On July 21, CMS deferred approximately $867.5 million in federal Medicaid payments to California and another $199 million to Minnesota while the states provide additional support for certain claims. These are deferrals of federal funding to the states, not permanent cuts and not a direct nationwide suspension of payments to Medicaid providers.
That distinction matters, but it should not cause Medicaid-dependent organizations to dismiss what happened. The larger lesson is that Medicaid risk is no longer limited to reimbursement rates, eligibility changes, or future reductions in federal funding. Organizations also need to consider what happens when the timing of a significant source of cash becomes uncertain. Most financial forecasts are not built to answer that question.
Revenue on Paper Does Not Make Payroll
A Medicaid payment delay may not immediately change the amount of revenue an organization expects to recognize, but it can still create a significant cash crisis. Payroll continues every two weeks. Vendors still expect payment. Debt service dates do not move. The organization may ultimately collect everything it is owed, but that does not help when cash leaves the organization faster than it arrives.
This is why days cash on hand, by itself, is not a contingency plan. It is an important measure, but it is an average. It does not tell management or the board the specific week cash becomes constrained, which obligation creates the first problem, whether the organization can access its line of credit quickly, what restrictions apply to available reserves, or which decisions require board or lender approval.
Those answers require a cash flow model, not just a calculation of days cash on hand.
Medicaid Concentration Is Also Liquidity Concentration
Organizations regularly evaluate payer mix as a revenue and margin issue. They should also view it as a liquidity concentration issue. An organization receiving 50 percent of its revenue from Medicaid does not merely have reimbursement exposure. It depends on one payment system to fund a significant portion of its daily operations.
The risk becomes more significant when that concentration is combined with limited unrestricted cash, high fixed payroll costs, debt service requirements, capital commitments that cannot be easily delayed, or a line of credit that is too small, unavailable, or subject to conditions. It can also be compounded when the organization already has other government receivables that pay slowly.
The question is not simply whether Medicaid represents 30, 50, or 70 percent of revenue. The question is what happens when that percentage of cash does not arrive when expected.
Run the Scenario Before You Need It
Every Medicaid-dependent organization should be able to model a 30, 60, and 90-day interruption or delay in Medicaid cash receipts. The analysis should produce more than a revised income statement. It should include a 13-week cash flow forecast showing:
- The organization’s lowest projected cash balance
- The week each liquidity threshold is reached
- Available borrowing capacity
- The effect on debt service coverage and other financial covenants
- Capital expenditures or other payments that can be deferred
- The point at which operating changes would become necessary
Management and the board should then agree on the actions associated with each threshold. When does the organization draw on its line of credit? When does it delay capital spending? When are hiring or discretionary spending restrictions implemented? What would require a special board meeting? At what point would the organization need to speak with its lender?
Those decisions should not be made for the first time when payroll is approaching and cash is already constrained.
This is the same type of downside modeling we use when preparing multi-year financial forecasts, evaluating debt capacity, and helping management and boards understand how reimbursement changes affect cash, operating performance, and financial flexibility. The value is not simply in identifying the downside. It is in understanding when it occurs, what causes it, and which actions are available before choices become limited.
Reserves Buy Time. They Do Not Replace a Plan.
It is easy to respond to this risk by saying the organization has reserves. That may be true, but the existence of reserves does not answer the larger questions. How much is actually available? How quickly can it be accessed? What commitments or restrictions apply? How many weeks does it provide, and what happens after it is used?
Using reserves may also solve one problem while creating another. It can reduce future borrowing capacity, weaken covenant performance, delay strategic investments, and leave the organization less prepared for the next disruption. The objective is not merely to prove that the organization can survive for a period of time. It is to decide how that time will be used.
A useful contingency plan should identify the order in which the organization would draw on reserves, access its line of credit, delay capital spending, reduce discretionary costs, and, if necessary, make more difficult operating decisions. It should also define the financial triggers and approval process associated with each action.
A Specific Request for the Next Board Meeting
Before the next board meeting, management should be prepared to answer one question:
If Medicaid cash receipts were delayed for 90 days, what week would the organization first need to take action, & what action would it take?
The answer should include specific dates, amounts, decision makers, and trigger points. There are separate and equally important questions about provider taxes, state-directed payments, 340B, and the longer-term Medicaid funding environment. Those issues should be incorporated into the organization’s multi-year forecast and strategic planning, but they should not distract from the immediate lesson.
A rate reduction affects margin. A payment delay can affect whether the organization makes payroll. That is a different risk, and it requires a different plan.
For organizations with significant Medicaid exposure, this should be a practical exercise, not a theoretical discussion. TBG can help management develop the 13-week cash flow forecast, test the 30, 60, and 90-day scenarios, identify liquidity thresholds, and establish the specific actions management and the board would take at each point. Just as important, we can incorporate the longer-term effects of reimbursement, provider tax, state-directed payment, and 340B changes into the organization’s broader financial forecast.
The best time to complete that work is while it remains a planning exercise, not after it becomes a liquidity crisis.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
