[NYAPRS Enews] CBPP: Current Bush Budget Would Shift Medicaid Costs to States

[Harvey Rosenthal]

NYAPRS Note: A new report by the Center on Budget and Policy Priorities
finds that to address funding cuts, states would have to reduce Medicaid
benefits, eligibility or payments to providers; redistribute funding
from other state programs to replace federal money; or increase taxes.
The report also discusses the implications of such actions. 

KEY FINDINGS:

*	The Administration's budget would cut federal Medicaid funding
by $25 billion over the next five years ($61 billion over the next ten
years).
*	$21 billion of the $25 billion in federal savings would be
accomplished by shifting costs from the federal government to the
states.
*	To compensate for the loss of federal Medicaid funds, states
would have to choose between cutting back on their Medicaid programs by
reducing eligibility, benefits, or payments to providers; cutting back
on other state programs and using those funds to replace federal
Medicaid dollars lost; or increasing taxes.

 

 

The Administration Again Proposes To Shift Federal Medicaid Costs To
States

By Leighton Ku, Andy Schneider, and Judy Solomon   Center on Budget and
Policy Priorities   February 22, 2007

 

In its new budget, the Administration proposes cuts in federal Medicaid
funding that total $24.7 billion over the next five years and $60.9
billion over ten years through a combination of legislative changes and
regulatory action.[1]  These reductions are more than five times as
large over the next five years as the federal Medicaid cuts enacted by
the Congress last year in the Deficit Reduction Act and would deepen the
cuts in health assistance for low-income people.[2]

About six out of every seven dollars' worth of savings proposed in the
Administration's new budget would reduce federal Medicaid spending by
shifting costs directly from the federal government to the states, as
seen in Figure 1.  (The Administration also proposed a large Medicaid
cost shift to states in its FY 2007 budget.[3])  For example, the new
budget proposes to reduce the federal matching rate for the costs of
certain administrative activities, such as inspecting nursing homes for
quality and safety.  The costs of inspecting nursing homes would not
disappear, but the state's share of the cost would increase.  These
Medicaid cost shifts are in addition to other proposals in the
President's budget that would reduce other grants in aid to states.[4]
The Administration's budget also contains a number of federal tax
proposals that could result in the loss of significant amounts of state
revenue, further compounding the fiscal squeeze on the states.[5]

If enacted, the Administration's Medicaid proposals would substantially
reduce the federal funds that states use to purchase covered services
and administer their programs.  States - many of which have already
taken aggressive measures to reduce Medicaid cost growth[6]  - would
have three options for making up the loss of federal Medicaid funds:
cutting back on their Medicaid programs by reducing eligibility,
benefits, or payments to providers; cutting back on other state programs
and using those funds to replace federal Medicaid dollars lost; or
increasing taxes.  In states that opt to cut back on their Medicaid
programs, low-income families, individuals with disabilities, and
seniors would be at risk for disenrollment, increased out-of-pocket
costs, or restricted access to providers.  In states that opt not to cut
back on their Medicaid programs but choose instead to replace the lost
federal dollars with state funds, fewer state funds will be available to
pay for coverage expansions among uninsured children and adults, such as
that underway in Massachusetts.

 

How Would the Administration's Proposals Reduce Federal Medicaid
Spending by $24.7 Billion Over Five Years?

Medicaid is administered and financed jointly by the federal government
and the states, with the federal government matching from 50 percent to
76 percent (depending on the state) of the costs that states incur in
purchasing health and long-term care services for eligible low-income
people.  Under this federal-state matching arrangement, there are two
ways that the federal government can reduce its Medicaid spending.  It
can achieve efficiencies in the purchasing of needed services for
Medicaid beneficiaries.  An example of this approach- which reduces both
federal and state costs- would be to increase the rebates that drug
manufacturers are required to pay Medicaid for the prescriptions that
Medicaid covers.  This would lower the net price of these prescriptions
to the program, resulting in savings for both the federal and state
governments.  In the alternative, the federal government could also
reduce its spending by limiting the state Medicaid expenditures that it
is willing to match, thereby shifting costs to state budgets, rather
than reducing those costs.  More than four-fifths of the
Administration's new Medicaid budget-reduction proposals would achieve
federal savings by shifting costs directly from the federal government
to the states.

 

The Administration's budget contains both legislative and regulatory
proposals affecting Medicaid.  The budget proposes legislative changes
that would reduce federal spending by $12 billion over five years,
offset somewhat by proposals that would increase federal spending by
$1.2 billion over five years.  These proposals would require
congressional approval.  The Administration is also proposing $12.7
billion in regulatory reductions over the next five years.  The
Administration's gross legislative and regulatory savings total $24.7
billion over the next five years and $60.9 billion over the next ten
years. (A more detailed listing of all the budget proposals and the
Administration's estimates of their budget effects is presented in Table
1 on the last page.)

 

What Legislative Reductions Does the Administration's Medicaid Budget
Propose?

The new budget proposes ten legislative changes that would reduce
federal Medicaid spending.  (This analysis discusses only those
legislative proposals that have a budgetary impact.)  Three of the
proposed changes, which account for $8.2 billion in reduced federal
spending (or more than two-thirds of the total legislative savings),
represent cost shifts to states.  Versions of all three proposals have
been unsuccessfully advanced in previous budgets.

The Administration's budget would reduce the federal matching rate for
all administrative costs to 50 percent. This proposal would produce
estimated federal savings of $5.3 billion over five years, making it the
single largest Medicaid reduction in the Administration's budget.[7] 

Currently, most state administrative costs are matched at 50 percent;
the costs of some high-priority administrative activities, however, are
matched at higher rates. States receive federal funds at a 75 percent
matching rate for operating a Medicaid management information system.
for inspecting nursing homes to ensure quality of care and the safety of
nursing home residents, for contracting with independent review
organizations to monitor the quality and need for services received by
beneficiaries. and for investigating and prosecuting fraud and abuse in
Medicaid.[8]

Under the Administration's proposal, all of these enhanced matching
rates would drop to 50 percent.  The resulting $5.3 billion in federal
savings represents a pure cost shift to the states.  Not only are these
administrative activities mandated by the federal government, they all
are essential to the fiscal integrity of state Medicaid programs and to
the protection of vulnerable patients served by providers or managed
care plans paid by the programs.  States will have little choice but to
replace the lost federal funds with state funds.

 

Budget Would Reduce Funding for States' Administrative Costs Even as
States' Administrative Responsibilities Are Growing

Legislative savings proposed in the new budget would reduce federal
funding for state administration of Medicaid by a total of $7.1 billion
over five years.  These cuts would occur during a period when recent
federal mandates have increased states' workloads.  These include the
requirement that states help  administer the low-income subsidies for
the Medicare drug benefit, that they document citizenship of most
Medicaid applicants and beneficiaries, and that they implement new
program integrity initiatives, like the Payment Error Rate Measurement
System (PERM).  While Medicaid administrative costs are low (5 percent
of total costs in 2007) and have been rising modestly (4 percent annual
growth since 2004), reductions in federal matching payments will make it
more difficult for states to adequately staff and manage their programs.

Note: For illustrations of the administrative costs associated with some
of the recent federal administrative mandates, see Donna Cohen Ross,
"New Medicaid Citizenship Documentation Requirement Is Taking A Toll:
States Report Enrollment Is Down And Administrative Costs Are Up,"
Center on Budget and Policy Priorities, Feb. 2, 2007, and the American
Public Human Services Administration, "PERM Survey: Initial
Implementation Information Experiences," Feb. 2007.

The Administration proposes to reduce the federal matching rate for the
cost of targeted case management services to a flat 50 percent for every
state. (In 38 states and the District of Columbia, the federal Medicaid
matching rate exceeds 50 percent in FY 2007.)  Targeted case management
services help specific groups of Medicaid beneficiaries, such as
low-income pregnant women, access health care and other needed services.
This proposal would affect all states with federal matching rates above
50 percent that have opted to cover targeted case management services.
The federal savings are estimated at $1.2 billion over five years. 

The Administration also would reduce federal Medicaid matching payments
to 46 states that have historically pooled the administrative costs of
making eligibility determinations for families and children receiving
Medicaid, TANF, and food stamps.  This proposal, technically known as
"cost allocation," effectively reduces the federal matching rate for
state administrative costs related to Medicaid eligibility
determinations.  The federal savings from this proposal are estimated at
$1.8 billion over five years. 

The budget contains another legislative proposal that would also reduce
federal payments to states, but there is insufficient detail to
determine whether this proposal would shift costs to the states.  The
proposal would require states to report on Medicaid performance measures
and "link performance to Federal Medicaid grant awards."  The
Administration estimates that the proposal would result in federal
savings of $330 million over five years. 

The proposal does not specify the purpose or content of the performance
measures, and it does not explain how performance would be linked to
federal Medicaid matching payments.  It is possible that the proposal
would pay bonuses to states that are able to reduce their rates of
Medicaid spending growth, and that the estimated federal savings of $330
million are net of such bonus payments.  It is also possible that the
estimated federal savings represent penalties imposed upon poorly
performing states in the form of reduced matching payments.  In either
case, the Administration's budget does not contemplate that federal
Medicaid spending will increase if state performance, however measured,
were to improve.

Almost all of the remaining legislative savings proposed by the
Administration, $3.4 billion over five years, derive from proposals that
would reduce Medicaid spending in such a way that savings would accrue
to both the federal and state governments.  Based on these estimates of
federal savings, we calculate that states may save $2.6 billion from
these policies.

The Administration proposes a number of changes to Medicaid pharmacy
policy.  It would limit Medicaid payments to pharmacists for multiple
source drugs (those with three or more manufacturers) to 150 percent of
the "average manufacturer price" of the drug.  Under the Deficit
Reduction Act, the reimbursement limit for such drugs was set at 250
percent of the average manufacturer price. 

The Administration would also allow states "to use private sector
management techniques to leverage greater discounts through negotiations
with drug manufacturers" in order to create prescription drug
formularies.  Currently, states may designate certain medications as
"preferred" and pay for these medications without further review; for
medications not listed as preferred, states pay only if the medication
is authorized in advance as being medically necessary.   Although
details are not available, it is possible that under this Administration
proposal, states would be allowed to exclude coverage of non-preferred
drugs altogether, so these medications would not available to Medicaid
beneficiaries regardless of medical need.

Finally, in order to prevent prescribing fraud, the Administration would
require all states in which physicians write prescriptions by hand to
use "tamper-resistant" prescription pads.  Total federal savings from
these three proposals are estimated at $2.3 billion over five years.
Corresponding state savings would be about $1.7 billion.

The new budget includes two proposals relating to Medicaid assets
policy.  The first has to do with the amount of home equity an
individual without a spouse living in the home may have and qualify for
Medicaid long-term care services.  Under the Deficit Reduction Act,
permissible home equity was limited to $500,000; states were allowed to
raise this amount to $750,000.  The budget proposes to take away this
state option, setting a nationwide ceiling at $500,000. 

The second proposal concerns assets verification. Currently, the Social
Security Administration is operating pilot projects in various locations
that use electronic financial records to verify the assets of elderly or
disabled applicants for Supplemental Security Income (SSI).  The
Administration would require states to establish pilots in the same
locations to verify the assets of Medicaid applicants.  As a result,
some elderly or disabled individuals would presumably be denied Medicaid
coverage.  Total federal savings from these two proposals are estimated
at $1.1 billion over five years.  Corresponding state savings would be
about $830 million.

 

What Regulatory Reductions Does the Administration's Medicaid Budget
Propose?

The Administration's budget proposes to reduce federal Medicaid spending
by $12.7 billion over the next five years and $31.4 billion over the
next ten years through four regulatory changes, each of which represents
a shift of costs from the federal government to the states.  Although in
the past, the Administration has advanced some of these proposals as
legislative initiatives without success, it now appears to believe that
it has sufficient statutory authority to take these actions
administratively, without Congressional approval. 

 

Some Budget Proposals Could Undercut Efforts to Cover the Uninsured

A growing number of states are considering plans to achieve universal
health coverage.  Others, such as Massachusetts, Maine, and Vermont, are
already implementing plans to expand health coverage.  Medicaid is an
essential part of financing these efforts, through direct coverage of
state residents and through federal funds that help subsidize health
care for other low-income residents without insurance.

The Administration's budget does not include any new federal Medicaid
funds to assist states in expanding coverage.  To the contrary, by
shifting certain costs from the federal government to the states, the
budget would reduce the federal funds available to the states for their
current programs, making it harder for states to expand health coverage
to reduce the number of low-income residents who are uninsured.

Massachusetts is a case in point.  The state's health reform plan
includes an expansion of Medicaid and SCHIP coverage for children, as
well as an increase in Medicaid coverage for parents, pregnant women,
people with disabilities, and some unemployed adults.  Other low-income
adults in Massachusetts who are not eligible for Medicaid and do not
have access to employer-sponsored coverage will receive subsidized
coverage through a new health plan.  Massachusetts is relying on federal
Medicaid funds to help in paying for these subsidies.

The regulatory and legislative proposals in the Administration's budget
would shift new costs to the states and thereby lower the federal funds
available to Massachusetts.  Massachusetts would have less money
available to finance its health reform plan, making it harder for the
state to achieve its goal of universal coverage.

The Administration's budget proposes to limit the amount of Medicaid
payments to hospitals, nursing homes, and other institutions that are
operated by state or local governments to the cost of furnishing
services to Medicaid beneficiaries.  Under this policy, governmental
providers would no longer receive Medicaid reimbursement for the costs
of serving uninsured low-income patients.  Because public hospitals and
nursing homes will continue to serve uninsured patients, they will
continue to incur costs in furnishing services to these patients; the
federal government, however, would no longer participate in those costs
through regular federal Medicaid payments.  The Administration had
proposed to limit payments to public providers as part of its fiscal
year 2005 and 2006 legislative proposals, but Congress did not act on
these proposals.  Last month, the Administration issued a notice of
proposed rulemaking to implement this policy.[9]  Savings to the federal
government are estimated at $5 billion over five years. 

Currently, Medicaid pays for the cost of covered services for eligible
children with disabilities that are part of a child's special education
plan under the Individuals with Disabilities Education Act (IDEA).
State and local school districts also can be reimbursed by Medicaid for
transportation costs.  The Administration's budget proposes to phase out
federal reimbursements for some of these administrative and
transportation costs.  That would reduce federal Medicaid payments to
state and local school districts by an estimated $3.6 billion over five
years and $9 billion over ten years. 

The Administration's budget proposes to limit the types of services that
states can cover with federal matching funds under the current state
Medicaid option to cover rehabilitation services.  Under this proposal,
states would lose federal matching funds for the costs of certain
services for which matching funds are currently allowed, such as special
instruction and therapy for Medicaid beneficiaries with mental illness
or developmental disabilities.  Here, also, there would be no state
savings.  The federal government would reduce its Medicaid spending by
an estimated $2.3 billion over five years and $4.3 billion over ten
years by shifting these costs to the states. 

The Administration's budget proposes to eliminate federal Medicaid
payments for the costs of graduate medical education (GME).  Teaching
hospitals with residency programs employ young physicians to provide
inpatient and outpatient services to their patients; GME payments help
these facilities recover the costs of these salaries.  The residents in
these programs are often the direct care providers for Medicaid
patients.  Under current law, states have the flexibility to include the
costs of GME in their Medicaid reimbursement to teaching hospitals. 

The Administration budget would end federal matching payments for these
costs to produce savings for the federal government of $1.8 billion over
five years and $6.2 billion over ten.  If the states make up the
shortfall, the costs will be shifted to them. If the states do not make
up the shortfall, these costs will be shifted to the teaching hospitals,
their residents, or their patients.

 

What Legislative Initiatives Does the Administration's Medicaid Budget
Propose?

The Administration's Medicaid budget does not contain any regulatory
initiatives that would increase federal Medicaid outlays.  It does
propose three legislative initiatives that would increase federal
Medicaid spending by $1.1 billion over five years.  The proposals for
transitional medical assistance (TMA) and coverage for "Qualified
Individuals" would extend coverage through 2008, while the SSI refugee
provision would be through 2010.[10]  The new budget does not include
any new federal Medicaid resources to assist states that seek in expand
health care coverage for their low-income populations.  The
Administration's "Affordable Choices" initiative for the uninsured
involves a diversion of federal funds that currently support public and
private safety net hospitals (see box below).

Under current law, families leaving welfare for work retain Medicaid
eligibility for up to 12 months.  TMA, which was enacted under President
Reagan and provides an essential work support as families leave welfare
for employment, is slated to expire on June 30, 2007.  The
Administration proposes to extend TMA through September 30, 2008 at a
cost to the federal government of $665 million. 

Under current law, states pay the Medicare Part B premiums ($93.50 per
month in 2007) for low-income elderly and disabled Medicare
beneficiaries with incomes below 135 percent of the federal poverty
level and low resources.  But for beneficiaries with incomes between 120
and 135 percent of the poverty level ($1,021 - $1,123 per month for an
individual in 2007), a group known as "Qualified Individuals" or QIs,
the federal government matches 100 percent of the cost of these Medicare
premium subsidies up to a fixed amount for each state. 

This federal funding expires September 30, 2007.  At that point, either
states would continue the premium subsidies with their own funds, or the
beneficiaries would have to pay the premiums themselves (through a
deduction from their monthly Social Security checks).   The
Administration proposes to extend this funding through September 30,
2008, at a cost of $425 million to the federal government.

Under current law, refugees and asylees who are elderly or disabled are
permitted to receive SSI benefits and the Medicaid benefits that flow
from SSI eligibility during their first seven years in the United
States.  After this point, they lose SSI and Medicaid benefits unless
they become citizens; the loss of benefits after that time harms
thousands of elderly and frail individuals.[11]  The Administration is
proposing to allow these individuals to remain eligible for SSI for
eight years, a change that would be in effect through fiscal year 2010.
This proposal would increase federal Medicaid expenditures by an
estimated $99 million. 

 

The Administration's "Affordable Choices Initiative" Would Limit State
Flexibility in Expanding Health Coverage

 The Bush Administration announced a two-part health initiative just
before the State of the Union address.  The first part is a proposal to
change the tax treatment of employer-sponsored health insurance and
create a standard deduction for health insurance costs.  The second part
is an initiative called "Affordable Choices," which encourages states to
take federal funds used to support hospitals and other health care
providers that provide care to the uninsured and instead use the funds
to pay for "basic private health insurance" for uninsured residents.

Even though few details have been released, some shortcomings of
"Affordable Choices" are apparent:

No new funds are provided to expand coverage, even as the
Administration's budget proposals would shift substantial costs to the
states.  Rather than re-invest these federal savings by providing
support for state efforts to expand coverage, the Administration is
urging states to expand coverage by taking funds away from health care
providers that provide care to the uninsured. 

The funding that currently goes to support uncompensated care delivered
by a state's safety net providers is not sufficient to provide
comprehensive coverage to all low-income state residents who cannot
afford to purchase health coverage.  As a result, health providers would
still be called upon to provide uncompensated care to people who are
uninsured or underinsured. 

The proposal appears to rest on the assumption that low-income people
would be able to use subsidies to purchase affordable coverage in the
individual health insurance market.  Such an assumption, however, is
untested and likely unfounded.  Many individuals with chronic conditions
would likely be unable to purchase coverage in the individual market.1
The Administration would allow states to use their diverted
uncompensated care funds for high risk pools "for very sick individuals
who are deemed uninsurable in the non-group market," but in most states,
coverage provided through high risk pools is very costly, provides
limited benefits, and entails long waiting periods for coverage of
pre-existing conditions.2 

 

 

http://www.cbpp.org/2-14-07health.htm 

 

 

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