Report: Medicaid system outsourcing on the rise

Spending on Medicaid management information systems for state and local government is expected to grow 20 percent by fiscal 2008, according to a report from market research firm Input Inc. of Reston, Va.

The increase in spending comes not only from greater scrutiny of rising Medicaid costs but also from anticipated cuts in federal funding for Medicaid management information systems (MMIS). For these reasons, agencies are outsourcing the development and maintenance of state-operated systems to the private sector as a way to control costs.

"Without complying with new, more stringent federal regulations that are on the horizon, state health care agencies are in jeopardy of losing federal funding," said Pepe Thupthien, an Input state and local market analyst.

"This fear has caused 20 states to re-evaluate the efficiency of their current MMIS structure and look for ways to save money," he said.

Without a clear timeline for when federal cuts may occur, there is a sense of urgency among states to update and overhaul entire MMIS structures, he said. Indeed, state-operated systems are beginning to be phased out entirely, mainly because of additional requirements and operational headaches.

The total market for outsourced MMIS development and maintenance is expected to grow from $5.1 billion in fiscal 2005 to $6 billion in 2008, Input said. About $4.1 billion worth of MMIS opportunities will be up for competition over the next three years, with more than $1 billion worth of MMIS opportunities available within the next 18 months.

Thupthien said vendors should watch for turnover in the market and jump on opportunities when they open up.

Vendors "often assume that there is no room for new players within this market, which simply isn't true," he said. "Nearly a quarter of today's systems will be managed by a different vendor within the next three years, giving rise to more than $700 million in increased spending on MMIS."