Strategy 4: Private Sector Cost Sharing in Medicaid

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Description of Strategy

There are several approaches that states can use to encourage private parties-employers, families, or individuals-to share the cost of Medicaid services and coordinate Medicaid with other health insurance coverage. Some of these strategies aim to reduce spending, while others minimize the cost of expansions.

The three most common cost sharing strategies involve recovering costs from other insurers, sharing costs with employers, and requiring Medicaid recipients to pay a portion of service costs. Although they theoretically save some state money by adding federal and private funds to the mix and possibly offsetting state-only spending, such programs have been small and their effect on spending is difficult to document.

Recovering costs from other insurers. Federal law requires that Medicaid be the 'payer of last resort' for services covered under multiple plans. When both Medicaid and a private insurer cover an individual, tiered billing (i.e., coordination of benefits) should shift some or all of an individual's medical costs to the private insurer. For example, federal law requires Medicaid recipients to sign over their rights to any payments from others for medical care and requires states to recover benefits paid on behalf of an individual who has available assets (OBRA 1993). It also requires states to seek payment for coverage from "non-custodial" parents when a court order exists (common in such circumstances) requiring the parent to supply or contribute to health insurance coverage for the child.(1) Some of the cost of Medicaid services may be recoverable from a third party (employer, insurer, etc.), particularly when family income or status changes.

Medicaid costs can also be recovered from a person's estate. Although the size of potential estate or asset recovery has been estimated to be as high as 20 percent of Medicaid long-term care costs, these claims have been disputed,(2) and such programs have been politically unpopular. In 1995, about 0.5 percent of the Medicaid money spent for nursing home care was recovered ($125 million).(3)

Sharing costs with employers. Employers may participate in paying a share of Medicaid costs. This is done by creating opportunities for them to share in the cost of Medicaid. For example, under the Health Insurance Premium Payment plans (HIPP) for low wage workers the state pays the worker's share of the health insurance premium, enabling the worker to be covered under the employer's health plan. The purchase of long-term care (LTC) insurance by employers or individuals may help to control future Medicaid expenditures. Under Medicaid buy-ins (such as "ticket to work") for people with disabilities, an employer pays the state to have the employee covered under Medicaid.

These approaches typically combine state subsidies or special tax treatment for employers with a framework that assures coverage in circumstances that might otherwise prevent eligibility. Savings are unproven, although they may make expansions more politically palatable.

Individual cost sharing(4) involves some form of payment by covered individuals to spread the cost of coverage between the insured and the insurer and to encourage cost conscious utilization of services (including prescription drugs). Research shows that, for very low-income people, payment is a barrier to prevention and needed care.(5)(6) Medicaid prohibits cost sharing for pregnant women, children under age 18, those expected to contribute most of their income to institutional care, and for emergency care or family planning services.

Where allowed, cost sharing must be nominal and cannot overlap (e.g., a copayment and a deductible on dental). In general, the federal government has interpreted "nominal" to mean no more than $3 per visit or services. Services cannot be denied for non-payment of cost sharing fees. "Health insurance flexibility and accountability" (HIFA) waivers may make such cost sharing easier in the future (see federal state involvement/constraints).

Pros and Cons

Pros

Sharing costs with private insurers can improve the continuum between public and private coverage, helping to create a seamless transition. This is particularly important today, when health plans use different providers and retaining the same plan may increase continuity of care.

Cost sharing with individuals may discourage unnecessary utilization. Cost sharing with employers may induce more employers to offer coverage to low-income workers (HIPP).

Cons

These strategies are not likely to lead to direct cost savings as a result of the recovered dollars since they tend to be administratively complex and the payoffs are limited in comparison to the effort required. Unless carefully designed, plans that complement private coverage may result in "crowd out," with public funds replacing private coverage. Some approaches, particularly third-party recovery and individual cost sharing, may adversely affect providers rather than beneficiaries, since enrollees may not be denied care for lack of payment.

State Experience

To help recover costs from third parties, Montana has created a third-party liability unit (TPLU), within the Department of Public Health and Human Services, Audit and Compliance Bureau. The TPLU identifies third parties with a legal responsibility for covering a beneficiary's medical costs. As part of its duties, the TPLU also identifies opportunities for the state to use Medicaid funds to purchase group coverage for eligible beneficiaries.(7)

Several states also have experience with other private sector cost sharing programs. Although Iowa, Pennsylvania and Texas are recognized as operating aggressive HIPP programs, the number of people enrolled in their programs and their reported cost savings are relatively small.(8) Twenty-three states offer a tax credit or deduction for the purchase of private LTC insurance. However, there is no evidence that state actions to encourage purchase of these plans actually increase LTC coverage or lower Medicaid costs

Most states have some cost sharing. Copayments are most common, and premiums generally are reserved for programs expanded to include higher income brackets. In Oregon, where the program includes sliding scale premiums for higher income recipients, the state collected more than $7 million from December 1995 to January 1997.

Design and Policy Issues

What is the objective for cost sharing strategies? Cost sharing may pit access objectives against financial concerns. Is the state's objective to maintain current access and reduce state funding or to increase access and maintain current funding? Is there a mechanism to ensure that cost sharing is not creating a barrier to access?

What is the state's current benefit requirement? Most cost sharing strategies work best at higher income ranges.

What are the capabilities of the state's Medicaid Management Information System?

Cost avoidance, recovery and coordination of benefits require financial and information systems that coordinate well with commercial payers, lest providers treating Medicaid beneficiaries be inadvertently harmed. Does the Medicaid management information system or contractor have this capability or (if not) what will it take to create it?

Some states have conducted audits for cost recovery, building an accurate picture of where money is going and the likely pay-off for such a program. How likely are recipients to have other coverage, and for which services? How can the state find out?

Does the state have the capacity to monitor programs designed to share the costs of coverage with the private sector and to recover payments from other entities? Sharing coverage costs for working recipients must be carefully monitored and continuously adjusted if "crowd-out" is to be avoided. Such programs are sensitive to labor market conditions and employer support. How will this be monitored? Will key employer groups back the program?

States must decide on a strategy for when and how they exercise their claims on other payers. A recent report from the Office of the Inspector General (OIG-HHS) found that states that sought to recover Medicaid payments for pharmaceuticals from insurers ("pay and chase") failed to recover more than 80 percent of the payments, in contrast with successful "cost avoidance" by states that refused to pay claims until other sources were exhausted.(9) (See figure 4.)

Federal and State Involvement/Constraints

Coordination of benefits, third-party payer liability (especially non-custodial parent liability) and estate recovery are federally mandated. Federal law requires that Medicaid be the "payer of last resort."

When a private insurer covers an individual, some of the individual's medical costs should be charged to the private insurer (coordination of benefits).

When an individual becomes ineligible for coverage because of increased income, some or all of those costs may be recovered from a third party such as an employer (third party liability).

If a non-custodial parent has employer-sponsored health insurance with the ability to cover family members and a court order exists requiring the parent to supply or contribute insurance coverage for the child, the parent can be compelled to add the child to his or her plan or pay the cost of Medicaid coverage.

Federal law requires states to recover benefits paid on behalf of an individual who has available assets (estate recovery). States are implementing these, but the major effect is deterrence. The administrative costs may be substantial. States may elect cost sharing, within specific limits, but it is not a federal requirement.

New federal guidelines for Health Insurance Flexibility and Accountability (HIFA) Waivers make it easier for states to develop and implement cost sharing strategies. Recently, the federal government has proposed a new approach to Sec. 1115 waivers. HIFA guidelines allow states to request higher levels of cost sharing for so-called optional groups (groups that states are allowed, but not required, to cover) and expansion populations (groups that do not meet Medicaid criteria-such as childless adults-who can be covered only under a waiver.) These waivers also would make it easier to buy into employer plans by waiving the requirement to cost out and compare benefits and by allowing limited benefits for optional and expansion groups. Any savings accrued through these strategies must be reinvested in coverage for additional people. lKH, KL

Notes

1 Review of available health insurance for Title IV-D children. U.S. DHHS, OIG, June 1998.

2 Korbin Liu and Marilyn Moon, Recovering Hidden Assets: The Magic Bullet for Medicaid Savings? (Washington, D.C.: The Urban Institute, September 1995).

3 Susan Harmuth, Long-Term Care Policy Office in collaboration with the Division of Medical Assistance, Comparing State Medicaid Recovery Efforts, (Raleigh, N.C.: NC Department of Health and Human Services, October 1998). See http://www.dhhs.state.nc.us/aging/estate.htm

4 Cost sharing includes premiums-monthly payments to maintain coverage; deductibles-annual out-of-pocket payment before insurance cuts in, copayments-fixed payment per visit or service, and co-insurance-percentage payment per visit or service.

5 Ku and Coughlin, The Use of Sliding Scale Premiums in Subsidized Insurance Programs (Washington, D.C.: The Urban Institute 1997).

6 C. Madden et al., "Voluntary Public Health Insurance for Low-Income Families: The Decision to Enroll." J Hlth Politics Pol &Law 20, no. 4 (1995): 955-72.

7 Montana Department of Public Health and Human Services, Audit and Compliance Bureau, Medicaid Parntership Plan: Medicaid Third Party Liability (Helena: HHS, 1998). See http://www.leg.state.mt.us/audit/summary/98p-03.htm

8 United States General Accounting Office, Medicaid: Three States' Experiences in Buying Employer-Based Health Insurance (GAO/HEHS-97-159), Report to the Chairman, Committee on Commerce, House of Representatives, (Washington, D.C.: GAO, July 1997).

9 U.S. Department of Health and Human Services. Office of Inspector General. Medicaid Recovery of Pharmacy Payments from Liable Third Parties (OEI-03-00-00030) (Washington, D.C.: DHHS, August 2001). See http://www.hhs.gov/oig/oei/reports/oei-03-00-00030.htm

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Strategy 4: Private Sector Cost Sharing in Medicaid

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Description of Strategy

Pros and Cons

Pros

Cons

State Experience

Design and Policy Issues

Federal and State Involvement/Constraints

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Notes

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