The future of Medicaid’s in flux as states debate flexibility or funding

As states sink more deeply into a financial morass, the Bush administration has proposed additional flexibility for Medicaid as a way out. But some analysts and congressional staffers say a massive infusion of federal money is the answer.

"The time to modernize Medicaid is here," Health and Human Services secretary Tommy Thompson said when he announced the administration’s Medicaid reform proposal. "The states’ budget crises are threatening the progress we’ve made in expanding health insurance, and at the same time, the old Medicaid rules are a straightjacket, restraining creative new approaches that could preserve coverage and expand it to more Americans in need. We need to bring the same clear-eyed spirit of innovation to Medicaid that we brought to welfare. We need to leave behind the old definitions and look at how we can better serve today’s beneficiaries." 

Mr. Thompson said he was consulting some governors on the proposal, which would be optional for the states. Two weeks after introducing the proposal, he said he will ask the National Governors Association to endorse it.

Plan highlights include:

1. extra federal funding of $12.7 million over seven years, starting with an estimated $3.25 billion in extra funding in Fiscal Year 2004;

2. federal funding for Medicaid and State Children’s Health Insurance Program (SCHIP) provided in two annual allotments, one for acute care and one for long-term care;

3. preservation of comprehensive care for mandatory groups and additional state flexibility to tailor coverage for nonmandatory recipients and services;

4. encouragement of coverage for whole families and not just children in a low-income family;

5. encouragement of "medical homes" so that all family members are treated by the same providers;

6. support for increased use of home- and community-based services for Americans with disabilities.

Such a broad approach is necessary, Mr. Thompson said, because simply pouring more money into an outdated system would neither provide better health care nor solve states’ problems.

"To the contrary," he said, "it’s going to put the health coverage of thousands of Americans at risk because states can no longer afford to provide it for their individual citizens."

He said the plan meets the immediate fiscal need of states because it increases Medicaid spending by the projected 9% growth. While 9% growth is projected over the next 10 years, the proposal front-loads Medicaid spending "to help prevent people from losing coverage, while also providing opportunities for our states to extend health care to more Americans as needed." Not specifically pointed out is that by reducing the federal funding in the last three years of the 10 year cycle, there would be a net of no cost to the federal government.

With the money would come additional flexibility, according to the secretary, including flexibility to expand coverage to the mentally ill, the chronically ill, those with HIV/AIDS, those with substance abuse problems, and childless adults, and all without having to seek federal waivers. "States could design long-term care programs for seniors that actually target benefits to meet their specific needs," Mr. Thompson said. "And seniors would be able to choose from a greater array of services. And people with disabilities would gain greater freedom to work and live independently without losing any of their health benefits."

He indicated that the two-allotment system being proposed would encourage states to focus on acute care and long-term care.

"Long-term care is the big driver," he said, "as far as costs right now and because our population is aging. And we want to make sure that states address this population and come up with innovative ways in which they might be able to handle that population instead of just putting them into a nursing home. States would have the opportunity to give vouchers or cash to an individual to stay in his or her own home instead of going into a nursing home. That, we think, would save lots of dollars and give a better quality of life for these individuals."

Mr. Thompson said that with SCHIP and welfare reform, Washington was able to give states more flexibility to provide better, more cost-effective care, and such innovative principles and ideas now need to be applied to Medicaid.

"The bottom line is that Medicaid is outdated," the former governor of Wisconsin declared. "It’s inefficient. Its spiraling costs and straitjacket rules are forcing states into no-win situations, where they need to reduce coverage and have little opportunity to expand coverage. And simply throwing money at the problem will not fix the problem. Governors recognize this . . . I believe the more governors understand this plan, the more excited they will become about it. I can tell you enthusiastically, that if I were still a governor, I would absolutely jump at an option like this. I would take it and run with it."

Implementing these reforms requires congressional approval, according to Secretary Thompson, and it’s not likely that legislation will pass unless governors back it.

NGA willing to help

The National Governors Assoc-iation (NGA) in Washington, DC, initially issued a brief statement commending Secretary Thompson "for recognizing the need to reform the Medicaid program. By developing a new proposal, he has clearly placed this issue on the national agenda. We look forward to reviewing the details of the proposal and working with the secretary and Congress to reform this critical federal-state partnership program."

But NGA issued a statement several days later saying there is a need for additional federal funding of between $20 million and $40 million. And at a Families USA Medicaid briefing, NGA executive director Raymond Scheppach endorsed the call for flexibility and more funding, but also stressed the structural changes that states need to make in their tax systems and in government size and efficiency.

Sen. Tom Daschle (D-SD) proposed $40 billion in additional funds for states in the economic stimulus bill he announced in January. Support for additional funding came from AARP, whose board met with key lawmakers and staff in early February.

"Frail and disabled people will lose home and community-based health services," warned AARP president Jim Parkel. "Nursing homes won’t be able to hire enough staff. Children and older Americans will lose coverage from state assistance programs. With no help from Congress, states may be forced to cut off coverage for many in need and not just the poor. Health providers, businesses, insurers, and local governments will suffer as costs for services covered by Medicaid are shifted onto them."

AARP said it was concerned that the administration’s proposal for lump-sum allotments would be insufficient and lead to more Medicaid cuts.

"This proposal handcuffs states because it leaves people more vulnerable in future years as states struggle to meet increased needs with decreased dollars," said AARP executive director Bill Novelli.

House Energy and Commerce Committee chairman Billy Tauzin (R-LA) indicated he was "generally supportive" of the administration plan, while Senate Finance Committee chairman Charles Grassley (R-IA) said he would reserve judgment until he could review the plan in detail. The ranking Democrat on the Finance Committee, Sen. Max Baucus (D-MT) said he was concerned "about the impact . . . on millions of vulnerable Americans who rely on Medicaid for their insurance."

Families USA executive director Ron Pollack said the proposal would "signal the end of Medicaid as an entitlement. This is a deal for shortsighted politicians. The longer-range problems are going to be someone else’s."

A pledge of cooperation came from the American Association of Health Plans (AAHP). AAHP president Karen Ignani released a statement saying that, "America’s health plans have played a leadership role in providing access to quality care for low-income families through Medicaid. We support the president’s objective to provide an additional almost $13 billion over seven years for the state Medicaid programs. . . . It is increasingly important for state Medicaid programs to be able to use innovative tools and solutions such as those created by health plans to achieve the goal of providing health care coverage to low-income families.

"Medicaid managed care organizations are a critical part of the infrastructure for providing health care services that meet the unique needs of Medicaid beneficiaries. Among their greatest strengths are improving access and care coordination. We are pleased that the administration’s proposal emphasizes the importance of medical homes where parents and children can receive coordinated benefits. America’s health plans stand ready to work with the administration, state governments around the country, and the Congress on ways to strengthen and improve the Medicaid program, and maintain access to high-quality health care for the beneficiaries it serves," Ms. Ignani said.

Center on Budget and Policy Priorities executive director Robert Greenstein said the proposal would force states to confront a choice between two alternatives, "both of which would substantially weaken health insurance for low-income children, parents, and elderly and disabled people. States could try to operate their Medicaid programs without any financial relief from the federal government to help them get through their current financial crises, a path likely to lead to deep Medicaid cuts in many states. Alternatively, states could receive some modest additional funding for the next few years, but only if they agreed to convert much of their Medicaid program into a block grant, under which federal funding no longer would automatically rise to meet increases in need due to recession, epidemics, or other factors that cause medical costs to increase. States electing this option would have to pay back the additional funding by the end of the decade."

The likely consequence of the first approach, Mr. Greenstein said, would be a reduction in the number of low-income people Medicaid covers or the medical services that it covers. The likely consequence of taking advantage of the new plan, he said, would be that such cuts would be instituted in the future and become an ongoing part of Medicaid. Such cuts, he added, would deepen over time if, as seems likely, the federal block grant funding does not keep pace with health care costs.

"Over time, the primary flexibility [given to states] may be the flexibility for states to deal with inadequate Medicaid funding by imposing significant Medicaid cuts not currently allowed under federal law," he said. "Such cuts could include artificial caps on the number of needy families and individuals allowed to enroll, cost-sharing requirements that exceed what many of the poor can afford, and elimination of coverage for important medical services.

"A primary goal of this proposal appears to be to reduce federal Medicaid expenditures over time, even though millions of Americans remain uninsured. Such a strategy ultimately could place significant numbers of beneficiaries at risk of losing Medicaid coverage and joining the rank of the uninsured. An underlying strategy may be to offer inducements to states to elect an option that reduces federal expenditures over time to free up more room in the federal budget for large tax cuts that are heavily tilted toward high-income individuals."

NHeLP analysis faults Bush plan

In a more detailed initial analysis, the National Health Law Program (NHeLP) said that one of the major problems with a capped allotment is that it "precludes Medicaid from responding to the ebbs and flows of the economy and health care costs. Medicaid is a counter-cyclical program — as the economy weakens and people lose jobs, they can turn to Medicaid for health insurance. With a capped allotment, a state will not receive additional money as it enrolls more individuals. Thus, just when stresses on Medicaid are greatest, states will have less money to spend per enrollee."

The group also complained that a cap destroys Medicaid’s role as an entitlement program. It is that entitlement, NHeLP said, that makes Medicaid an insurance program and gives beneficiaries the right to obtain needed services in a timely manner, and flexibility already has been tried and has failed. "Over the past decade," it said, "state flexibility has been greatly enhanced, through the use of waivers, to allow mandatory managed care and other cost-containment initiatives. How-ever, Medicaid spending has nevertheless increased. Other factors, largely beyond state control, are at the root of the spending increases — the aging of the population, health care price inflation, and increases in the number of people who are unemployed or have disabilities."

National Association of State Medicaid Directors chairman David Parella, Connecticut’s Medicaid director, told the New York Times that the administration held a two-hour conference call with state Medicaid officials to solicit their support for the proposal.

The group’s vice chairman, Missouri Medicaid director Gregory Vadner, told the paper that for states, "flexibility is great, but when you stop to think about it, I don’t see any new money in this. I welcome a dialog with the federal government, but I am concerned that we may end up with a short-term good deal that causes huge problems in later years."

While Mr. Thompson tried to avoid referring to the allotment system as a block grant, saying that the amounts would increase with medical costs and other factors specified in a formula, Mr. Vadner said, "It looks like a block grant to me. Every block grant I’ve seen can go up or down depending on future appropriations from Congress."

As analysts spent more time going over President Bush’s entire budget proposal for FY 2004, they concluded that Medicaid reform was but one aspect of a larger, intentional move to significantly change the federal relationship to the nation’s poor on a number of fronts. The Washington Post reported that the administration would "loosen federal standards and hand states vast new authority, if they want it, over housing subsidies, unemployment benefits, health insurance, and Head Start, a preschool program for children from disadvantaged families. It also would make outright cuts in some poverty programs, such as a reduction by a fourth in the amount the government devoted last year to community services grants for depressed neighborhoods."

Mr. Greenstein of the Center on Budget and Policy Priorities said the proposal represents "a more radical change than anything we’ve seen in more than 30 years. When you look at the budget, you actually see it starts a process of gradually disassembling central features of core safety-net programs, in particular, those programs targeted at people with low incomes."

White House spokesman Scott McClellan said the changes were designed to improve how the programs are run, a task better handled by the states. "The approach is to make these programs work better and to meet their goals, to make sure that we’re achieving results in these programs," he said.

[Download administration information from A transcript of Mr. Thompson’s news conference is available at]