The president’s long-term goal: $60 billion in Medicaid cuts
(Editor’s note: Not long ago, analysts predicted there would be little discussion of Medicaid reform in 2005, but President Bush’s 2005 budget calls for Medicaid cuts and structural changes over the next 10 years. This issue of State Health Watch looks at the president’s proposals and some of the reaction and analysis from a range of political perspectives. If the nation is serious about Medicaid reform, there is much to be learned from studies carried out by the National Academy for State Health Policy and George Washington University. They offer recommendations along with cautions about what could go wrong.)
The Bush administration’s proposal for Medicaid released as part of the FY 2006 budget calls for $60 billion in savings through policy changes over 10 years, as well as reduced spending of up to $90 billion. Appearing before Academy Health’s National Health Policy Conference 2005, Centers for Medicare & Medicaid Services administrator Mark McClellan said policy changes are needed to "make Medicaid more sustainable. That means making sure that the dollars going into Medicaid go to the intended uses in this federal-state partnership."
Mr. McClellan cited a number of changes the administration wants to make, including getting payments for drugs more closely tied to their best competitive prices rather than average wholesale price, limiting inappropriate shielding of assets by high-income people who use Medicaid long-term care services, and cutting out improper intergovernmental transfers.
Mr. McClellan and newly appointed HHS secretary Mike Leavitt said such changes can save $60 billion over 10 years without affecting the appropriate use of Medicaid funds.
But Mr. McClellan also called for giving states more ability to adopt innovative coverage approaches that would reduce costs while providing care for beneficiaries. "One example of this . . . involves encouraging and supporting the use of programs like disease management," he declared, citing examples from North Carolina and Washington state that, he said, have yielded excellent medical and financial results.
The administrator said the Medicaid statute, which dates from the 1960s, envisions a very different model of delivering health care than is possible today through some of the innovative approaches states want to try. Because the law is outdated, he said, states are forced to go through regulatory and administrative hoops and barriers when Medicaid should be focused on providing support for performance-based approaches that deliver results.
He also called for steps to reduce the burden on states for providing access to affordable health care. "We need solutions that augment Medicaid rather than force more reliance on it," Mr. McClellan added.
"We can do this through tax credits combined with new federal funding for states to help set up purchasing pools to provide more affordable health plans. We can do it by allowing states to add to the tax credits using SCHIP funds. We can do it by expanding support for health savings accounts," he said.
"And we can do it by continuing to expand access to community health centers for people without coverage. Altogether the president’s initiatives will help put access to quality care within the reach of lower income Americans by including a substantial increase in funding for helping the uninsured in the 2006 budget proposal and by providing greater access and more health care coverage by building on what works," Mr. McClellan noted.
Analysts have said the president’s budget would spend $140 billion over 10 years to reduce the uninsured, getting some of the money for that initiative from the Medicaid savings.
In a statement issued after release of the budget, the National Governors Association (NGA) said it shared the president’s concern with respect to the increasing federal deficit and its potential impact on the U.S. economy.
"We hope the administration and Congress will work with states to develop program efficiencies and other policies that can save both the states and federal government money," the statement said, "as opposed to shifting costs to the states through budget cuts, caps, or other mechanisms. The Medicaid program is growing rapidly because health care inflation is running two to three times the general inflation rate and the caseload has grown 33% over the last four years, including increases in elderly and disabled populations who are responsible for the majority of Medicaid spending. Governors have little control over these two cost drivers and do not want to be in the position of having to choose between funding health care programs for grandparents or programs for their grandchildren."
Medicaid on the edge
In comments written for Stateline.org before the budget was released, NGA executive director Raymond Scheppach said the Medicaid program "teeters at the tipping point."
He said that while it may be difficult to develop precise projections of future growth of Medicaid, there are "ominous signs on the horizon that the growth of Medicaid expenditures will accelerate. This will severely impact state budgets and force major cuts in other state programs, particularly education.
"Over the next few years," Mr. Scheppach predicted, "the rate of increase in the price index of health care is likely to slow only modestly from 4.5% to about 4%. At the same time, the health care industry has become increasingly more concentrated, costs for new medical technology are generally increasing, and the industry has yet to implement technology to reduce administrative costs. All these factors indicate that the price of health care likely will continue at two to three times the average CPI."
But even more important to prospective Medicaid growth will be future caseload expansion. As baby boomers begin to retire, the frail elderly and disabled populations in long-term care, which cost Medicaid an average of $13,000 and $11,800 respectively per year in 2003, will grow dramatically over the next 20 years. Specifically, the 65+ cohort will be 64% larger by 2020, and the 85+ cohort, the fastest-growing population, will increase more than 3% a year over the next 20 years. Also, the number of women and children who will become Medicaid eligible is likely to accelerate because of structural changes in the economy and the decline of employer-paid health care.
"Given that Medicaid is the only safety net available for many Americans, costs undoubtedly will soar over the next decade because of changing demographics and structural changes in the economy that will lead to a reduction in employer-paid health care," Mr. Scheppach wrote. "There are now 54 million individuals on Medicaid, and it costs federal and state governments about $300 billion per year. With its 28 categories of mandated eligibility and 21 optional categories, this 40-year-old state-administered health care program that was created for the nation’s neediest populations is out of sync with the rest of the health care system.
"Very simply, Medicaid needs to be radically rethought and completely reformed. As it stands today, it is simply unsustainable. The program needs to redefine the federal-state role in a way that makes the state financial commitment manageable and consistent with Medicare, as well as other employer-provided care and federal subsidies, such as tax credits for trade assistance workers and health savings accounts," he continued.
"Medicaid in the future cannot be the only safety net. If it is, more and more states will be forced to pull that net out from under our most vulnerable citizens. Other more cost-effective policies must be developed to assist the elderly in long-term care and low-income individuals who have lost their employer-provided care," Mr. Scheppach explained.
Meanwhile, two Senators have said the best approach would be to give experts a year to study the Medicaid program and recommend ways to improve it before any significant changes are made. Sens. Gordon Smith (R-OR) and Jeff Bingaman (D-NM) said Congress should create a commission to analyze what works and does not work in the program before making any spending cuts or structural changes. Following such a commission’s recommendations also would give members of Congress political cover in what could be a very contentious situation, Mr. Smith said.
Under legislation drafted by the pair, a 23-member commission would be established with appointees from the president, Congress, governors, and state and local officials. The panel would hold public hearings and issue a report with recommendations on how to improve Medicaid.
Twelve senators, including Republican Conference chairman Rick Santorum (R-PA), are co-sponsoring the bill. Rep. Heather Wilson (R-NM) planned a companion measure in the House.
Stalling tactic?
Appearing before an Alliance for Health Reform media briefing on health care and the budget, former Health Care Financing Administration (HCFA) administrator Gail Wilensky, now a Project HOPE senior fellow, said she usually opposes commissions because she sees them as a "stalling tactic," but in this instance, it might help in bringing together the administration, Congress, and various stakeholders in a common effort. She said the second Bush term could be a good time for such a commission effort, although it might be more possible to accomplish something early in the first term of the next president, assuming that it’s not too late by then.
On that same panel, former HCFA women and children’s health staff person Cindy Mann, now a professor with the Georgetown University Health Policy Institute, said it is good the president’s budget proposal is not likely to be adopted as drafted because there are provisions that would make things worse rather than better. "Most of the savings that are there come from increased cost-shifting to states, making state fiscal problems far worse."
She noted the president is proposing "major policy shifts in how the federal government pays states in a variety of ways that would all deepen the hole states already face and would not result in any state savings." Ms. Mann added, however, that it is good for the federal government to try to ensure states spend money wisely, and it’s also good to take steps to bring the nation’s governors to the table to work on a solution.
Key questions that need to be followed in the coming weeks and months, she said, are whether there really will be $60 billion in spending cuts, whether the policy changes that have been proposed are adopted, and how Medicaid modernization is defined. "Flexibility is fine," she said, "but we have to know whether it will help or harm states’ responsibility to serve vulnerable populations."
Ms. Wilensky said the president’s proposals were what could be expected from an administration that doesn’t have health as a major focus. She cautioned that with significant attention being paid to Social Security reform and implementation of Medicare reforms, it may be difficult for Congress to focus on any extensive Medicaid changes.
"In reality," she said, "the president is trying to cut Medicaid’s growth rate from 7.4% to 7.2% over the next 10 years and the question is whether that is something that can reasonably be done. I think the answer is maybe,’ because so little has been tried to make changes for the aged and disabled populations. Most of the experimentation has been with moms and kids, those who are two-thirds of the people on Medicaid but only take up one-third of the funds.
"We desperately need to rethink Medicaid," Ms. Wilensky declared, "and how it fits in with other services to the low-income population and the aged and disabled. It’s important to realize that enrollment growth has been mostly in the aged and disabled, and that’s not necessarily related to the economic recession."
With Medicaid already the most flexible federal government program, Ms. Wilensky said the real question is how many barriers should be created for states through the waiver process. She proposed allowing a great deal of flexibility in return for states having to provide information on health outcomes for low-income people as a result of their innovative programs. "We do a lot of experimenting and don’t know beans about what it means to people’s health."
Mr. Scheppach told the Alliance for Health Reform briefing that he expects to see dramatic cuts in state funding for higher education if Medicaid spending trends continue. He said the nation’s governors can support some of the president’s proposals, such as better drug pricing and an assets test for those receiving long-term care support, but oppose an upper payment limit that would cap federal Medicaid spending. He also saw possible benefits in benefit package flexibility, state purchasing alliances, and individual tax credits.
Mr. Scheppach echoed Mr. McClellan’s statement that policies are needed to help those requiring long-term care services and the low-income population to stay off Medicaid by obtaining the help they need in other ways.
Meanwhile, the Center on Budget and Policy Priorities (CBPP) released an analysis of the president’s Medicaid budget proposals (see table) warning that the spending reductions "would have significant implications for the program’s ability to provide health care coverage to low-income uninsured Americans and for states’ ability to finance their share of program costs."
CBPP analysts Victoria Wachino, Andy Schneider, and Leighton Ku said most states would not be able to absorb the added burdens and would be forced to choose between reducing Medicaid coverage or benefits, thereby further increasing the number of low-income Americans who are uninsured or underinsured, and raising taxes or cutting funding for other priorities such as education.
Impact of $45 billion in cuts
According to the CBPP report, the net savings projected of $45 billion over 10 years ($60 billion in spending reductions partially offset by $15 billion in proposed new Medicaid-related initiatives) represents a relatively small percentage reduction in total funding for Medicaid and SCHIP, but their impact on states’ ability to provide health care coverage would be substantial. For example, it says, $45 billion is nearly equivalent to the total amount of federal funding provided for SCHIP in its first 10 years, and is larger that the federal share of funding for Medicaid in 10 mid-sized states.
While critical of many of the proposed spending cuts, Ms. Wachino and her colleagues said some of the administration’s proposal warrant consideration, especially that relating to prescription drug prices and inappropriate transfer of family assets for those seeking long-term care. Also, federal policies that would limit use of inappropriate state financing arrangements warrant consideration, they said.
But the three consider other proposals problematic, especially the proposed cap on federal funding for state Medicaid administrative costs. "The federal government’s share of Medicaid administrative costs is an essential source of the financing for state efforts to safeguard the quality of nursing home care, prevent Medicaid fraud and abuse, and conduct outreach to eligible but uninsured individuals," they wrote.
"It should be noted that administrative costs constitute a significantly smaller share of overall health care costs in Medicaid than in private health insurance. Moreover, capping federal funding for state administrative costs is very likely to lead states to scale back activities in areas such as assuring nursing home quality, preventing improper billing by providers, upgrading computers and related systems that can strengthen program integrity and ensure the accuracy of eligibility determinations, and conducting outreach to uninsured working-poor families."
Consider helpful proposals
According to CBPP, proposals that have the potential to increase Medicaid’s efficiency without reducing coverage, benefits, or access for beneficiaries should be considered. But because Medicaid already is a relatively low-cost program, with per-beneficiary costs that are significantly lower than under private coverage, the number of efficiencies that can meet this criterion is limited. And, CBPP said, to the degree that reasonable proposals can be identified that would reduce federal costs, the federal savings should be reinvested in measures to strengthen states’ ability to finance their share of Medicaid costs and maintain the health care safety net that Medicaid provides. "Such savings could be reinvested to help states finance the increasing costs for long-term care that will come as the population ages," the analysts wrote. "At a minimum, such federal savings should be shared with states. The Medicaid program is a federal-state partnership, and federal savings should not be secured at the expense of states, especially in light of the increasingly serious Medicaid financing problems that states face. In other words, federal savings should be redirected to help states address the financial problems that are making it difficult for states to maintain health care coverage and to prevent cutbacks in Medicaid eligibility that would enlarge the ranks of the uninsured."
Addressing the possibility of a cap on federal Medicaid funding, essentially making it a block grant program like SCHIP, the CBPP analysts said that would represent a far-reaching change in the structure of Medicaid and raise extremely serious concerns. "Caps on federal funding for parts of Medicaid, such as the coverage of optional beneficiaries, would end the entitlement to Medicaid coverage for millions of low-income people covered under the part of the program that would be capped," they said. "Moreover, caps would sever the link between increases in health care costs and the provision of federal funding to help states cover those costs. With a cap, federal funding could fail to keep pace with health care costs, and the federal government’s share of Medicaid costs consequently could fall appreciably over time (unless states steadily cut their programs), federal funding caps thus would likely shift growing health care costs and risk to states, including the risk of having to shoulder a considerably larger share of the costs of long-term care for a rapidly aging population. To handle this shift in costs and risk, many states almost certainly would consider revisiting Medicaid coverage and benefits. The likely result would be decreases over time in the number of uninsured and underinsured low-income families and individuals. A cap would have a major impact on states, beneficiaries, and providers alike. If the administration does, in fact, intend to seek a cap on part or all of federal Medicaid funding as part of its Medicaid modernization proposal, then the proposal for a cap should be spelled out clearly and in full for Congress, the states, and the public to consider."
On the other side of the political spectrum, the American Legislative Exchange Council (ALEC), a group of conservative legislators, said it hailed the president’s Medicaid budget proposals because the "money follows the person" concept is successfully demonstrated in Cash and Counseling programs throughout the country. ALEC said the proposals will empower patients, expand state flexibility, and crack down on misuse of Medicaid dollars.
(For federal government budget and program information, go to www.hhs.gov and www.cms.gov. To see Mr. McClellan’s Academy Health presentation, go to www.kaisernetwork.org. Presentations from the Alliance for Health Reform briefing are at www.kaisernetwork.org. For the CBPP analysis, go to www.cbpp.org. Information on ALEC’s views is available from www.alec.org.)
Not long ago, analysts predicted there would be little discussion of Medicaid reform in 2005, but President Bushs 2005 budget calls for Medicaid cuts and structural changes over the next 10 years. This issue of State Health Watch looks at the presidents proposals and some of the reaction and analysis from a range of political perspectives.
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