Medicaid at a Critical Juncture: The Federal and State Proposals

Report March 31, 2005 Read time:

This document presents a summary of "Medicaid at a Critical Juncture: The Federal and State Proposals," a seminar sponsored by The Pew Fund for Health and Human Services in Philadelphia (Pew Fund). Held on March 31, 2005, the seminar was part of The Pew Charitable Trusts' information series called Programs Adjusting to a Changing Environment (PACE), created to improve nonprofits' ability to succeed by providing them with critical information, tools and resources.

Medicaid is the financial partnership between the federal and state governments that provides health care coverage to the nation's poor and disabled. In May 2004, an initial PACE session on Medicaid examined the combination of rising health care costs, increasing enrollment, and decreasing tax revenues that was placing significant strains on the program and creating challenges to its future. Nine months later, in February 2005, those challenges became even more apparent when the Bush administration and Governor Rendell introduced their respective FY 2006 federal and state budget proposals. The president's proposal would reduce federal spending on Medicaid by at least $45 billion over the next 10 years and potentially create fundamental changes in the current federal-state partnership. The governor's proposal would alter the state's program in several ways, including placing limits on the utilization of some services and expanding the use of co-payments.

The PACE session in March 2005 examined these federal and state proposals in detail in order to help local health and human service providers understand the potential impact on their agencies and the populations they serve. There were two presentations. Cindy Mann, research professor at Georgetown University's Health Policy Institute in Washington, D.C., focused on the federal proposal and its implications; and Estelle Richman, Secretary of the Department of Public Welfare for the commonwealth of Pennsylvania, described coming changes in the state's program. The session concluded with a question-and-answer period.

The Federal and State Budgets: A Focus on Medicaid

In her presentation, "Federal Medicaid Budget Developments: Choices Ahead," Cindy Mann noted that Medicaid has been "front and center of the federal budget debate" and emphasized that "the show is still unfolding." What happens in Washington will have an enormous impact on health coverage, the clients that agencies service, and the way they are able to serve them.

Why is so much attention focusing on Medicaid in both Congress and in state legislatures? There are, she said, different but converging reasons:

States are focusing on Medicaid because of rising health care costs, rising enrollment costs, and sluggish revenues. Some states are particularly looking at ways to slow rising enrollment in an effort to contain program expenses. However, Medicaid is an entitlement, with no waiting list, that is intended to expand during difficult economic times, with federal matching funds increasing when there is additional enrollment. In fact, the increasing enrollment in both Medicaid and SCHIP (the State Children's Health Insurance Program) indicates that the programs are doing exactly what they are supposed to do.
At the federal level, deficit reduction is driving the debate. Congress and the administration are pushing to reduce costs because they are focused on reducing the federal deficit. The question is whether the effort to reduce the federal deficit is going to help the state fiscal situation or make it worse.

Is Medicaid Broken?

Mann described Medicaid as "the workhorse in our health care system," and noted that is why it is growing. It is asked to do a lot, and relatively inexpensively, and it fulfills its mission fairly well. While there are changes that could strengthen the program and help control costs, the problems and pressures on the program are, for the most part, a result of external forces:

Medicaid and other entitlement programs are not primarily responsible for the soaring federal deficit. In 2001, the federal government had a surplus. Since that time, federal legislation has helped create and add to the deficit. Tax cuts have contributed to 58 percent of the deficit; increases in defense spending, including homeland security, 29 percent; and increases in entitlement programs, only 9 percent.
Medicaid costs less than private insurance. Adjusting for health differences, the per capita cost for adults on Medicaid is 30 percent less than for adults with private insurance, and 10 percent less for children. In addition, Medicaid expenditures per person have grown more slowly than private insurance costs.
It is the aging and disabled who use the greatest share of Medicaid resources, and their numbers are growing. Children and their parents represent the majority of beneficiaries but a relatively small percentage of the costs. The elderly and disabled accounted for 73 percent of the growth in federal Medicaid expenditures from 2002 - 2004. One of the major contributors to this growth was long-term care, and there is potential to control costs through a shift from focusing on nursing home care to community-based care.
The director of the Congressional Budget Office has testified that the "crisis" in the Medicaid program is a result of the overall crisis in health care. In a hearing in February 2005, Douglas Holtz-Eakin told the Senate Budget Committee that "the underlying source of the increase [in Medicaid and Medicare] is rising health care costs in the United States and not necessarily the structure of the programs alone."

The Federal Budget Process: Where Is It Now?

Currently, Congress is in the process of developing the budget resolution, a blueprint with general targets for spending. The President has instructed Congress to cut Medicaid spending, but questions remain about what those cuts will be and the forms they will take. There are a range of possibilities:

The President's FY2006 proposal includes cuts in Medicaid funding of $12.8 billion over the next 5 years and $45.7 billion over the next 10 years. As a way of gaining perspective on the magnitude of the proposal, Mann noted that the entire federal allotment for SCHIP during its first 10 years of existence (1998 - 2007) is $39.7 billion, significantly less than the amount the President wants cut from the Medicaid budget during an equivalent span of years.
The House and Senate have conflicting proposals for Medicaid cuts. The House wants to cut between $14.9 billion and $20 billion over five years. (Assuming that Pennsylvania's share of the cut is proportionate to its estimated federal Medicaid funding in 2005, it has been estimated that the state's resulting loss in federal funds would be between $752 million and $1 billion over this period.) In the Senate, the Budget Committee proposed a cut of $15 billion over five years, but the Senate ultimately voted for an amendment-the Smith-Bingham Amendment-to eliminate the cuts and create a committee to study Medicaid and issue recommendations. As the budget moves to conference, it is not known how the House and Senate proposals will be reconciled and whether all of the Senators who voted for the Smith-Bingham Amendment will remain committed to their position.
Thus far, the focus is on spending cuts, not on policy about how the cuts would manifest themselves. However, the administration's budget did include a few policy proposals, including changes in the rules for how states are paid. These changes, which would cut federal costs, alter the ways that states could use "creative financing" through mechanisms such as Intergovernmental Transfers (IGTs)-transfers of public funds among governmental entities, such as counties and states-to generate their share of the required Medicaid matching funds.

The Conundrum of Flexibility

The Bush administration has proposed giving states more flexibility in their Medicaid programs, something that governors across the country want in order to help them contain costs. But what this flexibility would include, and the trade-offs it would entail, are not yet clear. These are among the points Mann made about the issue of "flexibility":

At the federal level, much of the talk about flexibility focuses on "optional people" - people in optional groups who, while currently covered, are not required to be covered by Medicaid. They include about 20 percent of children currently covered; 43 percent of parents; 22 percent of the disabled; and 56 percent of the elderly. However, Mann noted, Medicaid is made up of more than 35 years of legislation, and the division between mandatory and optional groups is not always totally rational. Whether Congress has made a group mandatory or optional often has more to do with which party is in power and the overall political climate in Washington than with the reality of the needs of the group under consideration. In the past 12 years, Congress has not added any mandates to the program-everything has been done by option, with the goal of encouraging states to add coverage but not requiring it. Thus, there is no clean line between optional and mandatory-both groups have low incomes and significant medical needs.
It is important to understand the relationship between flexibility and the integrity of the Medicaid insurance product, and flexibility in terms of financing. Medicaid is a federal-state program both in its rules and in its financing. There is a delicate balance; and if the balance is changed on either side, there is an interactive effect. It is possible to move toward more federal standards and less state flexibility, or the other way around, and still have a balance in terms of integrity and financing. But if movement goes too far one way or the other, there will be significant disruption in the program. For example, Oregon received a waiver in 2003 to increase premiums for people in an optional group who were all also below the poverty level. The intention was to increase revenue, not reduce eligibility. However, the result was that the increased premium brought in less revenue because in only a few months, almost half the affected people left the program. While the premium had looked modest to the state, it was beyond the means of people to pay. No matter how much they needed the medical care, they determined they could not afford to stay in the program.
It is not yet known what the federal administration is going to propose in terms of financing in exchange for state flexibility. The administration has indicated that it wants to give states more flexibility without increasing federal costs. One way to achieve this would be to cap federal dollars, as the administration proposed in 2003, giving states allotments instead of federal financing that increases as health care costs rise or as more people need coverage.
A federal cap on Medicaid poses risks to states, families, providers, and local governments. A proposed federal cap would increase over the years, not be held flat. However, it would grow by a pre-set formula, despite the fact that it is very hard to predict what Medicaid costs will be in coming years. In 1998, for example, the Congressional Budget Office's projection of the federal share of 2003 Medicaid costs turned out to be short by almost $20 billion, a 12 percent miscalculation. In a capped system, states, communities, and providers would have been forced to pick up those costs. In reality, the long-term implications of capping federal dollars are always ominous because the funding inevitably becomes flat or declines over time. How, Mann asked, would a Medicaid block grant fare when there are rising health care costs, rising numbers of elderly who need long-term care, and a Congress that is continually looking to reduce spending?
Caps would also eliminate a key incentive for states to invest in optional coverage and benefits. Because of the current Medicaid state-federal funding system, if a state decides to save costs by cutting optional groups or services, it loses the matching federal dollars it would have gained to provide those services. This arrangement, which was intentionally built into Medicaid, causes states to think hard about making any such cuts. With caps, however, states could pull out of optional coverage and it would not cost them any federal dollars. Thus, a key incentive for states to maintain their current funding level would disappear.

What Can We Do?

"So what does this mean?" Mann asked. "That we should do nothing?" In fact, she said, it means that people have to do things that are smart and sensible. They have to think about the integrity of coverage and the ability to finance the program. There are real issues facing the Medicaid program-state revenue issues, the cost of dual eligibles (people on both Medicare and Medicaid), the aging population-and broader issues around health care costs and increasing numbers of people who are uninsured. She urged participants to focus on two important points:

Because of the cost of dual eligibles, states are doing double duty in the Medicaid program. Medicaid's share of Medicare-theoretically, a program that is 100 percent funded by the federal government-has been growing over time and will continue to grow as the population ages. In Pennsylvania, for example, 47 percent of Medicaid spending is for Medicare beneficiaries, filling in the gaps for services such as long-term care that Medicare does not cover. Mann argued that the federal government could begin to support a greater share of those costs for the Medicare population, but the current discussion of Medicaid is not addressing this.
It is important to address the issues affecting Medicaid while also maintaining the integrity of the program. Pennsylvania, like many states, has a significant portion of people who are uninsured and need coverage, and the numbers have been rising. But at the same time, there are fiscal pressures at the federal and state level. How do we move forward in addressing those pressures without losing our sense of direction about the essential role of Medicaid?

Pennsylvania's Medical Assistance Program: The Current Situation

After Mann described the national context, Estelle Richman discussed the situation in Pennsylvania and provided details about changes the state is planning for its Medicaid program in order to contain costs. Her description of the program and its challenges included these points:

Pennsylvania's Medicaid program, Medical Assistance, currently serves about 1.7 million low-income people. The majority of people in the system (60 percent) are children and their caretakers, but they use a relatively small amount (21 percent) of the money. The elderly and people with disabilities, who together are 34 percent of enrollees, account for close to 72 percent of the money the state spends on the program. The smallest part of the Medicaid population is adults with chronic illness.
The number of people on Medical Assistance is growing by about 100,000 a year. This is an appropriate increase, Richman said, because the people who are entering the program are people who have great need. The increase is a result, in part, of the growth in the number of people who have become uninsured. It also partly results from an increase in the numbers of elderly: Pennsylvania has the third highest elderly population in the country, after Florida and West Virginia, and the state is particularly seeing growth in the population ages 85 and older. Geographically, the greatest growth in the Medicaid caseload is not in urban areas but west and north of the Philadelphia five-country region.
In Pennsylvania, as is true across the nation, the increase in Medicaid spending is outpacing growth in state revenues. If the Governor's office gave all of its new revenues-everything the state collected-to the Medical Assistance program, it would still not be enough to balance its budget. Currently, Medical Assistance costs $14.2 billion in combined state and federal dollars, and several factors are helping to push the costs rapidly upward, including new drug treatments and technologies that are effective but expensive. Adding to the stresses on the state budget is the loss of the one-time infusion of federal money that helped cushion cost increases during the past two years. In addition, last year, the state tried to fill in the gap by looking to IGTs and other forms of creative financing that the federal government is seeking to limit or eliminate.

Changes in Pennsylvania's Medical Assistance Program

Richman emphasized that all states have been looking at cost-containment strategies. Controlling drug costs is a major effort everywhere. Also, many states are looking at reducing or restricting eligibility, reducing benefits, increasing co-payments, examining different approaches to handling disease management, and rebalancing the long-term care system. "We are all looking at the most creative, least painful ways to go on," she said. While Pennsylvania had been able to avoid making changes that could limit benefits for some enrollees, this year the state has to do it. These were among her major points about the likely changes facing the state's Medicaid program:

There were three basics the governor insisted on as they began to identify steps for balancing the budget. First, no one currently receiving health care services would lose eligibility. Second, there would be no changes in the array of health and social services for children. And third, the state would have to be able to meet the anticipated demand for services during the coming year by low-income people who become eligible to enroll.
Several changes are intended to save money by "managing smarter." One is the ACCESS Plus Program, a primary care case management model that focuses on disease management. Under ACCESS Plus, primary care physicians will coordinate their efforts with other providers so there is continuity of care. The program targets conditions-such as diabetes, asthma, and coronary artery disease-where this approach to disease management makes a significant difference in maintaining health and avoiding hospitalization.
A second aspect of "managing smarter" is a stronger focus on fraud and abuse. Previously, much of this focus had been on people enrolled in the system who might be hiding assets in order to access services. While they will continue to look for this type of abuse, their major effort will now shift towards providers who are defrauding the system-they are the ones who could be costing the state substantial amounts of money. The Department of Public Welfare (DPW) also wants the legislature to act so they can increase third-party liability recovery. "Medicaid should be the last payer in," Richman said. But in many cases DPW does not know who the third-party insurer is, and the insurance companies have not been willing to give them that information. Thus, DPW wants a legislative change that will allow it to access computer databases to identify the third-party insurer and make sure the commercial insurance companies are paying their share.
While the proposed benefits package would maintain the full scope of services, it would include limitations on use. There would be limits on how often people could access some benefits. For example, people would be limited to six prescriptions per month and 18 outpatient visits a year. Richman emphasized that the key to the limitations is what would be included. The outpatient limit would include visits for services such as check-ups and diagnosis. It would not include visits for disease management or therapy. In addition, pregnant women would be exempt from the outpatient visit limitation. Similarly, there would be a $5,000 annual limit for durable equipment, but this would not include items such as oxygen. The benefits package for people on general assistance would be even tighter, with people limited, for example, to three prescriptions per month. Richman noted that "some people have expressed their dislike" for these limitations, "and they are right-they are not good; you should not like them."
The benefits package also would increase some co-pays and add others. Co-pays for brand-name drugs and portable x-rays would be increased from $1 to $3 dollars, and all drugs would be subject to co-pays. There also would be new co-pays on lab work, dialysis, and home health care. The co-pay increases for people on general assistance are even higher. For example, brand-name drugs would require a co-pay of $12 instead of $2, and generic drugs would require a co-pay of $6.
The state would require cost sharing for disabled children from higher-income families. Currently, Pennsylvania spends about $400 million annually, or about $10,000 per child, to provide full benefits for more than 38,000 disabled children from families with incomes of at least $40,000 ("loophole families"). Approximately 4,000 of these families have incomes over $100,000. Other states have narrower eligibility definitions and thus far fewer people with relatively high incomes who are enrolled. While Pennsylvania wants to maintain full benefits for children with serious disabilities, it plans to implement a sliding-scale premium based on income level, family size, and the number of children in the family who have disabilities.
The state is continuing efforts to contain costs by rebalancing long-term care. Along with pharmacy costs, long-term care is the major factor in growing costs for Medical Assistance. The state's Community Choice program, which is currently operating in 10 counties, with 3,775 people receiving services, is successfully shifting the proportion of people served in nursing homes to less expensive home- and community-based care. DPW will be rolling out this program to additional counties and also piloting a cash-and-counseling program that gives consumers of long-term care more control over which services they receive.
Every change, every possibility for containing costs, is "still on the table." Richman emphasized that making changes in the program while maintaining its integrity is complex and painful. The state, she said, is "trying to re-run everything and look at every option we can think of to contain Medicaid costs." But she was not optimistic about the future: "Whatever options we come up with this year, there is still next year; and unless something magical happens with the federal government, there is no relief in sight."

Question-and-Answer Session

Following the presentations, participants had an opportunity to ask questions and raise concerns. These were among the issues they wanted to learn more about:

The origins of ACCESS Plus: Richman said that before the state implemented HealthChoices, its managed care program, a few counties were using a case-management model. In developing ACCESS Plus, the state looked at disease-management models around the country and at this earlier Pennsylvania model, particularly as it had been used in Lancaster County. They found that it was very successful but had been dismantled when HealthChoices was implemented. They have begun enrolling people into ACCESS Plus, and plan to evaluate its costs and outcomes in comparison to HealthChoices.
The potential benefits of the Medicare drug bill for older adults and for lowering the state's costs in providing pharmaceutical coverage for poor seniors: Mann said it is difficult to know how comprehensive the drug coverage will be for seniors because that will be decided by market competition, not by federal standards. She added that she does not think the drug bill will give the relief it should to states-states will still be required to pay a large share of drug costs for seniors. Pennsylvania currently provides prescription drug coverage for older adults with limited incomes through its lottery-funded PACE program, and the state might save some money on PACE because of the Medicare drug benefit. Thus, there were questions about how that money would be used. Richman noted that PACE is a program of the state's Department of Aging; and while there is discussion there about the issue, DPW has not yet been involved in the conversations.
Coverage for loophole children: Richman said that DPW is in the process of deciding how to structure the premium and is also trying to make sure the children have coverage. She called the premium an issue of fairness. DPW's primary responsibility is to the poorest people, and it is now having to ask people who make $200 a month to pay $12 co-pays. Thus, families with relatively high incomes should also be contributing to revenue by paying a premium. At the same time, she noted, nearly all of the loophole families have private insurance, and the state is looking for the commercial insurers to be better partners. If a child has diabetes or a heart defect or any other physical disability, commercial insurance will pay for it. But when a child has autism or another behavioral disability, it becomes a public cost that must be borne by taxpayers. Richman questioned why this division is acceptable and said the state-with help from the loophole parents themselves-is trying to put pressure on the commercial insurance companies.

Resources: Medicaid at a Critical Juncture: The Federal and State Proposals.