Medicaid Survival Kit
Executive Summary

Medicaid Overview

Medicaid consumed 20 percent of total state expenditures nationwide in 1997, up from an average of 10 percent in 1987. As costs have risen so have concerns about containing them. But cost containment is not the only issue in the debate. Medicaid now covers more than 40 million Americans who would otherwise lack health insurance or other resources to pay for health care services they may need. Controlling costs by eliminating coverage for certain people or services has become a political hot potato in Washington, D.C., and in state legislative chambers.

Even without the major federal reforms anticipated in 1995 and 1996, states have some flexibility to tailor their own Medicaid programs in the areas of eligibility, services and service delivery. Mandatory and optional categories exist both for the people covered and the services provided.

Most people realize Medicaid funds health services for many low-income Americans, but they do not realize how diverse its covered populations are, or how program resources are distributed:

• Mothers and children. Although about 74 percent of Medicaid recipients are children and adults (mostly mothers or pregnant women), they account for just 29 percent of the Medicaid services budget.
• Elderly people. Older Americans make up just 10 percent of Medicaid recipients, but their use of services costs 30 percent of the services budget.
• People with disabilities and chronic conditions. Classified by the Health Care Financing Administration (HCFA) for data reporting as "blind and disabled," people in this category account for 16 percent of enrollees, but use 40 percent of the services budget.

About 45 percent of Medicaid service expenditures fund hospital and nursing home services, compared with about 6 percent for physician services and 1 percent for well-child care services under Medicaid's Early and Periodic Screening, Diagnosis and Treatment (EPSDT) program.

Recent increases in the number of beneficiaries account for the largest proportion of budget growth in the past six years, followed by medical price inflation, disproportionate share hospital (DSH) payments and growth in the use of services.

Without significant program changes, federal Medicaid expenditures will grow an estimated 8 percent annually over the next several years and cover an additional 12 million people.

Federal Issues

The Balanced Budget Act (BBA) of 1997 (P.L. 105-33) made several significant changes to the Medicaid program, such as allowing states to do the following: enroll most Medicaid recipients in managed care plans without a waiver, grant presumptive eligibility and continuous eligibility to children, permit certain workers with disabilities to purchase Medicaid coverage, determine hospital and nursing home reimbursement rates under less stringent federal requirements, and integrate acute care and long-term care services for certain people who qualify for both Medicaid and Medicare and need nursing facility-level care.

The BBA also created the State Children's Health Insurance Program (CHIP), Title XXI of the Social Security Act, which enables states to insure additional low-income children.

Congressional proposals in 1995 and 1996 to make substantial changes to Medicaid stimulated debate at all levels of society and government. A variety of proposals received serious consideration, but key congressional leaders and the president could not reach a compromise for any major program changes. Key proposals that shaped the debate and may serve as foundations for future deliberations include the "Medigrant" bill that passed Congress and was vetoed by the president in December 1995; the Clinton administration proposal; the proposal adopted by the National Governors' Association in February 1996; and the Medicaid Restructuring Act of 1996. The National Conference of State Legislatures also has several policies related to reforming Medicaid.

In the meantime, the 1996 welfare reform legislation (the Personal Responsibility and Work Opportunity Reconciliation Act), signed Aug. 22, 1996, affected Medicaid in several ways:

• Eliminated the Aid to Families with Dependent Children (AFDC) program, to which Medicaid has automatic eligibility ties;
• Froze certain Medicaid eligibility criteria, subject to modification;
• Modified eligibility standards for Supplemental Security Income (SSI) for children, a program that also has automatic Medicaid ties; and
• Restricted Medicaid coverage for legal immigrants.

Mothers and Children

The growth explosion in Medicaid beneficiaries between 1988 and 1993 stems largely from expanding coverage to pregnant women and children. Congress expanded eligibility over several years to help address problems of infant mortality, sick newborns and children who lack immunizations and other preventive care. Businesses and policymakers alike find that investing in preventive and primary care can save money by reducing the incidence of problems later, especially for high-risk pregnant women. Nearly 40 percent of American births were covered by Medicaid in 1996.

Even though 74 percent of Medicaid recipients are mothers and children, they account for only 29 percent of service costs because they are relatively healthy compared with other beneficiaries. In their push to enroll Medicaid recipients into managed care, most states begin with mothers and children. But even though they make up such a large segment of people who receive Medicaid, the cost-savings may not be as large as some policymakers hope.

Medicaid's Early and Periodic Screening, Diagnosis and Treatment (EPSDT) program is designed to provide appropriate screening and treatment services to Medicaid-eligible children. Heralded by advocates as an important tool for improving children's health, EPSDT has also been controversial. This is because federal law requires states to cover any "medically necessary" care reimbursable under federal Medicaid guidelines for problems identified in health screenings, whether or not individual state Medicaid plans include those services.

Efforts to expand private insurance to children have not kept pace with the loss of employer coverage, which puts additional pressure on state Medicaid programs. In 1987, 73.6 percent of children under age 18 had private insurance, dropping to 65.6 percent by 1994.

The Balanced Budget Act of 1997 created the State Children's Health Insurance Program to enable states to insure additional low-income children. States may expand Medicaid eligibility or establish a non-Medicaid insurance program to cover children in families with income up to twice the poverty level, or higher under certain circumstances.

The Elderly

Although Medicare covers virtually all Americans age 65 and older, about 10 percent of Medicare recipients also qualify for Medicaid. Medicare actually covers only about half the health care expenditures of elderly people, and it does not pay for most nursing home care or prescription drugs. In contrast, Medicaid has become the nation's primary source of funding for nursing home care, paying about half of all nursing home expenditures. Many elderly people who receive Medicaid support for nursing home care were formerly considered middle class, but they exhausted their resources on long-term care services.

Because elderly people tend to have more health care needs than other adults and children covered under Medicaid, their costs are greater. Elderly recipients make up just 11 percent of Medicaid recipients, but account for 31 percent of service costs, mostly for nursing home care.

States use a number of strategies to control Medicaid costs for the elderly, including providing community-based care as an alternative to nursing home placement; preventing elderly people from transferring their assets to other relatives to qualify for Medicaid; and recovering some costs from the estates of deceased Medicaid beneficiaries.

People With Disabilities/Chronic Conditions

More than 6 million low-income Americans qualify for Medicaid based on physical and mental disabilities that qualify them for Supplemental Security Income:

• About 43 percent of recipients in Medicaid's "blind and disabled" category have a disabling physical condition.
• Medicaid funds about 72 percent of the nation's long-term care services for people with developmental disabilities.
• Although Medicaid covers certain services for beneficiaries with mental illness, the program will not pay for institutional mental health services for adults ages 21 through 64.
• About 90 percent of children with AIDS and 40 percent of all Americans with AIDS receive Medicaid assistance.

Because of their conditions, many people with serious health care needs are considered "uninsurable" in the private insurance market. Without employer-based insurance or other resources, many people with disabling and chronic health problems turn to Medicaid as a last resort for needed care. Also, because some people in this eligibility category need long-term intensive services, people with disabilities account for 40 percent of Medicaid service expenditures, even though they make up only 15 percent of people who qualify for the program.

Institutional services account for a disproportionate share of costs for people who qualify for Medicaid based on disability. For example, although the average annual cost for Medicaid recipients in the "blind and disabled" category was $8,421 in 1994, the average cost per resident of an intermediate care facility for the mentally retarded (ICF/MR) was $82,000 that same year.

Both the federal and state governments have sought to control costs for people with severe disabilities by developing community-based alternatives to costly institutional care. In 1994, the average cost for community-based services for people with developmental disabilities who would otherwise be in an institution was $33,444 per year. Community care is also preferred by the vast majority of consumers.

Health Centers and Other Community-Based Providers

Medicaid funds about one-third of total revenues for federally qualified health centers (FQHCs). Approximately 38 percent of FQHC patients have Medicaid coverage, about 40 percent lack insurance coverage of any kind, and the balance are covered by Medicare or private insurance.

As more state Medicaid programs move to managed care, policymakers may not be aware of the implications for federally qualified health centers and other community-based providers. Without Medicaid program participation, many centers and other traditional providers in underserved communities may not be able to keep their doors open and provide services to their other patients.

A number of states include FQHCs and other community-based providers in their managed care arrangements. In other cases, health centers have collaborated to form their own managed care plans. The switch to capitated reimbursement for centers accustomed to reimbursement based on "reasonable costs" causes concern for centers and may limit their ability to serve as many uninsured patients.

Homeless people are also a concern in Medicaid programs, especially as more programs move to managed care. Medicaid supplements the federal Health Care for the Homeless (HCH) Program, funding services to more than 82,000 clients in 1995 through HCH settings.

Pharmaceuticals

Prescription drugs, an optional benefit under Medicaid, accounted for nearly 10 percent of spending for Medicaid services in 1994-the third highest line item in the services budget (behind hospitals and nursing homes).

Beneficiaries who are elderly or have disabilities account for almost 75 percent of Medicaid prescription drug costs. Numerous studies point to cost-savings associated with drugs that control illness, prevent surgery or hospital stays, and prevent or delay nursing home placements. Nonetheless, state policymakers continue to seek ways to control rapidly rising costs of pharmaceuticals, while addressing issues related to quality of care.

Federal law sets payment limits on pharmacy reimbursement and requires certain pharmaceutical rebates to give state programs discounts similar to other high-volume purchasers, such as hospitals. A number of states attempt to control prescription drug costs through prior authorization requirements, caps on the number of prescriptions allowed, and through drug utilization review programs. Some studies indicate significant cost-savings through careful use of certain drug restrictions or generic substitutions, but other studies indicate greater costs associated with inadequate drug therapies due to restrictions.

Managed Care

Enrolling Medicaid recipients into managed care has mushroomed as a major cost containment strategy around the country. But focusing solely or primarily on cost containment when implementing managed care can be a costly mistake for states, according to Medicaid managed care veterans.

States generally enroll in their Medicaid managed care programs only children and adults (mostly mothers and pregnant women) who qualify based on the former Aid to Families with Dependent Children (AFDC) program or who qualify for Medicaid by "AFDC-related" criteria. Such enrollment is a major undertaking because women and children make up about 71 percent of recipients. But policymakers with high expectations for cost-savings may be disappointed for several reasons:

• Even though the population of women and children is large, two-thirds of program costs are attributed to people traditionally not covered under managed care-the elderly and people with disabilities.
• Most Medicaid programs reimburse providers under a fee-for-service arrangement. Savings in managed care depend largely on spending less per enrollee, compared with fee-for-service medicine. States' fee-for-service reimbursement rates usually fall well below prevailing fees, so when the state converts to managed care, the savings will usually be less than when private payers convert.
• Many program enrollees receive Medicaid benefits for less than a year, and if problems exist with patient education, outreach or appointment scheduling, states may find themselves paying managed care premiums for enrollees who do not receive the appropriate services.
• If the state's contract with a managed care organization is not done carefully, Medicaid recipients may not receive the services that policymakers desire and the expected health benefits may not be met.

Careful planning remains critical to success in implementing Medicaid managed care programs. Policymakers should assess the needs of people they intend to enroll, assess the characteristics and needs of providers and managed care organizations, and obtain input from everyone who has a stake in the program.

The contract with the managed care organization is the primary mechanism for ensuring that the state receives the services it desires. State policymakers need to be aware of issues related to the qualifications of managed care organizations and of how to ensure that the contract adequately covers services, practices and activities, and consumer protections.

Other Cost Containment Strategies

• The average annual cost of providing care in an ICF/MR was $82,000 in 1994, compared with $33,444 for home- and community-based services.
• In Oregon, the average annual cost per beneficiary for nursing home care was $19,884 in 1993, compared with $5,040 for community-based care.

State Activities

This section will report future state activities in notebook updates.

Private Insurance Reform

Activities in the private insurance sector affect state Medicaid programs. For example, if more people are covered by private insurance, fewer rely on Medicaid; when people do not have private insurance, or lose their private-sector coverage, reliance on Medicaid increases.

• Requiring insurers to offer or renew coverage for certain individuals or groups;
• Limiting the time period during which insurers may exclude coverage of preexisting medical conditions;
• Allowing certain people to change jobs without jeopardizing insurance coverage;
• Requiring insurers to offer everyone in a particular geographic area the same premium costs for equivalent coverage;
• Establishing high-risk pools for people rejected by insurance companies; and
• Enabling or encouraging formation of health insurance purchasing cooperatives or alliances.