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HHS Details Medicaid Cuts Adding $91 Billion in New Estimate of Baseline Savings

February 7, 2005—Bush administration officials now say they expect federal Medicaid spending savings to be $91 billion over 10 years, a significant savings increase from an earlier estimate. This revised figure is independent of the changes officials aim to make in a planned Medicaid overhaul.

Last Friday, officials gave a figure of $73 billion as their estimate for lower projected spending. Later that day officials alerted reporters to the higher savings estimate based on fiscal years 2006 through 2015 while the earlier number was based on 2005 to 2014.

The revised estimate of the 10-year federal Medicaid spending may make it harder for the administration to convince Congress to alter Medicaid law to trim an additional $60 billion through policy changes.

Administration officials said states will be unable to absorb the projected average annual increases of 7 percent for Medicaid spending. On that point, HHS Secretary Michael O. Leavitt said at a Monday press briefing to unveil the administration's HHS budget proposal that states now spend more on Medicaid than education.

Officials are only offering details on how they propose to generate the $60 billion in savings, while sticking to generalities in talking "flexibility," the other major element of their Medicaid overhaul plan. That element would grant states the authority to be more flexible with spending on their "optional" Medicaid populations. Optional coverage populations include women and children in households with incomes that while low, are too high to be part of the mandatory populations state Medicaid programs must cover. Optional populations also include nursing home residents and disabled people.

Centers for Medicare and Medicaid Services Administrator Mark McClellan said repeatedly Monday that flexibility would not entail trimming federal outlays for optional populations in coming years.

"We're just trying to get more people covered with the same amount of money," he said in a Monday press briefing.

"A modernized Medicaid system will give states greater flexibility without the need for burdensome waiver applications," the HHS document "Budget in Brief" said.

HHS officials spoke in their budget proposal of remolding Medicaid for optional populations along the lines of the State Children's Health Insurance Program, which allots specific sums of money to be paid out each year to SCHIP programs.

As an entitlement, Medicaid, in contrast, now bases funding for both optional and mandatory populations on whatever it costs to deliver a fixed benefits package to all qualified Medicaid enrollees.

It's unclear how a switch to allotments for optionals would be set and how a fall-off in the current rate of federal spending would be prevented.

Thus it's unclear whether federal Medicaid spending reductions would be limited to policy changes to generate the $60 billion in savings and those expected from the lowered spending forecast.

"Principles that are employed in SCHIP and emphasize innovation will be expanded to Medicaid beneficiaries, while long-term reforms will build on successful programs that use consumer direction and home- and community-based care to improve satisfaction and lower costs," the document added.

McClellan said the administration will prepare a legislative proposal to overhaul Medicaid after completing an "intensive dialogue" with state governors and others. "We want to get this done this year," he said.

Policy-Related Changes
HHS detailed the "accounting gimmicks" they intend to eliminate to generate about $40 billion of the $60 billion in policy-related changes.

HHS would save $11.9 billion by restricting payments between state and local governments and health care facilities in a way that draws down federal funding exceeding the percentage of Medicaid funding the feds usually pay.

Barring states from making Medicaid payments greater than the actual costs of care, another controversial tactic for drawing down federal funds, would save $3.3 billion.

Limiting state taxes assessed on providers to generate extra federal Medicaid money would save $6.2 billion.

A similar proposal relating to limiting state taxes on managed care plans would save $1.4 billion. Restricting which services could be claimed as "targeted case management" would save $7.7 billion. Establishing allotments for how much states could claim in administrative expenses to run Medicaid programs would save $6 billion.

Approximately $15 billion in reductions derives from changing the way pharmacies are paid for filling Medicaid prescriptions.

New curbs to prevent people from transferring assets to qualify for Medicaid would save $4.5 billion. This would entail ending the federal ban on the expansion of long-term care insurance policies that allow buyers to keep part of their assets when qualifying for Medicaid.

The administration's budget proposal calls for taking part of the $60 billion in savings and using it to fund expanded access to care. Thus net savings from policy changes would total $45 billion over 10 years after subtracting the $15 billion cost of the expanded access programs.

HHS estimates that combined federal and state spending on Medicaid in 2006 will total $338 billion, of which $193 billion will come from the federal government.

The budget also would fulfill the administration's multi-year effort to create a total 1,200 new or expanded community health centers by 2006. Funding added in 2006 would pay for another 570 new or expanded sites. The budget allots $26 million to establish 40 of the new centers in high-poverty counties.

The changes announced Monday drew sharp criticism from hospitals, consumer advocates, and Democrats on Capitol Hill.

"The true test of any reform will be whether it improves the lives of those who depend on this program—the children and elderly who can't care for themselves," said American Hospital Association President Dick Davidson.

"Medicaid cuts of the magnitude of $60 billion over 10 years could potentially devastate critical pediatric services" needed by both low-income and privately insured children, said Lawrence A. McAndrews, CEO of the National Association of Children's Hospitals.

The liberal advocacy group Families USA said that because of the cuts, "many seniors, children, and the sickest people in Medicaid will be devastated by a loss of health coverage."

"What will happen to our infrastructure of care for seniors and disabled if Medicaid can no longer serve them?" asked Sen. Max Baucus, D, Mont. "Cuts of this magnitude would have a dramatic impact wherever they are made," he said.

Baucus voiced alarm about proposed limits on state administrative spending. He said it sets a "dangerous precedent" and would harm efforts to improve efficiency and add information technology to Medicaid while further burdening states who have new responsibilities to implement the Medicare overhaul law (PL 108-173).

Baucus also criticized a proposal to eliminate the Rural Hospital Flexibility Program, which helps establish provider networks in rural areas and assists facilities in underserved areas in qualifying for higher Medicare payments.

The National Governors Association, whose support is key to Medicaid changes, said it looked forward to working with the administration on the reform effort.

It urged efficiencies "and other policies that can save both the states and federal government money, as opposed to shifting costs to the states through budget cuts, caps or other mechanisms." The overhaul effort needs to "redefine the federal-state role in a way that makes the states' financial commitment sustainable over the long run," NGA said.

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