MEDICAID AND SCHIP

States are caught in the crossfire of a decline in revenues and an increase in health care need. They are facing unprecedented budget deficits coupled with unanticipated increases in Medicaid enrollment as a result of the recent economic downturn. This situation is jeopardizing the Medicaid coverage for millions of Americans. Forty-three states had a shortfall in their FY 2003 budget; 27 of those states have seen their shortfall grow since June. This year, 49 states have plans or have acted to reduce Medicaid spending growth and there is concern about what 2004 will bring.

A key component of the existing Medicaid budget dilemma states are facing is increasing enrollment. Enrollment grew at 8.6% in 2002 and is expected to grow at 7.7% in 2003. In addition, prescription drug costs have continued to rise at record rates. Medicaid expenditures for prescription drugs rose over 16% annually between 1990 and 2000. In 1998, Medicaid spent $14.5 billion for prescription drugs representing 8.2% of total Medicaid costs, the elderly and disabled accounting for 80% of that spending. Long-term care costs are rising rapidly and will continue to rise as the baby boom generation ages.

One-time revenue measures like tobacco settlement funds or rainy day funds in many states are no longer available. States are responding by freezing provider rates, curtailing prescription drug spending (i.e., prior authorization, mandatory generic use, increased cost-sharing, supplemental rebates), limiting benefits (e.g., $600 annual dental limit per person); and cutting eligibility.

Proposals in the President’s Budget

The President’s Budget includes a proposal that would fundamentally alter the nature of Medicaid and the Children’s Health Insurance Program (CHIP). The Administration proposes an optional 10-year block grant, which would allow states to accept their Medicaid, CHIP and DSH funding in two lump-sum allotments -- one for acute care and one for long term care. The size of each state’s allotment would be determined by FY 2002 expenditure levels and would be increased annually by the Medical Consumer Price Index. States will be expected to contribute maintenance of effort (MOE) funds, inflated annually at a lower trend rate than the federal allotment rate.

States choosing this option will receive an additional $3.25 billion in 2004, and $12.7 billion over the 10 year window, although the program will be budget neutral over the entire 10 years. States opting to be in the new block grant will be given additional "flexibility" in managing their programs, particularly with respect to optional benefits (i.e., prescription drugs for children over $1,323/month (133% FPL) older than age six and drugs for pregnant women) and optional populations (elderly above SSI levels ($546/month), children over age six with family incomes above $995/month (100% of poverty for 2), disabled individuals above SSI levels ($546/month)). If a state’s block grant money runs out, however, the state must still cover mandatory people using state money. States that do not elect the block grant will not be eligible for additional funding and will not get any new flexibility.

The Administration cites the State Children’s Health Insurance Program (SCHIP) as an example of the benefit of state flexibility to support their proposal, yet they omit key facts regarding the enactment of that program. Unlike the Administration’s proposal, the SCHIP program prohibited states from cutting back the eligibility of their Medicaid programs for children if they wanted access to this new money for coverage of children. Additionally, the SCHIP program provided $40 billion dollars over 10 years, whereas the Administration’s proposal ultimately has no new funding for purported expansions and is budget neutral over the 10-year period. The President’s proposal would allow states to do what SCHIP prohibited them from doing; in President Bush’s proposal there are no guarantees for currently eligible Medicaid recipients -- in fact, quite the opposite.

Issues to Consider with Respect to the President’s Medicaid Reform Proposal

• Funding Relief For States: The Budget provides no new relief for states who wish to preserve their program as it is. States must accept a block grant if they wish to receive any immediate financial assistance. However, even for the states who do accept the immediate assistance and block grant their program, they must return the federal funding through program cuts in the later years of the budget, making the promise of immediate help merely a loan. In addition, the allocations are based on historical spending, which means that states are essentially locked in to where they were last year. In addition, the proposal will lock in spending differences between states. High-spending states will have a bigger allotment available than states which do not spend as much.

• State Financial Responsibilities: Ultimately, the block grant will leave states and families ultimately financially responsible as federal funding is capped, but the cost of care may rise. For example, the long-term care portion of the block grant would likely be severely underfunded over the 10-year period as costs increase and populations age and the proportion of people needing long-term care increases. The Federal Government could, for example, eliminate spending on nursing home care but it cannot eliminate the need for such care. And, the number of seniors needing such care will increase in the coming years as the baby boomers age. Either states will be left to finance this entirely on their own, or more American families will be forced to find ways to provide care for their elders.

• Adequacy of Funding Over Time: The allocations under the block grant are not based on the actual number of people enrolled or the actual cost of serving people. Therefore, if costs unexpectedly increased, or the number of individuals needing assistance increased, states would have to either implement waiting lists, reduce eligibility, reduce provider reimbursement rates, or reduce benefits/increase cost-sharing.

• Elimination of the Entitlement: Because states would now be free to cap enrollment, eligibility and benefits would no longer be guaranteed to those who meet the eligibility threshold. The state could choose to offer vouchers for beneficiaries to purchase coverage in the individual market; however, there would no longer be guaranteed services for any specified group of people. If a beneficiary could not find adequate or affordable private insurance coverage, the state would no longer be responsible for ensuring the beneficiary received needed care.

• All People Affected: The block grant applies to all optional services and people. Even mandatory people may receive optional benefits, so all beneficiaries would be affected. Optional groups account for about 30% of all Medicaid beneficiaries, including more than half (56%) of the elderly people covered under Medicaid (including those with incomes above the SSI levels (74% of poverty or $546/month) and most of those who spend down to Medicaid because they need nursing home services); 22% of disabled covered under Medicaid (those with incomes above SSI levels (74% of poverty or $546/month)); one out of five children covered by Medicaid; 43% of parents, (most of whom have incomes below $11,940/year for a family of two); pregnant women with incomes above $1,323/month (133% of poverty); the working disabled; and women with breast or cervical cancer.

The proposal eliminates protections regarding amount, duration, and scope of benefits and the cost-sharing rules regarding these benefits. States, therefore, would no longer be bound by the requirement that cost-sharing be "nominal" or that services be sufficient to reasonably achieve their purpose. Rules regarding affordability of coverage would be eliminated along with patient protections relating to managed care, appeals rights for erroneous eligibility decisions, protections for quality of care for elderly and disabled in nursing homes, and protections against spousal/family impoverishment.

• Removing Incentives For Expansion: Program funding would be capped at 2002 levels and indexed forward. States would not be able to receive new money if they wanted to expand coverage to new populations. States would have no incentive to expand coverage, and in fact could not do so without cutting other benefits/populations, because they would be at risk for any costs above their allotment. Administration materials indicate they would like to eliminate "rules" so states can cover "families," but, since most adults/parents are not now covered under Medicaid, this additional spending would come at the expense of current beneficiaries.

• Fairness Among Populations: Medicaid currently has rules regarding comparability and statewide availability of benefits so that beneficiaries throughout the state are treated equally. Under President Bush’s proposal, however, a Governor could choose to provide benefits only in cities, not rural areas, or provide benefits only to politically powerful groups, or could re-grant the funds to for-profit and not-for-profit organizations to manage. States also would not be required to use their funding for insurance coverage, and could instead provide grants to hospitals and health centers.

• Financial Integrity: Medicaid funds could possibly be used to refinance services currently financed through state and local funds, leading to a substantial reduction in services/coverage for providers and patients who now depend on Medicaid. States could possibly return to "donations and taxes" schemes to effectively eliminate the need to put forward any state dollars, completely withdrawing state commitment to the uninsured. Additionally, it is unclear whether the state-match requirement remains or whether the state could count other health spending toward their maintenance of effort.

  The proposal appears to run directly counter to at least two of the President’s principles for reform. The Administration claims it wants to "minimize state incentives to refinance State-funded programs with Medicaid and CHIP dollars" and "increase state accountability by ensuring that Medicaid and CHIP dollars are being used to address the health care needs of low-income, uninsured Americans." By eliminating Medicaid rules, these existing protections will be lost.

The Administration includes a five year (through 2008) extension of Transitional Medical Assistance (TMA), a program that allows parents transitioning from welfare to work to keep their health insurance for up to a year, at a cost of $2.4 billion. The proposal also includes a number of provisions designed to simplify eligibility for enrollment in the program. States will have the option to offer one year of continuous coverage, waive burdensome reporting requirements, and waive other requirements if they already cover children and families up to 185% of poverty. The program simplifications were originally included in the Clinton Administration budgets, as well as an extension of the TMA program. The Administration also proposes that states be allowed to offer "health coupons" for TMA beneficiaries to use in the private insurance market as well. This last proposal raises serious questions about whether the amount of the coupon would be adequate for a family to purchase an appropriate policy and what types of beneficiary protections (cost-sharing, benefits) these policies would include.

Extension of Premium Benefits to Certain Qualified Individuals (QI-1s)

The Administration’s budget extends the QI-1 program, which pays Medicare premiums for seniors and disabled with incomes between 120-130% of poverty for an additional five years and continues the federal obligation to pay 100% of the costs of the premiums, subject to the annual allotment as under current law. The Administration’s FY 2003 budget included a one-year extension of the program, however, the House Republican budget neglected to provide any funding for this purpose. An extension of this program was included in the House Democratic prescription drug legislation last year.

Extending the Availability of SCHIP Funds

The Administration’s budget extends for one additional year the availability of the SCHIP funds which are set to revert approximately $830 million to the Treasury at the end of FY 2003. The SCHIP program currently provides health insurance coverage for more than 4 million children. The President’s budget does not propose to reinstate the $1.2 billion that has already reverted to the Treasury, nor does it provide for any redistribution formula that would allow states with unspent money to retain a portion of it. (These two fixes were in legislation introduced last week by Chairman Tauzin and Ranking Member Dingell.) The failure to reinstate the $1.2 billion that has reverted to Treasury will put 790,000 children at risk of losing their SCHIP coverage.

Special Enrollment Period In Group Market for Medicaid/SCHIP

The Administration’s budget would make it easier for Medicaid and SCHIP beneficiaries to enroll in private health insurance by making eligibility for Medicaid or SCHIP a trigger for enrollment in private health insurance outside the plan’s open season. While the details are sparse, this proposal appears to impose a new burden on employers and health insurance plans. In addition, there are no details as to whether states would have to ensure these employer plans have protections that Medicaid and SCHIP do for these low-income populations or whether the state would be required to fill in inadequacies in private insurance benefit packages or ensure affordability of coverage.

Medicaid Drug Rebates

The Administration’s budget includes a proposal to revise the base formula used to calculate the Medicaid drug rebate, saving $13.2 billion out of the program over ten years. Last year’s budget included a proposal to base payments and rebates off of average wholesale price; however, this year’s proposal would base rebates off of average manufacturer price (AMP).

Partnership for Long-Term Care

The President’s budget includes a proposal that would change current law to eliminate the prohibition on developing "partnership" programs. This proposal would allow individuals to purchase long-term care insurance to cover the initial cost of long-term care; once the policy ran out, the individual could be eligible for Medicaid coverage without divesting their assets. While the details are sparse, the proposal raises a number of questions. For example, what types of standards and market reforms would be provided to ensure that individuals are enrolled in quality long term care products? How long would the individual be required to have coverage before becoming eligible for Medicaid? In addition, there is a concern that the proposal could become merely an asset protection program for wealthier individuals. Anyone whose assets exceeded the cost of the policy over the time period would be able to shelter their estate. Finally, depending on how the program is structured, it could give Medicaid a long term obligation to extend coverage to people who otherwise wouldn’t qualify, when it is clear that under the President’s reform proposal there is not even enough money under the block grant to take care of the anticipated influx of low income elderly and disabled who will need long term care.

New Freedom Initiative and Institutional Care Demonstrations

The Administration’s budget proposes $8 million for three demonstration projects ($778 million over ten years) to promote at home care as an alternative to institutionalization, including respite services for caregivers of disabled adults and severely disabled children, and home and community-based services for children currently residing in psychiatric residential treatment facilities. While the goals are laudable, the funding appears to be insufficient given the need that exists in the community. In addition, the "Money follows the individual" demonstration includes 100% federal match for only one year, raising questions about how effective this initiative will be in inducing states to take up this new option. Finally, the requirement that demonstrations be budget neutral raises concerns about the broader effect of these demonstrations on the benefits and care for disabled populations as a whole. Current demonstrations provide a set amount of money for disabled individuals to budget for a limited range of "personal care services" and have allowed disabled individuals greater freedom to choose and pay individuals to assist them with very personal needs, such as bathing, etc. Any attempt, however, to broaden the scope of services included under these demonstrations to provide vouchers for acute or chronic health care services like physical therapy or hospitalization could pose significant difficulty for these vulnerable populations in receiving needed health care.

Child Support Enforcement and Disability Determination Proposals

The Administration proposes to require states to review child support proposals every three years resulting in more children receiving private health insurance. The budget also requires 50% of all favorable disability benefit determinations to be reviewed to verify eligibility. Together these proposals will save $1.4 billion over ten years. The budget makes no mention of increasing staffing in order to meet these goals, raising questions of whether other administrative services will be curtailed. Additionally, the proposal to move children to private insurance makes no mention of the adequacy or affordability of that insurance compared to their previous coverage and could result in the number of under-insured children increasing.

Administrative Cost Allocation

The budget assumptions include requiring "cost-allocation" for administrative costs between the Medicaid and welfare program (Temporary Assistance for Needy Families (TANF)). As a result of the overlap between eligible populations, states often undertake administrative activities that benefit more than one program. But, because TANF is now a block grant, the Administration is concerned that states may try to save on their TANF dollars by allocating shared administrative costs to Medicaid where they could receive an uncapped 50% match for these activities. Last year, this proposal was used to offset the cost of the TMA extension in the TANF bill. This proposal will place additional administrative burdens on states and may result in fewer case workers, fewer out-stationed workers, and fewer resources to run programs.

Miscellaneous