Few challenges legislators face are as difficult and complex as the urgent need to wisely manage health care spending, particularly in the Medicaid program. Curtailing spending in an arbitrary way creates the risk of real harm to needy senior citizens, people with disabilities, and adults and children who have few or no other options to have their medical costs covered. Yet, failure to rein in program costs can wreak havoc on all other legal and programmatic state responsibilities such as education, environment, criminal justice, economic development, and non-health related human services.

The cost control challenge can be especially difficult when-as now-rising costs occur in the midst of an economic downturn. Legislators face daunting choices at a time when the need is greatest, and those who may be adversely affected face few viable alternatives. Rising unemployment, increasing public assistance rolls, closing businesses, and businesses canceling health insurance coverage-these all set the context and frame the urgency for legislators to act wisely, carefully, and yet decisively.

Adding to this dilemma is the reality of the past 30 years in U.S. health policy. Between the 1960s and the late 1980s, federal and state governments for the most part pursued a regulatory strategy to control rising costs-both public and private-through devices such as certificate of need, rate setting, and coordinated health planning. In the late 1980s and early 1990s, that strategy came to be seen as a failure and was abandoned or significantly de-emphasized. In the 1990s, policymakers pursued a market-based strategy, relying on managed care and competitive purchasing to restrain costs. At the beginning of the 21st century, that strategy is also now seen as ineffective as health care inflation once again surges.

Thus, we enter this period of renewed inflation with less clarity than ever regarding an overarching approach to cost control. Widespread implementation of managed care, thought by many in the early 1990s to be a silver bullet, has been carried out and has run its course as costs rise and public antipathy solidifies. There is an important lesson in this for all legislators-new and veteran- to be skeptical of the "next big thing," to be cautious in the presence of those who wrap their proposals with grand predictions of huge, painless savings.

Legislators also must keep their objectives in perspective. The growth dynamic in state medical costs is intimately tied to the growth in private sector spending. Small business premiums and Medicaid costs, large business premiums and state employee health insurance costs, all tend to rise in tandem-because all are driven by the same forces. States cannot on their own reverse the overall growth in health sector spending. At the same time, effective, well designed interventions can effectively reduce the rate of growth-reductions that can translate into vitally important savings in millions of dollars. In other words, although it may not be able to drive your rate of cost growth from 15 percent to zero, there can be real benefits in decreasing the rate to 12 percent or 13 percent.

In baseball terms, legislators facing health cost growth realistically should expect to hit more singles and an occasional double than home runs or grand slams. It is in this sense that this report, prepared by the Health Policy Staff at the National Conference of State Legislatures, is particularly timely, important and helpful. The policy directions outlined in this report are realistic, practical and informed by hard experience and history. Legislators who were first elected after 1991 will particularly benefit from the wisdom and experience contained in these pages. Legislators in states with term limits also will find real value because they serve with few colleagues who have any memory of the prior fiscal crises and health cost explosions.

In the spirit of realism, many legislators will discover that their hard work to find responsible ways to constrain cost growth will win them few fans or friends. But no task in the current environment is more important and needed. Veteran legislators understand that times of fiscal stress are also periods when important reforms can be achieved that are not possible in calmer times. The experiences obtained by those who face these challenges head on may be the supreme challenge one faces in an entire legislative career. The wisdom gained will serve any legislator well in the years ahead when the past fiscal distress becomes a faint memory to others.

The National Conference of State Legislatures has experienced and time-tested staff who are able to assist legislators as they address these challenges. Readers should feel welcome and encouraged to interact with NCSL staff to learn more about specific policy choices and to discover opportunities to engage with other legislators who face similar problems.

Every fiscal crisis in the past 50 years has been followed by fiscal recovery. Every health spending crisis is followed by some degree of spending moderation. Those who aid their publics in this time of stress fulfill the highest obligation to their citizens and to their oath of office.

John McDonough

Co-Director, Health Chairs Project

Chapter 1. Introduction

As rising health care costs meet flattening revenue projections, state health budget-makers will face tough decisions, especially when it comes to Medicaid spending. Although most states are in good financial health overall, state revenue collections are showing signs of slowing and, in many states, the health spending budget is often the first to face a crisis. Spending on direct, personal health care accounts for more than a quarter of total state spending. Almost three-fourths of these dollars-$186 billion in fiscal year (FY) 2000-go to Medicaid, a joint-federal state program. (1) In 23 states, these Medicaid expenditures were emerging as problematic as early as February 2001. (2) By June 2001, two-thirds of the states projected shortfalls in their Medicaid budgets for the current fiscal year. (3)

What can a legislator do? How can legislatures help ensure that funds for health care are used wisely? Legislators called back into special session to deal with Medicaid shortfalls, or faced with Medicaid budgets that threaten to crowd out discretionary spending, will want quick solutions. But the underlying causes of cost increases are complex and deeply rooted. Cost control will require a mix of short-term and long-term strategies. Although there is no one solution, many opportunities exist for incremental savings.

For an introduction to Medicaid, see the NCSL Medicaid FAQ at http://www.ncsl.org/programs/health/forum/faqmedicaid.htm

This report will help state lawmakers ask the right questions when considering whether a given approach is appropriate for their state. It ends with snapshots of 10 strategies that states typically consider when faced with Medicaid budget crunches.

Chapter 2. (Spending and Costs) This chapter follows the money by taking a close look at what drives Medicaid, the largest piece of health spending in most state budgets. It describes what influences state Medicaid spending and costs, provides a little economic and financial theory, contains national data on where Medicaid money comes from and where it goes, and points readers to sources of information about state-specific costs and spending. Summary tables show which strategies address each of the different factors that are helping to increase spending and costs.

Chapter 3. (Thinking Strategically) This chapter focuses on legislative action. It offers advice on how to obtain and analyze state-specific information that helps legislators and others determine what approaches are suitable for a given state. Health budget strategies tend to have complicated interactions with one another, and an apparently simple decision about state spending can reverberate in the private sector or conflict with another state health policy.

Chapter 4. (Ten Cost-cutting Strategies) This chapter contains brief profiles of 10 strategies that states have used to contain costs. Each profile includes enough information to help you decide whether to explore the strategy in more depth and offers tips on how to tell whether an approach might be right -or very wrong-for your state. The profiles also suggest resources for more information.

Chapter 2. Medicaid Spending and Costs

Influences on State Medicaid Spending

Medicaid spending is on the rise as states forecast flat revenues. After some six years of record low growth, Medicaid spending began to accelerate in 1999. In 2001, the national economy slowed, bringing down government revenues as well. In response to a February 2001 survey, 23 states reported that Medicaid expenditures were emerging as problematic. (4) By June 2001, roughly two-thirds of the states projected Medicaid budget shortfalls in the current fiscal year. (5)

See http://www.nasbo.org/Publications/PDFs/FSJUN2001.pdf

Low Medicaid spending growth in the 1990s was an anomaly. There are a number of different explanations for the relatively low rates of increase in Medicaid spending during the mid-1990s.

· There was lower underlying health inflation. Medical inflation, which was in the double digits from 1990 to 1992, slowed through the second half of the decade, falling as low as 3.2 percent. (6) This decrease was at least in part the result of competition-driven changes in financing and organizing care-both public and private-that often are lumped together as "managed care."

· Medicaid managed care controlled prices and utilization. By 2000, 55 percent of beneficiaries were enrolled in managed care-17.8 million, with 13.8 million in risk-based plans and 4.5 million in primary care case management (PCCM) programs. This is up from 10 percent in 1991. (7)

· Federal laws limited states' expansions of payment mechanisms that resulted in increasing federal payments to the states. For example, the federal government put a cap on the amount of additional payments available to the states to support disproportionate share hospitals (DSH), i.e., those serving large numbers of Medicaid beneficiaries and uninsured patients.

· A number of states improved cost control in long-term care, which is one of the most significant components of Medicaid expenditures. This was accomplished through limits on nursing home beds, tightened payment rates to the facilities, and expanded coverage of home and community-based services. (8)

· Family enrollment fell as people left the ranks due to a strong economy and welfare reform. Continued lower Medicaid enrollment, even after state outreach efforts were put in place, coupled with slightly higher rates of employer-based coverage, suggest that some people leaving welfare were finding employer-based coverage. At the same time, a number of people who were eligible for Medicaid appeared to have been improperly dropped from Medicaid rolls. (9)

Medicaid Inflation

· According to Ku and Guyer, Medicaid grew at 11.2 percent per annum 1998 to 2000.

· CBO predicts average annual growth from 2000 to 2011 of 8.7 percent for Medicaid

· Twenty-three states in NCSL (February 2001) survey report that Medicaid expenditures are emerging as problematic.

· Two-thirds of the states recently projected Medicaid shortfalls in their current fiscal year according to a 2001 survey by NGA and NASBO.

· In 2000 and 2001, for the first time since 1992, states outspent their Medicaid budget expectations, forcing HCFA to request additional funds to get through the year.

Why Medicaid Spending Is Rising Now

A number of factors are pushing up state Medicaid spending. The explanations include: general economic theory and normal business cycles; some "usual suspects" such as demographics, technology, and labor costs; managed care backlash; and new concerns such as the cost and use of pharmaceuticals and changes in federal regulations.

Economic Theory and Normal Cycles

· Baumol's law. (10) This theory argues that costs for services (such as medical care) rise faster than the economy as a whole because "high touch" goods like care cannot replace labor with technology as easily as manufacturing can. This almost guarantees that health cost inflation (including Medicaid) generally outpaces general inflation.

· Normal price fluctuations. Many analysts argue that an overdue upturn in the normal, cyclical fluctuation of prices for both public and private insurance (sometimes known as the insurance or underwriting cycle) is taking place. They believe insurance prices were artificially suppressed in the late 1990s as a result of market share competition described in the previous section.

"Medicaid costs are influenced by a variety of factors including the size and health care needs of the eligible population, the scope of medical benefits provided, service utilization levels, and the amount of payment for services provided. The double digit Medicaid increases in the first half of the 1990s were primarily attributable to: (1) increases in eligibility; (2) inflation in the costs of medical services paid for through the program; and (3) special financing measures to maximize federal funds...Other influences include broad social and economic conditions such as increases in the poverty level, unemployment rates, the number of uninsured, the aging of the population, the explosion of new medical technologies, and inflationary trends in the health care system which also place spending pressures on the Medicaid program. Many of these pressures will continue well into the future."

Source: Bill Fairgrieve, Michigan House Fiscal Agency, Medicaid Costs in Michigan (Lansing: HFA, 1998) See http://www.house.state.mi.us/hfa/medcost.htm

The Usual Suspects

Demographic trends. The mix of people in the program ("case mix") is changing. By 2030, the over-65 population will double, and the over-85 population will triple. Because of this growth, overall levels of disability in the population as a whole are expected to continue to rise. This change in demographics is expected to increase the average per capita cost of Medicaid overall.

Three-fourths of projected increases in federal Medicaid spending, according to Congressional Budget Office projections, will be due to care for the elderly and disabled. One-fifth of this growth is a result of rising enrollment in these categories. However, more than half is due to expected higher expenditures per enrollee in these categories. Growing proportions of people on Medicaid are higher cost disabled enrollees-average expense: $9,558 in 1998, compared to $1,892 for an adult and $1,225 for a child. (11)

The CBO projects another 900,000 children and 200,000 adults will be enrolled in FY 2001 as a result of outreach and program changes, but this will increase federal expenditure on Medicaid only by 0.8 percent. After that, "enrollment is expected to remain flat for children, with only modest increases for adults" due to demographic changes. (12)

· New technology. New therapies are coming on line, partly because of new technology and new medical procedures. This puts pressure on Medicaid to cover additional services, many of which come with a relatively high price tag. Furthermore, new medical technologies often increase labor costs rather than lowering them.

· Labor costs. Provider-particularly nurse-shortages drive up labor costs. The average age of the nurse workforce is over 40. Hourly wages in health services establishments increased in 2000 at the highest rate since 1992. (13)

Managed Care Backlash

· Managed care savings peaked. The transition to managed care is nearly complete. Markets are highly consolidated, frequently as a result of plan mergers. Some areas have only two or three managed care organizations, so there is little competitive leverage. Savings from managed care already have been achieved or are not occurring as expected.

· Higher rates. Providers, managed care plans and carriers are making up for the conservative budgeting of their recent past. Health plans are withdrawing from the Medicaid and Medicare markets, citing excessively low prices. Those that remain are successfully demanding and negotiating higher compensation and rates.

· Loosening restrictions. Managed care plans are loosening the restrictions they traditionally have used to control excess utilization. For example, plans are making it easier for consumers to obtain services without obtaining prior authorization. They also are removing restrictions designed to reduce the use of emergency rooms. Some analysts believe these actions are contributing to the rise in Medicaid spending.

Table 1.

PROGRAMS AND ENROLLMENT
AS OF JUNE 30 OF EACH YEAR (POINT-IN-TIME DATA)
YEAR	MEDICAID MANAGED CARE
	ELIGIBLES (MILLIONS)	ENROLLEES (MILLIONS)		PERCENT OF TOTAL
1998	30.9	16.6	54%
1997	32.1	15.5	48%
1996	33.2	13.3	37%
1995	33.4	9.8	27%
1994	33.6	7.8	22%
1993	33.4	4.8	14%
1992	30.9	3.6	12%
1991	28.3	2.7	10%

Source: Center for Medicaid and Medicare Services, Office of Managed Care Medicaid National Summary Statistics: (HCFA-2082 Report) National summary of Medicaid managed care programs and enrollment as of June 30 of each year (Washington, D.C.: CMS, 2001). See http://www.hcfa.gov/medicaid/msis/2082-11.htm (Accessed November 2001).

New Developments

· Pharmaceuticals. Spending on pharmaceuticals is projected to grow at least 15 percent to18 percent annually through 2004. The Center for Medicare and Medicaid Services (CMS)-formerly HCFA-projects that Medicaid's prescription drug expenditures will grow 70 percent faster than overall Medicaid growth between 2001 and 2006, (14) especially for the elderly and disabled. These estimates do not take into account possible offsetting savings in other areas.

· Creative financing. The most important factors in the 2001 increases were states' use of so-called "creative financing"-techniques for drawing down additional federal funds through accounting methods used to value health care provided through public entities or for uncompensated care (see Strategy 3-Intergovernmental Transfers and Other Alternative Funding Mechanisms). Because these methods, which include intergovernmental transfers, increased the federal matching rates without raising state spending, their main effect was on federal, not state Medicaid spending.

Influences on State Medicaid Costs

Medicaid costs depend on who receives care, what care they receive, who provides it, what the provider is paid, and the basis for the payment. Federal law allows states some flexibility in each of these areas, while requiring that certain categories of low-income people (children, pregnant women; and aged, blind and disabled people) and certain services (long-term care, hospital, physician) be covered. Other populations and services may be covered or excluded at each state's option. (15)

Average Medicaid Spending by Category, 1998		Total Medicaid Spending by Category, 1998 ($billion)
Child	$1,225	Child	$24.5
Adult	$1,892	Adult	$16.0
Blind and disabled	$9,585	Blind and disabled	$67.7
Elderly	$11,235	Elderly	$46.1
Source: Kaiser Commission on Medicaid and the Uninsured. Bruen and Holahan, Slow Growth.		Source: Kaiser Commission on Medicaid and the Uninsured. Bruen and Holahan, Slow Growth.

Costs may grow because the size of a group grows, or because services change. A rapidly growing group is not necessarily one whose costs are high. Because different groups use services at different rates, when a group that uses higher levels of services grows faster than other groups, average Medicaid costs also rise faster.

Who Receives Care: Enrollee Mix

Who is covered has more of an effect on Medicaid costs than how many people are covered. On average, Medicaid spends more than nine times as much for an elderly recipient as for a child, and spending for elderly, blind and disabled people accounts for more than 70 percent of health services spending. About half of all poor people are covered under Medicaid; almost 40 percent of births are paid for by Medicaid; about 20 percent of children age 18 and under are covered by Medicaid; and some 6 million people who are poor or disabled rely on Medicaid to supplement Medicare and pay for such things as pharmaceuticals and long-term care. Costs are affected by the number of people enrolled and the services they use.

(For information about state-by-state enrollment see www.statehealthfacts.kff.org)

Most Unpredictable Growth: Children and their Families

· Changes in Medicaid costs for children and families are largely driven by changes in enrollment, which is a function of state and national eligibility policy, the condition of the economy, outreach, and public perception of the program. This population is most like the general population covered under employer-based insurance. Although this is the largest group of enrollees, even in aggregate less is spent on these families than for the numerically smaller eligible groups, the elderly and disabled. Nationally, children represent half of all enrollees but only 15 percent of the spending for Medicaid.

Myth: Costs are going up because so many children enrolled in Medicaid as a result of SCHIP outreach.

Fact: Children are the cheapest group to cover, and prevention in this age group pays off. Children and their parents make up 73 percent of the Medicaid covered population but only 25 percent of the health care spending.

According to Ku and Guyer, very little of the growth in Medicaid spending is due to more children, because per capita costs are quite low. In FY 2000, $200 million in increased federal Medicaid spending was due to adding children and adults vs. $1.8 billion due to state fiscal strategies. In FY 2001, greater enrollment success and higher growth are expected. CBO projections are flat for this population after this year (due to demographic changes).

Source: Ku and Guyer, Medicaid Spending.

· In the late 1990s, states experienced level or declining enrollment for this group. About 200,000 fewer people were on Medicaid in 1998 than in 1997. This drop was attributed to a strong economy, welfare reform and confusion over continued eligibility for the working poor that led to declines in Medicaid coverage. These falls were offset in some states by higher enrollment due to outreach efforts for the State Children's Health Insurance Program (SCHIP) that also reached people who were eligible, but who were not enrolled in Medicaid.

· Not all eligible people enroll; it is estimated that three-fourths of uninsured children are eligible for Medicaid or SCHIP but fail to enroll. There are many reasons why people do not enroll, ranging from the complexity of the enrollment process to their perception of the program. Within this group, however, people who are sickest are likely to enroll first because they are in contact with the health system. For this reason, outreach can lower per capita spending (while raising the overall program spending) because it tends to bring in people who use the same or fewer services, on average, than those currently in the program.

Myth: Aging America will bust the health budget

Fact: Americans are living longer, but they are living longer in better health. A recent study (Manton) found that average lifetime numbers of days with disability had remained constant, even as people's life expectancy rose.

Hard truth: Caring for disabled people is a major area of increased Medicaid spending. Some of this is due to more people with disabilities-due to better medical care that spares people who might have died in the past. Part of this may be an artifact of state financing changes that capture more federal dollars to cover people whose care was previously primarily paid for by states and local governments. Some is due to aging.

Source: K.G. Manton, "Future Trends in Chronic Disability and Institutionalization: Implications for Long-term Care Needs." Health Care Management 3, no. 1 (June 1997) 177-91.

The Most Costly Growth: Poor Elderly People and People with Disabilities

· The poor elderly and people with disabilities consume a much higher share of the Medicaid budget. Compared to children and families, these groups are likely to be in poorer health or to need extensive support such as long-term care. Many states make it easier for these groups to enroll by either allowing certain groups to "spend down" to become eligible or using the "medically needy" optional eligibility category available for people with particularly high medical expenditures-typically people in need of nursing home care; 56 percent of elderly enrollees are in the optional category. (16) Although in theory a state could choose not to offer this coverage, it makes financial, social and political sense to use the Medicaid program to fund this essential care. Medicaid is a way of mobilizing federal resources for health care for groups that otherwise would rely heavily on public services and institutions

· Spending changes for these groups are largely due to changes in the service mix. For example, changes in policies related to home and community-based care have led to rapid growth in spending for non-institutional long-term care services. Recently, spending for pharmaceuticals has registered sharp increases. These increases are due in part to changes in prices and prescribing practices, but also to the availability of new therapies that substitute for other treatments.

Medicaid's relatively generous service mix-better coverage for mental health services, pharmaceuticals, personal care attendants and various rehabilitative therapies-affects enrollment. Medicaid typically provides better coverage than Medicare or private insurance for services that people with disabilities use. As private coverage and Medicare become more restrictive, the sickest people with dual eligibility become likelier to enroll in Medicaid. To the extent that private insurance coverage is restrictive, expensive and even unavailable for persons with disabilities, Medicaid becomes an insurer of last resort for low-income workers with chronic conditions.

· Once enrolled in Medicaid, a person who is elderly or permanently disabled is likely to remain in the program. Changes in enrollment are more likely to reflect changes in demographics and program requirements (such as changes in income eligibility levels) than changes in the economy.

· Costs for the low-income elderly and disabled are difficult to manage because these are particularly vulnerable enrollees and many are dually eligible for Medicaid and Medicare. (17) Among the more expensive groups covered under Medicaid are individuals with developmental disabilities, chronic and severe mental illnesses, conditions such as HIV/AIDS, and the frail elderly. These groups depend on states to act as their advocates and also to fund their care. This can place state agencies in conflicting roles, with one agency having protective responsibility for the vulnerable patients while another must manage budgetary demands. Legislators face both responsibilities.

"Medicaid spending for aged, blind, and disabled people dominates the program. While just over one-quarter of Medicaid enrollees in 1997 were aged, blind, or disabled, they accounted for 72 percent ($104.9 out of $145.2 billion) of Medicaid spending on medical services. Long-term care, particularly in institutional settings, is a significant contributor to these expenditures. States spent $57.9 billion on long-term care for the aged, blind, and disabled in 1997, including $42.6 billion for nursing facilities and intermediate care facilities for the mentally retarded (ICF/MRs). Other significant contributors to the high cost of coverage for these enrollees are inpatient hospital care ($13.6 billion, mostly for the blind and disabled) and prescription drugs ($8.5 billion)"

Source: Brian K Bruen, Joshua M. Wiener, Johnny Kim, and Ossai Miazad, State Usage of Medicaid Coverage Options for Aged, Blind, and Disabled People. (Washington, D.C.: The Urban Institute, 1999), 99-109.

Different Enrollees, Different Care: Prevention

For children and their families, prevention is particularly important as an investment against future health costs. For older and disabled populations, prevention emphasizes managing existing conditions to avoid worse outcomes as well as protecting against communicable diseases such as influenza.

What Care Is Provided: Service Mix

Different groups have very different costs because they use different services. For example, people with disabilities accounted for 17 percent of enrollment and 43 percent of medical service expenditures in the program nationwide in 1998. (18) The services and needs of this group differs from those of pregnant women and children, for example. This means that strategies for managing costs will differ among groups.

Services vary across states. Although the federal government requires that states provide medical, hospital and long-term care to all eligible groups, there are other services-such as chiropractic services, hospice care, eyeglasses and rehabilitative services-that states have the option of covering. If a state chooses to offer an optional service, it must be offered to all eligible groups. Some optional services, such as prescription drugs, are universally offered because the cost of providing them is deemed to be less than the cost of treating the more severe illnesses that may result from not covering the cost of the drug.

For information on state expenditures by service, see www.hcfa.gov/pubforms/Martin.pdf

States can, and have, set "reasonable" limits on both mandatory and optional services, such as the number of prescriptions or the number of visits to a particular type of provider. In practice, with the exception of required services for children, (19) states have exercised wide discretion in the amount, duration and scope of services they cover. Research suggests that such limits can be problematic in a small number of cases where there are particularly complex medical needs. (20)

Whether it is done by the Medicaid agency or a health plan, a first step in managing costs and care is to look at categories of spending and changes in spending, by eligibility group, to see where costs are higher than expected. Restrictions and opportunities that apply to specific vendors will affect various groups-elderly or disabled persons versus indigent families-in different ways. Even apparently similar services are used differently. For example, dental care for children has very different requirements, typical services and average costs than dental care for people with disabilities. Strategies that entail changes in what services are offered can be expected to mobilize providers as well as recipients and their families. Because their needs are complex and family members are advocating for them, children with disabilities have become a touchstone for whether or not care management is coordinating services and thus improving quality, or whether it is chiefly throwing up barriers to access.

How Trade-offs Are Managed

Rapid growth in one category of spending is not necessarily bad because increasing the use of some services may decrease the use of more expensive services and lower costs over time.

· Outpatient and physician's office visits increased a decade ago due to a shift from inpatient to less expensive outpatient care.

· Pharmaceutical spending has swelled alarmingly in recent years; however, it is not clear that this is undesirable. For at least some conditions, such as chronic mental illness, pharmaceuticals are an alternative to more expensive care or procedures and may slow the costly progression of disease and disability.

· Home and community-based care have been growing at double-digit rates, encouraged by the view that it often is less expensive than institutional alternatives. New community-based services create budget problems if they are not offset by decreased use of nursing facilities. More than half of Medicaid long-term care spending goes to nursing homes, although the proportion varies from state to state (see chapter four).

Waiver services by state: See http://medicaid.aphsa.org/waivers/waivers.htm

To understand the effect of spending for specific services on Medicaid budgets, the entire profile of spending, including offsetting savings and improved outcomes, needs to be considered. Remember, however, that it may be difficult to evaluate savings that result from substituting one service for another.

How Care Is Financed

Another traditional lever for controlling costs has been to limit reimbursement rates. Over the years, rate-setting methodologies have become more complex, with more attention focused on how different payment systems affect providers' choices. Medicaid rarely pays as much as other third parties and is legally the last payer when more than one party is responsible for medical costs. Medicaid rates have tended to be closer to marginal rates-the cost of an additional unit of care-than to a proportionate share of total costs.

Today, rather than setting prices and limiting services one at a time, most states use managed care to achieve wholesale control of prices and utilization. Mirroring the growth of managed care in the private sector, all states expect Wyoming and Alaska have experimented with financial arrangements designed to manage costs and utilization for at least some of the Medicaid population. The Federal 1997 Balanced Budget Act gave states new flexibility to manage spending by allowing them greater freedom in setting payment rates for institutional care (21) and allowing them to require recipients to enroll in managed care without a waiver. Reimbursement often is based on average per person costs (capitation) paid to an intermediary-a health plan-that then makes various service and payment arrangements with a range of providers. In addition to contracting with health plans, states are experimenting with directly managing care or contracting out components of care management for some populations. The rapid growth of managed care has changed how care is coordinated and how access to services is managed, even outside of managed care plans. Although a majority of enrollees are in managed care, it actually comprises a small portion of the Medicaid budget. (22)

Some analysts have announced the death of managed care. Nonetheless, a creative variety of approaches to bundling and coordinating care continues to grow, as described in the strategy profiles in chapter three. Costs are increasingly controlled by changing the mix of services and the number and type of services that individuals receive based on their medical needs.

"Why Change to Managed Care?

The cost of providing health care continues to increase. There is a point at which either fewer persons can be covered or fewer services can be provided, unless there are some measures instituted to control the cost of providing health care. Of all the options available to the state, implementing managed care seemed the best."

Source: Texas Mental Health Consumers, www.tmhc.org/managedhc.html, accessed November 2001.

Costs for the "dually eligible"-low-income disabled or elderly people who are covered by both Medicaid and Medicare-may be difficult to manage because control is divided. This is because Medicare chiefly covers hospitalization and physician services, while Medicaid is the primary funder for pharmaceuticals and long-term care. Rehabilitation and supportive services, (generally used by the elderly and people with disabilities) may raise state Medicaid spending, even when they lower total health costs by lowering hospital use. It is also difficult to enroll dually eligible people in managed care, since the benefits must be coordinated across the two programs. (23)

Challenges to Controlling Medicaid Budgets

Medicaid was called "the Pacman of state budgets" in the late 1980s because of its propensity to gobble up budget surpluses. The program looms large over state budgets. Because Medicaid is an entitlement, once rules for eligibility and reimbursement are set, the program cannot be terminated when funds run out without legislative action. Furthermore, providers and plans may effectively resist changes in their payments and contracts. For all these reasons, accurate budgeting is important. This is complicated because it requires accurate forecasting; dealing with uncertainties built into the Medicaid program; understanding how Medicaid interacts with other state spending and leverages federal support; and predicting how Medicaid policies may spill over into the private sector.

Forecasting Issues

Medicaid budgets are difficult to forecast for a number of reasons.

· Medical costs are fungible. Like a water balloon, when pressure is applied to prices in one part of the health system, another part of the system is affected. Providers typically charge purchasers of health services different rates. Before private sector employers began to use managed care to extract low prices, Medicaid sometimes was blamed for shifting costs to the private sector. Today, the pressure may work in either direction. Medicare and private insurance rate changes will affect whether states can negotiate lower Medicaid rates.

· Enrollment increases if the economy slows.

· Complicated connections exist between the number of people covered and the cost of care. Because Medicaid shares the cost of uncompensated care with other payers, Medicaid costs change if there are changes in the number of people receiving unpaid care. States may have to rescue public providers.

· Policy changes-including programmatic and judicial decisions-affect Medicaid enrollment, services and spending in unpredictable ways. Some recent examples are shown here.

· A recent Supreme Court decision (Olmstead) dictates that states provide the least restrictive possible care for people with disabilities. This has forced many states to restructure their services for people with disabilities and it may lead to increased spending if institutional costs are not contained at the same time. (24)

· Outreach for SCHIP brought new populations into Medicaid. At the same time, TANF eligibility changes resulted in many families being wrongly dropped from Medicaid. States still are re-enrolling these eligibles.

· The same law that repealed the Boren amendment (25) and thus gave states flexibility to lower provider payments also cut Medicare payment rates. Although provider groups succeeded in rolling back some of the cuts, one upshot has been pressure to increase Medicaid rates.

· Medical costs in general are notoriously hard to predict. State-level data needed for projections may be nonexistent (e.g., health inflation), unreliable (e.g., counts of uninsured persons) or not timely (e.g., expenditure data.)

Myth: It's all because of unfunded mandates.

Fact: Mandates have been relaxed. The Boren amendment-which required states to pay certain providers market rates-has been repealed. States have more managed care flexibility and more waivers than ever before. No major mandated eligibility increases have occurred since 1990, except fully funded Medicare-related groups. There were minor changes in federally qualified health center (FQHC) payments in 2000. However, states have used administrative devices to drive up their own budgets, making creative use of programs such as disproportionate share hospital payments (DSH) and intergovernmental transfers (IGT) to define a greater part of public health spending as Medicaid and capture a larger federal match.

Source: Ku and Guyer, Medicaid Spending.

Programmatic Complexity

The Medicaid program itself makes Medicaid budgets difficult to explain and difficult to project. Much of this stems from programmatic complexity built into Medicaid rules. Although these rules (added incrementally over the years) often were meant to give state programs more flexibility, they also can confusion.

· Different program partners use different calendars. Different entities-states, the federal government and health plans with managed care contracts-use different fiscal years. The Medicaid budget is a mix of state and federal (and sometimes local) spending. It is important to know which figure and which time period are being discussed.

· A state dollar spent on Medicaid can reduce overall state spending growth. One of the ways states manage the growth of Medicaid spending is to increase federal financial participation through a variety of techniques. This cost shifting can make the Medicaid budget seem to grow faster, even as it relieves total state spending growth. The rules for these programs are complex and have changed when the federal government determines they are being misused by states. Federal policies that unexpectedly change the availability of these options can challenge state budgets. (See chapter three, strategies 1 and 3.)

· Federal payments vary. The extent to which the federal government matches state Medicaid payments varies (see strategy 2 - Low Match to High Match). At least half of Medicaid payments for medical services are paid by the federal government (50 percent in 11 states, up to 76 percent in Mississippi); other costs may be covered at higher rates. As a result, $1 of state general fund money is worth at least $2 on the Medicaid budget and frequently more, depending on the federal matching rate (FMAP) for the state. (26) Designating other state health spending as Medicaid (e.g., expenditures for school-based health services to eligible children) allows the state to draw down matching federal funds to offset other state spending on health (see strategy 1).

Although Medicaid spending in 2000 grew at double-digit rates in nine states, much of that spending growth reflects changes in how states account for health care costs. Only three states with high Medicaid spending growth-Idaho, Kansas and Nebraska-experienced higher than average general fund spending growth as well. In at least one of these states, Kansas, the increase may reflect changes in federal rules that limit the extent to which states can take advantage of another aspect of the Medicaid program known as "disproportionate share hospital" (DSH) payments to offset state spending in mental hospitals

Source: Gloria Timmer, Greg Von Behren, Stacey Mazer, and Jill Schamberger, 1998-1999 State Health Care Expenditure Report, (New York: Milbank Memorial Fund, National Association of State Budge Officers, and the Reforming States Group, March 2001). 51-53. See http://www.milbank.org/1998shcer/index.html

See FMAP's at http://aspe.os.dhhs.gov/health/ or http://aspe.os.dhhs.gov/health/fmap.htm

· Federal matching rates change. The rate at which the federal government will match state payments is set annually. Depending on the period for which the budget is being forecast, or if the average per capita income in the state has changed sharply, there may be some uncertainty over the federal reimbursement rate, and hence the amount of the grant to the state. Even a fraction of a percentage point will have an enormous effect on a state's spending. (27)

· Determination of actual costs takes time (the problem of estimation and reconciliation). The federal government quarterly advances state Medicaid programs its estimated share of spending. Actual vendor payments (net of recoveries from such things as third party payers, and fraud and abuse enforcement) then are reconciled, a process that can take an extended period of time if there are disputes over methodologies between the state and providers or between the state and the federal government. When there are rapid fluctuations in Medicaid spending, this can become complicated. The vendor payment data often are produced by MMIS contractors, (28) who receive claims, determine whether they will be approved, and generate the reports needed for federal reimbursement. This either can add another layer of complexity when the systems are not working well or can facilitate the process when they work right. At the end of this process, a state may owe or be owed money, so it is difficult to know the extent of state Medicaid shortfalls or windfalls at any point in time.

· Federal policy changes are being considered. Some policy changes that have been discussed in Washington could substantially change states' Medicaid obligations or how they program Medicaid spending either by increasing flexibility or by creating new federal programs that affect some populations that are at least partially covered under Medicaid. These include recent changes in 1115 waiver policies and methodologies and proposals related to easier or expanded SCHIP family coverage, pharmaceutical benefits under Medicare, and changes in the treatment of dually eligible individuals.

Federal Cost Containment Mandates

Although these are not a major focus of policy, the federal government dictates that state Medicaid programs carry out certain activities that are designed to contain costs. The justification for each of these is cost control. State and federal governments both save when they work, but some states have found the pay-off to be low in relationship to their administrative costs. Legislators may want to know how their state is pursuing these activities.

· Third-Party Liability and Recovery

Medicaid is the payer of last resort. State programs are required to recover from other carriers, including noncustodial parents and private insurers. A recent study of pharmaceutical cost recovery by the HHS inspector general's office found that, "States are at risk of losing over 80 percent ($367 million) of the payments they tried to recover ($440 million) in 1999 through the 'pay and chase' approach. However, the cost-avoidance approach prevented $185 million from being at risk" (29) (see strategy 4).

· Estate Recovery

Since 1993, states have been required to recover certain expenditures for hospitalization or long-term care from the estates of deceased Medicaid beneficiaries, typically through a lien on a home after the death of a surviving spouse. (30) This program often referred to as "grave-robbing" by opponents has spawned an entire legal industry.

· Administrative Simplification-HIPAA

States are among the payers being called upon to conform to uniform, electronic standards in billing that are designed to lower administrative costs while still protecting privacy. Federal-and, thus, state-rules have been slow to emerge because of seemingly intractable privacy concerns. Changes will require substantial up-front investment in Medicaid information systems. (31) Most states are using vendors to meet these requirements. This investment will be largely reimbursable. Some states have seen this as an opportunity to upgrade and coordinate a variety of health data collection, as well as and reporting activities, including public health and hospital data collection as well as Medicaid systems (see strategy 2).

· Reduce Fraud and Abuse

Each state has a Medicaid Fraud Control Unit that is funded at 75 percent by the federal government. Estimates of the amount of fraud and abuse vary, but states that have focused on payment irregularities often have been able to find problems and either recover misspent funds or prevent continued problems, according to a recent GAO report. (32) The new MMIS may be a tool for reducing fraud and abuse, since many vendors have developed sophisticated programs to flag patterns of unusual billing activity for scrutiny.

The Medicaid Budget: Consequences

Medicaid budgets are particularly difficult to manage because they interact with other health spending in complicated ways. Even aside from the federal matching share, what a state Medicaid program spends is not the same thing as the cost of coverage to a state.

Cutting Medicaid spending affects other state spending and providers. The cost of Medicaid coverage for the state is the difference between the state's share of Medicaid coverage and what would be spent by the state (through programs such as general assistance, hospital uncompensated care programs, and local health departments and clinics) for the person's health care if he or she is not covered under Medicaid.

· Medicaid spending replaces spending on uncompensated care, which states often pay either directly (through grants and reimbursements to providers of uncompensated care) or indirectly (through intergovernmental transfers to counties and in higher payments for public employees' coverage-state-only spending).

· If a person is not covered by Medicaid or other public funds, care still will be needed. Cost shifting to private insurers and payers may result in higher insurance rates, harming access to insurance and even increasing Medicaid enrollment if low-income workers and their employers drop coverage.

· Not being able to obtain care may cost more than care itself. For example, consider the relative costs of hospitalization for pneumonia vs. a flu shot or amputation of a limb vs. insulin management.

Medicaid budget decisions can affect insurance premiums and reimbursement rates for the entire state. State and federal health spending now makes up approximately half of all health spending (more, according to Employee Benefits Research Institute; less according to Center for Medicaid and Medicare Services), so state decisions on how to buy health care reverberate heavily in the private sector. Because they are so dominant in the market, state and federal decisions about payment rates, contractual terms and reimbursable services may influence what the private sector does or may force other buyers to pay more to compensate for underpayments. As if the push and pull of state, federal and private spending were not complicated enough, economists point out that health spending can be difficult to control because most is through insurance or insurance-like public programs (Medicaid, SCHIP and Medicare) that shield users from the true costs of care.

Chapter 3. Thinking about Solutions

It has been said that there are 56 different Medicaid programs, with every state and territory's program having a unique set of rules. That means that no single strategy will work for every state. This chapter lays out some core strategic issues, proposes some features to consider when putting together a package, and suggests policy questions to ask when deciding what approach to try. It also offers suggestions about where to go for answers tailored to a specific state.

Some Medicaid Budget Strategies

What keeps health budgets down? In the starkest terms, states can do less, pay less, do for fewer people, or do better. Most so-called cost containment consists of one of these four options.

The obvious solutions-cut people from the program, provide fewer services, pay less-may be examples of Mencken's easy solutions: "Explanations exist; they have existed for all times, for there is always an easy solution to every human problem-neat, plausible, and wrong." (1) Because these are fundamental policy shifts that require political, not technical analysis, this report does not profile reducing eligibility or eliminating service options. (2) Instead, it suggests some strategies that prudent administrators, with the encouragement of watchful legislators, may want to consider as they respond to expected growth in demand and costs.

The Problem with Simply Cutting

· Individuals who are not covered by Medicaid can turn up elsewhere in the system eventually, paid for by state or local governments without the generous federal cost sharing. Moreover, cuts in eligibility or services represent a shift in policy, since most federal and state health policy changes in the 1990s were to make coverage available for more people. States have wooed employers, insurers and providers to be partners in new financing arrangements such as managed care and buy-ins. If states are seen as unreliable partners, their abdication could crush carefully cultivated ties.

· Doing less or for fewer people can depend on someone else paying for services. Deferred or denied services can result in higher treatment costs in the future. If the state pays for those costs as well (through uncompensated care and indigent care or lower workforce productivity), it needs to consider which is the better way to pay. In the case of Medicaid, getting someone else-the federal government, employers or individuals-to pay part of the bill also is an important option.

· Paying less (3) can have unexpected effects on the rest of the system, as the excess costs are absorbed by other payers. Underpaid providers may shift costs to private insurance or refuse to treat Medicaid patients altogether. If providers and plans find lower payments unacceptable, paying less can reduce access as well.

Doing It Better

· Ideally, costs are saved by giving care more efficiently, eliminating unnecessary and wasteful systems, and keeping people well by preventing rather than treating illnesses. Unfortunately for states that are facing budget crunches, the best of these are long-run strategies that may require investment: for example, public health, information systems, and quality improvement systems all promise long-term savings and better quality, but require up-front expenditures that may not be possible in a year of budgetary constraints.

No Simple Solutions

· Just as the growth in Medicaid spending has many faces and complex causes, state responses will have to be nuanced and multi-faceted. Usually, lawmakers will want to tackle costs on more than one front, rather than trying to achieve budget goals through a single strategy. In that case, lawmakers need to consider how the approaches complement one another-for example, balancing long- and short-term strategies, or mixing ones that have the greatest effect on providers and ones that change rules for managed care plans. Where strategies depend upon one another-for example, increasing home and community-based services while constraining the availability of beds-lawmakers may even consider adding nonseverability provisions to avoid problems that could arise if only one strategy is implemented.

· Health budget strategies tend to have complicated interactions with one another. An apparently simple decision about state spending can reverberate in the private sector or conflict with another state health policy. Medicaid provides literally vital-life-giving-services to the most vulnerable populations. Managing its budget without doing harm is one of the most-difficult challenges a lawmaker faces. Strategies include increasing the flow of money into the Medicaid program from non-state sources-especially the federal government-as well as slowing increases in spending.

Ways to Cut the Pie

States will want to consider a number of factors in developing the strategies that best fit their needs. Strategies vary in their effect, in who is affected, in the kind of environment they require to work, and in the mechanisms they use. States are likely to want to use a mixture of strategies. These categories may be helpful to policymakers as they think through the best mix for their states.

· Long-term or short-term strategies. How long does it take to implement and how soon is there a pay-off? Many strategies that are likely to accomplish long-term savings require investments in the short-term: prevention, changes in the long-term care delivery system, or disease management. Strategies that maximize federal and private funding-such as Medicaid maximization-may have a quick budgetary pay-off, but do nothing about underlying cost inflation. A strategic mix of short- and long-term approaches may give a state the leverage to begin fundamental cost-saving changes, such as a shift to community-based care, by providing a financial bridge to carry the state through start-up costs.

· Macro or micro strategies. Does the strategy work by changing systems at a health plan or statewide level-for example through health planning-or does it affect individual decisions at the patient or treatment decision level-for example through financial incentives and managed care?

· How extensive or intensive is the strategy? Does it make a small difference across a large number of people or cases (for example, substituting generic pharmaceuticals for all), or are the effects very concentrated (for example, managed care for people with disabilities)? Are activities coordinated or selectively targeted? The answer will have implications for the politics of change. For example, a narrowly targeted change may mobilize a group if it feels unfairly targeted.

· Is the strategy collective or individual? This is related to the previous two concerns. Does the strategy have widely shared or individualized costs? One collective, widely shared strategy is to spread the costs of health care more widely across the entire population-for example, using general revenues to cover Medicaid expansions or requiring health insurance companies to community-rate. Making eligibility standards more stringent individualizes costs for people who lose eligibility.

· Regulate or compete? Does the strategy depend on state administrative action or on market competition for its effect? This is a key decision in designing managed care strategies, and will be affected by which approach is most familiar to providers, health plans, and the state Medicaid agency.

· Who has to act, and who is affected? Although states initiate cost saving, they almost always need cooperation from others to carry out their plans. Who else is key? Providers? If so, which ones-doctors, hospitals, long-term care providers? Patients? Health plans? Strategies that change where care is provided-such as reimbursement changes that move people from hospitals to the community, or experiments that divert people from nursing facilities to community-based care-generate winners and losers. When multiple strategies are adopted, their effects and costs need to be balanced so they all do not fall on one group.

· Levels of risk and certainty. Every new strategy involves some risk. Insurance is about risk; one of the biggest unknowns is how much health costs will change in the future. States have tried to minimize uncertainty through "public-private partnerships," such as managed care contracts in which health plans assume some of the risk. The federal government has encouraged states to develop information systems to gather data and improve their understanding of their own spending in order to find opportunities to lower costs. For example, many have tried to reduce uncertainty about clinical practices by identifying medical practices that vary significantly in different parts of the state.

· What state and federal laws apply? The federal environment is the same for every state, but Medicaid law permits considerable state flexibility. Some strategies-such as home and community-based care-may require a federal waiver. Other areas-such as pharmaceutical coverage or eligibility for unemployed workers-are being debated at the federal level. State Medicaid policies exist in law and also in state Medicaid plans that are approved by the federal government.

Questions to Ask

Each of the 10 strategy profiles that follow includes a set of key questions to consider in deciding whether to adopt that strategy and in designing its details. Several of these questions seemed especially important to ask when approaching any of these Medicaid budget strategies. Another set of questions should be asked in order to assess a specific state's starting point and capability:

· What is the reason for trying to use a given strategy? What is its goal? To generate funds to maintain current access and reduce state funding? To increase access and maintain current state funding? The answer to these questions will determine the appropriateness and potential effectiveness of various cost containment strategies.

· What are the cost estimates? Are the benefits worth the cost? State policymakers should weigh the costs of any strategy being considered against the anticipated benefits. Costs and benefits may be near-term or long-term, direct or indirect, and economic or political. The costs and risks involved in implementing any cost containment strategy include spending money, using other resources to develop and maintain infrastructure, or taking a risk that the number of providers willing to serve Medicaid beneficiaries will decline. For example, the direct benefits of cost savings or improved health of the Medicaid population may also have indirect benefits in the form of positive economic effects for the state as a whole.

· How will the state measure clinical and fiscal objectives? How does it propose to measure costs and health consequences? This is essential when the state plans to use private entities to carry out its policies, since there must be a way to define and measure their performance. Ideally, state agencies may be held to performance standards as well if information can be gathered and analyzed at a reasonable cost.

· What are the risks inherent in the strategy and who will bear them? Does the strategy take advantage of opportunities for containing costs, improving services, and expanding coverage? Few actions solely affect cost, access or quality. Most policies aimed at one of these dimensions impinge upon the others. For example, cutting reimbursement rates often hurts access. Improving clinical quality may require short-term investments and garner long-term savings.

What information do policymakers need to assess the potential of a particular cost containment strategy? The value of the various strategies depends on specific coverage and cost patterns in a state, and success may be related to a state's previous experience with a given solution. Data are essential in assessing the potential of a given strategy. Does the state have the information it needs? Do policymakers know where to obtain it? Following are some things a policymaker needs to know. The questions should be posed to Medicaid and health agency staff as well as to legislative health committee staff.

· What does the current Medicaid program look like? What will it look like if a strategy is adopted? What populations and services are and will be covered? To what extent? Who delivers services and how are they paid? How generous are the payments? Will this change?

· What is the capacity of the existing health service system? Of the state administrative system? Do providers or managed care organizations have the capacity and willingness to make implementation possible? Does the state have the capacity to implement and monitor the effect of the changes? What are the capabilities of the Medicaid Management Information System? Does the state have the information it needs to evaluate the potential of the strategy before deciding to adopt it? Will the state be able to obtain the information it needs to assess the strategy once it is in place?

· How is Medicaid policy changed? What will it take to change the populations and/or services covered or the way in which programs in the state are financed? Some changes will appear as part of Medicaid budgets. Other policy changes are made through the state Medicaid plan. Who is responsible for developing the budget? The state plan? Who must approve changes? In some states, executive agencies may play the major role. In others, the legislature may be involved. Since more than one state agency may have to be involved in working out services standards and budgets, the legislature may have to bring together two or more agencies that traditionally have not been linked. Legislative and agency fiscal analysts should be able to provide information about the potential effects of proposed changes.

· Would the approaches being proposed be politically feasible? Who are the key interest groups? Would they support or oppose the change? How willing are they to work with you? What would it take to get their support?

Who Knows?

Policymakers need good information about their states as well as about Medicaid in order to make informed decisions. Where can they get that information?

At the National Conference of State Legislatures

This paper was written by staff of the Forum for State Health Policy Leadership, in the Washington office of NCSL.

This Web site- http://www.ncsl.org/programs/health/medfipha.htm -links directly to Medicaid-related matters on the NCSL site. Questions about specific issues may be directed to NCSL policy area specialists here and in the Denver office, as follows.

In Washington, D.C.:	(202) 624-5400	In Denver:	(303) 364-7700
Donna Folkemer	(Donna.Folkemer@ncsl.org) Medicaid, pharmaceuticals	Martha King	(Martha.King@ncsl.org) Medicaid, SCHIP
Wendy Fox-Grage	(Wendy.Fox-Grage@ncsl.org) Long-term care and disability
Shelly Gehshan	(Shelly.Gehshan@ncsl.org) State Children's Health Insurance Program (SCHIP), behavioral health
		Richard Cauchi	(Richard.Cauchi@ncsl.org) Insurance, pharmaceuticals
Kala Ladenheim	(Kala.Ladenheim@ncsl.org) Financing, access, insurance, the uninsured
Joy Johnson Wilson	(Joy.Wilson@ncsl.org) Federal-state

State Resources

State health information often is scattered among a number of departments.

· State legislative staff: Health committee staff, legislative fiscal staff and central research staff work with Medicaid information. Most legislative staff rely on state agencies for data but conduct varying amounts of further analysis with this data. Legislative staff may be called upon to develop forecasts of Medicaid spending under varying policy assumptions.

· Medicaid agency: The agency will have information about the program characteristics and history, and data on recipients, services and spending. The detail, currency and quality of this information often depend on the state's investment in management information systems and staff, as well as the quality of reporting by providers and health plans. Some states have suffered from a paradox of early automation. Because Medicaid systems often were among the first to be automated, they may depend on outmoded information systems that are difficult to use, with upgrades limited by efforts to remain compatible with past data and a reluctance to invest again.

State Medicaid directors: http://medicaid.aphsa.org/members.htm

· Fiscal and budget agency: This may be part of the Medicaid agency, or it may be housed elsewhere in the state.

· Vital statistics and state health data: Public health data systems and health planning often are separate from the Medicaid program. They may have valuable information about the characteristics of the overall population of the state. All states collect data on births, deaths and certain diseases. Many states collect data on health care billing, discharges, services or other activities by hospitals. States also collect information on health behaviors such as smoking and obesity.

· State planning: State planning may be carried out in an economic development department or the governor's office, or may be contracted out to a university. This is a source of information on overall population trends, income, family composition and employment. Trends that affect Medicaid programs that these units may monitor include changes in immigrant and minority populations and workforce changes. These planners also may have technical expertise in population and economic forecasting.

· Insurance agency: For Medicaid programs with eligibility set at and above the poverty level, policymakers may need information about insurance. The state insurance department will have information about the state's laws and limits on what can be required of employers. A few states collect data on individual and small group policies sold in the state, but federal law makes it difficult to get information about insurance coverage and plan contents from larger employers.

Federal officials

· The Center for Medicare and Medicaid Services (CMS), the federal Medicaid agency formerly called HCFA, is organized into regions. CMS regional offices may be a source for program information, comparisons with neighboring states, and policy interpretation.

State and federal Medicaid contact information can be found on the CMS web page at http://www.hcfa.gov/medicaid/mcontact.htm or http://www.hcfa.gov/regions/roinfo.htm

Other federal agencies with information on Medicaid: Several other federal agencies are valuable sources of studies and data: The secretary of health and human service's Office of the Inspector General (OIG) (http://oig.hhs.gov) carries out program audits and similar studies. Another source of Medicaid-related policy and analysis is the office of the assistant secretary for planning and evaluation (ASPE) at (http://aspe.hhs.gov). This is also the site of the Catalog of Federal Domestic Assistance Programs, which lists details of the Medicaid program.

The General Accounting office (GAO) (http://www.gao.gov) publishes regular reports with useful information on Medicaid. Other congressional study bodies who often examine Medicaid are the Congressional Budget Office (CBO) (http://www.cbo.gov) and the Congressional Research Service (CRS). CRS reports are not available to the public, but several sites now offer them, most notably Congressman Mark Green of Wisconsin. (http://www.house.gov/markgreen/crs.htm).

Associations

In addition to the NCSL, the National Association of State Medicaid Directors (http://medicaid.aphsa.org) and the National Governors Association (http://www.nga.org) have state-level information and analysis of Medicaid programs. They can be valuable sources for comparisons among states. The National Association of State Budget Officers (NASBO) (http://www.nasbo.org) and the federal funds information for states (FFIS) (http://www.ffis.org) are sources for current, comparative budget data for states.

Private Sector Organizations

A number of foundations, think tanks and advocacy organizations carry out research on Medicaid programs. The following partial list emphasizes organizations with current, factual, state-based information related to cost management that is easily accessible for state researchers.

· Some foundations also maintain collections of information at their own sites.

The Robert Wood Johnson Foundation's State Coverage Initiatives (SCI) (http://www.statecoverage.net) and the Kaiser Family Foundation's Commission on Medicaid and the Uninsured (http://www.kff.org/sections.cgi?section=kcmu) produce a range of reports and compilations of state information about Medicaid for policymakers.

Other foundations with resources related to Medicaid include the Kellogg Foundation, with a database of grantees' products related to welfare, SCHIP and Medicaid reform (http://www.wkkf.org/Programming/Overview.asp?CID=162) and the Commonwealth Fund (http://www.cmwf.org), which posts a number of Medicaid-related studies.

· Two prominent think tanks that work on Medicaid are

The Urban Institute (http://www.urban.org), particularly its project on assessing the new federalism (http://newfederalism.urban.org) carries out surveys, simulations and studies of Medicaid and other programs. Mathematica Policy Research, Inc. (http://www.mathematica-mpr.com) and its affiliate, the Center for Studying Health System Change (http://www.hschange.com) are also known for surveys, simulations and evaluation of Medicaid programs.

· A number of agenda-oriented organizations carry out Medicaid research and analysis. The Center on Budget and Policy Priorities (http://www.cbpp.org), a policy organization with a focus on programs for low and moderate income groups, has released several recent analyses on costs and eligibility in Medicaid. Other sources can be found in the footnotes.

Private Sector Consultants

Several consulting firms specialize in Medicaid and several have former Medicaid directors or state health commissioners on staff. States will want to develop their own relationship with consultants who are familiar with their state and its specific concerns. Several who were consulted while writing this paper indicated they would be willing to field questions from states:

Chuck Milligan, Lewin Group	(703) 269-5627 (chuck.milligan@lewin.com)	Vernon Smith, Health Management Associates	(517) 482-9236 (vsmith@hlthmgt.com)
MaryJo O'Brien, Capital Health Strategies	(651) 224-8267 (obrienmjo@aol.com)	Jim Verdier, Mathematica MPR	(202) 484-4520 (jverdier@mathematica-mpr.com)

We welcome your suggestions about groups and individuals that have expertise in Medicaid cost containment, either generally or in relation to a specific strategy. lKL

Chapter 4. Cost-Cutting Strategies

The profiles that accompany this report describe 10 strategies states have used to manage Medicaid costs. They fall into three categories: maximizing available funding for Medicaid; financing and delivery incentives; and fine-tuning managed care and selective contracting.

Maximizing available funding for Medicaid contains four strategies designed to directly or indirectly reduce state Medicaid costs by generating additional federal or private sector funding to enhance state Medicaid budgets. These strategies are:

1. Medicaid maximization

2. Low-match to high-match

3. Intergovernmental transfers

4. Private sector cost sharing

Financing and delivery incentives include three strategies to reduce or contain costs by changing the incentives for providers and encouraging the use of different, potentially cost saving services and delivery mechanisms. These strategies are:

5. Reconfiguring the long-term care delivery system

6. Pharmacy cost containment strategies

7. Rate adjustment

Fine-tuning managed care and contracting for services include three strategies for contracting with providers and plans to reduce costs and improve how care is managed. They include:

8. Managing health care better

9. Expanding managed care

10. Selective contracting

Each profile consists of: a brief description of the strategy and how it is used; the pros, cons, design and policy issues that need to be considered; and any federal or other limits on its use. State examples are provided for each. A table and graphic showing which states currently are using each strategy and some key references-such as important studies or useful Web sites-also are included.

Notes

Chapter 2 Notes

(1) Much of this paper also will apply to the State Child Health Insurance Program (SCHIP). However, because of its different structure and the small dollar amount, it is not included in this paper.

(2) National Conference of State Legislatures, State Fiscal Outlook for 2001: February Update (Denver: NCSL, March 2001). See http://www.ncsl.org/programs/fiscal

(3) The National Governors Association and the National Association of State Budget Officers, The Fiscal Survey of States: June 2001 (Washington D.C., June 2001). See http://www.nasbo.org/Publications/PDFs/FSJUN2001.pdf

(4) NCSL, State Fiscal Outlook for 2001.

(5) NGA and NASBO, The Fiscal Survey of States: June 2001.

(6) Brian Bruen and John Holahan, Slow Growth in Medicaid Spending Continues in 1997 (Washington, D.C.: Kaiser Family Foundation, November 1999). Published with the permission from the Kaiser Family Foundation. See http://www.kff.org/content/2000/2165/pub2165.pdf

(7) Center for Medicare and Medicaid Services, Penetration Rates from 1996 - 2000, National Summary Table 2000 Medicaid Managed Care Enrollment Report (Washington, D.C.: June 2000). See http://www.hcfa.gov/medicaid/trends00.pdf

(8) Bruen and Holahan, Slow Growth.

(9) Eileen R. Ellis, Vernon K. Smith, and David M. Rousseau, Medicaid Enrollment in 50 States: June 1997-December 1999 (Washington, D.C.: The Kaiser Commission on Medicaid and the Uninsured, 2000).

(10) Baumol's law: Labor intensive services, such as health care, cannot substitute capital for labor as efficiently as the general economy, so the cost of producing them goes up faster than general inflation. Government ends up taking on these "inefficient" services-public safety, education, long-term care and other care-based health services. Scott Gottlieb, "One Doctor: One Patient: It's Baumol's Disease, and it pretty much guarantees that healthcare will stay expensive." CQ Online 7, no.1 (March 2001), See http://www.cost-quality.com/restpast/v7i1a8.html

(11) Leighton Ku and Jocelyn Guyer, Medicaid Spending: Rising Again, but not to Crisis Levels (Washington, D.C.: Center for Budget and Policy Priorities, 2001). See http://www.cbpp.org/4-20-01health.htm

(12) Ibid.

(13) Bradley Strunk, P.B. Ginsburg, and J.R. Gabel, "Tracking Health Care Costs," Health Affairs (Sept. 26, 2001). Obtained from http://130.94.25.113/readeragent.php?ID=/usr/local/apache/sites/healthaffairs.org/htdocs/Library/v20n6/s2.pdf [Health Affairs Web Exclusive] Internet.

(14) Ku and Guyer, Medicaid Spending.

(15) States may receive permission from the federal Medicaid agency to experiment with programs that go beyond these definitions through a waiver process that often is difficult and lengthy. There are other variations from the basic rules, such as requiring people to participate in managed care in certain parts of the state or creating programs to move people from nursing facilities to home and community-based long-term care (HCBC), that require simpler, more readily obtained waivers. For more information about Medicaid eligibility policy, see http://www.hcfa.gov/medicaid/obs2.htm

(16) John Holahan, Medicaid "Mandatory" and "Optional" Eligibility and Benefits (Washington, D.C.: The Kaiser Commission on Medicaid and the Uninsured, 2001). See http://www.kff.org/content/2001/2256/2256.pdf

(17) According to KFF state health facts Total Dual Eligibles, 2000: "Dual eligibles are those who receive Medicare (Part A and Part B) and also some form of Medicaid assistance. This group includes 1) "Full Medicaid", those people receiving full Medicaid benefits (i.e. prescription drugs and nursing home care) and Medicaid coverage of Medicare's financial requirements, and 2) "Buy-Ins", those people receiving some level of assistance with Medicare cost-sharing and premiums only." Problems of dual eligibility are discussed at greater length later in this report.

(18) Bruen and Holahan, Slow Growth.

(19) According to the CMS web site, the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) service is Medicaid's comprehensive and preventive child health program for individuals under age 21. EPSDT includes periodic screening, vision, dental, and hearing services; any medically necessary health care service must be provided to an EPSDT recipient even if the service is not available under the state's Medicaid plan to the rest of the Medicaid population. See http://www.hcfa.gov/medicaid/epsdthm.htm

(20) For a discussion of mandatory and optional populations and services see www.kff.org/content/2001/2256

(21) This act removed the "Boren" amendment, which required states to pay hospitals and nursing homes market rates.

(22) Only $17 billion of $130 billion federal Medicaid dollars are expected to go to managed care in 2001, according to the Congressional Budget Office (CBO).

(23) In fact, Medicare managed care recipients are free to disenroll any month, even if Medicaid requires them to stay in a plan.

(24) Helen Hendrickson and Vic Miller. "States Plan Responses to Olmstead Decision," FFIS Issue Brief (Federal Funds Information for States) 1, no. 33 (July 2001).

(25) The Boren amendment required states to pay certain providers market rates for their services.

(26) The federal government's share of the medical assistance expenditures, known as the Federal Medical Assistance Percentage (FMAP), is determined annually by a formula that compares the state's average per capita income level with the national income average. States with a higher per capita income level are reimbursed for a smaller share of their costs. By law, the FMAP cannot be lower than 50 percent or higher than 83 percent of the program's costs. In 1999, the FMAPs varied from 50 percent in 10 states to 77 percent in Mississippi, and averaged 57 percent overall. Most administrative costs are matched at 50 percent, although higher percentages are paid for certain activities and functions, such as family planning services or development of mechanized claims processing systems. See FMAP at http://aspe.os.dhhs.gov/health/fmap.htm

(27) FMAPs will rise in 2003 in 23 states and decline in 17, according to FFIS. Vic Miller, "2003 FMAPs:Bureaus Meet Their Match," FFIS Issue Brief (Federal Funds Information for States) 1 no. 56 (October 2001). See http://www.ffis.org/exec_sum/issue/ib01-56s.htm

(28) For example: EDS, Consultec, First Health.

(29) Department of Health and Human Services, Office of Inspector General, Medicaid Recovery of Pharmacy Payments from Liable Third Parties (Washington, D.C.: HHS, August 2001). See http://www.hhs.gov/oig/oei/reports/a534.pdf

(30) Center for Medicaid and Medicare Services, Estate Recovery Provisions in OBRA (Washington, D.C.: CMS, 1993). See http://www.hcfa.gov/medicaid/obs1.htm

(31) Timothy M. Westmoreland, State Medicaid Directors' Letter on HIPAA administrative simplifications activities, (Washington, D.C.; HHS, September, 2000). See http://www.hcfa.gov/medicaid/letters/smd90800.htm

(32) Government Accounting Office, Medicaid: State Efforts to Control Improper Payments Vary (Washington, D.C.: GAO, June 2001). See http://energycommerce.house.gov/107/reports/d01662.pdf

Chapter 3 Notes

(1) H.L. Mencken, The American Language: An Inquiry into the Development of English in the United States, 2nd ed. New York: A.A. Knopf, 1921; Bartleby.com, 2000. http://www.bartleby.com/185/ [November 28, 2001].

(2) However, considerable savings may be achieved by restructuring options so that lower cost substitutes are preferred. Such approaches are covered in the managed care approaches in strategies 8 through 10.

(3) This can include cutting growth below inflation rates.

Acknowledgments

This report was prepared with the generous support of

The Robert Wood Johnson Foundation and The Kaiser Family Foundation.

This report is truly a team product. The Forum director, Richard Merritt, conceived and guided the project. In addition to writing individual sections, the various authors helped plan and review other parts of the report. In particular, Donna Folkemer, the Forum's Medicaid expert, served as the in-house consultant to all the authors, providing substantive guidance, review and editing for the individual strategies and was the lead on the strategy section. Phyllis Kaye edited the parts into a whole and, with NCSL's production and editorial staff, including Gregory Martín, Allison Hansen and Leann Stelzer, met constantly shifting deadlines with grace and skill. A number of friends of NCSL and the Forum provided advice, reviewed drafts, and suggested examples of state activities. These include Kurt DeWeese, John Kasprak, Jeanne Lambrew, Cindy Mann, John McDonough, Vic Miller, Chuck Milligan, MaryJo O'Brien, Lee Partridge, Vernon Smith and Alan Weil. We are particularly grateful to our project officers, Julie Hudman at the Kaiser Family Foundation and Pamela Dickson at the Robert Wood Johnson Foundation, for their continuous involvement, support, guidance and inspiration.

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Medicaid Cost Containment: A Legislator's Tool Kit

March 2002

Contents

Foreword

Chapter 1: Introduction

Chapter 2: Medicaid Spending and Costs

Chapter 3: Thinking about Solutions

Chapter 4: Cost Cutting Strategies

Strategy 1: Medicaid Maximization (HTML) (PDF)

Strategy 2: Low-Match to High-Match (HTML) (PDF)

Strategy 3: Intergovernmental Transfers (HTML) (PDF)

Strategy 4: Private Sector Cost Sharing (HTML) (PDF)

Strategy 5: Reconfiguring the Long-Term Care Delivery System (HTML) (PDF)

Strategy 6: Pharmacy Cost Containment Strategies (HTML) (PDF)

Strategy 7: Rate Adjustment (HTML) (PDF)

Strategy 8: Managing Health Care Better (HTML) (PDF)

Strategy 9: Expanding Managed Care (HTML) (PDF)

Strategy 10: Selective Contracting (HTML) (PDF)

Notes

Acknowledgments

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Downloads

Click here to download Chapters 1-4 in Adobe Acrobat (PDF)

Click here to download the entire Strategies Packet in Adobe Acrobat (PDF)

Foreword

Chapter 1. Introduction

Chapter 2. Medicaid Spending and Costs

Chapter 3. Thinking about Solutions

Chapter 4. Cost-Cutting Strategies

Notes

Acknowledgments

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