Deficit Reduction Act: Changes to Medicaid
The 2006 budget reconciliation bill (S 1932), called the Deficit Reduction Act of 2005, includes provisions expected to reduce Medicaid spending by an estimated $10 billion over the next 10 years. Among the rules that will have an impact on states are tighter restrictions on asset transfers and greater state flexibility to impose premiums and cost-sharing and to change benefit design for certain Medicaid beneficiaries. The bill was signed into law by President Bush in early February 2006 as public law 109–171.
Asset Transfers and Long-Term Care
The bill tightens asset transfer rules to reduce the incidence of seniors transferring a substantial amount of their money and other assets to relatives in order to be eligible for long-term care services under Medicaid. It extends the "look back" period from three to five years. This refers to the period of time examined to see if an individual has transferred assets for less than fair market value. Any such "gifted assets" result in a penalty period—essentially a waiting period before which the individual would be eligible for Medicaid coverage. Another change is that this waiting period would no longer begin when the last asset transfer was made, but rather when the individual applies for coverage. Furthermore, those with $500,000 or more in home equity would automatically be disqualified from applying for Medicaid.
These rule changes are intended to reduce fraud associated with inappropriate transfer of assets just to receive Medicaid coverage, promote the purchase of private long-term care insurance, and ultimately reduce Medicaid costs.
Potential impact on states and individuals. By limiting eligibility for Medicaid, the asset transfer rule changes will almost certainly reduce some state spending on long-term care under Medicaid. A Congressional Budget Office report estimates that as many as 15 percent of long-term care beneficiaries would experience delays in coverage due to the additional asset transfer restrictions. By spending less on people who are not truly qualified for Medicaid, states will have more funds to protect people who are indeed qualified.
It is not clear, however, whether the new rules will encourage older adults to purchase private long-term care insurance, since premiums for private plans remain unaffordable to many, and applicants can be rejected for these policies based on health conditions. As a result, older adults who are deemed ineligible for Medicaid or subject to longer waiting periods, including some relatively low-income individuals, will be paying a far greater amount for long-term care out of pocket. It is likely that some of these individuals will forgo needed treatment, resulting in worsening of their health conditions and increased hospitalizations and costs.
State Flexibility in Premiums, Cost-Sharing, and Benefit Design
Under the new rules, states are able to impose premiums and cost-sharing and modify the benefit package for Medicaid recipients through a state plan amendment; they are no longer required to apply for a federal waiver. Giving states this flexibility is intended to reduce Medicaid spending and enable states to design benefit packages that are better aligned with the specific needs and resources of different populations.
Premiums. States are able to charge premiums to groups of Medicaid beneficiaries, with certain limits and exceptions. For example, premiums may not be imposed upon individuals with family income equal to or less than 150 percent of the federal poverty level (FPL), pregnant women, individuals in hospice care or institutions, disabled children, or certain breast/cervical cancer patients. States may terminate eligibility for Medicaid for failure to pay a premium for 60 days; however, states may waive premium payments in cases where payments would impose an "undue hardship."
Cost-Sharing. States may impose cost-sharing for any group or service, with certain limits and exceptions. Copayments must be nominal ($1 to $3 initially) for people with income below 100 percent of the FPL. States cannot charge cost-sharing to mandatorily eligible children, or for preventive services for children, pregnancy-related services, hospice care, services for inpatients and institutionalized patients, family planning, or emergency services. The bill allows states to impose higher cost-sharing for non-preferred drugs, and waive or reduce the cost-sharing for lower-cost preferred drugs in order to encourage their use. Total premiums and cost-sharing may not exceed 5 percent of family income.
Benefits. In the past, states had to offer the same benefit package to all Medicaid recipients unless they were granted a federal waiver. Under the bill, states are permitted to modify the package for groups that are not specifically exempted.  Modified packages can be equivalent to any of the following plans: the standard Blue Cross/Blue Shield PPO option under the Federal Employees Health Benefits Program, the plan of the state's largest HMO, a plan offered to state employees, or, with approval from the Secretary of Health and Human Services, another basic benefit package. States may offer different benefits based on factors such as geography, age, and eligibility category. However, notably, most Medicaid eligibility groups are exempt from modified plans and children receiving any of the modified packages must also receive EPSDT wraparound services.
While these changes would generally reduce the scope of services, the bill also allows for expanded access to certain benefits. For example, it allows states to cover home and community-based services (HCBS) as an optional Medicaid benefit for individuals age 65 or over who meet specified criteria, without requiring a waiver. And it allows state Medicaid programs to cover payment for part or all of the cost of self-directed personal assistance services (except room and board), based on a written plan of care to persons who would otherwise require and receive personal care services or HCBS under a waiver.
The bill also gives states the right to allow health care providers to deny services to Medicaid beneficiaries who are unable to pay required cost-sharing. And beginning June 1, states will be required to verify citizenship for all Medicaid beneficiaries renewing their eligibility.
Potential impact on states and individuals. The law gives states greater flexibility, enabling them to reduce or expand coverage. On the one hand, it will be easier for states to limit benefits as well as to reduce Medicaid rolls by imposing or raising premiums. A report from the Congressional Budget Office (CBO) estimates that 45,000 Medicaid beneficiaries would lose coverage in 2010, rising to 65,000 fewer beneficiaries by 2015. The report attributes this to individuals not applying for Medicaid because of premiums, voluntarily disenrolling because they are unable to pay them, or becoming ineligible due to missed premium payments. The report estimates that 1.3 million would have to pay premiums, and 1.6 million would lose benefits—largely dental, vision, and mental health. In fact, CBO estimates that of the $9.9 billion expected reduction in Medicaid spending over the next 10 years, 80 percent will come from the decrease in medical service utilization. If indeed this leads to more uninsured and underinsured individuals, this could generate an increase in hospitalizations (from lack of access to preventive and primary care) and avoidable emergency department use, an increase in uncompensated care, and higher costs borne by the safety net and, ultimately, by states.
On the other hand, the new flexibility provides an opportunity for states to reduce per capita costs, and thereby expand or at least avoid cuts in eligibility. For example, states could extend Medicaid coverage with premiums and higher cost-sharing to previously uninsured individuals while still covering the lowest-income groups with minimal or no cost-sharing.  Also, higher cost-sharing might discourage individuals from dropping private coverage to enroll in Medicaid.
The new citizenship verification will add an administrative burden on states, and may deter both illegal and legal immigrants from applying for coverage. This could result in a reduction in direct Medicaid spending, but an increase in the uninsured that would, again, lead to greater uncompensated care costs.
 Congressional Budget Office. "Additional Information on CBO's Estimate for the Medicaid Provisions in the Conference Agreement for S. 1932, the Deficit Reduction Act of 2005," January 27, 2006.
 According to the Center for Retirement Research at Boston College, average annual nursing home costs exceed $70,000.
 The term "cost-sharing" appears to be used synonymously with copayments in the Deficit Reduction Act.
 Manditorily eligible children are those ages 6 to 18 with family income less than 100 percent of the FPL, and children under age 6 with family income less than 133 percent of the FPL.
 For those with income between 100 and 150 percent of the FPL, cost-sharing may not exceed 10 percent of the cost of the service; for those with income above 150 percent FPL, it may not exceed 20 percent of the cost of service.
 Exempted groups include: mandatorily eligible children and pregnant women, people dually eligible for Medicaid and Medicare, foster care children or those children receiving adoption assistance, institutionalized or terminally ill individuals, blind and disabled individuals, TANF parents, the medically frail, and those receiving long-term care services. See bill text for full details of exceptions.
 Early and Periodic Screening, Diagnostic, and Treatment program
 Early Congressional Budget Office. "Additional Information on CBO's Estimate for the Medicaid Provisions in the Conference Agreement for S. 1932, the Deficit Reduction Act of 2005," January 27, 2006. Prepared for Congressman John M. Spratt Jr., Ranking Member of the Committee on the Budget, U.S. House of Representatives.
 Early States expanding eligibility must provide the traditional Medicaid benefits to previously uninsured individuals unless they obtain a federal waiver, but may impose premiums and cost-sharing.