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Washington Health Policy Week in Review - Continued




October 25, 2004


America's Unraveling Safety Net
October 21, 2004—Melvin Foote, a 47-year-old Marine veteran, relies on Lexapro, Abilify, and other drugs to treat schizophrenia and bipolar disorder. He fears that if he stops taking them, he will slip back into an angry cycle of deep depression, followed by frenzy. But that threat may soon become a reality as politicians in his home state of Oregon wrestle with the future of Medicaid.

In Oregon, Foote and 40,000 other Medicaid recipients may lose all of their health benefits in August unless the state can find a way to continue paying for skyrocketing health care costs without raising taxes on the state's residents.



"I'm most concerned about my mental health," said the Klamath Falls man, who speaks slowly and pauses to draw a breath before each answer. "And I'm worried about emergencies, just in case. If I had an emergency, I'd have to get checked into a hospital without insurance, and I'd have to pay it off as well as I can."

Oregon is one of the states that expanded its Medicaid program in the 1990s, when states were flush with cash, to cover a wider net of uninsured people. Now Oregon legislators must consider cuts to scale back that expansion. The state, in fact, has already had to pull back some benefits and services as a result of the crunch, reducing the Medicaid rolls by more than 50,000 people, according a forthcoming report from the Kaiser Family Foundation.

Oregon, which has in the past been touted as a national leader in health care innovations to help the uninsured, may yet find ways to avoid these cuts. One option is to impose taxes on health care providers, such as hospitals.

In the meantime, Foote represents those who worry most about what will happen to Medicaid. The program, which is designed as a federal-state health care safety net for low-income people including children, pregnant women, and the elderly, blind, and disabled, is consuming an ever-growing percentage of resources, rising from $159.9 billion in 1997 to $258.2 billion in 2002 in total federal and state costs.

In the past 15 years, Medicaid costs have doubled, from one-tenth of state spending in 1989 to more than one-fifth today.

These ballooning costs are a result of both medical inflation and increased eligibility for the program. And the costs have risen just as tax revenue has plunged. That has left every state in the nation struggling with deflated revenue and swelling costs. In the past three years, they have all had to curb spending by cutting Medicaid eligibility, benefits or reimbursement rates for providers. Many states have cut all three.

The pressures are leading policy makers in Washington and around the nation to re-examine the fundamental nature of Medicaid. With the enactment last year of legislation to add a prescription drug benefit to Medicare, Republicans who control Congress and the White House are turning their attention to health insurance and Medicaid issues. Anxiety about rising costs is fueling the debate over whether Medicaid is primed for an overhaul.

"Financing is at the core of all this," said Nina Owcharenko, senior health care analyst at the conservative Heritage Foundation. "In the end, it's all about the money."

Many Republicans in Washington, including those in the administration, want to cap federal spending on Medicaid. Such a move would transform the fundamental nature of the entitlement program. It also would prove enormously controversial because it would almost certainly stir up ideological arguments between the parties over the best way to provide for the poor.

The Bush administration last year proposed a cap on spending, drawing protests from many on Capitol Hill, especially Democrats. Governors, too, have complained about such proposals. At the same time, though, many of them are attempting to find ways to deal with the possibility that Washington will put limits on spending in the future. Already some states are winning new flexibility to cut benefits if they accept some restrictions on federal funding.

"This way, they don't need legislation and they achieve some of the same goals," said Joy Johnson Wilson, a health care analyst at the National Conference of State Legislatures.

Critics say that when states strike individual deals with the federal government, it allows policy makers to avoid accountability for important decisions that affect Medicaid beneficiaries. They prefer that the federal and state governments develop more uniform policies.

Other state officials say that each state is different and that experimentation allows legislatures to tailor their programs to their individual populations. States already have considerable latitude to administer their Medicaid programs as they see fit, setting eligibility standards and payment rates and basically deciding what to cover.

In tough economic times, making such decisions is taking on greater urgency, and a larger portion of state officials' time.

"This is the biggest issue we wrestle with," said Jim Frogue, health policy director for the American Legislative Exchange Council, which represents state legislators.

A Drain on Resources
Most policy makers agree that the current growth of the program—enacted in 1965, along with Medicare, as part of the Great Society's expansion of government—is unsustainable. Medicaid has outpaced Medicare to become the second-most expensive domestic entitlement program, after Social Security. Costs will continue to climb in the next decade as the population ages.

Governors, most of whom must balance their budgets each year, say that they have little choice but to cut health care for the poor when tax revenue drops. Medicaid costs are crowding out demands from taxpayers for better schools, roads and other services. After education, Medicaid is the second-largest drain on state budgets.

State officials have some control over costs because they have leeway to decide what coverage to provide and to whom. But the federal government, which pays for the bulk of Medicaid costs, matches state contributions for any approved expense and supplies 57 percent of the average state program's expenses.

"We have to rethink the entire Medicaid program from the ground up," said former Rep. Newt Gingrich (1979–99), who tried in 1995 as Speaker of the House to convert Medicaid into a block grant program. "There's far too much centralization . . . and we need to give states more flexibility to solve problems."

The central question for conservatives such as Gingrich is whether policy makers can find a way to provide better services to beneficiaries at lower costs. "It's not a question of hurting the poor but a question of getting better outcomes," Gingrich said.

But advocates for the poor say that as states curb costs, the safety net will deteriorate for low-income people who have few other options for health coverage. They also say that the nation cannot afford to allow more people to become uninsured or underinsured, and they note that the rising number of uninsured people, now estimated at more than 43 million, would be even higher without Medicaid.

The consequences each time a patient loses insurance are grave. The Institute of Medicine reported recently that as many as 18,000 uninsured Americans die prematurely from treatable conditions, often because they delay checkups. Some seek treatment in crowded emergency rooms rather than doctors' offices, which drives up costs in the entire health care system.

Defenders of the program say that any proposal to cap spending for benefits would inevitably deny needed treatment to the poor.

"Medicaid is not something that can be cut back to any significant degree without enormous harm," said Ron Pollack, executive director of Families USA, a liberal consumer rights group. "The president is hell-bent [on] trying to convert Medicaid to a block grant that would reduce federal and state spending and in the process would push people into the ranks of the uninsured. That is going to be a huge battleground if the president is re-elected."

Given the polarization on the issue, enacting a legislative overhaul would be a challenge. Many experts say that the Bush administration is more likely to persuade individual states, one at a time, to accept federal caps in exchange for waivers allowing more flexibility from federal regulations. The governors of at least five states have accepted or are considering such options.

"It makes sense for a lot of governors," said Thomas A. Scully, who recently resigned as administrator of the Centers for Medicare and Medicaid (CMS) and is now a health care consultant. "I'm sure you'll see a lot more of this."

The policy makers who are considering Medicaid's future agree on one thing: The task of controlling Medicaid costs while protecting the health care of the nation's needy is daunting. The program's demands are more complex than those of Medicare, which cushions America's seniors from skyrocketing costs. The Medicaid program pays for one-third of all births in the United States, two-thirds of stays for nursing home residents, and nearly half of the public funds for AIDS patients. The populations served by Medicaid are significantly more diverse than the seniors served by Medicare.

Not only does the program offer a range of services for diverse constituencies, but each of the 56 state and territorial programs has been built from a series of local financial trade-offs, political compromises, and individualized public demands. Across the nation, Medicaid benefits vary widely from state to state.

During the booming 1990s, many states went beyond the congressional mandates and court decisions that defined the parameters of Medicaid coverage and expanded the program to new groups. A few states, including Vermont, covered some groups in families earning up to 300 percent of the federal poverty level. On the heels of those expansions, however, economic growth declined. States that just a few years earlier had ambitiously improved their programs were forced to retreat.

Those retreats underscore the uncertainty of a system in which officials make coverage decisions based on budget issues that may fluctuate wildly. Whether the solution is more federal spending or less, analysts agree that the current system should be more stable.

"We need to stabilize coverage and care for people, so we're not giving it and jerking it back, because it really affects people's lives in the most basic ways," said Cindy Mann, a Georgetown University expert who was director of the family and children's program for the Center for Medicaid and State Operations during the Clinton administration.


Should the federal government cap its spending on Medicaid, or leave it as an entitlement program?

Even before it was created, the Medicaid program generated debates between conservatives and liberals about the most equitable way to offer medical care to low-income people. Recent cutbacks in Medicaid by state officials have revived those debates.

Liberals argue that low-income people should be entitled to standard medical benefits to protect their health. If spending were capped, they say, states would face difficulties when revenue fell or costs rose and would then have to consider cuts in services that people had come to expect.

The argument for capping Medicaid grants is consistent with the conservative philosophy of giving states freedom from federal rules and regulations as a way to reduce their dependency on Washington. According to this argument, governors would be able to experiment to find the best solutions for their states' unique populations, the most effective innovations could serve as models for other states, and states would not have to follow rules that did not make sense for their citizens. Many governors say they could find more cost-effective ways of doing business if they did not have to follow so many federal rules.

Under the current system, Medicaid coverage depends on a complicated structure that was initially designed to roughly correlate with old welfare classifications. The categories have evolved into a patchwork system that some experts say is confusing, arbitrary and in some cases even discriminatory. Indeed, Medicaid's complex eligibility rules have kept a significant number of people under the federal poverty level ineligible for its benefits.

About one-third of current Medicaid beneficiaries fall into the optional beneficiary groups that states have added. It is this population of generally less needy people that policy makers are scrutinizing most closely for change.

The Bush administration proposal, for example, would cap funding for the optional category as a way to slow the growth of Medicaid spending over time. As an incentive to participate, the states would get more Medicaid funding during the first few years of a 10-year spending plan, but less in the final years.

The declining federal contributions in the proposal are the main reason governors, even some Republicans, are reluctant to sign on to it. The administration, which has until recently been focused on the congressional debate over adding a prescription drug benefit to Medicare, has not pushed for the plan in the face of resistance from lawmakers.

But the question of Medicaid's structure will not go away because it is at the core of the debate.

Just because plans to convert Medicaid into a capped grant have not advanced in Congress does not mean that the administration is not pursuing the approach. In fact, several states—California, Connecticut, Florida and New Hampshire among them—are said to be pursuing waivers that would include spending caps.

In Connecticut, news reports suggest that Republican Gov. John G. Rowland's office is negotiating with federal officials over a waiver that would give more-generous coverage to the neediest low-income children, seniors and people with disabilities, but would reduce the services provided to poor single adults.

"Basically, the state would negotiate for this flexibility based on something like the block grant approach proposed by the Bush administration almost a year ago," read a memo by Rowland's office, according to the Hartford Courant. Rowland did not inform legislators in his own state that he was already trying to strike a deal with the federal government to cap spending.

That Rowland would support such an approach is no surprise, however. In 2003, he and two other GOP governors—Colorado's Bill Owens and Florida's Jeb Bush—wrote a letter to Congress supporting capped grants.

"It is time to review and fundamentally rewrite the nation's Medicaid law," they said, suggesting that Medicaid "move away from entitlement without responsibility."

The two also proposed that Medicaid programs operate more like private managed care plans and that patients receive more "choices" in their coverage.

Florida's recently passed fiscal 2005 state budget includes language allowing Gov. Bush to waive many federal rules if the CMS agrees. State health officials have been discussing a wide range of far-reaching changes with federal policy makers.

As part of the proposed changes, Florida health officials have suggested they would probably accept five-year capped allotments if it meant they could avoid federal requirements. Bush is considering proposing legislation that would cap Medicaid costs as a proportion of the state budget—with a ceiling of 20 percent, for example, down from the current 22.4 percent. The state wants to limit beneficiaries to a lifetime cap on the number of years that they can receive health coverage.

State officials are trying to "move from a defined benefit to defined contribution design," according to a discussion draft, that would "test voucher" models. They are also seeking to move more people with disabilities into managed care, impose the highest possible co-payments or deductibles, and cut back on screening and benefits for children.

Proponents of capped grants point out that the popular State Children's Health Insurance Program, known as S-CHIP, is not an entitlement program like Medicaid, but rather a grant program. The children's program, created in the 1997 Balanced Budget Act (PL 105-33), covers those in families with incomes slightly higher than Medicaid eligibility levels allow.

But critics of capped grants note recent events affecting S-CHIP enrollment: Because of funding limits, a number of states—including Colorado and Florida—stopped enrolling children who otherwise would be eligible if the money were available.

In Florida, as many as 110,000 children were put on a waiting list until the legislature earlier this year provided enough money to cover 90,000 of them. But in the future, it will be much harder for children to get S-CHIP coverage because of a new law, backed by Gov. Bush, that considerably scales back eligibility for the children's program. Under the law, children are unable to get health care coverage if their families are eligible for any type of employer-sponsored insurance—even if it is inadequate for their needs. The law also added more barriers to enrollment, such as permitting only two enrollment periods a year during which coverage will be available on a first-come, first-served basis. And the state will stop tracking how many children are turned away if there are not enough slots for all of them.

Republicans said that slowing the growth of the children's program is responsible and necessary. Allowing it to continue to grow could be a financial disaster, they said.

"The discipline the legislature has brought to this program protects the long-term viability" of the program, Bush said when it passed in March.

In words echoing the national debate, Democrats in Florida challenged Republicans' assertions that fully funding the program would be fiscally irresponsible.

"What could be more fiscally responsible than to provide health care for the children of the working poor in Florida?" said state Rep. Suzanne Kosmas, a Democrat from New Smyrna Beach, during the debate. "It strikes me as fiscally responsible, and allows parents to be working and productive and allows these young people to go to school healthy, graduate . . . and out of the social services."

Democrats argue that similar cuts would be in store for needy people in Medicaid if it were a capped grant.

"By shifting fiscal responsibility to states, the Medicaid block grant encourages states to limit their liability by capping enrollment, cutting benefits and increasing cost-sharing for millions of low-income people," said Rep. Frank Pallone Jr., D-N.J., at a March 18 House Energy and Commerce Health Subcommittee hearing on Capitol Hill.

Federal officials say that, under a capped grant system, the future of each state's Medicaid program would be in the hands of local politicians and policy makers and that they would be accountable for any changes.


Should Medicare rather than Medicaid cover long-term care?

Medicare is known as the health insurance program for the elderly and disabled, but it is Medicaid that actually covers long-term care for most seniors. About 13 million people in the United States need long-term care services to help with basic activities, such as eating and bathing, because they cannot function on their own, and about 56 percent of those are over the age of 65.

Medicaid is the largest single payer of long-term care costs, such as home health services or nursing homes, financing about 48 percent of all long-term care expenses. For the 1.6 million Americans who use nursing homes, Medicaid pays for 70 percent of beds, according to Scully. Medicare only pays for short-term stays in nursing facilities, such as when a patient is recovering from surgery.

But ask any governor, regardless of party, and chances are he will say that the federal government should pick up the tab for long-term care for seniors. While the cause has not been taken up by members of Congress, some state officials are aiming for a compromise in which the federal government would pay for poor seniors who are eligible for both Medicaid and Medicare.

In the coming decade, the issue will become more urgent as the population ages. The 77 million Americans in the baby boom generation will begin to turn 65 in seven years. About six of every 10 Americans who reach age 65 eventually use some type of long-term care services.

"Much of the increase in Medicaid spending over the past 10 years can be attributed to the ever-increasing costs of providing long-term care," said Scully in a 2003 congressional hearing, when he was CMS administrator.

Medicaid projects that it will spend approximately $90 billion in federal and state dollars on long-term services in fiscal 2004, with $49.1 billion going to nursing home care.

"For state policy makers, long-term care for our seniors is at the center of a very difficult debate on exploding health care costs going on in virtually every statehouse in the nation," said Dirk Kempthorne, R-Idaho, chairman of the National Governors Association (NGA). Kempthorne has launched an initiative to bring attention to long-term care issues.

Though many Americans think of Medicaid as the provider of care for poor children, substantially more Medicaid money is spent on care for older and sicker populations, which is more expensive. While the elderly, blind and disabled account for only 26 percent of Medicaid beneficiaries, the payments made in their behalf take up about 70 percent of Medicaid's budget.

Governors say they cannot continue to contribute so much of their budgets to long-term care needs. They note that it is not just the poor who are relying on Medicaid to pay for these services. Often, beneficiaries are not eligible for Medicaid until they spend down so much of their resources for medical care that their bank accounts and stock holdings total no more than $2,000.

"It is . . . unacceptable for Medicaid to be the only long-term care program in this country," reads a plank in the Medicaid Reform Principles Policy of the NGA. The policy also states that the "federal government should assume full responsibility for the acute, primary, long-term, and pharmaceutical care of the dual eligibles, individuals who are enrolled in the Medicare program, but because of their low- income, are also eligible for the Medicaid program."

But if Medicare does not begin to pick up more of the costs for long-term care, then governors are hoping the public will plan ahead better for their care. Kempthorne and other governors, along with the White House, are encouraging people to buy insurance for long-term care services. In some states, tax breaks are available for consumers who purchase the plans. The federal government is subsidizing long-term care insurance for its workers, and about five states allow people who buy state-approved long-term care insurance policies to qualify for Medicaid if necessary without "spending down" their life savings.

However, private insurance is still paying only about 13 percent of long-term care costs, according to CMS.

"Private insurance hasn't done much on long-term care," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured. "So we should discuss what the role of Medicare should be in providing long-term care."

The alternative to shifting the costs of long-term care to Medicare is to attempt to find less expensive ways to meet long-term care needs.

For example, the care for frail nursing home patients is more expensive than that for people who can remain in their homes. A year's stay in a nursing home costs roughly $57,000, and the average nursing home stay is about two-and-a-half years. Letting a beneficiary receive care at home is much cheaper: about $15,000 a year.

Redesigning the way that people receive long-term care will take time, but the trend is toward more home or community-based care, such as home health services, assisted-living facilities or adult day care centers, that can give family caregivers a break during the day.

In 1991, 86 percent of Medicaid spending for long-term care went to institutional facilities, with 14 percent going to home or community care. Ten years later, institutional care took up 71 percent of long-term care spending in Medicaid.

The push toward allowing people to receive care in their homes or community facilities was accelerated by a 1999 Supreme Court decision, Olmstead v. L.C. The high court found that individuals who wanted to get care at home or in less restrictive community settings should be able to do so.

A year ago, the administration created a demonstration program that allows an individual in a nursing home or other institution to take the money set aside for his or her care and use it in other settings.

In a few states, Medicaid programs have experimented with "cash and counseling" projects that allow patients to cash out the funding that would be provided for their care and use it to hire people, including family members, to offer assistance.

Supporters of consumer-directed care say that individuals, not the government, should make decisions about their own care. But critics fear that beneficiaries might not be able to make the best judgments about the care, might abuse the system, or could use the benefit to pay relatives for services that they previously offered free. Governors wonder whether Medicaid costs would rise.

Some officials believe that at-home care will dominate future services for people who can no longer take care of themselves independently. Government budget writers are hoping that home and community-based care can provide a solution to the problem of escalating long-term care costs.

"This issue is only going to grow in importance," said Frogue of the American Legislative Exchange Council. "This and other Medicaid issues are the ones that [legislators] understand least, and long-term care is growing on autopilot, so they will have to deal with it in very forceful ways."


Do Medicaid cuts affect people with private insurance?

Medicaid spending affects not only the low-income people receiving it, but also those with private insurance as its impact ripples throughout the health care system.

Most significantly, Medicaid pays for many of the most expensive patients in society, such as people with disabilities and the elderly. If those patients were forced into private insurance, premiums for other people in those pools would probably increase.

"By taking on that coverage, Medicaid has played an important role in holding down premiums for the rest of us," said Rowland of the Kaiser Commission.

Additionally, cuts in Medicaid could motivate hospitals, doctors and other providers to charge privately insured people more to make up the difference. Some economists say that such cost-shifting should not happen in theory, but many practitioners and policy makers believe it occurs.

"To the extent that reimbursement rates are cut, that cost shift has to be pushed on private payers because there's nowhere else to go," said Frogue of the state legislators' association. "And that is a significant factor in rising health insurance premiums."

Patients with private insurance also use some of the same providers who treat Medicaid patients. If providers have to limit their services because of low reimbursement rates, that could diminish care for everyone in a community. The quality of care for privately insured people would suffer especially with the closure of a hospital that provided unique services.

"The closure of a regional trauma center or reduction in its scope of services puts the health of everyone in a community—whether insured or uninsured—at risk," the Institute of Medicine noted in a recent report.

"All the financial bones are connected in this body, and if Medicaid is sore, that gets transmitted to other programs," said Joseph Antos, a former Medicare official who is now a policy expert at the conservative American Enterprise Institute. "We all are affected."

Medicaid receives far less attention than Medicare, despite the fact that Medicaid is a larger program, partly because average Americans do not view themselves as beneficiaries. "It's the ugly stepchild of health policy programs," said Wilson of the state legislatures' association.

Some say its impact on taxpayers is just as important to consider as its impact on the overall health care system. When Medicaid spending is high, all taxpayers have to contribute.

"The problem is that you create this program that grows exponentially without any curbing of growth of funding," said Owcharenko of the Heritage Foundation. "Medicaid is one of the biggest cost drivers for the government, and those are taxpayer dollars. What are you going to do with the unfunded liability of the program? You just can't have growth rates that high, and you can't have a program that is an open-ended check."

Medical providers say that Medicaid financing is an important component in the mix of public and private funding that they receive. It does not pay providers as generously as Medicare or private insurance, say health care providers, but it is better than receiving nothing to care for the uninsured.

"Our resources are stretched piano-wire thin," said Art Kellerman, a top emergency room physician at Grady Memorial Hospital in Atlanta and the co-chairman of a committee that was charged by the Institute of Medicine to study the uninsured. "If Medicaid is cut more, we will be crushed like bugs."

At Grady, an inner-city trauma center where low-income patients line the halls of the emergency room, a number of prominent people have found themselves in need of treatment. Kellerman pointed out that Grady, like many other regional trauma centers, is the only hospital in the state equipped to address many life-threatening injuries. If a terrorist incident were to strike, Kellerman said, Grady would be the hospital to handle it. But a lack of resources means that the hospital could become overwhelmed in a crisis, and other hospitals would be even less prepared to help.

Even in less dramatic circumstances, Medicaid funding can affect the care—and the pocketbooks&#8212'of the privately insured.

Because Medicaid covers people who would otherwise not have insurance, cuts in the program would lead uninsured people to seek care in more costly settings, such as the emergency room, where hospitals are required to stabilize patients without regard to their ability to pay. A high amount of uncompensated care can lead to higher health care costs for people with insurance.

Cuts in reimbursements from Medicaid can also drive up costs for the privately insured, many analysts believe.

Among economists, there is a vigorous debate about whether such cost shifting occurs and, if it does, how it happens. Some analysts question whether private insurers are really forced to pay more to compensate for low government reimbursements. Others say it is only natural that when large programs such as Medicaid and Medicare pay less, the providers would have to charge others more.

"Today, with the return of double-digit health care inflation, there is considerable belt-tightening in the public and private sectors. Hospital margins are being squeezed from all sides. With increasing frequency and to a greater extent, the individual consumer is experiencing cost-shifting," the journal Health Affairs reported last fall. The paper focused on Medicare payments, but its findings could be applied to Medicaid as well.

"When providers' prices rise and neither public nor private payers' compensation follows suit, consumers pay more. The result is that people lose coverage. This appears to be the ultimate cost shift, and the issue deserves more public and private attention and action than current politics are likely to allow, at least for now."

Kellerman and other policy experts say that no matter what one's perspective about the solutions for Medicaid, it is clear that its problems affect all of society.

"This is not just an issue for poor folks," he said. "This affects the middle class. Everyone's health care is at risk unless we sort out this very messy, dysfunctional health care system."


A program in crisis gets scrutiny at the federal and state levels

Although the economy is improving and state revenues are inching up, total Medicaid spending is still expected to grow an average of 8.2 percent in fiscal 2004. That is slower than the nearly 12 percent rate of growth two years earlier, but still a significant increase.

That growth, and the resulting fiscal difficulties for states, have fueled long-raging debates about the structure of the program, the proper balance of social responsibilities and funding concerns, and the level of appropriate federal oversight for Medicaid.

"It's in crisis," said Georgetown University's Mann. "Changes are going to happen in the next few years, and some are needed."

Few expect Congress to overhaul the program in the next year or two. In the meantime, lawmakers at both the state and federal levels are investigating new ways to reduce the program's costs.

"Medicaid is such a budget driver that some major changes have to occur," said Scott Pattison, executive director of the National Association of State Budget Officers.

After the fall elections, lawmakers can be expected to show heightened interest in the issue, especially if the Republicans maintain control of both houses of Congress and the White House.

The administration's 2003 proposal called for transforming part of Medicaid into a voluntary capped grant program for states that choose to participate, with more funds available in the first years of the system but less in later years. The proposal would be a set amount of funding per person for chronic and acute care. It would have affected optional beneficiaries that states choose to cover even though they are not required to do so, a group that makes up about one-third of the Medicaid population.

So far, that proposal has met with a strong resistance from Congress and governors, suggesting that any such overhaul would not come easily. Just as the Medicare debate of 2003 demonstrated, the current polarization in Congress has made major social policy legislation very difficult to enact. The two parties come at the issue from very different perspectives.

"The White House and some Republicans would very much like it to be a more defined program and cap the amount spent," said Gail Wilensky, who ran the Medicare and Medicaid programs in the first Bush administration. "But this is one of those areas in which there are substantial philosophical divisions. It would be very hard to resolve it without a clear majority in Congress."

In the meantime, a handful of states are already poised to accept caps on federal spending in order to get more flexibility in how they cover the low-income program and what types of people would qualify.

Demands on Medicaid have outpaced its resources since 2001. Many states cut benefits such as eyeglasses, hearing aids, dentures and orthotics for the needy, who were forced to start making co-payments with their meager incomes. In some states, patients faced new limits on the number of prescriptions they could have filled, and could get coverage only for drugs on the state formularies. Provider rates were cut, so many doctors stopped seeing new Medicaid patients. Some patients lost their coverage altogether. With each new legislative session, more states imposed a wider range of cost control measures.

Then in 2003, Congress stepped in to help. Federal lawmakers provided $10 billion to be divided among the states for Medicaid and $10 billion for other purposes. In many states, lawmakers said that the cuts in 2004 would have been much worse without the assistance.

But that aid ends in June 2004. And not only does the fiscal relief expire, but the Bush administration and Republicans in Congress are calling for tighter control over the flow of federal dollars to the states—even though costs are still climbing.

"There are underlying factors that will continue to drive Medicaid spending that far exceed revenue growth, and this will keep pressure on the states," said Vern Smith, a former Michigan Medicaid director who now tracks national growth rates as a consultant with the firm Health Management Associates. "State resources are still extremely strained, and it will be some time before revenues are restored to previous levels. This will be an issue around the country for some time."

The issue has caused intense friction between states and the federal government, a tension analysts say they have not seen since the mid-1990s, the last time that Republicans tried to convert the Medicaid entitlement into a block grant program.

President Bush's tough new approach on Medicaid includes a proposal for $1.5 billion in Medicaid cuts next year and $23.6 billion in the coming decade. During the debate on the fiscal 2005 budget resolution March 10, the Senate voted 53-43 to reject the cuts. But state officials say the proposed cuts by Republicans in Congress and the administration will not be the last.

Another example of the White House's interest in taking a harder line on state finances is its plan to require states to submit their budget proposals to the federal government 150 days before they are implemented. That is to allow federal officials to ensure that the states plan follow all federal rules correctly. Currently, federal officials review Medicaid budgets after claims are paid.

State officials complain that the proposal would require them to produce new paperwork that would provide little significant new information. They also say they often do not even have detailed budgets available that early.

The administration published the proposal in January, giving states only one day, rather than the typical 60-day comment period, to respond. After governors protested both the substance of the plan and the way it was released, the administration said it would work with state officials to revise it. But governors remain wary because federal officials say they still plan to implement some type of new requirements this year.

Already, federal officials are scrutinizing states' requests to update their programs with a more skeptical eye.

One issue that has state officials immediately concerned is the federal government's heightened scrutiny of what are known as "creative financing schemes," which are bookkeeping maneuvers that states use to increase the amounts they receive from the federal government. One of the ways they do this is through "intergovernmental transfers," or IGTs, which are mechanisms for transferring money from state to local governments and back. For example, a state may make a payment to a county nursing home, which the federal government must match, but then some of those funds go back to the states.

CMS has suggested that as many as 35 states use some type of IGT mechanism to get federal funds in excess of their actual costs. Eighteen states use a particular type of scheme to get the "upper payment limit," or an amount that is intended to be a ceiling on federal matching rates for certain services.

Critics say that states are gaming the system to leverage federal matching dollars without paying their full share. These tactics are legal but seen by some as unfair.

Another point of contention is that some states are not using the funds they receive through these transfers to improve or expand health care services for the poor. Federal matching funds flow into the general state coffers and become unaccountable. Because they are not earmarked for health care, they can be used for a range of purposes.

"States can and do continue to claim excessive federal matching funds through [upper payment limit] arrangements, using them for non-Medicaid purposes or to inappropriately increase the federal share of Medicaid program expenditures," the General Accounting Office said in a February 2004 report.

Three years ago, the federal government ordered the 18 states that use schemes to get the highest payments possible to phase out the practices on timetables of five to eight years. Now, federal officials are warning that they may reconsider those agreements and put a stop to them. Some state officials say the federal government may be using these issues as ways to persuade states to accept caps on their federal dollars.

State officials say the tactics provide life-saving funds that states rely on.

"Without the benefit of IGTs, large county-based states, such as New York, California, Wisconsin, and North Carolina, to name just a few, would literally be unable to finance their Medicaid programs, destroying the safety net in many parts of the country and drastically increasing the numbers of the uninsured," Barbara Edwards, director of Ohio's Medicaid program, told the House Energy and Commerce Subcommittee on Health on April 1.

But federal officials say that they have a duty to keep costs down.

The federal government "has a strong interest in strengthening financial oversight and ensuring payment accuracy and fiscal integrity," said Dennis Smith of the Center for Medicaid and State Operations. "Federal matching funds must be a match for real Medicaid expenditures."

The tension between the states and the federal government will probably continue as long as funds are limited. In the next decade, costs for long-term care in Medicaid will climb precipitously as the population ages — particularly since Medicaid is the greatest single payer for nursing home care. The costs for the elderly and disabled are the highest for the program. Seniors and people with disabilities make up about 25 percent of the program's population, but consume nearly 70 percent of its resources.

"This is something we need to deal with now, but I have a feeling that Medicaid will be something we'll be hearing a lot about for the next 10 years," said former CMS Director Scully.

Politics and Prognosis
Over the next 10 years, the pressure on states from health care spending is not likely to ease. Funding for Medicaid and the State Children's Health Insurance Program is expected to roughly double by 2013.

Concerns about mounting Medicaid costs will drive the debate about the future of the program in Congress, the White House and statehouses across the country.

Advocates for the low-income say that Medicaid should be a more reliable source of health care coverage. "Inevitably, these cuts do have an impact on real people," said Edwards at an event sponsored by the Kaiser Commission on Medicaid and the Uninsured.

To be sure, states now face more stable budget conditions than a year ago because they trimmed spending or collected more revenue. In some states, Medicaid cuts that passed this year were not as deep as proposed.

For instance, in Missouri, the state legislature considered cutting thousands from the Medicaid rolls, but ended up slicing coverage only for about 325 low-income parents. Other states actually restored some cuts previously made—such as in Connecticut, where the Democratic legislature found the money to eliminate new premiums and co-payments established last year.

But officials say that they are not in the clear yet. Even though circumstances have improved, the situation in most states is not as strong as before the recession. And not only will rising Medicaid spending continue to be a factor, but the end of additional Medicaid payments from the federal government on June 30 will hit some states hard—especially states with a high number of poor people.

"If states were a patient, the patient is certainly out of intensive care but is certainly still in the hospital," said Pattison of the state budget officers' group.

Some lawmakers, such as Sens. John D. Rockefeller IV, D-W.Va., and Gordon H. Smith, R-Ore., favor additional aid to states. But they face resistance from others, particularly Republicans, who would cut Medicaid below current levels.

One question that policy makers will have to address concerns the level of coverage that beneficiaries receive. Should Medicaid recipients get benefits that are as generous as those provided by private insurance?

Advocates for the poor say that paltry benefits harm patients in the long run. Limits on prescription drugs or other treatments not only hurt the poor, they say, but they are not cost-effective. They say that if patients do not get the appropriate treatments and follow them without restrictions, they will end up sicker and require more costly care later.

Others say that cheaper substitutes are just as effective.

"People with the most generous private insurance. . . they just get overtreated and mistreated at the same time," said Antos, the former Medicare official, now a health policy analyst at the conservative American Enterprise Institute. "Because it's free, so why not?"

Wilensky said it is a fundamental question that deserves an honest and open discussion.

"One of the most serious issues that we must address will require having clear discussions about how much we are willing to spend on the poor," she said. For other government benefits, such as housing or food stamps, she said, people acknowledge that benefits may not equal those that individuals buy for themselves, but "we have trouble saying the same thing when it comes to health care."

"How can we define a level of care that is adequate, even if it is not as convenient as the care for the privately insured?" she said. "It doesn't necessarily have to be what I want when I pay for it myself."

The outcome of this fall's elections will be part of what determines the outlook for the program. GOP leaders will continue their push for capped allotments that would reconfigure the shape of the program. Democrats say that Medicaid needs more federal funding, not less, and that Medicaid can be credited with preventing more people from losing insurance.

Both sides agree that an evolution of the program is in store.

"I do see it as a pivotal moment in Medicaid's history," said Mann. "A solution is needed that would strengthen the program and allow it to do its job."

Return to October 25, 2004 Issue

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Washington Health Policy Week in Review - Continued, October 2004