Stateline Story

Medicaid: Biggest Insurer Is a Budget Buster

  • August 03, 2006
  • By Daniel C. Vock




Medicaid went largely unnoticed when it first came into being in mid-1965, meriting only passing mention from President Lyndon B. Johnson at a bill-signing ceremony in Independence, Mo., that focused on the passage of the Medicare health plan for Americans over age 65.

But four decades later, Medicaid's numbers are eye-popping. It is now the nation's largest health insurance program, covering 59 million poor people (53 million in traditional Medicaid and 6 million in the State Children's Health Insurance Program), or one in six Americans, according to the U.S. Department of Health and Human Services . It pays for 37 percent of all births in the United States and helps foot the bills for more than 60 percent of all patients in nursing homes.

With states picking up nearly half of Medicaid's $320 billion costs this year - and the federal government the rest - it's little wonder that Medicaid is constantly generating controversy in state capitols and in Washington, D.C. Cut it, and politicians face accusations of harming the country's most vulnerable citizens. But doing nothing is costly, too. Medicaid costs have been growing at 6 percent or more annually, twice the rate of inflation, and threaten to swamp state budgets.

Medicaid covers the poor and working class, but not all of them. The program is designed for low-income pregnant women, parents and children, the elderly, blind and disabled. It's limited to Americans and legal immigrants, largely those who have been in the country more than five years.

That population includes some of the sickest - and most expensive - patients in the health care system. States try to clamp down on those costs, but at the risk of angering doctors, dentists, hospitals, nursing homes and drug companies that provide the services.

The impact on state budgets is huge. Accounting for 22 percent of state spending, Medicaid recently surpassed elementary and secondary education as the most expensive item on state ledgers, once federal matching grants are taken into account. And because Medicaid is geared toward poor people, its expenses and enrollments climb when states can least afford them: when the economy turns sour.

In February 2006, President George W. Bush signed a budget-cutting bill that gives states more flexibility to decide who qualifies for Medicaid, what services to offer and how much recipients should help pay for their medical care. The changes are projected to save the federal government $6.9 billion - and state governments nearly as much - over five years. But the savings still amount to less than one-half of 1 percent of Medicaid spending in those years.

The changes to Medicaid marked a culmination of a year-long lobbying effort by the National Governors Association to give state governments a freer hand in designing their Medicaid programs.

State governments can bend some of the rigid federal rules for Medicaid by getting permission from the federal Centers for Medicare and Medicaid Services (CMS). That flexibility means that Medicaid has become a kind of policy playground for governors. The result is that no state's Medicaid program is exactly like another's, leading health policy experts to say Medicaid isn't one program, but 51 (one for each state and the District of Columbia).

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 lead to 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 (57 percent) of the tab, states pay the other half. In 2006, Medicaid will serve 59 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 43 million senior citizens and retirees over 65 years of age.

Until recently, states had no direct role in Medicare. But starting Jan. 1, 2006, Medicare's Part D began providing a prescription drug benefit for the first time. But unlike all other Medicare services, states will partly pay for this benefit. Plus, most states helped smooth the transition by covering the costs of seniors who couldn't get prescriptions, while the federal government and the insurance companies sorted out the details.

Medicaid and Medicare also share other costs associated with "dual eligibles" - people who qualify for both programs.

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, but help pick up the tab for their Medicare premiums, cost-sharing and some prescription drug costs. The states argue that the federal government should shoulder more of the cost of caring for this group.

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?

Medicaid covers 59 million Americans. 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
  • Certain low-income Medicare recipients.
  • States have broad authority to cover other "optional" groups if they want. In 2005, for example, 41 states covered pregnant women at income levels that exceed the minimum amount required by federal law.
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 $320 billion on Medicaid in 2006. Medicaid accounts for 22 percent of state budgets, when factoring in federal funds spent by states. 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 2006, 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 six states got matching rates higher than 70 percent (Arkansas, Mississippi, Montana, New Mexico, 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.

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 sometimes dramatic and sustained increase has surprised some state budget and health officials.

Enrollment jumped by one-third from 2000 through 2004, but the growth has slowed since then. According to the Kaiser Commission, enrollment grew by 4 percent in the year ending June 30, 2005, and by 3.1 percent in the year after that. Higher enrollment means higher costs for states.

But even with the economy rebounding, Medicaid costs still are expected to eat up state budgets. Rising health care costs, particularly prescription drugs, play a huge role, but so do demographics. As Americans gets older, many will need more long-term 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 dropped 190,000 adults from TennCare's rolls to save the program. In 2006, the Tennessee Legislature approved another Bredesen proposal establishing a different type of health insurance for lower-income workers, dubbed Cover Tennessee, that worked outside the Medicaid program.

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. Congress must reauthorize it in 2007.

What's next for Medicaid?
 
States continue to face many challenges with Medicaid, especially in light of the Deficit Reduction Act that Bush signed in February 2006, which is projected to save the federal government $6.9 billion over the next five years and states nearly the same amount.
 
The law contains many items governors pushed. It lets states make patients pay more for prescription drugs and hospital visits. It makes it harder for seniors to give away their money and then ask the government to pay their nursing home bills.
 
The budget-reducing measure gave governors much of the flexibility they had asked for, and already states like Florida and Kentucky are using the new authority to try new ways of managing their Medicaid costs.
 
But the law also imposes new burdens, most notably a provision that requires states to check each enrollee's citizenship documents to prevent illegal immigrants from receiving benefits.
 
Just days after signing the Deficit Reduction Act, though, Bush unveiled a new budget proposal that would further rein in federal Medicaid spending through a series of moves that would reduce federal payments to states for the program and save the federal government $13.6 billion over the next five years.
 
The president wants to stop allowing some of the more inventive accounting techniques states use to capture more federal dollars.
 
For example, states often tax health care providers and use that money to bring in more federal dollars. Then the states turn around and give most of the money back to the providers, so both the states and the majority of providers end up with a net gain from the transaction. The administration wants to make sure money from provider taxes is directed toward facilities with high amounts of Medicaid patients.
 
Bush proposed enacting the changes by administrative rules, which would not require the approval of Congress.
 
Governors and state officials complain that the reductions would save money for the federal government at the expense of the states. And, they note, CMS has approved many of the contested arrangements in the past.
 
Meanwhile, states are experimenting with ways to expand health care coverage to the uninsured, often using Medicaid as a springboard for those efforts.
 
Massachusetts passed a sweeping new law in April to require that all residents buy health insurance - and that all employers offer it. The initiative was possible, in part, because legislators were under pressure by the federal government to change the way the state paid hospitals.
 
Illinois' new All Kids program, which aims to offer insurance to all children who live in the state, is being paid for by savings in the Medicaid program. In fact, the vast majority of children who have signed up for All Kids already would have been eligible for insurance under the Medicaid program.
 
Stateline.org Staff Writers Kathleen Hunter, Pamela Prah and Erin Madigan contributed to this report.

Tags: Safety Net