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Amazing Medicaid Facts

March 3, 2005—Oh, the inscrutable Medicaid program. Governors look at it, and don't understand. The public hears passing mention of it in the news, and gets the wrong idea. Rugged individualists think they can bring it to heel, and it jumps up and bites them. Politicians think they can ignore it, but find it bleeds profusely when cut. As congressional debate over the program's future heats up, politicians, the public, the press and even policy wonks and providers are all getting a crash course in the mysteries of Medicaid and its unsuspected role undergirding the entire U.S. health care system.

At a press briefing Wednesday sponsored by AARP, former Indiana Medicaid director Kathleen D. Gifford sought to shed light on the program's mysteries, conducting a tutorial dubbed "Medicaid 101." Among the lessons:

It's the biggest health insurer:
Although it's becoming better known, one fact about Medicaid that still surprises people is that it's bigger than Medicare. Gifford said fiscal 2005 Medicaid spending is expected to total $329 billion, compared with $309 billion for Medicare. Of the $329 billion in projected Medicaid spending, 60 percent, or $197 billion, consists of federal spending, and 40 percent, or $132 billion, is made up of state and local funds. Fifty–three million people get Medicaid coverage, while 42 million are enrolled in Medicare.

Medicaid is also the largest single source of grant funds received by the states, and pays for more than half of publicly financed mental health care. It shells out $13 billion a year in "DSH" money to public and teaching hospitals that make up much of the nation's health care safety net and take all comers, including high proportions of uninsured and underinsured people. It's also a big source of funding for community health centers, which treat people regardless of their ability to pay.

Medicaid's benefits in funding acute care extend beyond the poor, Gifford said. By picking up much of the cost that facilities incur caring for poor people, Medicaid keeps hospitals from charging commercial insurers as much for those expenses, thereby holding down premiums charged to more affluent Americans, she said.

Medicaid now appears to be the biggest spending category in state budgets. It accounted for 21.4 percent of total state expenditures in 2003, slightly less than elementary and secondary education at 21.7 percent. Gifford said Medicaid has likely overtaken that category by now. However, it's not accurate to say states spend more on Medicaid than on education, only that it accounts for more spending than elementary and secondary education. Higher education consumed another 10.8 percent of state spending in 2003, Gifford said.

It's a big safety net with big holes:
"Folks think that everybody who is poor qualifies for Medicaid," Gifford said. "That is not the case." According to a Kaiser Commission analysis of U.S. Census data, Medicaid covers 40 percent of Americans below the federal poverty line. Employers cover another 15 percent, while 5.9 percent have individual or other private coverage, other public entities cover 3.3 percent, and 36 percent are uninsured.

In addition to having a low income, qualifying for Medicaid requires falling into one of more than two dozen categories, said Gifford, now a principal with the consulting firm Health Management Associates. "In reality, Medicaid is not one program, but many," Gifford's colleagues Vernon Smith and Greg Moody said in a paper released Feb. 28 for the National Governors Association. Medicaid is:

  • "An insurance program for low-income, uninsured children and some parents, and pregnant women."
  • "A program of chronic and long-term care for persons with disabilities, including persons with mental illness, and low-income elderly."
  • "A supplement to Medicare for low-income seniors and persons with disabilities, and a support for those awaiting qualification for Medicare on the basis of permanent disability."
  • "A source of funding for safety-net hospitals and community health centers that serve a disproportionate share of the uninsured."

Poor women and kids account for few of its costs:
Gifford said children account for 48 percent of Medicaid's enrollment but just 18 percent of its costs. Adults, not including the elderly, make up 26 percent of enrollment, but only 11 percent of costs. The elderly account for 10 percent of enrollment, but 26 percent of Medicaid costs. And the blind and disabled pack the biggest cost wallop, making up just 16 percent of enrollment but 44 percent of costs. The elderly and disabled accounted for 70 percent of the increase in Medicaid spending between 2002 and 2003.

Almost half of Medicaid spending goes to pay for Medicare beneficiaries: Forty-two percent of Medicaid spending in fiscal year 2002 went to cover a variety of expenses for poor Medicare beneficiaries. Of Medicaid spending on these "dual-eligibles," 65 percent went for long-term care, 15 percent for acute care, 14 percent for prescription drugs, and 6 percent for Medicare premiums.

In general, Medicare doesn't cover these expenses, regardless of income level. Although Medicare will begin picking up prescription drug costs in 2006, states will have to keep paying part of those costs through "clawback payments" required under the Medicare overhaul law (PL 108-173).

Given the high percentage of Medicaid spending on Medicare beneficiaries, Gifford said it's small wonder governors look at their growing Medicaid budgets and voice frustration that the federal government isn't picking up more of the tab.

Optional Medicaid may not be so optional:
Gifford cautioned that proposals to allow a lesser set of benefits for "optional" populations covered by the states may create the wrong impression. "Some of the optional categories are the most needy categories from a medical perspective," she said.

Among the optionals are the "medically needy," or people with low incomes who have high medical bills they can't pay; disabled people with low incomes above the very low level that qualifies them for SSI benefits; low-income elderly nursing home residents making above SSI levels; low-income children above federal minimum incomes qualifying them for mandatory coverage; and low-income pregnant women making above 133 percent of the federal poverty level.

And optional benefits may not be so optional either, she suggested. They include prescription drugs; nursing facility care and inpatient psychiatric care for low-income recipients younger than 21; and intermediate care facilities for the low-income mentally retarded.
The optional part of Medicaid dominates the program, Gifford noted. In total, 65 percent of Medicaid spending is optional, she said. Thus if states go after optional Medicaid, potentially they go after a big part of the program.

Cut it, and it may bite back at the middle class: For every dollar a state decides to cut from Medicaid, it loses up to two dollars in federal matching money, Gifford said. There is also a potential ripple effect throughout the health care system that hurts the middle class, and affluent people using Medicaid to protect assets they want to pass on to their children.

AARP asserted Thursday that cuts to Medicaid could cause hospitals and doctors to charge other insurers more for their services to cover growing costs of uncompensated care. Employers might react to the rising costs of insurance by dropping coverage, adding to the uninsured population.

It isn't just AARP that's concerned about the impact of cost shifting on employer coverage. Major business groups may weigh in on the debate over Medicaid cuts, Mary Grealey, president of the Healthcare Leadership Council, an industry group, noted earlier this week.

For better or worse, Medicaid functions as what HHS Secretary Michael Leavitt calls "an asset protection program" for more affluent Americans. That's not what it should be, Leavitt says. An estate planning industry has sprung up in which the elderly shift assets to their children to qualify for Medicaid nursing home care instead of funding that care themselves. Leavitt says $5 billion in federal Medicaid spending could be saved by making it more difficult to shelter assets in that way.

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