Testimony on the National Governors’ Association Proposal on Medicaid – Report

Hearing before the United States House of Representatives Committee on Commerce on the National Governors Association Proposal on Medicaid

Testimony of Diane Rowland, Sc.D., Executive Director, Kaiser Commission on the Future of Medicaid and Senior Vice President, Henry J. Kaiser Family Foundation

March 6, 1996

Thank you, Mr. Chairman and members of the Committee, for this opportunity to provide some perspective on the recent proposal of the National Governors Association for Medicaid reform and its implications for health and long-term care coverage of the low-income population. I am Diane Rowland, Executive Director of the Kaiser Commission on the Future of Medicaid and Senior Vice President of the Henry J. Kaiser Family Foundation.

The Kaiser Commission on the Future of Medicaid is a 14-member, bi-partisan national commission established by the Henry J. Kaiser Family Foundation in 1991 to serve as a Medicaid policy institute and forum for analyzing, debating, and evaluating future directions for health care for poor and vulnerable populations. I am pleased to be here today to share the work of the Kaiser Commission and discuss Medicaid's role in financing care for 36 million low-income Americans and the implications of the National Governors Association (NGA) proposal to restructure Medicaid.

Medicaid Today

Since its enactment in 1965 as companion legislation to Medicare, Medicaid has operated as a federal and state partnership to meet the health needs of our nation's most vulnerable populations. Medicaid has evolved from a program providing financing to states for health coverage of their welfare population to a program that now finances health and long-term care services for one in eight Americans and accounts for 13 percent of national health care spending. Its funding is the major source of financial assistance to the states, accounting for 40 percent of all federal grants-in-aid to the states.

Over the last 30 years, Medicaid has helped to close the gaps in care between the poor and non-poor and eased financial burdens and provided a safety net for the most needy Americans. It has been a major force in shaping health and long-term care services for low-income families and aged and disabled Americans. In 1995, Medicaid financed care for 36 million low-income Americans, covering one-quarter of American children and paying for over one-third of the nation's births and one-half of all nursing home care.

Medicaid plays multiple roles for the populations it serves. For nearly 18 million children and more than 8 million adults in low-income families, Medicaid provides fundamental health insurance protection. For 4 million low-income elderly people and 6 million low-income people with disabilities, Medicaid provides both health insurance and long-term care coverage. In its long-term care role, Medicaid pays for home- and community-based services and is the dominant source of public financing for nursing home care. In its insurance role, Medicaid is a supplementary insurance program for low-income aged and disabled Medicare beneficiaries, paying Medicare's premiums and cost-sharing requirements and covering additional services, most notably prescription drugs. For low-income disabled adults who do not have Medicare coverage, Medicaid also serves as a basic health insurance program.

Although children accounted for over half of the 33.5 million Medicaid beneficiaries covered by the program in 1994, they accounted for only 16 percent of program spending (Figure 1). From the perspective of how Medicaid dollars are spent, Medicaid is predominately a program serving the low-income aged and disabled population. The elderly and disabled constitute 27 percent of beneficiaries, but account for 59 percent of spending because of their intensive use of acute care services and the costliness of long-term care in institutional settings. The per capita cost of an elderly beneficiary is eight times that for a child on Medicaid (Figure 2).

As a safety net for health and long-term care, Medicaid pays the bulk of the cost of care for the nation's poorest and most disabled individuals. It assists individuals with the most catastrophic of illnesses-children with chronic conditions that can leave them disabled for a lifetime, adults with mental illness and retardation that require extensive care in the community or in an institutional setting, and the frail elderly and the disabled who also need long-term care. Medicaid's average cost for a pregnant women or child without complex medical needs is often substantially lower than a comparable private health insurance premium, whereas the average cost for a severely retarded individual on Medicaid, a population that is generally not covered by most private insurance, can exceed $50,000 per year.

Because Medicaid provides coverage to those with critical health problems and costly medical needs, including segments of the population generally not covered by most private insurance, it has become a major budgetary commitment for both the federal and state governments. Total federal and state spending for Medicaid in 1995 was estimated at $156.3 billion and projected grow to $302.8 billion by 2002, with the federal government providing roughly 56 percent of total expenditures. Federal expenditures for Medicaid now account for 6 percent of the federal budget while state spending for Medicaid (exclusive of federal Medicaid payments to the states) accounts for 13 percent of state budgets.

Although rates of growth for Medicaid have historically been more moderate than increases in private health care spending, Medicaid costs accelerated rapidly from 1988 through 1992. From 1990 to 1992, annual rates of increase exceeded 25 percent. The rapid growth rates during this period were attributable to a combination of factors, including a national recession, growth in the number of people eligible for Medicaid, inflation in health care spending, and states' use of statutory loopholes to leverage additional federal dollars.

Spurred by federal requirements to increase coverage of pregnant women and children, state efforts to cover more low-income uninsured, and court-required expansions in coverage of the disabled, Medicaid enrollment increased from 22 million in 1988 to 33.5 million in 1994. As shown in Figures 3 and 4, although low-income children accounted for the largest share of the growth in Medicaid enrollment, they played a relatively minor role in the growth in Medicaid spending during the 1990s.

The major factor contributing to the spike in program spending in the early 1990s was that some states used provider taxes and donations and disproportionate share hospital (DSH) payments as alternative financing strategies to increase the base payments that had to be matched by the federal government. As shown in Figure 5, the growth in DSH payments had the most pronounced effect on the growth in Medicaid spending between 1991 and 1992. In that period, over half of the annual increase in Medicaid spending was attributable to increased DSH payments, concentrated in about 15 states. By 1994, DSH payments accounted for 12 percent of total Medicaid spending.

Legislation enacted in 1991 and implemented in 1993 to restrict state use of tax and donation financing strategies and curb the growth in DSH payments has clearly had a constraining effect on Medicaid spending. With the new rules in effect, the program's expenditure growth rate has returned to historical rates, leveling off at 9.2 percent per year from 1992 to 1994. Future projections by the Congressional Budget Office assume an annual growth rate of about 9.9 percent over the next seven years. Future increases are expected to be driven primarily by inflation and enrollment growth due to increases in the number of people in poverty and the expansion of coverage under current law to children under age 18 with incomes below the poverty level.

The structure and financing of Medicaid has become a major issue in the federal budget debate. In searching for a new approach for the program's future, the federal/state partnership has been challenged by the rising cost of maintaining Medicaid coverage and the need to meet the demands of the 40 million uninsured Americans. The policy dilemma at both the federal and state levels is how to restrain the rising cost of Medicaid without compromising the vital role of the program in ensuring access to essential health services for the needy.

In the first session of the 104th Congress, legislation was passed that would have replaced the Medicaid program and its entitlement to low-income people with a block grant to the states providing broad discretion over program structure in return for a cap on federal spending. Under the Balanced Budget Act of 1995, federal spending on the program would have been reduced by $163 billion over the next seven years. President Clinton vetoed that legislation in December 1995 and offered his own approach to Medicaid reform as part of his balanced budget plan. The President's plan would retain the Medicaid entitlement, reduce federal spending by $55 billion over the next seven years, and provide more flexibility to the states to increase managed care enrollment and set provider payment rates.

The National Governors Association (Nga) Medicaid Proposal

The proposal to restructure Medicaid adopted by the nation's Governors at the National Governors Association meeting on February 6, 1996 represents their effort to find common ground in the stalemate between the President and the Congress over how to restrain Medicaid spending, provide more flexibility to states, and protect coverage for the most vulnerable low-income Americans. The proposal attempts to balance concerns over maintaining health coverage for low-income Americans with the desire for greater control over program structure and dollars. The extent to which the plan achieves this balance and what would be gained or lost in the restructuring are critical to understanding the potential impact of the proposal.

My testimony today will focus on the issues and questions raised by the NGA resolution. However, the effects of this plan cannot be easily assessed with only the NGA's six-page resolution that outlines their proposal for restructuring the program. When the details of the proposal become available, the Kaiser Commission on the Future of Medicaid intends to analyze its impact and effects on a state-by-state basis and would be pleased to submit our analysis for the record at that time.

The Impact of the NGA Proposal on Medicaid Coverage of the Low-Income Population

Under current law, Medicaid provides an entitlement to health insurance coverage for low-income families and aged and disabled individuals. This means that individuals who meet the income, assets, and categorical requirements for Medicaid coverage are eligible to receive a defined set of benefits and can enforce their right to eligibility and benefits in federal or state court. The entitlement thus has three components: defined criteria for eligibility, established benefits, and a legal right to enforcement.

Today, to be eligible to receive federal Medicaid matching payments, the federal statute requires states participating in Medicaid to cover and provide basic benefits to certain low-income groups, most notably recipients of cash assistance under the Aid to Families with Dependent Children (AFDC) or Supplemental Security Income (SSI) programs, low-income pregnant women and young children, and elderly and disabled Medicare beneficiaries with incomes below 120 percent of the federal poverty level. In addition to these basic coverage and benefit requirements, states have the option to cover other low-income groups who are not receiving cash assistance and to provide more comprehensive benefits, such as prescription drugs and dental care, and still receive federal matching payments. Approximately two-thirds of current program beneficiaries are covered due to federal requirements, with the remaining one-third covered at state option. As a result, the scope of coverage of the poverty population varies significantly across states.

The NGA proposal appears to redefine the nature of the entitlement and to provide states with more discretion over the populations to be covered and the benefits to be provided. It would protect the coverage of certain populations currently entitled to Medicaid, but would leave other groups with an entitlement under current federal law to be covered at the option of the state. Under the NGA proposal, protected groups include low-income children under age 13 and pregnant women, the elderly who receive SSI cash assistance, and welfare recipients (as determined by the states). The disabled are listed as a protected group but, instead of using the national SSI disability standards, determining the definition of “disability” is left to each state.

Although states would be permitted to use Medicaid funds for coverage of individuals with income up to 275 percent of the poverty level, no assurances are made for many individuals with required coverage under current law. Most notably, the NGA proposal would repeal the bi-partisan Congressional agreement signed into law by President Bush to phase in Medicaid coverage to 3 million poor children ages 13 to 18 by 2002 and to have Medicaid pay the Medicare premiums for 2 million elderly and disabled Medicare beneficiaries with incomes between 100 and 120 percent of the federal poverty level. Under the proposal, continued coverage for the 6 million disabled beneficiaries and 1.5 million nursing home residents would depend on how states define disability and how they cover long-term care benefits. The 4 million Medicare beneficiaries with incomes below the poverty level who rely on Medicaid to pay their Medicare premiums ($42.50), Part A deductibles ($736.00), and cost-sharing are assured coverage only for cost-sharing. Payment of Medicare premiums and the deductible is unclear.

Even those with assured eligibility have uncertain coverage under the NGA proposal because there are no minimum standards for the benefits to be offered to those with “guaranteed” coverage. States would be required to offer a set of services, but would have “complete flexibility” to determine the amount, duration, and scope of services provided. They would no longer be required to provide benefits at levels sufficient to meet medical necessity. This latitude in determining the scope of benefits would allow states to set absolute limits on the number of hospital days or the number of physician visits covered, resulting in wide variation across states in what is actually covered for the “guaranteed” Medicaid population. There are no specifications for benefits to individuals covered at state option under the proposal.

In addition, the proposal would apparently eliminate the current requirement that benefits be offered “statewide” and be “comparable” across eligibility groups. This means that states could offer benefits packages that differ by county or geographic region. States could also offer various levels of benefits to individuals with different medical conditions. Finally, by redefining the “T” in Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services, fewer services would be guaranteed for children.

Under the NGA proposal, individuals would lose their private right of action in federal courts to enforce eligibility and benefits. They would be permitted to bring suit in state court only after going through a state-determined appeals process and state remedies. Providers would be prohibited from initiating suits on behalf of patients. This means that beneficiaries would no longer have a right to seek a remedy for the deprivation of medical care in federal courts if they felt a state was violating federal Medicaid law. Moreover, it means that the due process rights of individuals would be defined in the states and thus could differ across the country.

Taken together, the uncertainty surrounding the eligibility guarantee, broadened flexibility in determining services, and the restriction of the private right of action to the state courts raise many questions that need to be addressed before the impact of this proposal can be assessed:

• What kind of coverage would ultimately be guaranteed to individuals and how would this guarantee be enforced? Who would lose guaranteed eligibility? What benefits would be provided to non-guaranteed groups?
• How much latitude would states have in determining the definition of the disabled? Could states exclude specific groups, such as persons with AIDS, or limit their access to vital drugs and services?
• Would states only be obligated to pay for cost-sharing under Medicare and not Medicare premiums or deductibles for Qualified Medicare Beneficiaries (QMBs) with income below the poverty level? What happens to coverage of Medicare beneficiaries with incomes between 100 and 120 percent of the poverty level?
• Would states have to meet minimum standards for scope of benefits related to medical necessity? How widely could benefits and coverage vary within states?

These are issues that need to be resolved in order to understand the impact of the NGA proposal on coverage of the low-income population. Previous work done by the Kaiser Commission has documented thewide variations across states in their current coverage of the low-income population and role of federal minimum coverage standards in providing a national floor for coverage of low-income children and pregnant women and aged and disabled individuals. Moreover, research shows that expansions in Medicaid coverage of the low-income population over the last decade have mitigated the growth in America's uninsured population by offsetting the decline in employer-based insurance (Figure 6).

Maintaining insurance coverage for the low-income population is a daunting task for both the states and the federal government. In 1993, in 38 states and the District of Columbia, more than one-quarter of the non-elderly population was either on Medicaid or uninsured and, in 9 states and the District of Columbia, over one-third of the non-elderly population was uninsured or on Medicaid (Figure 7). The potential impact of the NGA proposal on state-level differences in the availability of health insurance coverage has both state and national implications and warrants careful consideration.

Impact of the NGA Proposal on State Flexibility

To contain costs, states are seeking greater flexibility over how they structure the delivery of services and pay providers. Today, most states are aggressively trying to move many of their low-income beneficiaries, especially children and adults in low-income families, from fee-for-service care into managed care plans (Figure 8). This year, 30 percent of Medicaid enrollees nationwide will receive care from Medicaid managed care plans. Many states are planning to expand managed care enrollment to disabled beneficiaries, although there is only limited experience in managed care for this population.

However, many states have wanted to move more swiftly, rely more heavily on Medicaid-specific plans, and require more mandatory enrollment than the federal statute permits. Many have sought waivers of federal law in order to implement their managed care plans, but the process has often been both cumbersome and constraining for states. The NGA proposal would address these concerns by allowing states to pursue managed care without the need for federal approval and without imposing requirements on the types of plans that can be used for mandatory enrollment of Medicaid beneficiaries.

The NGA proposal would also increase states' ability to set payment rates and conditions of participation for health plans and providers. The Boren Amendment, which currently mandates that state payment rates for hospitals and nursing facilities be “reasonable and adequate” to meet the costs incurred by “efficiently and economically operated” facilities, would be repealed. Providers would no longer have a right to sue over the adequacy of payment. Also, when a state pays for cost-sharing for care received by Medicare beneficiaries who also qualify for Medicaid, the proposal would allow states to use the generally lower Medicaid payment rate instead of the Medicare payment rate as payment in full.

The proposal does not address the standards for many providers (for example, for intermediate-care facilities for the mentally retarded (ICF/MR) or home health agencies). Federal nursing home standards enacted in 1987 to replace variable state standards with uniform national requirements to protect the health and safety of nursing home residents would remain in effect, but responsibility for enforcement would be moved from the federal to state governments.

Allowing states greater flexibility over the organization of services, the setting and enforcement of quality standards for health plans and other providers, and the payment rates for provider raises a number of questions to be considered in assessing the NGA proposal:

• Will states continue to provide insurance coverage to Medicaid beneficiaries or will they be permitted to limit coverage to a provider network, such as state hospitals and clinics?
• How will increased reliance on managed care and changes in provider payment affect the safety-net providers that have traditionally served this population? Will beneficiaries have a choice of plan?
• Will plans or providers be willing to participate in the program with further declines in payment rates? What will lower payment rates mean for beneficiary access?
• Will states shift Medicaid dollars from current services to support state-run services, such as inpatient mental health facilities?
• What standards will be used for plan or provider participation and how will quality be enforced?
• Without federal standards and enforcement, will quality of care in nursing homes and ICF/MRs decline?

Previous research has shown that access to care for low-income populations can be impaired if payment rates are inadequate to guarantee provider participation and if quality standards are weak or poorly enforced. In many states, physicians are already unwilling to see Medicaid patients because payment rates are so much lower than private rates. The move to managed care is an attempt to secure a provider network, but the success of managed care depends in large part on the future adequacy of the capitation rates and the ability to maintain access to care. As states move to implement managed care and cost-containment programs, attention must be given to safeguarding the quality of care and access to care for poor and vulnerable populations that do not have the financial resources to go “outside the Medicaid system” to obtain care.

Impact of the NGA Proposal on Federal and State Roles

Under current law, Medicaid is a federal/state partnership in which federal funds flow to match state expenditures as enrollment and service costs rise. The federal share of costs is determined by a formula based on state per capita income and the amount of federal funds to any state is determined both by the matching formula and the level of state expenditures. Federal costs increase as state expenditures grow. In times of recession when Medicaid enrollment increases, federal funds expand to meet the federal share of growth in state expenditures.

The NGA proposal seeks to define and limit federal and state financial responsibilities for coverage of the poor, but provides increased federal funds to states to accommodate growth in beneficiaries. The proposal would limit federal spending by establishing a limited or maximum allocation of federal funds. Although the details are unspecified, the proposal would establish a base allocation to states, and would allow growth (through a growth factor and an “insurance umbrella”) in that allocation to reflect increases in the population served by the program. In addition, special federal funds would be provided to certain states to provide care to native Americans and to illegal aliens. Finally, the proposal would increase the minimum federal requirement from the current 50 percent to 60 percent of total spending under the program. Current restrictions on provider taxes and donations as sources of state matching funds would be eliminated.

The NGA proposal leaves considerable uncertainty as to the sufficiency of federal or state funding to maintain current levels of coverage. If either federal or state funding fails to reflect changes or growth in the covered populations or increases in the overall cost of health care, either people will go without care or providers will be left to shoulder the burden. At the federal level, the NGA proposal leaves uncertain what growth rates will apply to federal funds and the circumstances under which the “umbrella funds” will be made available. Both are critical to assuring that states have adequate federal dollars available to serve their populations, as economic and demographic circumstances change. At the state level, the proposal creates uncertainty about state obligations to provide adequate matching funds for Medicaid. New opportunities to use provider taxes and donations, as well as decreases in state matching rates, create the potential for a substantial reduction in state funds for care for the poor.

The proposed restructuring of the federal and state partnership also raises the issue of state accountability for the use of federal funds. Under current law, the federal government finances over half of the Medicaid program's costs. Under the NGA proposal, the federal share would increase from 56 percent of program costs to more than 60 percent. Further consideration of the NGA proposal therefore requires answers to several critical questions:

• Will sufficient federal dollars be available to reflect changing economic and demographic circumstances in the states?
• Will states sustain financial support for Medicaid in response to lower matching requirements and the reopening of provider taxes and donations as a way to augment state spending?
• Will the federal and state governments shift burdens to safety-net providers? How will uncompensated care be handled?
• How will states be held accountable for the use of federal dollars? What safeguards will there be on inappropriate use of federal taxpayer dollars? What oversight and sanctions will the federal government have?

The structure and adequacy of the financing are fundamental to understanding how this proposal would affect coverage of the low-income population and program costs. Recent experience with Medicaid clearly shows that the “financing rules” can result in wide funding disparities across states, as evidenced by the rapid growth in DSH spending and the concentration of this money in 15 states. Given the fiscal constraints at the state level and the downsizing of state governments now underway, the capacity of the states to accept and manage the broadened responsibility under this proposal warrants careful consideration.

The Challenges Facing Medicaid

There are no simple solutions to reducing the cost of providing care to the 36 million Americans who now rely on Medicaid or the millions more who fall just beyond its reach. There are only hard choices. The Medicaid program is currently set up as an entitlement for low-income, elderly, and disabled Americans, just as health insurance for workers and Medicare for older people entitle them to benefits. Medicaid is also an entitlement to states for federal matching funds for individuals and services that fall within federal guidelines. Simply put, individuals are currently guaranteed coverage if they meet the eligibility requirements and states are guaranteed fiscal assistance for themselves and their low-income residents.

In addition, the matching funds provided by the federal government through Medicaid enable states to respond to changes in the economy that affect the number of poor and uninsured in each state, to accommodate population growth, and to undertake health and long-term care reform at the state level. Programmatic changes such as the ones before us today will inevitably affect the poor, the old, the disabled, and the children protected by Medicaid, simply by altering the conditions upon which states and beneficiaries have come to rely.

While the states have argued that with greater flexibility they can run their programs to do more while spending fewer dollars, the details underneath the sweeping term “flexibility” are likely to entail limits on eligibility and benefits, cuts in provider payment, and the imposition of cost-sharing and premiums for the poor. The Kaiser Commission's report, “Cutting Medicaid Spending in Response to Budget Caps,” examines the choices available to the states to reduce spending without cutting eligibility and shows how difficult it will be to implement these options. Even the most aggressive implementation of managed care with the enrollment of some of the disabled population is unlikely to provide overall savings in Medicaid spending of more than 5 percent because of the limited experience with coverage of the elderly and disabled and the high cost of their care, especially long-term care services.

There is no magic or painless solution-no magic wand of flexibility that can provide medical care and long-term care to one in eight Americans at a dramatically lower cost. Broadened use of managed care will require time to implement and even then will not accomplish big overall savings for Medicaid unless extended to the elderly and disabled populations, both groups with limited managed care experience. Changes in the delivery system can be made to accomplish savings but, in order to be effective and preserve access to needed services, these changes will require time to implement and the development of an adequate infrastructure to deliver care.

Since its enactment in 1965, Medicaid has improved access to health care for the poor, pioneered innovations in health delivery and community-based long-term care services, and stood alone as a primary source of public assistance with nursing home care. Despite gaps in coverage and rising costs, together, the federal government and state governments have much to be proud of in Medicaid's accomplishments. Restraining the rising cost of care for the vulnerable populations served by Medicaid without compromising the vital safety net role of the program is a daunting task. A dramatic devolution of the federal government's responsibility for Medicaid to the states will not solve the problem of maintaining Medicaid's safety net responsibilities; it will merely shift the hard choices and responsibilities to the state governments that are already struggling with their own fiscal problems.

Thank you.

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