipal health care. But little has been written, up to now, on the key linchpin of Governor Patrick’s budget, which is his budgeted savings of about $1 billion dollars in health care. Secretary Jay Gonzalez recently testified at a legislative hearing, and said that the billion dollar savings was achievable. From the State House News Service:

“It’s increasing co-pays. It’s reducing benefits. It’s reducing provider rates,” Jay Gonzalez, secretary of administration and finance, told lawmakers at a State House hearing. “There’s no question about it.”

Gonzalez said those “hard savings,” which also include limiting state reimbursement for preventable readmissions to hospitals, would slash about $450 million in projected health care cost growth.

“I think a billion dollars is achievable. We have to do this,” he said. “These proposals are the way we can get there.”

So, from a political perspective, the Governor will likely manage to nick just about all of the stakeholders in the health care system, which may make legislative progress difficult. He is taking on a herculean task, as he is faced with the loss of additional federal stimulus money that had been helping to finance health care spending (about $1.5 billion) as well as a natural expansion of the eligible population. Currently Mass Health covers about 1.3 million people, while Commonwealth Care covers about 161,000 people. The Governor’s own estimates show an increased caseload in Mass Health (in FY12) of about 4.5%, bringing that number to about 1.36 million, while he estimates growth in Commonwealth Care of about 8%, bringing that number to an estimated 174,000.

With even the Governor estimating increased enrollment, and with the loss of federal stimulus money, his job is truly difficult. And keep in mind that cuts in Mass Health also result in less existing federal reimbursements, making State savings a bit more difficult.

The Governor’s budget essentially levels funds Mass Health at $10.507 billion, despite the increased enrollment and medical inflation. The estimated shortfall from that budgetary allocation is about $800 million. The Governor also level funds Commonwealth Care at $822 million. All seem to agree that based on those numbers the Governor needs to make program changes to save about $1 billion dollars.

I am not looking to get into the weeds of health care spending here, but the Mass Budget and Policy Center has provided some interesting tidbits on the Governor’s proposal. Where does he hope to achieve these savings?

Provider and Managed Care Organization Rates
Reduces rates or payments to health care providers resulting in total savings of $150 million, for a net savings to the state of approximately $75 million. These cuts include: not paying
hospitals for “preventable” readmissions that occur within 30 days; reducing transition payments to certain hospitals; reducing hospital rate “add-ons” for hospitals that serve a disproportionate share of publicly funded patients; eliminating special payments to community health centers to support
increased dental capacity; and eliminating payments to nursing facilities to hold a patient’s bed for up to 10 days while the patient receives care in a hospital.
• Eliminates rate increases for managed care plans for a projected savings of $169 million in total, or $84 million in net savings to the state.
Service Delivery
• Includes a proposal for aggressive contracting of most state-administered health care programs: MassHealth, Commonwealth Care, the Group Insurance Commission which purchases coverage for state employees, dependents and retirees, and the Medical Security Program for the unemployed. The Governor estimates total savings of $351 million to the MassHealth program alone from competitive
procurement of services for up to 800,000 of its members. This initiative focuses on care integration and care management for high risk populations and aims to lay the foundation for delivery system and payment reforms throughout the health care system.

The changes are not limited to the above. The Governor increases co-pays for prescription drugs for certain categories of Mass Health recipients (means tested), continues to limit dental coverage in both Mass Health and Commonwealth Care programs, and looks to make major cuts in the Adult Day Health Program, cutting $55 million (for a State savings of $27 million).

The Governor is also looking to drive enrollees into “managed care” plans, which limit choice but save the State considerable money. He is rolling out managed care in the State GIC, which covers state employees (and which may soon cover most municipal employees). From the State House News Service:

At Wednesday’s hearing, Gonzalez identified “limited networks” as a core component of the administration’s strategy to reduce health care costs. Insurers that offer limited networks restrict their members’ access to hospitals, community health centers and other health care providers that offer care at more affordable rates, reducing consumer choice but also resulting in substantially lower costs. Last month, the Group Insurance Commission approved a plan requiring all participating insurers to offer limited network plans, and the governor has proposed covering the first three months of premiums for any employees who choose to join a limited network plan.

Although Gonzalez noted that the administration won’t require Commonwealth Care insurers, and likely won’t require MassHealth insurers to form limited networks, he said he thinks insurers participating in those programs will offer them to meet strict cost limitations.

“That will be a consequence of the procurement strategy,” he said.

The Governor is truly taking aggressive steps to contain costs. The question is will they save the type of money needed to keep his budget in balance. And if the Legislature does not agree with some or all of Governor Patrick’s recommendations in this area how will they look to make up what could be a large shortfall in the budget. The Governor recommended a 7% local aid cut. Will Legislative changes to the health care cost savings in the Governor’s submission require further cuts in local aid, as well as other critical parts of the State budget? That is the billion dollar question.