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Debate Sharpens Over Impact of Bush Medicaid Plan

February 22, 2005—Sharpened appraisals made in recent days by key players in the debate over the Bush administration's Medicaid overhaul plan suggest common ground on proposals to change drug reimbursement and tighten asset-related eligibility tests for long term care coverage.

But the more detailed analyses revealed a wide gulf among key players over the overhaul plan's provisions for "flexibility" in establishing Medicaid benefits and for ending several controversial methods used by the states of getting more Medicaid money from the federal government.

Veteran Medicaid analysts Gail Wilensky, Cindy Mann, and Raymond Sheppach offered their views on the Bush plan at a forum last Friday in the nation's capital. And the liberal Center on Budget and Policy Priorities (CBPP) released a detailed critique the same day.

Although difficult, Medicaid revisions are within reach, Wilensky and Sheppach suggested. "We're on board with major Medicaid reform," Sheppach told the non-partisan Alliance for Health Reform. "We've got to have it." The current program is not sustainable and is eating away state funding for higher education, he said.

Wilensky ran the Medicaid program under President George H.W. Bush, and said the current White House plan would amount to a reduction in the growth rate of Medicaid spending of just two-tenths of a percentage point. Cuts of this magnitude may be attainable in Congress, she said.

"Cuts" and "Caps"
But Mann, who ran the federal part of the State Children's Health Insurance Program (SCHIP) late in the Clinton administration, said the net reduction of $45 billion in federal Medicaid spending Bush would achieve in 2006 to 2015 is roughly the funding level of the entire SCHIP program. SCHIP currently covers some 5 million children. CBPP said the $45 billion "is larger than the total federal share of funding for Medicaid in 10 mid-sized states."

In total, the Bush plan would take away $60 billion from Medicaid spending growth, while adding back in $15 billion for kids' coverage and home-based care for nursing home patients and other changes.

The Dollar Breakdown
The $60 billion in cuts consists of $40.5 billion from ending what the White House calls state "accounting gimmicks" to boost federal Medicaid outlays, $15.1 billion in lower payments to pharmacists who dispense pharmaceuticals, and $4.5 billion from making it harder for more affluent Americans to qualify for Medicaid nursing home coverage by transferring assets that otherwise would disqualify them.

The $15 billion add-back consists of: $11.3 billion to cover more children; $1.8 billion to switch nursing home residents to home care and other "New Freedom" initiatives Bush espouses for the frail and disabled; and another $1.9 billion in various programs to extend coverage, pay out-of-pocket costs, or provide respite care for caregivers.

The liberal Center on Budget and Policy Priorities said the net effect of the Bush plan would be higher state costs. While the approximately $20 billion in pharmaceutical payment and asset test savings would save both federal and state governments money, the plan to save the federal government $40.5 billion by ending controversial state accounting practices would switch those costs to the states, CBPP said.

And while the pharmacy and asset savings would offset about $15 billion of the $40.5 billion in added state costs from accounting changes, expanded coverage of children from the $11.3 billion in federal money would require another $8.5 billion in state outlays.

The net effect of the administration plan would be to add $34.3 billion to state costs over 10 years, the liberal think tank said. "As a result, states would likely feel compelled to institute reductions in Medicaid coverage and benefits that would lead to increases in the number of uninsured and underinsured low-income people," CBPP said. That said, CBPP doesn't necessarily oppose the accounting changes. But if they are made, savings should be fully reinvested in state Medicaid programs, it adds.

"Flexibility" Provisions
But the most intense criticism from liberals is directed at the Bush plan's "flexibility" provisions, which would allow states to trim benefits for populations states have the option of covering but are not required to cover.

Although the administration denies the flexibility plan reprises the unsuccessful "capped allotments" proposal for optional populations the White House made in 2003, critics assert that it will entail caps despite these claims.

The administration's "flat statement" that the flexibility plan would not mean additional federal costs implies a cap on at least part of federal Medicaid funding for the states, the Center said.

Mann noted that two programs that the White House describes as models for its flexibility approach, Medicaid waiver programs under its Health Insurance Flexibility and Accountability initiative and SCHIP both "operate in the confines of a cap on federal spending."

Caps "would end the entitlement to Medicaid coverage for ... millions of low-income people," the Center said. "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." States would trim Medicaid and "the likely result would be increases over time in the number of uninsured and underinsured low-income families and individuals."

The imposition of caps isn't contingent on the administration making them part of its flexibility plan, the think tank added. Congress could choose to make changes in Medicaid other than those specifically recommended by the White House while adopting a Medicaid savings figure that entails the use of caps, CBPP said.

CBPP added that caps do figure explicitly in the White House plan when it comes to trimming federal spending growth on payments for Medicaid administrative costs, an issue that falls outside the flexibility proposal. Caps in this area will lower state spending for nursing home quality and fraud-fighting efforts, the Center said.

The Case for Flexibility
Critics of flexibility ignore state budget realities, administration officials say. Sheppach noted that state collection systems are geared to capturing revenues from the manufacturing economy of the 1930s and 1940s, not today's service-oriented economy.

HHS Secretary Michael O. Leavitt says with education funding threatened by rising Medicaid costs, states can either take the far more draconian step of ending Medicaid benefits outright for optional populations or the more humane step of offering lesser benefits under flexibility that also could widen coverage of people not now qualifying for Medicaid.

Wilensky suggested that fears about the impact of flexibility on health care for low-income Americans could be addressed by requiring states to measure and report the health status of that population. Flexibility would be a small price to pay to get this kind of information from the states, she said.

Sheppach denied that flexibility would sharply reduce growth in federal Medicaid outlays. Preliminary scoring estimates obtained by the NGA do not show large reductions, Sheppach said, although both federal and state governments would save money through flexibility, he acknowledged.

Interpretations of Tradeoffs
Governors are opposed to the accounting changes espoused by the White House. That means some form of enforceable savings from flexibility—call them caps or not—could become key to realizing Medicaid savings in the fiscal 2006 budget. But Mann warned that the tradeoff for many Medicaid beneficiaries could be harsh, despite claims by Leavitt that they would be trading "Cadillac" benefits for "Chevy" benefits. Mann said the accurate analogy is the "Pinto"—benefits that may not include hospital or mental health care and add up to "a non-moving vehicle."

Wilensky emphasized the importance of more efficient care for "dual-eligibles," low-income Medicare beneficiaries who also qualify for Medicaid. A large part of Medicaid spending is on that population. A big part of Medicaid spending growth goes for long-term care, she also noted, expressing puzzlement at the "scorn" shown by Democrats for "Partnership" long-term care insurance policies sold in four states that allow buyers to preserve some of their assets when they go on Medicaid. Those policies could help reduce Medicaid outlays by encouraging sales of private coverage, she suggested.

But Wilensky voiced skepticism that the White House plan to move more nursing home residents to home-based care would generate large savings.

Savings would be offset by added costs from other Medicaid beneficiaries attracted to new home- and community-based care programs, she predicted.

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