Fiscal Fitness: How States Cope

Indiana's Medicaid waiver program covers more than 40,000 uninsured

More than 40,000 Hoosiers are now receiving health care coverage through the Healthy Indiana Plan (HIP), which began enrolling beneficiaries in January 2008. The plan is the first that allows a state to provide a benefits package to a low-income population that wouldn't otherwise qualify for Medicaid, modeled after a high-deductible plan and health savings account and using Medicaid funds.

In December 2007, the Indiana Family and Social Services Administration obtained a federal waiver that provided federal funding for 34,000 childless adults. Since that limit has been reached, any person in that category who applies for HIP coverage will be issued a denial letter and included on the wait list based on the date and time his or her application was received. Enrollment remains available, however, for parents and other caretaker relatives living with dependent children.

HIP is for uninsured Hoosier adults between the ages of 19 and 64 who earn less than 200% of the federal poverty level (FPL), about $20,800 for an individual; do not have access to employer-sponsored health insurance coverage; and have been uninsured for at least six months.

HIP includes a Personal Wellness Responsibility (POWER) Account valued at $1,100 per adult to pay for initial medical costs; a basic commercial benefits package once annual medical costs exceed $1,100; and coverage for preventive services up to $500 a year at no cost to participants. Contributions to the POWER Account are made by the state and each participant, based on the ability to pay. No participant pays more than 5% of his or her gross family income. Also, no copays are required except for emergency department use. However, those copays will be returned if the service is deemed a true emergency, using the "prudent layperson" standard.

If all age- and gender-appropriate preventive services are completed, all remaining POWER Account funds, both state and individual, will roll over to offset the following year's contribution. If preventive services are not completed, only the individual's prorated contribution to the account will roll over.

Services covered by HIP include physician services, prescriptions, diagnostic exams, home health services, outpatient hospital, inpatient hospital, hospice, preventive services, family planning and case and disease management. Mental health coverage also is included and is similar to coverage for physical health, including substance abuse treatment, inpatient, outpatient, and prescription drugs.

State faced a daunting challenge

From the approval of the Indiana Check-Up Plan by Indiana legislators in April 2007 to the start of the HIP program in January 2008, the state was faced with a condensed time frame for implementation. The following activities had to be completed in that short time frame: A waiver approval from the Centers for Medicare & Medicaid Services, development of a request for proposal, procurement process, contract negotiations with health plans, written program policies, rule promulgation, state plan amendment updates, readiness review criteria set and monitored, operations testing and marketing initiatives.

"All of these activities took place concurrently, with limited resources," says interim Medicaid Director Pat Casanova.

Currently, HIP is funded with cigarette tax revenue. For the current fiscal year, the cost of the program is estimated to be over $130 million. Unused cigarette tax revenues are reserved to fund the program in later years, when cigarette funding alone will not be able to fund the program. Previously, $47.5 million in cigarette tax revenue was needed to support the program, but the state's Medicaid program will now receive $9 million from the economic stimulus package. "The increased FMAP will lessen the amount of the cigarette tax revenue that is needed to support the program," Ms. Casanova says. "The stimulus package significantly reduces the state's obligation, and, therefore, moves the break-even point between cigarette tax revenue and expenses further into the future."

Based on current state estimates, HIP could potentially expand coverage to 120,000 previously insured adults.

The state plans to offset the costs of coverage expansion by using a portion of their Disproportionate Share Hospital Funds and achieving savings in its existing Medicaid coverage. Beyond the savings needed for budget neutrality, the state also has agreed to achieve additional savings of $15 million over the five-year waiver period.

"The stimulus package will fund in the short term the increased enrollment of individuals needing Medicaid services due to the employment issues we are facing," says Ms. Casanova.

However, since the stimulus package only is a nine-quarter program, Ms. Casanova says if the recovery takes longer and is slower than those in recent years, there is concern about the "cliff" of expenses for built-up service needs without the concurrent revenue from this funding source.

"Before the stimulus, Family and Social Services Administration had begun working on a couple of initiatives that would help fill the gap between revenues and service needs-a pharmaceutical carve-out and a short-term retention of up to 5% of provider billings," says Ms. Casanova.

Indiana's commitment to a balanced budget over the past four years has maintained eligibility criteria, says Ms. Casanova, and even supported reducing or eliminating wait lists for certain services.

"Because they lived ahead of their income, a number of states have had to announce more restrictive eligibility criteria, reduced provider reimbursement rates, restricted access to services, or other draconian measures to reduce their budget deficits," she says. No budget cuts have been necessary for the state's Medicaid program thus far, and the Medicaid program will not cut services "except as a last resort," adds Ms. Casanova.

Instead, Indiana's Medicaid program is forging ahead with improving health outcomes through a variety of initiatives. These include improved data aggregation and reporting, transparency of quality information for patients and consumers, improving early access to prenatal care for pregnant women, and moving to a paperless system for communications and billing.

"Many of the cost-saving initiatives in Medicaid have grown out of transforming models of care for individuals in need," says Ms. Casanova.

For instance, the closure of the last center for the developmentally disabled in Fort Wayne replaced the outmoded institutional care model with community-based opportunities for inclusion and care. It also reduced the total spending from more than $60 million a year to less than $24 million, a savings of 60% for the same population.

Similarly, the elimination of the wait list for the Aged and Disabled Waiver significantly reduced the demand for nursing facility placements. This saves significant dollars currently, and even more in future years as individuals are staying in the community longer.

In addition to the new populations reached by HIP, the CareSelect care management program was created to serve the population of the aged (excluding the dual-eligible members), blind, physically and mentally disabled, members who get room and board assistance, members on MEDWorks, children receiving adoptive services, and members receiving select nondisabled home and community-based services.

"Neither the HIP nor CareSelect programs was threatened by the revenue projections per se, and the stimulus package is not the reason for continuing to fund them in the budget for the state fiscal year 2010 and 2011 biennium," says Ms. Casanova.

Looking forward, she says a key area of focus for the state Medicaid program "is assuring that these programs are working as we envisioned them, and improving outcomes for Medicaid members."

Stimulus could jump-start plans for cost-saving initiatives

"It's pretty clear that even with the stimulus funding, states are going to need to manage their Medicaid programs well," says Neva Kaye, senior program director for the National Academy for State Health Policy in Washington, DC. "It's something that they have always needed to do, but it gets to be even more important in times like these."

This means that state Medicaid programs will have to continue to press forward with quality improvement initiatives. "I think what is happening right now is creating a lot of opportunity. Those who have been thinking long-term will be able to capitalize on this quite effectively," she says.

For example, many states have done extensive planning on how they could use and support health information technology (HIT), organize primary care, or implement medical homes. This planning will enable them to use the stimulus dollars to jump-start those plans. "It presents a whole new field of opportunity for states to advance and move some of their thinking into reality," says Ms. Kaye.

Since so many states are facing budget shortfalls, a lot of the help in the stimulus package will go exactly to what it was intended for-helping states maintain their Medicaid programs during these tough times. "But I think that other parts of the bill will support Medicaid programs in being innovative and moving forward," she adds.

Reform is critical

One of the biggest challenges for state Medicaid directors right now is to improve the cost-effectiveness of their programs.

"In a time of significant financial constraints, health care reform is not only important; it is critical," says Patricia MacTaggart, lead research scientist and lecturer at the Health Policy Department at the George Washington University. "States have historically found innovative service delivery approaches to address access and quality within financial realities."

Now states have the chance to move from concepts to implementation of real change, for the betterment of publicly funded enrollees.

"Transforming health care and health care delivery is not easy, but it is feasible, if the federal and state governments can rebuild the trust that has been lost over the last few years and work together as real partners," says Ms. MacTaggart.

States, such as private purchasers, have only four options to consider when money gets tight, she says: eligibility (eliminating a population group), coverage (cutting out an actual service), payment (reducing or not increasing payments to providers), and service delivery (more effectively and efficiently purchasing and delivering the service).

"The option with the least negative impact-and the one with the greatest potential for a positive impact-is in changes to service delivery. This is dependent on a better system of care and better information," says Ms. MacTaggart.

The stimulus bill provides funding for HIT infrastructure. This could allow states to implement the information tools necessary to assure appropriate utilization of services.

Ms. MacTaggart predicts that states will look to e-prescribing, e-health information exchanges of information, decision support enhancements for rate setting and quality oversight, and mechanisms for their staff to use to do their work "right the first time."

State budgets, as they tighten, often require cutbacks on state staff, so using human resources more effectively through HIT becomes even more necessary.

"States are looking at more web-based provider management, member management, and contract management, in order to have a greater impact with less staff," says Ms. MacTaggart. "Waste will be an immediate focus through fraud and abuse activities, review of overutilization, and focused payment efforts, such as not paying for 'never events.'"

As for cost-saving initiatives, economic realities will "force states to work on these, no matter what," says Ms. Kaye. "Even with the federal money, there are still budget gaps in some states, and you have to figure out what to do about that. That always presses you to look at cost effectiveness and quality and efficiency and to make those investments."

Ms. Kaye adds that for the past year, she has been involved with states advancing initiatives on medical homes for Medicaid and SCHIP beneficiaries and has observed "absolutely no slowing down on that. As a matter of fact, there is continued strong interest in it, as a way of making the system work more efficiently."

States such as Iowa and Minnesota that are already "marching down that path" toward medical home initiatives will continue to do so, she predicts. "They will not only continue to define and develop what is a high-quality medical home, but will look at ways of changing their systems, support practices, and reimbursement. There is a lot of interest in what these states are doing," Ms. Kaye says.

States may freeze reimbursements

States may seek to freeze or cut reimbursement for providers, but this is a difficult prospect since Medicaid rates are already low. "Medicaid may be a $350 billion program, but on a per capita basis, given the number of people it covers, it's really a pretty cheap program. There's not a lot of fat in that system to cut," says Michael S. Sparer, PhD, JD, a professor of health policy at Columbia University's Mailman School of Public Health, and author of Medicaid and the Limits of State Health Reform.

"There's not much you can do with reimbursement, although states do have battles with providers over reimbursement, and those will continue to play out over the years," he explains.

Similarly, the "big-ticket" items in benefits packages aren't a money saver for states. "Either they are mandated by the feds, or they are things like drugs that you can't realistically cut," says Dr. Sparer. "So, you end up with services like podiatry, mental health, and substance abuse. You don't really save much money when you cut things like that; they are politically difficult, and it also could end up costing you money. If you don't get a mentally ill person the help that they need, they could end up in the ER, costing you all kinds of other money."

Some states are trying to save money on medications, either through purchasing pools or drug lists, although their leverage to save money in that area was significantly lessened by the Medicaid Modernization Act, which shifted all the dual-eligibility drug costs out of Medicaid into Part D.

"So, cutting benefits is tough, cutting reimbursement is tough, cutting drug costs is tough, and cutting eligibility is tough," says Dr. Sparer.

Another area getting a lot of attention is care management of the complex client who is chronically ill.

"A very high percentage of the Medicaid dollar goes to folks with five or more chronic conditions, many of whom are dual-eligible, most of whom have traditionally been excluded from state Medicaid managed care initiatives," says Dr. Sparer. "This is the area, in theory, where they can have the biggest impact."

However, this also is tough to do, he notes, and though you expect to achieve better quality, you don't necessarily save money by managing the care provided to the chronically ill.

"There are those who say the ultimate key to cost containment is greater use of HIT, and there is now obviously federal money for HIT," says Dr. Sparer. "We really should have better HIT, but in the short run, it's going to cost a lot of money. The feds are going to help pay for it right now, but the states are going to have to put in some money to pay for it. It's also administratively tough to do, particularly if you're in a state with a lot of solo practitioners and office-based docs."

So, while HIT, as well as improving primary and preventive care for Medicaid clients, could save money in the long run, Dr. Sparer says he doesn't see it as a short-term money saver for the states.

"The one area I think states are really going to try to experiment [with] is with dual-eligibles," says Dr. Sparer. "That is a very expensive population. It's a very difficult and high-cost population, and it's a very hard-to-manage population."

It's important to note that for what Medicaid does, says Dr. Sparer, "it's a pretty low-cost program" and ultimately, he says, what the states really need is help from the federal government.

"States are saying, 'We think Medicaid is an appropriate vehicle to expand coverage to the uninsured, but we need additional federal funding, given our requirements to have a balanced budget and our limited ability to raise money," Dr. Sparer says. "If Medicaid is really going to be the safety net for the low-wage worker and the uninsured in the U.S., the states can't be put in a position of financing a large chunk of the cost of that. They are going to need more help from the federal government, I think."

Contact Dr. Sparer at (212) 305-5611 or