After 40 years and a very close vote, Medicaid will see dramatic changes

Changes to Medicaid included in the budget reconciliation bill include the most radical alterations to the program in its 40-year history.

While this isn't the first time Congress has scaled back Medicaid spending, it is the first time in at least 30 years the changes were directed at beneficiaries rather than at states or providers. The bill was narrowly adopted, 216-214, in the House of Representatives in February and signed by the president.

"This is the first time in 40 years — that is since the program was enacted — that we actually have policy coming out of Congress that reduces Medicaid's commitment to the poorest children," says George Washington University Department of Health Policy chairwoman Sara Rosenbaum, who helped write many earlier Medicaid reform bills. She notes that changes allowing states to redesign their benefit packages "go to the heart of what it means to be insured. They are all about allowing states to fundamentally change the meaning of coverage for around 50 million people."

To comply with an April 2005 budget resolution, both the House and Senate passed budget reconciliation bills making changes to Medicaid last November. A conference report reconciling differences between the two versions was voted on late in December but technical modifications to the Senate bill required the House to vote on the revised bill, which it did in February.

Some lawyers and Congressional Democrats claim the bill signed by the president is not actually law because of an inadvertent mistake by a Senate clerk. Because of that mistake, according to Democrats who contacted House Speaker Dennis Hastert, the House and Senate passed different versions of the budget reconciliation bill. The president signed the Senate version, although the House had never actually voted on it. And before the bill went to the president for his signature, it reportedly was changed again from the version narrowly approved by the House vote. The Democrats say the error was known several days before the final vote and assume it was not fixed through a legitimate manner because that would have involved another vote that might not have approved the bill. There were no indications at press time whether any court challenges might be brought over implementation of the bill's provisions because of this mistake.

Provisions in the budget bill are expected to reduce federal Medicaid spending by $4.3 billion and Medicare spending by $5 billion over the next five years, according to the Congressional Budget Office. While the actual cost savings are closer to those in the Senate version of the bill, many of the policy changes came from the House bill, according to an analysis by the Kaiser Commission on Medicaid and the Uninsured.

The Senate version pulled more than 80% of its savings from proposals related to prescription drug payment policies, while most of the Medicaid savings in the House package came from reduced benefit packages and increased cost-sharing amounts, areas in which states have sought additional flexibility.

Here are some of the key areas in which changes will be made, according to the Kaiser analysis:

Prescription drug payments. Previously, states typically reimbursed pharmacies for Medicaid drugs at a discount off average wholesale price plus a dispensing fee. Payments for most drugs were subject to federal upper limits that typically were set at 150% of the lowest published price for equivalent drugs. The bill changed the way pharmacists are paid from average wholesale price to average manufacturer price. And it set the federal upper limit at 250% of average manufacturer price for multiple-source drugs. Kaiser said studies have shown that average manufacturer price is significantly lower than average wholesale price and the change will decrease Medicaid revenues to pharmacists by reducing payments for drug ingredient costs.

While the drug pricing changes reduce federal and state costs for Medicaid prescription drugs without shifting costs to beneficiaries, other bill provisions allow states to impose higher copayments for nonpreferred drugs and allow pharmacists to deny access to drugs if beneficiaries cannot pay the copayments.

The Coalition for Meaningful Medicaid Reform, representing more than 55,000 community pharmacies and 150,000 pharmacists, challenged the cuts. National Community Pharmacists Association CEO Bruce Roberts said the administration looked at pharmacy as an easy target and noted the cost associated with dispensing medications "represents only a small fraction of overall Medicaid costs and holds the greatest potential for reducing the enormous economic and human cost of medication-related problems, and yet it is this component that is being targeted." And American Pharmacists Association executive vice president John Gans cautioned that if it becomes financially impossible for pharmacists to serve Medicaid patients, it won't matter if the beneficiaries have a drug benefit. "A benefit is moot if patients can't go to their local pharmacist to get their prescription medications and work with their pharmacist to make the best use of those medications," he said.

Premiums and cost-sharing. Past law provided cost-sharing protections that reflected the limited incomes and significant health care needs of Medicaid beneficiaries, Kaiser said. States could not charge most beneficiaries premiums or enrollment fees. Nominal cost-sharing requirements could be imposed on certain populations for most services, including prescription drugs. Children and pregnant women could not be charged cost-sharing, and there could be no cost-sharing for services such as emergency department visits, family planning, and hospice care. Under the new budget, states may charge unlimited premiums to beneficiaries with family incomes over 150% of the federal poverty level and also may charge copayments up to 20% of the cost of medical services. Copayment limits are set at 10% of the cost of the services for beneficiaries with incomes between 100% and 150% of the federal poverty level. Beneficiaries below the poverty line lost protections from premiums or cost-sharing for services provided, a change Kaiser said seems inconsistent given the protections afforded those at higher income levels.

States are prohibited from imposing premiums and cost-sharing for services and preferred drugs on certain groups, including mandatory children and pregnant women. Certain services also are exempt from cost-sharing. Higher copayments will be allowed for nonemergency services in emergency departments and increased cost-sharing for nonprescription drugs. No beneficiary groups are exempt from cost-sharing for nonpreferred prescription drugs.

Total cost-sharing and premium amounts cannot exceed 5% of a family's income over a three-month period. The bill also made copayments and premiums "enforceable," meaning providers or pharmacists can deny services or access to drugs to beneficiaries who cannot pay the cost-sharing amount at the point of service or terminate coverage for failure to pay premiums for 60 days.

The Kaiser Commission cited "a large body of research, as well as recent experience with Medicaid 1115 waivers" that found premiums and cost-sharing can create barriers to obtaining or maintaining coverage, increase the number of uninsured, reduce use of essential services, and increase financial strains on families who already devote a significant share of their incomes to out-of-pocket medical expenses.

Benefit changes. The law had required states to provide certain mandatory services. In addition, states could receive matching funds for the costs of covering people and services not mandated by federal statute. Some critical services such as prescription drugs were classified as "optional." Some 60% of all Medicaid expenditures went for optional services. States also had flexibility to determine the amount, duration, and scope of the services provided under the program.

The bill allows states to replace the existing Medicaid benefits package for children and certain other groups with "benchmark" coverage that includes the standard Blue Cross Blue Shield Plan offered under the Federal Employees Health Benefits Plan, health coverage for state employees, or the coverage offered by the largest commercial HMO in a state. Benchmark coverage also will include any coverage proposed by a state that the Centers for Medicaid and Medicare Services determines provides "appropriate" coverage for affected populations.

Kaiser says even more comprehensive benchmark plans often don't cover key Medicaid services such as family planning and many rehabilitative services. While the bill requires wraparound coverage for Early and Periodic Screening, Diagnostic, and Treatment (ESPDT) services, Kaiser says it is unclear if the wraparound will provide children the same access to a broad range of screening and treatment services. Providing limited benefits could result in unmet health care needs and make it more difficult for beneficiaries to access care as they are likely to have difficulty paying for uncovered services, the commission says.

Asset transfer changes. Until now, individuals applying for Medicaid long-term care services have been required to divest all but a minimum level of assets ($2,000) before becoming eligible. Countable assets included savings accounts and investments, but excluded the home, one car, life insurance with a face value of less than $1,500, and certain other items. Special rules allowed a community spouse of a nursing home resident to keep a portion of the couple's income and assets to prevent impoverishment; applicants who transferred assets for amounts below fair-market value within three years of applying for Medicaid nursing home care were subject to an eligibility delay.

Spending restrictions in the new bill are largely attributable to increasing penalties on individuals who transfer assets for less than fair-market value to qualify for nursing home care by moving the start of the penalty period from the date of the asset transfer to the date of the Medicaid application and by increasing the look-back period for assessing transfers from three to five years. The bill makes individuals with more than $500,000 in home equity ineligible for Medicaid nursing home benefits, and gives states an option to raise the threshold to $750,000. It also counts as assets some previously exempt items such as certain annuities, promissory notes, and mortgages.

The Congressional Budget Office estimated 120,000 or 15% of new Medicaid nursing home residents would face an eligibility delay of about three months due to the stricter penalty and look-back provisions. Kaiser said most elderly living in the community who are at high risk for nursing home use don't have sufficient assets, excluding home equity, to finance a nursing home stay of one year or more. Private insurance and Medicare generally don't cover nursing home care, leaving many eligible elderly to turn to Medicaid as the only alternative to help finance care.

AARP policy director John Rother said Congress "went after people who had already spent down whatever savings they had to qualify for Medicaid, and they're disallowing some of those people from getting any assistance whatsoever because they've given money to a grandchild or given money to charity."

Other proposed changes to reduce spending. The budget reconciliation bill included a documentation procedure requiring most new applicants and current beneficiaries to document their citizenship. Kaiser said research consistently has shown that increased documentation requirements are a barrier to Medicaid enrollment.

There is a provision in the budget bill to tighten the definition of what qualified as Medicaid targeted case management, specifying that foster care-related activities can't qualify, and there are other provisions to restrict provider taxes on managed care organizations.

Medicaid spending provisions. The bill appropriated $2 billion for the Secretary of Health and Human Services to pay states that provided care to affected Hurricane Katrina individuals or evacuees under a Section 1115 waiver to pay for the nonfederal share of medical care for Medicaid and SCHIP through June 30, 2006. Through Jan. 31, 2006, the funds also cover other health care services approved under 1115 waivers (uncompensated care pools), reasonable administrative costs and other purposes approved by the secretary.

Legislation was included to allow states an option to permit parents with disabled children to "buy-in" to Medicaid for their children if they have family income below 300% of poverty.

There is $64 million in five-year funding to establish Health Opportunity Accounts in 10 states. Kaiser says these Medicaid demonstrations are a fundamental policy change, even though their funding is not substantial. States would set up accounts for individuals to pay for medical services. However, after money in the account is exhausted, beneficiaries could face additional cost-sharing requirements to meet a deductible before they get access to full Medicaid benefits.

There is additional spending for home- and community-based services for the elderly and disabled by allowing states to offer such services as an optional benefit instead of requiring a waiver. Unlike other optional services, however, states would be allowed to cap the number of people eligible for the services.

The bill included additional spending for "money-follows-the-person" demonstrations, changes to the Alaska federal match, increased disproportionate share payments for the District of Columbia, increased funding for the territories, and funding to expand the long-term care partnership program to encourage purchase of private long-term care insurance.

Republicans who helped write the budget reconciliation bill said those who are objecting are overreacting, especially on changes that affect coverage for children. Senate Finance Committee chairman Charles Grassley (R-IA), who led the Senate negotiations on the measure, said the bill does what the nation's governors asked Congress to do. "Governors, including my own governor, said, 'You give us more flexibility, we can save the states money, we can save the federal government money, and we can serve even more people,'" Grassley said.

Not all governors like the plan

But New Mexico Democratic Gov. Bill Richardson said the bill's changes aren't what he had in mind.

"These are cuts that are actually going to hurt kids in working families, people that pay their bills and deserve health care," he said.

Families USA executive director Ron Pollack said the cuts "will cause tremendous hardship for millions of low-income seniors, children, and people with disabilities. Those depending on Medicaid as their health care safety net will see a significant increase in their out-of-pocket expenses and, in exchange, will receive even fewer benefits. To make matters worse, many of them will completely lose all access to Medicaid for their health care services.

"What makes this particular reconciliation package so insidious is that the House and Senate leadership are saying it needs to be done in the name of fiscal discipline and deficit reduction. However, Congress is poised to enact a massive tax cut bill that primarily favors the wealthy and ultimately dwarfs the size of this spending cut package. So instead of reducing the size of the deficit, the net result of the budget and tax bills will be to add tens of billions of dollars to our already massive deficit.

"To make matters worse, the scope of this budget bill is very different from what the Senate originally approved last year. The original Senate bill would have improved the cost-effectiveness of the Medicare and Medicaid programs through the elimination of big windfalls to the drug and insurance industries. Unfortunately, through closed-door deals in the conference committee, these laudable proposals were dropped, and Medicaid beneficiaries were instead targeted as the ones to absorb these massive cuts. It is wrong to balance another round of massive tax cuts for the rich on the backs of our most vulnerable citizens, especially when the resulting cuts will make needed health care unavailable."

(Download the Kaiser Commission on Medicaid and the Uninsured analysis at www.kff.org/medicaid/reconciliation.cfm. Contact Ms. Rosenbaum at (202) 296-6922, and Mr. Pollack at (202) 628-3030.)