Navigating the Complexities of Healthcare Costs and Managed Care: Insights from Stephen Smith, Director at TennCare

In the world of healthcare, managing costs and ensuring efficiency while maintaining quality is an ongoing challenge. During a recent cohort session, experts and participants discussed healthcare cost trends, the impact of long-term care, and the evolution of TennCare’s challenges and solutions surrounding these critical issues, with significant insights shared by Stephen Smith, Director at TennCare, and Caleb Gallifant, Managed Care Cohort Mentor and VP Integrated Health at Humana.

The History and Evolution of Managed Care

Managed care, particularly through the Health Maintenance Organization (HMO) Act, was designed to control inflationary healthcare costs. While the intent was to limit escalating healthcare expenditures, the outcomes have been mixed. Smith noted that although the HMO model hasn’t fully achieved its goal of controlling costs across the board, there have been significant strides in certain areas.

From a TennCare perspective, members are primarily low-income children, pregnant women, parents, and individuals who are elderly or have a disability. TennCare covers approximately 20% of the state’s population and as of February 2025, TennCare enrollment stood at 1,410,040 members with approximately 40,000+ individuals enrolled in LTSS (long-term services and supports) programs.

Since it’s beginning in 1994, Tennessee’s Medicaid program has transformed from a limited service, unpredictable and unsustainable plan to one that is comprehensive, sustainable and highly valued. Key drivers that have supported TennCare’s sustainability include: 1) Sustainable Cost Trends with Effective Utilization Management; 2) Stable, Experienced MCOs with Statewide Operations; 3) NCQA Accreditation & Full Set of HEDIS Measures & CAHPS; 4) More Home and Community-Based Options for More People; 5) Delivery System Transformation with Focus on Value.

“We’ve seen a 2% year-over-year increase in healthcare costs over the last few years,” Smith remarked, a stark contrast to the usual 6-7% annual increase in the commercial healthcare space. He also highlighted the importance of the trend rate negotiated during the waiver process with CMS, which agreed to a 5-5.5% trend rate. “We beat that every single year,” he proudly added, underscoring the success of their cost containment strategies.

Key Drivers of Healthcare Costs

As the conversation progressed, the discussion shifted to the key drivers of healthcare spending. Smith emphasized that the most expensive populations to care for are older adults, followed closely by individuals requiring behavioral health care and the rising costs of pharmaceuticals.

The impact of behavioral health costs, in particular, has been increasingly pronounced. Behavioral health is not only expensive in terms of treatment but also in terms of the long-term care required, adding a layer of complexity to managing overall healthcare expenditures.

Additionally, Smith shed light on the role of long-term care, which, during the pandemic, saw a great shift in utilization with a sharp decrease in nursing home utilization and an increase in home and community based services. This rebalancing has continued post-pandemic, which is a win-win, as the overwhelming majority of individuals want to live in their homes and communities and can do so at a significantly lower expense to the taxpayers.

The Challenge of Medicaid vs. Medicare Reimbursement Rates

Another crucial topic in the session was the disparity between Medicaid and Medicare reimbursement rates. One cohort participant raised the point that hospitals and healthcare providers have historically made their margins on commercial patients, while Medicaid and Medicare patients often resulted in lower reimbursement rates.

Smith explained that the difference between Medicaid and Medicare reimbursement rates is largely due to state budget constraints. "The biggest difference is that states have balanced budget requirements and many competing priorities to operate within that balanced budget,” said Smith. This disparity creates challenges for providers who must navigate the financial limitations of state-run Medicaid programs, especially as they work to balance care for lower-income populations.

Adjustments During the Pandemic and Long-Term Fiscal Strategies

A particularly interesting aspect of the discussion centered on the adjustments made during the pandemic. Smith explained that, during COVID-19, federal match funding increased, providing additional resources to cover the surge in enrollment and other related costs.

Despite the challenges, Smith’s team implemented a fiscally responsible strategy by separating one-time pandemic-related costs from ongoing healthcare expenditures. This allowed them to manage the financial impact without overburdening the state’s regular budget.

Key Takeaways: The Road Ahead for Managed Care

From the cohort discussion, several key takeaways emerged regarding the future of managed care and healthcare cost containment:

1. Managed Care Is a Work in Progress: The history of managed care shows that while it has helped control costs in some areas and certainly is an improvement over cost growth in fee for service programs, the broader goal of reducing inflationary healthcare costs remains a challenge. Continued innovation and strategic adjustments are necessary to achieve the long-term vision of affordable healthcare.
2. Behavioral Health is a Critical Focus: With rising demand for behavioral health services, it is becoming clear that this sector must be prioritized to manage healthcare spending effectively. Addressing the needs of the behavioral health population could help curb long-term costs while improving patient outcomes.
3. Long-Term Care Costs are Rising: While the pandemic led to a temporary dip in utilization, long-term care remains one of the most significant drivers of healthcare spending, especially for aging populations. Understanding how to balance long-term care models with cost-effective solutions will be critical in the coming years.
4. Strategic Planning is Key to Fiscal Health: By separating one-time pandemic-related costs from recurring expenditures and using federal funds strategically, healthcare organizations can manage budgetary challenges without compromising care quality. Such fiscal responsibility could serve as a model for other states and organizations in the future.

Looking Forward

The cohort session provided invaluable insights into the complexities of healthcare cost management, particularly in the areas of long-term care, behavioral health, and the disparities between Medicaid and Medicare reimbursement. As we move forward, the need for continued innovation and strategic planning will be paramount in achieving sustainable, cost-effective healthcare solutions. The conversation also emphasized the importance of collaboration across sectors to address the multifaceted challenges facing the healthcare industry today.

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