Is Medicaid a burden or a boon? Is it time to reinvent the program?

A report prepared for the National Governors’ Association in Washington, DC, says that 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."

The solution, according to Vernon Smith, a principal with Health Management Associates in Naples, FL, who prepared the report, lies in a number of options that would restructure financing of the program so states could afford to contribute to its financing in the future.

Mr. Smith tells State Health Watch that one goal the National Governors Association had in publishing his analysis was to give those who work on public policy and can do something about the situation a sense of urgency. "States can’t continue to support Medicaid at current levels, and by design, the situation is going to get worse," Mr. Smith says. "Real consideration needs to be given to finding ways to bring fiscal relief to the states."

Matt Salo, National Governors’ Association’s director of health legislation, tells State Health Watch that he thinks there are a lot of people who care about the difficulties facing states, but "unfortunately, it’s a big, big problem. There are a lot of stakeholders with a lot invested in the status quo. Also, there is the natural fear that comes with trying to change something that is as large as Medicaid."

Medicaid has significant impact

Mr. Smith says it is difficult to overestimate the importance and impact of Medicaid in American life today because the program is so large, it serves so many people in many different population groups, and it 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," he says. "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 expenditures will total $245 billion in federal FY 2002. Total Medicaid spending is higher than that for Medicare and is increasing at a faster rate than Medicare. Medicaid spending has increased dramatically since the late 1980s, causing Medicaid’s share of state budgets to almost double in 10 years.

Medicaid spending growth has been much greater than the increases in overall state spending categories, causing it to increase as a share of state budgets. 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 held steady in the late 1990s, but is increasing again now that Medicaid spending is increasing faster than spending for other state programs. In 2002, almost every state is dealing with budget shortfalls. "In some cases, the shortfall in the overall state budget is caused in significant part by increases in Medicaid spending," Mr. Smith reports.

Beneficiaries deserve the best

He says that 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," Smith declares, "and so it better reflects the ability of states to continue to finance it."

He says that 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."

Changes that would allow states to become prudent purchasers of medical coverage and responsible administrators of public funds fall in several categories, according to Smith:

  1. Changes to improve federal financial support for Medicaid
  2. 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
  3. Changes to allow states the ability to structure eligibility to simplify program administration and to cover more low-income uninsured individuals and families
  4. Changes that would rationalize the relationship between Medicaid and other coverages, including Medicare, State Children’s Health Insurance Program (SCHIP), and employer-sponsored health insurance

Mr. Smith recommends policy-makers to first look at the relationship between Medicaid and Medicare. "There is general agreement that the federal government has primary responsibility for health care for senior citizens through Medicare and Social Security," he says. "But today, 35% of Medicaid expenditures go for people who also are on Medicare. We need to look at restructuring the financial relationship between the two programs. We need to find ways that the federal government can pick up a greater share of the cost from the states."

Mr. Smith says it never was intended that Medicaid should spend an enormous share of its resources as a coinsurer for persons on Medicare. But federal law now requires that Medicaid pay for Medicare premiums, for Medicare coinsurance and deductibles, and for services not covered by Medicare.

Possible initial fixes, he says, include a prescription drug benefit under Medicare or providing an enhanced federal match rate (possibly 90% or even 100%) for low-income seniors who are on Medicare and also receive Medicaid services.

A second area he recommends looking at is to use the SCHIP match rate for the same type of children who are enrolled in Medicaid. Using the SCHIP rate could be justified, Mr. Smith says, by the fact that many children and families 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," he says.

"Using the SCHIP federal matching rate would provide equity, administrative simplification, and financial relief to states," he adds.

Laundry list of other options

Other options advanced by Mr. Smith include:

  • Prohibit states from obtaining federal matching funds for any payments in an upper payment limit arrangement.
  • Calculate the federal match for territories with the same methodology as used for the states.
  • Limit to 0.5% any annual decrease in the federal match when it is recalculated each year.
  • 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.
  • Change federal law to allow states the option to define eligibility for Medicaid based only on state-defined income levels without regard to arbitrary eligibility categories.
  • If Medicare doesn’t assume all or most responsibility for the cost of medical care for dual eligibles (Medicaid and Medicare), federal law could allow states to require dual eligibles to be subject to state Medicaid policies relating to coverages, cost-sharing, and managed care enrollment.
  • Simplify the administrative relationship between Medicaid and Medicare to minimize the burden placed on Medicaid.
  • 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.
  • Remove the prohibition on SCHIP enrollment for children who are covered by employer-sponsored health coverage that is not as comprehensive as SCHIP, and allow SCHIP to wrap-around the employer-sponsored coverage as Medicaid does.
  • Allow Medicaid payments to subsidize and encourage the use of health coverage offered through employers.

Mr. Smith tells State Health Watch that because both Medicaid and Medicare are relatively young and have been evolving continuously since their founding in 1965, shifting the responsibility for dual eligibles to the federal government "would be a logical direction for continued evolution." He says discussions about the need for financial relief for states has "gained some currency" in Washington and could be a first-step toward a long-term solution.

How long do we have to fix the problems before Medicaid threatens to implode? No one can say for sure.

Mr. Smith says states have demonstrated their commitment to keeping the program going as much as possible, but says pressures are mounting to find ways to constrain the rate of Medicaid growth, possibly even taking it back to the growth rate of other programs.

There are 15 to 20 states that have a particular problem, he says, because restrictions on upper-payment limits are affecting state revenues and the states have to find ways to replace the lost money.

Mr. Salo says that realistically it is not likely that any major reform will occur this year, but there can be a good start at debating the issues.

The Governors Association, he says, has called for creation of a Medicaid commission to look at the big-picture financing issues and how to make Medicaid viable for the future.

Mr. Salo says he thinks it is realistic to expect that more federal money will ultimately be made available, and says it is likely that any rational bipartisan group of people on the study commission will agree that states can’t continue with things as they currently are in terms of Medicaid financing.

Meanwhile, an Urban Institute analysis by John Holahan reported in the on-line edition of Health Affairs says that it is likely that Medicaid and SCHIP will survive the current recession largely intact, but will face serious problems extending well into the future.

Mr. Holahan says that the number of uninsured people has not increased much since the mid-1990s, primarily because of substantial growth in employer coverage. But the recession is likely to cause this source of insurance coverage to decline, as unemployment rises. And there is growing evidence of increases in health care costs and in insurance premiums that employers pay, increases that could affect employers’ decision to continue to pay the same share of the premiums or even to offer coverage.

The report says that states have found that Medicaid managed care no longer greatly reduces the rate of growth in acute care spending. Hospital costs are rising and states also face rising prescription drug costs and have a limited array of tools to use in addressing the problems.

Aging population to consider

Further, the aging of the population is going to increase long-term care costs and the Supreme Court’s Olmstead decision may lead to increased spending for home and community-based services.

At a time when Medicaid spending is likely to increase, Mr. Holahan says, disproportionate-share payments and upper-payment limit programs are likely to decline as a source of revenue. "In the face of these pressures, states could have a hard time maintaining current eligibility levels under Medicaid and SCHIP."

He projects that states will have limited ability to take advantage of Section 1931(b) or SCHIP waivers because they require additional spending and says the Health Insurance Flexibility and Accountability demonstration initiative may be of limited benefit.

Cuts in optional acute-care benefits are not likely to yield enough savings to allow any appreciable expansion in coverage, and reductions in spending on services to aged and disabled populations would yield more savings but could have an adverse impact on sicker and more vulnerable populations.

Struggle to maintain coverage

"States will have to work hard just to maintain current coverage commitments," Mr. Holahan explains, "and it seems unlikely that they will go much further in extending coverage. Additional incentives, perhaps at the federal level, may be required to reduce the number of uninsured persons. These initiatives could include allowing states to cover all adults below an established income threshold, increasing the matching rate on current Medicaid beneficiaries, and permitting more flexibility in benefit packages.

"Higher matching rates would give states some fiscal relief and greater incentives to expand coverage. More flexibility could include providing broad benefit packages to the most vulnerable populations but allowing more flexibility in benefits and use of cost-sharing for higher income groups," he says. "The current system may be reaching its limits, and there are good reasons to believe that states will struggle greatly in the foreseeable future."

[Contact Mr. Smith at (517) 482-9236, Mr. Salo at (202) 624-5336, and Mr. Holahan at (202) 833-7200.]