Making Medicaid Better: Options to allow States to continue to participate and to bring the program up to date in today s health care marketplace

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1 Making Medicaid Better: Options to allow States to continue to participate and to bring the program up to date in today s health care marketplace Prepared for the National Governors Association By Vernon K. Smith, Ph.D. Principal Health Management Associates Abstract: Medicaid is a State-Federal health care program created by the Social Security Amendments of States administer the program within Federal guidelines. Over the years, Congress has added substantially to the scope of Medicaid, and as the program has expanded it has become increasingly important as a mechanism to finance health care for low-income children, families, pregnant women, the elderly and persons with disabilities. It also now finances a large share of mental health, public health and services for the aging. Over time Medicaid has become burdened with new requirements, and the costs for states have become greater than ever expected. Medicaid has grown to be larger than Medicare in terms of program costs and the number of persons served annually. The cost of Medicaid borne by states has become so large as to raise a question about the ability of states to pay their share in the future. This paper identifies options that would restructure the financing of the program so states could afford to contribute to its financing into the future. These changes would help Medicaid be more effective in providing health coverage for low-income uninsured Americans. 1

2 Making Medicaid Better: Options to allow States to continue to participate and to bring the program up to date in today s health care marketplace Outline I. What Medicaid is Today Indicators of Medicaid s Importance and Impact: Medicaid s role in financing state health services and its impact on state and federal budgets and programs II. How to Make Medicaid Better in 2002 Medicaid has been a program under continuous change. Options for Change in 2002 Options to improve federal financial support for Medicaid. Options to allow states to structure Medicaid coverage and reimbursement policies so states can be prudent purchasers of medical coverage and responsible administrators of public funds. Options to allow states the ability to structure eligibility to simplify program administration and to cover more low-income uninsured individuals and families. Options that would rationalize the relationship between Medicaid and other coverages, including Medicare, SCHIP and employer-sponsored health insurance. III. Summary and Conclusion Appendix: 35 Years of Change in Medicaid Law: 1965 to

3 I. What Medicaid is today Medicaid is a State-Federal program that finances health care for low-income children, families, pregnant women, the elderly and persons with disabilities. The program is designed and administered by the states within federal guidelines that are set forth in regulation and in Title XIX of the Social Security Act. These guidelines define the terms under which each State Medicaid program can qualify for Federal matching funds. By federal law, states are entitled to matching funds on all qualifying expenditures. Similarly, individuals who qualify under the terms adopted by each state are entitled to Medicaid coverage. Medicaid has become one of the most significant health care programs in America today. In federal fiscal year 2001 Medicaid served over 44 million Americans at a cost of $224 billion in federal, state and local funds. Federal expenditures for Medicaid totaled almost $130 billion, and the non-federal share of Medicaid spending (state general funds and in some states, state and local funds) was about $94 billion. Medicaid is now one of the largest categories of state spending, second only to education. It is difficult to over-estimate the importance and impact of Medicaid, because the program is so large, it serves so many people in so many different population groups and plays a role in helping to finance virtually every state program that relates to health. By any measure, Medicaid makes a great positive difference, even a critical difference, in the lives of millions of low-income persons. By its design, Medicaid s impact is greatest among specific groups that are targeted for coverage, including children, families, pregnant women, adults and children with disabilities, persons with chronic medical and mental problems, and the elderly. Medicaid is now a major economic factor in many segments of the health care market place. Most significantly, Medicaid now has an enormous impact on state budgets. Because of the enormous amount of money expended by states for Medicaid services, and the number of persons served by the program, it is difficult to overlook Medicaid s impact and cost. Selected indicators of Medicaid s impact are listed in the next section. 3

4 Indicators of Medicaid s Importance and Impact 1. Medicaid will serve over 44 million people this fiscal year (FY 2002). Compared to Medicare, Medicaid serves more people and its enrollment is growing faster. In federal fiscal year 2002 Medicaid will serve a total of 44.7 million persons, compared to total Medicare enrollment of 40.0 million. Table 1: Number of Medicare and Medicaid Beneficiaries during Federal Fiscal Years 2000, 2001 and 2002 (Millions) Program Fiscal Year 2000 Fiscal Year 2001 Fiscal Year 2002 Medicaid Medicare Source: Congressional Budget Office, April 2001 Baseline. For each program the definition of enrollment is an unduplicated count of persons enrolled for any length of time during the fiscal year. The Congressional Budget Office projects that Medicaid enrollment will increase at an annual rate of 2.3%, or by 2.1 million persons, over the two-year period from 2000 to Over the same two years, Medicare enrollment is projected to increase at an annual rate of 1.1%, or by 0.9 million persons. 2. Medicaid expenditures will total $245 billion in Federal Fiscal Year Total Medicaid spending is not only greater than Medicare, but Medicaid spending is increasing at a faster rate than Medicare. In federal fiscal year 2002 Medicaid total expenditures are projected to total $245 billion, compared to $230 for Medicare. Over the period from 2000 to 2002, the Congressional Budget Office projects that total expenditures will increase at an annual rate of 10% for Medicaid, and at an annual rate of 8% for Medicare. 4

5 Table 2: Expenditures for Medicaid and Medicare, Fiscal Years 2000, 2001 and 2002 Program Fiscal Year 2000 (billions) Fiscal Year 2001 (billions) Fiscal Year 2002 (billions) Avg. Annual Rate of Growth Medicaid- $118 $130 $142 10% Federal Only Medicaid- $ 86 $ 94 $103 10% State* Medicaid- Total** $204 $224 $245 10% Medicare** $197 $218 $230 8% Notes to Table 2: * Medicaid-State is estimated and includes local funds in some states. **Medicaid expenditures net of third party collections and co-payments. Medicare expenditures are net of collections, premiums, coinsurance and deductibles. Source: Congressional Budget Office, April 2001 Baseline. 3. Medicaid is the largest single category of federal grants to states Medicaid federal funds accounted for 42% of all federal grants to states in The proportion has been at this level or higher since Medicaid s share of all federal grants to states increased from 26% in Table 3: Medicaid share of Federal Grants to States State Fiscal Year Medicaid Share of Federal Grants to States % % % % % % % % Source: National Association of State Budget Officers, 2000 State Expenditure Report, Summer,

6 4. Medicaid spending increased dramatically since the late 1980s, causing Medicaid s share of state budgets to almost double in one decade. State spending on Medicaid has increased dramatically, particularly since the mid-1980s. Medicaid spending growth has been much greater than the increases in overall state spending categories, causing Medicaid to increase as a share of state budgets. Over the decade from 1987 to 1997, Medicaid general fund spending increased from 8% to 15% of state general fund budgets. When federal funds are included, total Medicaid spending increased from 10% to 20% of total state spending from all sources. Medicaid s percentage share was stable in the late 1990 s but is increasing again now that Medicaid spending is again increasing faster than spending for other state programs. In 2002 almost every state is having to deal with budget shortfalls. In some cases, the shortfall in the overall state budget is caused in significant part by increases in Medicaid spending. In every case, Medicaid is affected by state efforts to reduce the recent pace of spending growth, because of the recent economic downturn and decrease in state general revenue growth. Table 4: Medicaid as a Share of State General Fund and Total State Spending State Fiscal Year Medicaid General Fund Expenditure as % of All State General Fund Expenditures Medicaid Total Expenditure as % of Total State Expenditures, all Fund Sources % 10.2% % 11.3% % 14.2% % 18.8% % 19.8% % 20.0% % 19.5% % 19.6% Source: NASBO, State Expenditure Report, various years. 5. Medicaid pays for the prenatal care, delivery and health care services for the first year of life for over one-third of all infants, and is the source of health coverage for over 20% of American children. In 1997 Medicaid paid for over one-third of all births in the U.S. The percentage ranged from 20% in New Hampshire to 51% in New Mexico. Since the mid-1980s, Federal law has required Medicaid coverage for low-income pregnant women and for low-income infants for their first year of life. States are now 6

7 required to cover these groups up to 133% of the federal poverty level, with the option to cover them to 185% of the federal poverty level. As of October 2000 a total of 39 states cover these groups at the income levels above the minimum required levels, including 12 states and the District of Columbia that cover pregnant women at or above 200% of the FPL 1. Over half of all Medicaid beneficiaries are children. In FY 2001 Medicaid covered 43.9 million persons, of whom 22.6 million were children. Medicaid provides health coverage for more than one child in five in the U.S. Because the proportion of children with Medicaid coverage is so high, Medicaid has become a significant source of funding for public child health programs, including school-based health centers, rural health clinics and community health centers. 6. Medicaid pays for almost half of all nursing home care in the U.S. Medicaid is the predominant payer of nursing home care in the U.S. A majority of patient days are for persons with Medicaid. In 1998 a total of $87.8 billion was spent on nursing home care, of which Medicaid paid $40.6 billion. Under special waiver programs, Medicaid pays for home and community based services that most other health care plans do not cover. These services allow persons who might otherwise be in a nursing home to live in a home or community setting. Under these programs Medicaid pays for supporting medical and non-medical services such as personal care, respite care or even home repair or modification to allow, for example, the home to be wheelchair accessible. Through its payment for nursing home services and for home and community-based services, Medicaid is the largest single payer for long-term care services in the U.S. 7. Medicaid pays for about half of all AIDS care in the U.S. Medicaid is the single largest source of public financing for HIV/AIDS health care in the U.S. 2 In FY 2000 Medicaid spending on health care for HIV/AIDS totaled $4.1 billion, which represented 43% of all spending on the care and assistance for HIV/AIDS (compared to 18% from Medicare and 17% from Ryan White Care funds). 3 Medicaid covers 55% of adults and 90% of children under age 13 with AIDS. 4 1 National Governors Association, Center for Best Practices, Health Policy Studies Division, MCH Update. Available at 2 Westmoreland, Medicaid and HIV/AIDS Policy: A Basic Primer, Kaiser Family Foundation, The Kaiser Family Foundation, Federal HIV/AIDS Spending: A Budget Chartbook: Fiscal Year Centers for Disease Control and Prevention, HIV/AIDS Surveillance Report, Vol. 11, No. 2. 7

8 8. Medicaid pays for health coverage for persons who are not or cannot be covered by employer-sponsored health insurance. Two-thirds of Americans receive their health coverage through their employer. Still, in the year 2000 about 39 million Americans were without health insurance. Of this total, about 9 million were children and 30 million were adults ages 18 to 64. Of the 30 million uninsured adults, only 7.2 million were not working during 2000, and 18.1 million were working full-time. 5 These workers either do not have insurance offered to them or find it unaffordable to purchase it when it is offered. Many of these workers have incomes low enough that they or their dependents qualify for Medicaid. A significant number of persons with disabilities who are employed (or would like to have a job) find themselves unable to find health insurance coverage. For these persons Medicaid is the only source of coverage. Without Medicaid coverage the cost of care would be borne by the individuals themselves, by providers through uncompensated care, or by higher insurance premiums paid by everyone else. During a time of economic downturn, Medicaid serves as a safety net for health coverage for those who lose their employer-sponsored insurance. A recent study shows that an increase in the unemployment rate of one percent would increase Medicaid enrollment by over 1.5 million persons, including 400,000 non-disabled adults, 130,000 disabled adults and one million children. The cost would total almost $3 billion, including $1.2 billion borne by states Medicaid pays for most publicly financed mental health. According to the Substance Abuse and Mental Health Services Administration (SAMHSA), Medicaid now pays for more than half of the public mental health services that states administer. Persons receiving mental health services comprise 10% of all Medicaid enrollees, but because their care is costly, they are 30% of the high cost enrollees. Depending on the state, between 25% and 50% of persons receiving state mental health services only receive them from Medicaid. Among the 6-14 age group, about a quarter of Medicaid spending is for mental health services; in some states it is as high as 40% Medicaid is the source of $15 billion in special disproportionate share hospital (DSH) payments to safety net and other hospitals that serve low income and uninsured patients. 5 U.S. Census Bureau, John Holahan and Bowen Garrett, Rising Unemployment and Medicaid, Urban Institute, October 16, Also see: Kaiser Commission on Medicaid and the Uninsured, Medicaid Coverage during a Time of Rising Unemployment, December Substance Abuse and Mental Health Services Administration, National Expenditures for Mental Health and Substance Abuse Project 8

9 Since 1987, Federal law has required state Medicaid programs to designate hospitals that are disproportionately financially dependent on Medicaid as Disproportionate Share Hospitals (DSH). Medicaid pays these hospitals more than otherwise identical hospitals. The federal purpose was to assure that hospitals that disproportionately served the poor could survive financially. States can decide which hospitals are included, but hospitals where the Medicaid share of patient-days is greater than one-standard deviation above the mean, or whose low-income percentage is more than 25% automatically qualify. DSH payments are often the difference between solvency and insolvency for hospitals serving Medicaid and indigent patients. It should be noted that some states have used the DSH mechanism to increase hospital payments as part of a strategy that also involved provider taxes or donations to the state, or transfers from government-owned hospitals. Statutory and regulatory changes since the mid-1990s have significantly restricted this use of DSH financing. However, DSH remains an important mechanism for Medicaid to support safety net hospitals. 11. Medicaid pays for the Medicare premiums, coinsurance and deductibles for low-income elderly and disabled beneficiaries who qualify for both programs at the same time. For persons enrolled in Medicare, Medicaid also pays for services Medicare does not cover, including prescription drugs and nursing home care. About 6 millions elderly and disabled persons are covered by both Medicare and Medicaid. These six million persons are about 15% of all Medicaid beneficiaries, but they account for over 30% of all Medicaid expenditures. 12. Medicaid and Medicare are credited with the largest one-time drop in the number of uninsured in the U.S. Before the enactment of Medicaid and Medicare in 1965 about 60 million persons were without health insurance -- one-third of Americans. By 1975, after implementation of these two programs, the number dropped to 19 million or 11% of Americans. (By 1991 the rate had increased to 14%. In 2000 the proportion without health insurance is still 14%.) Summary Because of the amount of money spent on Medicaid, taxpayers and beneficiaries alike deserve the best possible program. There are ways to make Medicaid a better program so it is more effective at covering the low-income uninsured, so it better reflects the current market place and so it better reflects the ability of states to continue to finance it. In the following section specific options for change are listed that would accomplish this purpose. 9

10 II. How to Make Medicaid Better in 2002 Medicaid: A program under continuous change The history of Medicaid spans several decades. It is a story of continuous change. When President Lyndon Johnson signed into law the Social Security Amendments of 1965, he quoted former President Franklin D. Roosevelt, who in 1935 had described the creation of Social Security as a cornerstone in a structure that is being built but which is by no means complete. Medicare and Medicaid, said President Johnson, were the most important additions to that structure in the three decades since the cornerstone was first laid. 8 Medicaid s immediate predecessor was the Kerr-Mills program, which Congress adopted in Kerr-Mills provided important precedents for Medicaid. Kerr-Mills, for example, was a state-federal program to finance vendor payments to medical providers who provided services to low-income persons on welfare, or who met state-set categorical eligibility standards; federal matching funds were available to states for qualifying expenditures. 9 These features carried over to Medicaid. However, the Kerr- Mills program was never fully successful. Its shortcomings are instructive even today. Eligibility was limited, in that the program covered only the poor elderly receiving welfare cash assistance under the aid to the aged program. Like Medicaid, Kerr-Mills was optional for states, and many states simply chose not to participate. The primary reason for the low-participation was that states regarded the federal matching formula as insufficient. At its peak, no more than 30 states opted into the Kerr-Mills program, so it was never a national program. With the Social Security Amendments of 1965, Medicaid was to be an improvement on the Kerr-Mills program. Eligibility was expanded to include not just the elderly poor on welfare, but also children and families receiving welfare under the Aid to Dependent Children program, and adults on welfare under the aid to the blind or aid to the disabled programs. Like the Kerr-Mills program, Medicaid was to be a vendor payment system for 8 Office of the White House Press Secretary, The White House, Remarks of the President at the Signing of the Medicare Bill, July 30, From the archives of the Lyndon Baines Johnson Library, Austin, Texas. 9 In the words of one of the program s architects, Wilbur Cohen, Medicaid s roots in the welfare system went back at least to 1950: Changes were made in federal legislation in the welfare program, which was the beginning of what we would later call Medicaid, namely about vendor payments for medical care for persons who were on the welfare rolls or whose incomes were somewhat higher but not able to pay for heavy medical costs So with the various increases beginning in 1950 that authorized payments for medical care in the welfare program, it was inevitable [that Kerr-Mills and Medicaid] would be primarily related to the welfare program. And since the welfare program was primarily related to state operations, financed partially by federal funds and with federal standards, the Medicaid program became a federal-state system, whereas Medicare became a federal system. That is how these two programs evolved. Source: George Weeks, Wilbur Cohen: An Oral History of Medicare and Medicaid,

11 medical services for persons on welfare. In addition, Medicaid could cover persons who were medically needy when their large medical bills were taken into account. Almost immediately after enactment, efforts were initiated to amend, expand and improve Medicaid. A review of the key changes in Medicaid law reveals a list of legislative milestones that show a process of change and improvement that has occurred continuously for almost four full decades. 10 Over the years, changes to Medicaid law either mandated or provided states the option to extend Medicaid coverage to new population groups, e.g., to children, pregnant women, families or the working disabled. Other changes were motivated by a desire to control how states would use new delivery and financing systems in the health care market place, e.g., by the emergence of managed care in the 1980s and 1990s. Through these changes federal Medicaid law (and the associated federal regulations) have imposed new requirements on states to cover new population groups, to cover services provided by specific providers, and to use specific reimbursement methodologies. In some cases, the law prevents states from using specific policies that have become common among employment-based health insurance, such as limits on certain benefits or beneficiary cost sharing. For these reasons, plus inflation in the cost of health care services, Medicaid has evolved into a program whose size, cost and significance are far beyond the original vision of its creators. Medicaid is now much more than a vendor payment system to pay providers for medical services for persons on welfare, as it was first designed. Indeed, Medicaid now is a mechanism for financing a wide range of health care services for an increasing number of low-income uninsured, and has become a critical source of revenue for important safety net providers. In the tradition of the past three decades, it is time again for Medicaid to be updated. Medicaid law needs to reflect some very important realities relating to the current health care market place and the ability of states to continue to finance the program in 2002 and beyond. The next section describes the changes needed that would bring the program into line with these realities. How to Improve Medicaid: Options for Change in 2002 Medicaid is at a critical juncture in its evolution. On the one hand, states have demonstrated their solid commitment to Medicaid and its public policy objective of assuring health coverage for low-income persons. This commitment has been shown through increasingly large annual appropriations of state general funds, and by a willingness to expand coverage to include increasing numbers of children, pregnant women, adults in families where the children are covered and working adults with disabilities. State general fund appropriations for Medicaid more than doubled from $50 billion in 1992 to $103 billion in A list of key legislative milestones is in Appendix A. 11

12 The state general fund cost of Medicaid is increasingly difficult for states to bear. In fiscal year 2002, Medicaid enrollment is increasing at the same time that state economies have weakened and state revenues have dropped. Almost every state is now faced with a shortfall in its overall general fund budget just at the time that the need for Medicaid has increased. 11 From a state perspective there is an urgent need for significant changes in Medicaid financing. The most needed changes are those that would increase federal funding for Medicaid, because States simply are not in a position to increase funding for Medicaid faster than for other programs, year after year. Nor can states increase funding for Medicaid when other programs are being cut. That is what will continue to happen if Medicaid remains as it is currently configured. Needed changes are in the following categories, so states can be prudent purchasers of medical coverage, responsible administrators of public funds and can afford to continue to participate in Medicaid in the future. Changes to improve federal financial support for Medicaid Changes to allow states to structure Medicaid coverage and reimbursement policies so states can be prudent purchasers of medial coverage and responsible administrators of public funds. Changes to allow states the ability to structure eligibility to simplify program administration and to cover more low-income uninsured individuals and families Changes that would rationalize the relationship between Medicaid and other coverages, including Medicare, SCHIP and employer-sponsored health insurance These proposed changes and specific options for consideration are outlined below. A. Changes to improve federal financial support for Medicaid. There is an urgent need for greater federal financial support for Medicaid. Almost every state is now facing a shortfall in the overall state budget. In every case, Medicaid expenditures are contributing to the shortfall. The overall budget shortfalls are forcing states to make difficult choices on how to reduce the growth in Medicaid expenditures. One of the great virtues of the current Medicaid structure is that states are given significant responsibility for the design and financing of the program. This allows each state to design its program to reflect the unique values, priorities and health care delivery system in that state. This great virtue becomes an Achilles heel, however, in times of economic stress such as the current economic downturn. We see now, for example, that state revenues are declining just at the time Medicaid costs are increasing. As a means- 11 Smith and Lannoye, Medicaid and State Budgets: An October 2001 Update, The Kaiser Commission on Medicaid and the Uninsured, October Publication

13 tested program, Medicaid is designed to serve a counter-cyclical role. However, States are unable to afford the new higher costs of Medicaid at a time when major budget cuts are required across all state programs. As a result, states are forced to cut Medicaid just when the demand for Medicaid services increases. Even with the cuts, current state general fund Medicaid spending continues to increase faster than the rest of the state budget and faster than the overall growth in state general fund revenues. For states the current Medicaid financing situation is unsustainable. Several options would provide the kind of fiscal relief that would allow states to continue to participate in Medicaid. Option 1: To apply the same federal support for all children and families covered by Medicaid and the State Children's Health Insurance Program (SCHIP), apply the current federal matching rate for SCHIP to all Medicaid services provided to children, adults and families who are not also enrolled with Medicare. This would include children and families, pregnant women and about two-thirds of adults with disabilities. Using the SCHIP federal matching rate for Medicaid would be an important step toward the needed fiscal relief for financing Medicaid. It is justified by the fact that many children and families currently move back and forth between the two programs. It is difficult to justify a lower federal matching rate for families and children on Medicaid when these families are in lower-income households and in greater need, compared to SCHIP. Using the SCHIP federal matching rate would provide equity, administrative simplification and financial relief to states. Option 2: To recognize the federal responsibility for persons on Medicare, increase the federal Medicaid matching rate to 90% for Medicaid payments for persons who are enrolled in Medicare and also on Medicaid ( dual eligibles ). Through Social Security and Medicare, it is generally understood that the federal government has primary responsibility for persons over age 65 and with permanent disabilities. It was never intended that Medicaid should spend an enormous share of its resources as a co-insurer for persons on Medicare. However, federal law now requires that Medicaid pay for Medicare premiums, Medicare coinsurance and deductibles and for services not covered by Medicare. Medicaid payments for persons on Medicare have become over 30% of total Medicaid expenditures. This has placed an unintended and unaffordable burden on state budgets. It would be logical for the federal government to pay 100% of these costs now borne by the states. As an initial step, one option would increase the federal matching rate for all states to 90%. This step would recognize the federal responsibility for paying for medical services for low-income Medicare beneficiaries who also qualify for Medicaid. Option 3: To partially finance the federal cost of the enhanced federal Medicaid matching rates, prohibit states from obtaining federal matching for any payments in an arrangement now known as an upper payment limit (UPL) arrangement. 13

14 Over the past several years, many states have responded to the fiscal pressure caused by Medicaid by pursuing strategies to increase federal funding through use of UPL arrangements. Fiscal pressures at the state level have driven states to great lengths to maximize federal funding wherever possible. Examples over the last decade include arrangements for provider donations, provider taxes and more recently, upper payment limit (UPL) arrangements. States have developed these approaches which are legal to improve the level of federal support of Medicaid. No one at the state or federal levels would regard these strategies as the best of public policy. However, states that have used them have felt compelled to do so out of fiscal necessity. Without these approaches states would have been under even greater pressure to reduce or constrain the growth in Medicaid spending. In 2000 and 2001, new federal rules were issued that would further limit the use of this UPL approach. These rule changes will significantly reduce federal Medicaid dollars to some states beginning in federal fiscal year Unless increases in the FMAP occur at the same time, the result will be a dramatic withdrawal of federal support for Medicaid at a time when it will be impossible for states to make up the difference. The dollars foregone by giving up these financing opportunities would help finance the federal cost of enhancing the FMAP, would eliminate concerns about the inadequate distribution of federal dollars and would assure that current federal financial support is used to support the Medicaid program. Option 4: To achieve equity among states and territories, calculate the FMAP for the Territories using the same methodology as is used for the states. It is generally not well understood that the U.S. territories are treated inequitably with regard to financing their Medicaid programs. Federal Medicaid support for the territories differs from the states in three important ways: The federal Medical Assistance Percentage (FMAP), the federal Medicaid matching rate, is set by federal law at 50%. A state with a relatively low per capita income will have a higher FMAP. The highest current FMAP is 76% but in the past FMAPs have exceeded 80%. However, the FMAPs for poorest of U.S. political entities the territories are permanently set at 50%. Their lower per capita income is not recognized, as it would be for a state. The total federal support of Medicaid for each territory is capped. For states, a claim on federal Medicaid matching funds is an uncapped entitlement. Federal matching funds are available to a state for all qualifying expenditures. However, a territory has a limited claim on federal funds that goes only up to the cap. Above the cap, the territory must spend its own general revenue 14

15 dollars. The result is that the effective federal matching rate for the territories is less than 50%, the lowest of all U.S. entities, even lower than the wealthiest of U.S. jurisdictions. Territories are prohibited from making special payments to disproportionate share hospitals. Among the states, DSH payments provide essential support to public and other hospitals that serve a disproportionate share of Medicaid and other indigent patients, including the uninsured. DSH payments now constitute about 6% of all Medicaid payments. However, territorial Medicaid programs cannot qualify for federal matching funds for DSH payments, and are unable to provide similar support for their public hospitals. This option would provide territories the same opportunity to claim federal matching funds as the states, by calculating FMAP with consideration for annual per capita income, allowing an uncapped claim and allowing DSH payments for territorial hospitals. Option 5: To improve financial stability for states, limit to one-half of one percent any annual decreases in the FMAP when it is recalculated each year. The FMAP is recalculated each year, based on the most recent data on state per capita income. The recalculation inherently lags the economy, so it does not reflect the reality of the current economic situation. As a result, some states will suffer significant reductions in their FMAP, even when their state revenues are affected by the economic downturn. From a state perspective, the lower FMAP is a direct loss of federal funds that must be made up dollar-for-dollar with state general funds just to maintain the Medicaid program as it is. Two current state examples will illustrate. In the most recent recalculation of FMAP for federal Fiscal year 2003, California and Michigan were the two biggest losers in terms of dollars lost. California suffered a drop in its FMAP of 1.4% and will have to replace $324 million in lost federal funds with state general revenue. For Michigan the drop in FMAP was 0.94% and Michigan will have to find an additional $73 million in state general fund revenue just to maintain the program. These states currently are dealing with enormous state budget deficits, and there is no general fund revenue that is available to make up the loss in federal funds. In total for 2003, there were 23 states with higher FMAPs and 17 states with lower FMAPs, including six with decreases greater than 0.5%. 12 This option would limit any annual reduction in FMAP to one half of one percent (0.5%). 12 The six states with decreases greater than 0.5percent from 2002 to 2003 are: CA 1.4%; MI 94%; ND 1.51%; SD 0.64%; VT 0.65%; and WY 0.65%. Federal Funds Information for states, 2003 FMAPs: Bureaus Meet Their Match, Issue Brief October 19,

16 Summary: Changes to improve federal financial support for Medicaid. These options address the fundamental issue of states ability to finance the state share of Medicaid costs from limited state revenues into the future. State general fund revenues derived from income taxes and sales taxes historically have not grown as fast as the growth rate for medical costs. As a result, Medicaid has taken an increasing share of state budgets over time, and states are increasingly hard pressed to raise the general fund revenue needed to support Medicaid. In the current period of fiscal stress, it is virtually impossible for a state to maintain the needed level of financial support for Medicaid. 16

17 B. Changes to allow states to structure Medicaid coverage and reimbursement policies so states can be prudent purchasers of medical coverage and responsible administrators of public funds. Even in the current economic climate, states would like to improve their programs and make them work better within the current health care market place. For example, some states would like to extend Medicaid coverage to working persons who do not have any health insurance, and whose household incomes are above the federal poverty levels. When states look at the how to do this within current rules, they are frustrated by the application of federal Medicaid rules that were written decades ago when Medicaid was a very different program. At that time, almost everyone on Medicaid was on welfare, and even the few not receiving cash welfare assistance typically were medically needy persons with net incomes after medical costs well below the federal poverty level. Medicaid eligibility has now been de-linked from welfare, and Medicaid coverage now extends to families and certain other population groups with incomes well above the federal poverty level. Many current Medicaid beneficiaries are working, and most are not on welfare. 13 They live in communities where their neighbors may have employersponsored health coverage. For these groups, a reasonable benchmark for good health coverage would be the health coverage small businesses in their communities typically offer their employees. Such coverage typically would not meet Medicaid requirements, because it is less comprehensive and requires more cost sharing than is allowed under federal Medicaid rules. Option 6: Change federal Medicaid law to allow a state plan option for coverages and cost sharing similar to those offered by employers in that state for persons at or above the federal poverty level. Of particular importance to states is the ability to require cost sharing for groups at and above the federal poverty level. This issue is important because there is a belief that even a small patient copay encourages the responsible use of covered services, and also encourages a sense of personal responsibility and dignity to the user of a service. Current federal rules severely limit cost sharing to a minimal amount, and require that the provider render the service (or provide the product, such as a prescription drug) even if the Medicaid beneficiary is unable or unwilling to pay the minimal amount. Certain groups such as children and pregnant women (for pregnancy related services) and persons receiving hospice care are exempt, as are certain services such as family planning and emergency services. A significant barrier to extending coverage to additional groups would be removed if a state were able to structure Medicaid coverages and cost sharing so they were similar to 13 Ellis and Smith, Medicaid Enrollment Trends: June 1997 to December 2000, Kaiser Commission on Medicaid and the Uninsured, (forthcoming, January 2002.) In December 2000, more than half of Medicaid enrollees were not on welfare in all 17 states for which these data were reported. The proportion of nonwelfare Medicaid enrollees averaged 63%, and exceeded 80% in two states. 17

18 those offered to employer groups in that state for population groups above the federal poverty level. Currently, this option is only available under a Section 1115 demonstration waiver. The extra requirements imposed by the waiver process on states make the Section 1115 waiver an unattractive option for many states. However, extending coverage would be more attractive if states had the increased flexibility under a Medicaid state plan option to structure Medicaid benefits for population groups with higher incomes. A key area of flexibility relates to the desire of states to manage the pharmacy benefit effectively. Current federal law places restrictions on what a state can do, making it impossible for a state to manage the pharmacy benefit like a well-run health plan would. Part of this option would include the flexibility to be a prudent manager of this benefit. In February 2001 the National Governors Association adopted a proposal for Medicaid restructuring based on the principal that states should have the flexibility to structure benefits and cost sharing for optional eligibility groups. 14 The proposal called for state flexibility so that Medicaid might adopt policies similar to those of employer-sponsored insurance for these groups. The proposal also called for enhanced federal matching rates for certain categories of benefits and population groups. 15 Discussion relating to the 2001 NGA proposal has noted that only about 35% of Medicaid spending is for mandatory services provided to mandatory populations, reflecting the interest states have had to extend optional benefits such as prescription drugs to all beneficiaries, and to cover optional populations such as medically needy elderly and disabled, as well as higher income families and children. Some comments also suggested that full flexibility requested in the NGA proposal would not incorporate the protections of current federal law and might result in added federal spending with no gain in coverage. 16 The option in this section is intended to provide the flexibility for states to expand coverage by structuring benefits and cost sharing for non-disabled, non-elderly adults with incomes at or above the federal poverty level. Together with increases in the federal Medicaid matching rates, this flexibility would provide a strong incentive for states to expand coverage that would reduce the number of persons without health coverage. In these tough economic times states are unlikely to pursue coverage expansions, or even 14 National Governors Association, Policy Position HR-32, Health Care Reform Policy. Available at: 15 Current federal law defines the set of benefits a state must include in its Medicaid program, as well as a set of benefits that the state may cover if it chooses to do so. Similarly, federal law defines eligibility categories the state must cover in its Medicaid program, and those it may cover if it chooses. For a list of mandatory and optional services and eligibility groups, see Medicaid Mandatory and Optional Eligibility and Benefits, Kaiser Commission on Medicaid and the Uninsured, July Publication #2256. Pages 8-9. Available at 16 An analysis of the NGA proposal is in Medicaid Mandatory and Optional Eligibility and Benefits, Kaiser Commission on Medicaid and the Uninsured, July Publication #2256. Available at 18

19 maintain recent expansions, without an increase in the federal financial support for the Medicaid program. Summary: Changes to allow states to structure Medicaid coverage and reimbursement policies so states can be prudent purchasers of medical coverage and responsible administrators of public funds. A decade ago, when Medicaid was still largely a health program for persons receiving welfare, it was easier to rationalize the broader coverages and prohibition on most cost sharing. Now however, more than half of Medicaid beneficiaries are not on welfare. Many Medicaid beneficiaries are in households where someone is working, and often incomes are above the poverty level. In these situations it would make sense for states to have the latitude to model Medicaid coverage for certain beneficiary groups after employer-sponsored health coverage that might be offered by businesses in that area. C. Changes to simplify eligibility policy allow states to cover more low-income uninsured persons. Option 7: Federal law should be changed to allow states the option to define eligibility for Medicaid based only on state-defined income levels, without regard to arbitrary eligibility categories. A defining characteristic of Medicaid eligibility law has been the concept of eligibility categories. To be eligible for Medicaid, a person has had to fit a specific category. The familiar categories are children, adults in families with children, pregnant women, persons with disabilities, and persons age 65 and older. Depending on how they might be defined, in a particular state there might be several dozen (or more) categories and subcategories. Notably, single individuals and childless couples (who are not aged or disabled) are not a coverable category; these persons cannot ever qualify for Medicaid regardless of how low their assets and incomes (except when covered as part of a special Section 1115 demonstration waiver). Historically, the concept of Medicaid eligibility categories was directly related to the tie between Medicaid and welfare eligibility. With the de-linking of Medicaid and welfare as a part of welfare reform in 1996, the concept of eligibility categories no longer has a policy basis. Eliminating the myriad of Medicaid eligibility categories has the potential to greatly simplify administration of the eligibility process. A few states have adopted coverage of childless individuals and couples through a Section 1115 demonstration waiver. However, the hassle of the waiver process should not be necessary for a state to offer coverage for these groups if the state wishes to do so. 19

20 D. Changes that would rationalize the relationship between Medicaid and Medicare, SCHIP and employer-sponsored health insurance. Medicaid continuously interacts with other providers of health coverage, including Medicare, SCHIP and employer-sponsored health insurance. Like other providers of health coverage, Medicaid must coordinate benefits to ensure that Medicaid pays only for what it is responsible for, whether it is the whole claim, part of a claim, a coinsurance or deductible. SCHIP law prohibits enrollment in SCHIP if the child is eligible for Medicaid or is covered by any health insurance, so the issue between Medicaid and SCHIP is keeping up with the ever-changing insurance and income status that determines eligibility. Medicaid coverage wraps around Medicare and employer-sponsored coverage, paying for benefits not covered by these payers. About 15% of Medicaid beneficiaries are also enrolled with Medicare, and some Medicaid beneficiaries are covered by an employersponsored health insurance coverage. Medicaid s subsidy of Medicare is a key reason that Medicaid expenditures have grown so large. Currently, about 30% of Medicaid expenditures are for low-income Medicare beneficiaries. Over the years, federal law has layered new responsibilities on states to pay for Medicare premiums, coinsurance, deductibles and for services that Medicare does not cover (notably prescription drugs and nursing home care). At the same time that states are required to be accountable for the costs of care for this group, federal law has prohibited states from exercising any control over these costs. Medicaid s interaction with other health insurers is critically important, affecting both coverage and also the administrative burden borne by beneficiaries and Medicaid. There are several options to improve the relationship and interaction between Medicaid and Medicare, SCHIP and employer-sponsored insurance. Option 8: If Medicare does not assume all or most responsibility for the costs of medical care for Medicare-Medicaid dual eligibles (See Option 2, above), then federal law might allow states to require dual eligibles to be subject to state Medicaid policies relating to coverages, cost sharing and managed care enrollment. The relationship between Medicaid and Medicare has become increasingly and unnecessarily complex. There are now six categories of dual eligible Medicare Medicaid beneficiaries. The Medicaid responsibility is different in each case, ranging from full Medicaid coverage to partial payment of Part B Medicare premiums. However, because Medicare is primary, and because Medicare law dictates full freedom of choice and the availability of the fee-for-service option, Medicaid is precluded from applying its policies for Medicare beneficiaries. When Medicaid does implement a policy to coordinate care, Medicaid is unable to benefit fully from its efforts. It is Medicaid that bears the cost (of case management or 20

21 prescription drugs, for example) and it is Medicare that reaps the savings (through lower use of expensive services, such as inpatient hospital care, for example). One option would be to allow Medicaid to require dual Medicare-Medicaid eligibles to be subject to all Medicaid policies, such as mandatory enrollment in managed care. If this is not possible the federal matching rate should be increased to recognize the federal responsibility for this eligibility group (See Option 2, above). Option 9: To rationalize the relationship between Medicare and Medicaid, the administrative relationship between the programs could be simplified. This would require changes in federal law to minimize the burden now placed on Medicaid. In addition to the need for the Medicare responsibility to be recognized in the federal Medicaid matching rate, there also is a need to simplify the administrative relationship between Medicare and Medicaid. Under current law, Medicaid is required to administer complex administrative systems to enroll Medicare beneficiaries into the correct dual eligibility category, initiate payment of the Part A and Part B premiums depending on the eligibility group, and reconcile payments as beneficiary circumstances change. The state is required to initiate changes in enrollment status that result in transfers of payments for premiums to the federal government. For the QI-1 and QI-2 categories, the state must go through the administrative processes, but no state matching funds are required. It should be possible to simplify the entire process so it works better for Medicare, Medicaid and for the beneficiaries. Option 10: To improve coordination, continuity of coverage and to simplify the relationship between Medicaid and the State Children s Health Insurance Program (SCHIP), change federal SCHIP law to allow the parents of children who apply for SCHIP and are found eligible for Medicaid to choose enrollment in SCHIP. Current SCHIP law prohibits any child who is eligible for Medicaid from enrolling in SCHIP. This requirement prevents a state from earning the higher SCHIP matching rate by enrolling children in SCHIP when they otherwise would be enrolled in Medicaid. If the matching rate is equalized (See Option 1, above) this incentive is removed. Allowing a child to remain enrolled in SCHIP would simplify administration of SCHIP, because of the high rate of churning among enrollees. Children flow into and out of SCHIP eligibility through the normal changes that occur in families. SCHIP eligibility is a narrow band in the income distribution, expressed as a percentage of the federal poverty level (FPL). Since the FPL varies by family size, any of several changes (e.g., a new child in the household, or a reduction in earned income) will place the family at a lower or higher percentage of the FPL, and possibly make them eligible for Medicaid and ineligible for SCHIP. An unintended consequence of the churning between Medicaid and SCHIP is the potential for a child to lose all coverage for a period of time, during a shift from Medicaid 21