Designing Optimal Recommended Budgeting Thresholds for a Medicaid Program





Citation of Original Publication

Henderson, Morgan, and Ian Stockwell. “Designing Optimal Recommended Budgeting Thresholds for a Medicaid Program,” The American Journal of Managed Care 28, no. 7 (July 14, 2022):342-347.


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Objectives: To develop and test a methodology for optimally setting automatic auditing thresholds to minimize administrative costs without encouraging overall budget growth in a state Medicaid program. Study Design: Two-stage optimization using administrative Maryland Medicaid plan-of-service data from fiscal year (FY) 2019. Methods: In the first stage, we use an unsupervised machine learning method to regroup acuity levels so that plans of service with similar spending profiles are grouped together. Then, using these regroupings, we employ numerical optimization to estimate the recommended budget levels that could minimize the number of audits across those groupings. We simulate the effects of this proposed methodology on FY 2019 plans of service and compare the resulting number of simulated audits with actual experience. Results: Using optimal regrouping and numerical optimization, this method could reduce the number of audits by 10.4% to 36.7% relative to the status quo, depending on the search space parameters. This reduction is a result of resetting recommended budget levels across acuity groupings, with no anticipated increase in the total recommended budget amount across plans of service. These reductions are driven, in general, by an increase in recommended budget level for acuity groupings with low variance in plan-of-service spending and a reduction in recommended budget level for acuity groupings with high variance in plan-of-service spending. Conclusions: Using machine learning and optimization methods, it is possible to design recommended budget thresholds that could lead to significant reductions in administrative burden without encouraging overall cost growth.