Stateline Story

Medicaid - Cost and Complexity Tax Reform Efforts

  • March 07, 2005
  • By Daniel C. Vock

EDITOR'S NOTE: For an updated version, see -- Medicaid: Biggest insurer is a budget buster

SEPT. 15, 2005 - When Medicaid first came into being in mid-1965, the now gigantic government health care program went largely unnoticed. The federal-state policy commitment to provide for the medical needs of the poor was so overshadowed by passage of sweeping Medicare health care guarantees for every American over age 65 that President Lyndon B. Johnson gave Medicaid only passing mention at an Independence, Mo., bill-signing ceremony.

Forty years later, Medicaid has evolved into a policy nightmare whose ever-growing costs overburden the federal treasury and threaten to swamp state budgets. At a February meeting of the National Governors Association in Washington, D.C., it was the dominant issue, sparking much discussion of possible budget cuts and proposed reforms.

The governors' ideas -- and President Bush's call to rein in the program's costs -- sparked a debate on Capitol Hill over who should qualify for assistance, how much they should pay and how much flexibility states should have in administering Medicaid.

But like so many policy debates these days, many well-informed people probably found the discussion incoherent; the governors and federal officials used often-confusing, ever-changing frames of reference in talking about the program. As Pennsylvania's Democratic Gov. Edward Rendell observed resignedly in a hallway conversation, Medicaid is so complicated it's hard to explain.

In hopes of bringing some light to this important discussion, Stateline.org set out to better define the Medicaid program and point you to resources that might give you a greater understanding of what the politicians are talking about. You?ll find a great deal of basic information on a web site maintained by the U.S. Department of Health and Human Services; click on Medicaid . The Henry J. Kaiser Family Foundation offers help at Kaiser/Medicaid and Kaiser Report . The Nelson A. Rockefeller Institute of Government has compiled still more information at Rockefeller research.

Stateline.org will list other helpful sites as we find them. This "Backgrounder" is a work in progress and will be updated as warranted. Here are some facts at a glance in FAQ form:

What is Medicaid?

In reality, Medicaid is not one program, but 50 different programs that states administer using broad federal guidelines and federal funds. Washington picks up about half of the tab, states pay the other half. In 2005, Medicaid will serve 53 million people -- more than any other single health care program in America, including Medicare.

Is Medicaid the same as Medicare?

No. Medicare is a federal program that provides health care for some 41 million senior citizens and retirees over 65 years of age. Until recently, states had no role in Medicare. Starting Jan. 1, 2006, Medicare will provide a prescription drug benefit for the first time, but unlike all other Medicare services, states will partly pay for this benefit.

Is Medicaid associated with welfare?

No. Almost half (48 percent) of Medicaid recipients are children. Adults, primarily low-income working parents, make up nearly a third (27 percent). Disabled Americans make up 16 percent and the elderly 9 percent, according to the Kaiser Commission on Medicaid and the Uninsured. The 1996 welfare law no longer links Medicaid to welfare. Today, most Medicaid beneficiaries are not on welfare, a striking difference from 20 years ago when three-fourths of people on Medicaid also received welfare.

Who does Medicaid cover?

The federal government tells states which groups of people they must cover and the kind of services they must provide. "Mandatory" groups include:

  • Poor pregnant women, low-income, uninsured children and some parents of low-income families.
  • Low-income elderly, blind and disabled people, and
  • Certain low-income Medicare recipients.
  • States have broad authority to cover other "optional" groups if they want. In 2004, for example, 40 states covered pregnant women at income levels that exceed the federal poverty ceiling.

What does Medicaid pay for?

Medicaid pays for a variety of mandatory benefits in every state including:

  • Doctor's visits
  • Inpatient hospital services
  • Laboratory services and X-rays
  • Outpatient hospital services that are preventive, diagnostic, rehabilitative
  • Nursing home care
  • Family planning and pregnancy-related services
  • Home health care
  • Nurse-midwife services
  • Periodic screening for children under 21

What are some optional benefits that many state Medicaid programs cover?

States can -- and often do -- go beyond required benefits. Among the most popular "optional" services are:

  • Prescription drugs
  • Dental services
  • Eye glasses and hearing aids
  • Medical equipment and supplies, such as wheelchairs
  • Ambulance services
  • Intermediate care for the mentally retarded
  • Hospice care

Even though prescription drug coverage and ambulance transport are listed as optional, all states offer both.

How much does Medicaid cost?

Together, state and federal governments are expected to spend nearly $330 billion on Medicaid in 2005. Medicaid accounts for 22 percent of state budgets, when factoring in federal funds. That's up from just 8 percent in 1985. That means the growth of Medicaid spending is crowding out funding for other programs that states deliver, including education, corrections and transportation.

The federal government each year tinkers with its formula for calculating how much money it gives each state. Generally, the richer the state, the less it gets. The federal matching rate is based on states' average per-capita income and is always at least 50 percent, but could be as high as nearly 80 percent. In 2005, 12 states got the minimum 50 percent rate (California, Colorado, Connecticut, Illinois, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Virginia and Washington) while 10 states got matching rates higher than 70 percent (Alabama, Arkansas, Idaho, Louisiana, Mississippi, Montana, New Mexico, Oklahoma, Utah and West Virginia).

Because Medicaid is the biggest source of federal revenue to the states, even the slightest variation of the federal match can have a big impact on a state's budget.

The changes for fiscal 2006, for example, will require that states pony up an additional $527 million, according to the Federal Funds Information for States (FFIS), a joint subscription service for NCSL and the National Governors Association that tracks budget issues affecting states.

States hardest hit by this change in matching formulas include New Mexico, which could lose some $82 million, Alaska (potentially losing $76 million) and Louisiana (potentially losing $70 million), according to FFIS.

Why are states' Medicaid costs going up?

It was no surprise that Medicaid enrollment went up in the last few years when the economy took a downturn. As more people lost their jobs and income, they turned to Medicaid. But the dramatic and sustained increase has surprised some state budget and health officials.

Enrollment jumped by one-third from 2000 through 2004. If recent state estimates are on target, enrollment will grow another 5 percent in 2005, making the rise in overall enrollment for 2000-2005 nearly 40 percent, according to the Kaiser Commission. Higher enrollment means higher costs for states. Medicaid spending jumped by more than 50 percent between 2000-2004.

But even as the economy rebounds, Medicaid costs still are expected to eat up state budgets. Rising health care costs, particularly prescription drugs, plays a huge role, but so do demographics. As Americans gets older, many will need more long-term care and nursing home care. Medicaid already is the nation's primary long-term care program, accounting for 43 percent of total long-term care spending and paying for nearly 60 percent of nursing home residents.

Changes in the U.S. workplace also are a reason for the spike in Medicaid enrollment. More employers are opting not to provide health care insurance for their employees, forcing some working poor to turn to Medicaid. Experts say the Medicaid safety net prevented substantial growth in the number of uninsured Americans, estimated to total 36 million to 45 million people.

What are states doing to curb Medicaid costs?

While state revenues have been improving, state budgets still are feeling relentless pressure from Medicaid. States, which are required to balance their budgets, have tried myriad ways to cut.

Between 2002 and 2005, all states reduced payments to health care providers such as doctors and nursing homes and tried various prescription drug cost controls. Thirty-eight states tightened eligibility requirements, and 34 cut benefits.

In Tennessee, for example, ballooning medical costs forced Gov. Phil Bredesen (D) to scale back TennCare, the state's 10-year-old health care program for the poor and uninsured that went well beyond Medicaid's requirements and covered working families who couldn't afford private insurance. The state is dropping 323,000 adults from TennCare's rolls to save the program. Without the cuts, the state would have had to find an extra $650 million dollars to cover TennCare's bills in fiscal 2006. Even with cutbacks, the program's price tag is going up an additional $75 million.

Who are "dual eligibles" and why are states so upset about them?

In any debate about Medicaid, state officials are certain to use the term "dual eligible," referring to 7 million elderly people who are on the rolls of both Medicare and Medicaid. These people account for more than 40 percent of total Medicaid spending because they tend to be very poor and frail and have substantial health problems.

States not only pay for their long-term needs and prescription drugs, but help pick up the tab for their Medicare premiums and cost-sharing. The states argue that the federal government should shoulder more of the cost of caring for this group.

What is S-CHIP?

Commonly called "S-CHIP," the State Children's Health Insurance Program was created in 1997 to expand health insurance coverage to children in low-income families that did not qualify for traditional Medicaid but could not afford to pay for private insurance. It's largely hailed as a successful program, but it also suffered economic woes during states' budget crises.

What's next for Medicaid?

The nation's governors, the Bush administration and Congress agree that Medicaid costs are growing at an unsustainable rate, but there is considerable debate over how best to rein in the growing costs.

In April, Congress agreed to cut federal dollars for Medicaid by $10 billion over the next five years, rejecting President Bush's far bigger proposed cutback of $40 billion over 10 years.

Those cuts, however, are not binding unless the lawmakers take further action by Oct. 26. So far, Republican leaders haven't backed away from the cutbacks, but Hurricane Katrina could disrupt their plans. Instead of focusing on deficit reduction, Congress is turning its attention to disaster relief, and some lawmakers are beginning to question whether it's the appropriate time to cut medical benefits for poor people.

If they do proceed, they can look to a blueprint prepared by an independent commission headed by Health and Human Services Secretary Michael Levitt that suggested changes to Congress in September that would slow Medicaid growth by $11 billion over five years.

Governors insist that Congress should look beyond just cuts and offer more sweeping reforms. Specifically, they'd like more flexibility for states to tailor benefits for different types of recipients. The governors are pushing to streamline the federal approval process for state-by-state variations, and they want curb the power of federal courts to intervene on behalf of Medicaid recipients.

But some of the governors' suggestions do strive to save money. They signed off on some of the president's cost-saving ideas, such as allowing states to require co-payments with less federal red tape and restricting the ability of seniors to transfer assets to qualify for Medicaid's nursing home coverage. Another approach that governors believe could be promising is the president's proposals to provide $4 billion to states to help low-income people purchase private health insurance along with $74 billion for health insurance tax credits.

In the meantime, states under pressure to balance their budgets are going to try to rework their Medicaid plans using the current system.

Some states, most notably Tennessee and Missouri, eliminated coverage for thousands of recipients in 2005 and scaled back benefits for patients who remained on the Medicaid rolls. But others, such as Colorado, Iowa and Illinois, expanded the reach of their S-CHIP programs this spring.

Stateline.org Staff Writers Dan Vock, Kathleen Hunter, Pamela Prah and Erin Madigan contributed to this report.