States rush to upgrade Medicaid systems to beat funding cuts
- By William Welsh
- Dec 10, 2004
"There are more procurements either going on now or getting ready to roll out than there have been in a number of years." ? Ray Hanley, EDS Corp.
Fear of possible reductions in funding for Medicaid information systems is prompting states to move quickly to upgrade existing technology before Congress changes funding levels.
States' concern that Congress may change the funding levels, and the anticipated decision by several states to outsource Medicaid claims processing now done in-house have combined to provide a major block of opportunities for health care work, according to analysts and industry officials.
Modernization of Medicaid management information systems, coupled with possible new outsourcing efforts by states, have sparked a flurry of new state and local health care opportunities that may provide $1.5 billion in new business opportunities in nearly 20 states over the next 18 months.
"This is the heaviest I've ever seen it," said John Crysler, senior vice president of operations for state health care, Affiliated Computer Services Inc. of Dallas. "The level of activity in this space is stretching the resources of the contractors."
"There are more procurements either going on now or getting ready to roll out than there have been in a number of years," said Ray Hanley, vice president for state health and human services with Electronic Data Services Corp. of Plano, Texas.
More than 50 million Americans are eligible to receive benefits through the Medicaid program, which was established to provide medical assistance to individuals and families with low income and resources.
Medicaid spending this year is expected to reach $309 billion, with states shouldering $133 million of that amount, according to the National Association of State Budget Officers of Washington.
Integrators manage and operate Medicaid management information systems, which must comply with government regulations, for more than two-thirds of the states.
They also provide fiscal agent services determining eligibility of those who apply for aid, processing claims by providers and making payments to providers.
Spending for state and local government health care IT will increase by 50 percent over the next five years from $6 billion in fiscal 2005 to more than $9 billion in fiscal 2009, according to Input Inc., a Reston, Va., market research firm.
The projected increase is driven by requirements for greater health care system and administrative efficiencies, as well as continued investment in Medicaid management information systems.
The forecast includes funding for all state and local health and welfare technology and outsourcing, spending for hospitals that are affiliated through state and local governments, and perceived increases in projected health care spending related to homeland security.
The increased spending is expected to last through 2007 before budgetary pressures constrain the program and level off spending increases, and runs counter to the assumption of the last several years that health care IT spending would suffer severely because of state budget shortfalls.
"With state budgets the way they were in the last few years, everyone had the impression that major cuts were going to be made for anything that was tagged health care, and it doesn't look like that is happening," said Jim Krouse, Input's manager of state and local market analysis.
Driven by continued and dramatic increases in Medicaid costs, Congress is considering legislation that would decrease federal funding for Medicaid information systems, Input reported. The effort is likely to continue in the next session of Congress.
The federal government provides states with up to 90 percent of the funding for the design, development and installation of Medicaid information systems, and 75 percent of the funding for operation of states' automated claims processing and retrieval systems.
The buzz in state capitals that Congress may cut back on federal financial participation in Medicaid has impelled some states to move quickly with procurements that involve technology refreshments, which fall in the design, development and installation category.
"There is a school of thought that if you need a new system, you should do it now while you can lock in 90 percent for system enhancements," EDS' Hanley said.
Another catalyst is that states can no longer easily get extensions from the Center for Medicare and Medicaid Services, which regulates state-run systems, to continue operating systems that don't comply with federal regulations, industry officials said.
States that have Medicaid information systems are upgrading their systems, and some states that still operate claims processing in-house are moving to outsource those operations to the private sector.
Of the roughly one dozen states that still handle in-house what is known in the industry as fiscal agent services, about a third of those are now considering turning over those operations to the private sector.
"At least three or four states are seriously exploring outsourcing, because Medicaid has gotten so large and complicated, both in the growth of the program and in the difficulty of keeping IT professionals in place within the restrictions of the civil service system," Hanley said.
Not everyone agrees. Unless there are significant fiscal and leadership changes in those states, there may not be enough impetus to change the status quo, said Rishi Sood, a vice president with market research firm Gartner Dataquest in Mountain View, Calif.
"I do not believe these states will make the major move toward business process outsourcing unless environmental issues change," Sood said.
The top integrators providing Medicaid technology and outsourcing services are ACS, EDS and Unisys Corp. EDS provides Medicaid-related IT services in 16 states, ACS in 13 states and Unisys in five states, company officials said. First Health Services Corp. of Glen Allen, Va., also has an established presence in the market.
The new business opportunities are re-igniting competition among old rivals and attracting new companies, Sood said. The newest entrants to the competition are Client Network Services Inc. of Rockville, Md., and Perot Systems Corp. of Plano, Texas.
"The opportunity has been so significant that new companies are teaming to enter the marketplace, older companies are revitalizing their MMIS focus, and new entrants are trying to find the right opportunity to face industry leaders, such as ACS and EDS," he said.
There is healthy competition on every deal, EDS' Hanley said. "You won't find all of them bidding for the same contract, but it will be rare to have less than two or three," he said.
One of the ways that companies can get an edge on their competitors is by offering Medicaid information system refreshments or upgrades that include intelligent technologies aimed at helping states curb program costs.
"States have to be able to know where that money is going," Hanley said. "That means investing not just in technology that processes claims, but also in decision support systems and data warehousing that allow states to see not only how much they are spending but where it is going."
EDS provides its decision support tool to a number of states, including Alabama, Arkansas, California, Indiana, Kansas, Oklahoma, Pennsylvania, Vermont and Wisconsin. The solution allows for fast detection of fraud and abuse queries.
Another way for states to control rising Medicaid costs is to install technologies that can help them manage the high costs associated with certain diseases such as childhood asthma, diabetes and coronary artery disease, said Frank Abramcheck, vice president and managing partner for Global Public Sector at Unisys.
"The only real way for states to get their arms around cost is to get into the disease management arena," he said.
Unisys partners with New York-based CapGemini U.S., which provides informatics for the disease management solution the company is currently marketing to states, Abramcheck said.
These kinds of enhancements are a prerequisite if states are to get a handle on Medicaid costs, Input's Krouse said. "It's spend big now so you can save later," he said. *
Staff Writer William Welsh can be reached at wwelsh@