Republican Leaders Target Medicaid For Deep Cuts: Health Care to the Most Vulnerable Americans Now At Risk

President Bush and Republican leaders in Congress are attempting to make large reductions in domestic programs that help millions of Americans, including cuts to essential services like Medicaid. But Medicaid is more than a line item on a budget spreadsheet; it is a lifeline for millions who have no other health coverage options. Making significant cuts to Medicaid could prevent some of the nation's most vulnerable people from obtaining the health care they need, shift costs to states that have already been struggling to cover Medicaid expenditures, and increase the amount of uncompensated care incurred by hospitals and physicians.

Recognizing these consequences, a bipartisan coalition successfully stripped proposed Medicaid cuts from the Senate's budget resolution. The House budget resolution calls for between $15 billion and $20 billion in Medicaid cuts over five years, but a bipartisan majority in the House is now on record opposing Medicaid cuts in the final budget plan. Nevertheless, Republican leaders appear intent on trying to include them.

Medicaid Provides a Crucial Safety Net

Medicaid makes health insurance available and affordable to millions of Americans whose income is too low to afford private insurance. It is "the workhorse" of the U.S. health care system that has been called upon to aid populations in need of health coverage and health care providers in need of financial support.¹

Medicaid provides vital health services to 39 million low-income children and parents and 14 million individuals who are elderly, blind and disabled.² Its reach extends widely throughout the health care system:

• One in four children rely on Medicaid for their health coverage.³
  
  
• More than one-third of all births in the U.S. are financed by Medicaid.⁴
  
  
• Medicaid finances care for nearly 70 percent of nursing home residents.⁵
  
  
• Medicaid provides more than half of the funds for state and local community mental health services.⁶
  
  
• Seven out of 10 poor children with severe disabilities and four out of 10 poor working adults with severe disabilities receive assistance from Medicaid.⁷
  
  
• Medicaid provides assistance to about 95 percent of people who rely on intermediate care facilities for people with mental retardation.⁸
  
  
• People living in remote rural areas are 50 percent more likely to have Medicaid coverage than people living in urban areas.⁹
  
  
• Medicaid is the largest source of revenue for health centers¹⁰ and its Disproportionate Share Hospital (DSH) funds provide much needed financial assistance to hospitals that serve large numbers of low-income and uninsured people.
  
  

Medicaid Spending Is Increasing Because The Program Is Doing Its Job

Preserving Medicaid's safety net of health coverage is vital, yet it is creating significant budgetary challenges for federal and state governments. Spending on the program grew by one-third between Fiscal Years 2000 and 2003, from $205.7 billion to $275.5 billion.¹¹ Seeking ways to maximize the value of Medicaid spending is an appropriate response. Cutting federal Medicaid spending is not because the factors driving up spending on the program are largely out of Medicaid's direct control: 1) higher enrollment triggered by a decline in private health insurance; 2) overall increases in health care costs; and 3) gaps in Medicare coverage.

Growth in enrollment. Medicaid is a counter-cyclical program, meaning it is supposed to expand when the economy declines. When unemployment increases and income falls, more people lose private health insurance and become eligible for Medicaid. Between 2000 and 2003, the number of people living in poverty increased by 4.3 million¹² and the number of people with employer-sponsored health insurance dropped by 4.8 million.¹³ Not surprisingly, the number of people who enrolled in Medicaid also increased substantially.

When researchers at the Urban Institute analyzed Medicaid spending growth from 2000 to 2003, they found that the increase in spending was "largely driven by enrollment growth" that was triggered by the recent economic downturn.¹⁴ Moreover, a recent survey of state Medicaid officials found that higher enrollment was the most frequently cited contributor to the recent growth in Medicaid spending.¹⁵

In other words, Medicaid spending has been increasing primarily because the program is doing its job: providing a safety net of health coverage for people who would otherwise become uninsured. If Medicaid had not been available, or if federal Medicaid funding had been more limited, then the increase in the number of uninsured Americans would be even higher than the 45 million that were uninsured in 2003.

Growth in overall health costs. In addition to enrollment growth, Medicaid has had to confront the same forces that are driving up expenditures throughout the health care system. After a period of relatively modest health care spending growth during the 1990s, health care spending has risen considerably during the 2000s. The fastest growing components of private-sector health spending growth have been hospital and prescription drug spending.¹⁶ State Medicaid officials have said that, after enrollment growth, the cost of prescription drugs, medical care and long-term care were the next largest contributors to rising Medicaid spending.¹⁷

Gaps in Medicare coverage. More than half of the spending growth in Medicaid from 2000 to 2003 was due to care provided to people who are elderly or disabled, who are the most expensive populations to cover.¹⁸ States have had to use Medicaid to provide services for people who are elderly or disabled because the federal Medicare program fails to do so. More than 40 percent of Medicaid spending is for services provided to people who are also eligible for Medicare, primarily for long-term care, prescription drugs, and financial assistance for Medicare premiums and cost-sharing requirements.¹⁹ Medicaid fills the gaps in Medicare, which provides only limited long-term care coverage and has not yet begun to cover prescription drugs. Even when the Medicare drug benefit takes affect next year, states will not be relieved of most the cost of providing prescription drugs to people who are dually eligible for Medicare and Medicaid. Instead, states will have to make monthly payments to the federal government based on what a state would have paid for drug coverage for dual eligibles if the new Medicare drug bill had not been enacted.²⁰

With the main factors driving Medicaid spending growth lying outside of the Medicaid program itself, efforts to contain spending must also extend beyond Medicaid. If the search for a solution to rising Medicaid costs is focused on budget cuts and caps on federal payments, there is a risk that the effort will merely become an exercise in cost shifting — to patients, to states, or to health care providers, or some combination of the three.

Bush Administration Proposes Substantial Medicaid Reductions

The Fiscal Year 2006 budget proposal by the Bush Administration calls for a $60 billion reduction in federal Medicaid spending over 10 years. The Administration envisions achieving these reductions by prohibiting certain mechanisms states have used to cover their share of Medicaid financing, changing the way prescription drugs are paid for, and making it more difficult for people to transfer assets in order to qualify for Medicaid's long-term care coverage. While $16.5 billion of this $60 billion reduction may be reinvested into Medicaid and the State Children's Health Insurance Program (SCHIP), these funds would primarily be used for new initiatives and would primarily go to SCHIP. Consequently, even if some of the funds are reinvested, funding for existing Medicaid services would still have to be reduced by close to $60 billion.

The Administration also proposes placing a cap on federal payments for Medicaid's administrative services. The proposal sets a dangerous precedent by eliminating the matching-rate financing mechanism that applies to all other Medicaid services and could hinder the adoption of information technology and other initiatives to improve the efficiency of Medicaid. The proposal would also come at a time when state Medicaid offices will be taking on new administrative responsibilities related to implementation of the new Medicare law.

The President's budget proposal also affirms the Administration's support for more fundamental changes to the Medicaid program. While the budget proposal provides no details, it does call for giving states greater flexibility over Medicaid but at no additional cost to the federal government, which strongly implies some type of cap on federal Medicaid spending. In 2003, the Administration proposed eliminating guaranteed federal matching funds for non-mandatory Medicaid services and populations. The Administration's proposal that year would have set limits on federal funding and given states greater flexibility to determine who would be eligible, what services would be covered, and how much Medicaid recipients would be asked to pay.

The Administration's budget incorrectly suggests that large savings in Medicaid can be achieved painlessly by simply closing loopholes and giving states greater flexibility. But funding reductions will ultimately be paid by someone: Medicaid recipients (through reduced eligibility or fewer covered benefits); state governments (who are struggling to balance their budgets while maintaining other critical services); or health care providers (through lower reimbursement or greater uncompensated care).

Republican Leaders Push Medicaid Cuts In Budget

Following the President's lead, Republican leaders in Congress tried to include Medicaid savings in this year's budget resolution: up to $15 billion over five years in the Senate and between $15 billion and $20 billion in the House. Democrats and moderate Republicans united to remove the Medicaid cuts from the Senate's budget resolution and replace them with funds to establish a bipartisan Medicaid Commission to examine ways to strengthen and increase the efficiency of the program. The House passed its large Medicaid cuts, but 44 House Republicans have recently announced their opposition to including Medicaid cuts in the final conference agreement. A clear bipartisan majority in the Senate and House now stands opposed to Medicaid cuts.

Large Medicaid Savings Are Not Possible Without
Serious Consequences

A bipartisan majority coalition is opposing Medicaid cuts because setting arbitrary goals for savings runs the risk of shifting costs and harming some of the most vulnerable Americans.

Medicaid is not inefficient. While Medicaid spending is increasing, the program is not "inefficient," as the new Secretary of the Health and Human Services Department, Mike Leavitt, claimed during his confirmation hearing.²¹ In fact, the growth in Medicaid spending actually compares favorably to spending increases in private health insurance.

Administration officials have argued that giving states more flexibility would enable them to design more efficient programs that could actually increase Medicaid coverage. But flexibility combined with large Medicaid reductions is not the solution. The limited effect of greater flexibility has been demonstrated by the Administration's Health Insurance Flexibility and Accountability (HIFA) waivers, whose results are less impressive than the Administration claims. These budget-neutral waivers have resulted in a net gain in coverage of only about 200,000 people, and some Medicaid recipients have been made worse off as their benefits were reduced in order to finance expanded eligibility for others.²² If federal Medicaid funds were reduced, as the Administration proposes, states would likely have to reduce Medicaid eligibility and services, even if they were also granted greater flexibility to design their programs.

States have already been reining in Medicaid spending. States have an incentive to contain Medicaid spending growth, and they have been doing just that. In recent years, states have taken numerous steps to contain their Medicaid expenditures - measures that have extended beyond mere belt-tightening to actual reductions in who is eligible and which services are covered by Medicaid. In Missouri, for example, the governor has proposed ending Medicaid coverage for about 125,000 people.²³ If Congress enacts reductions in federal Medicaid spending, states will be forced to make even deeper cuts to their Medicaid programs, making access to health care more difficult for low-income children, adults, senior citizens, and people with disabilities.

Less than two years ago, the federal government recognized states' plight and provided them $20 billion in fiscal relief, including $10 billion specifically for Medicaid. Now the Administration and Republican leaders in Congress are proposing to reverse course and actually increase states' Medicaid costs.

Medicaid's optional coverage provides essential coverage and services. Medicaid recipients have few resources to pay for health care and typically have a greater need for care. Using private health insurance as a model for Medicaid coverage would not be appropriate for this vulnerable population. If Medicaid did not cover a needed service, or if the cost-sharing requirement were too high, many Medicaid recipients would be unable to access that care.

Some have suggested limiting federal funds for optional Medicaid coverage, which accounts for two-thirds of Medicaid spending. But optional does not mean unimportant. States cover many optional low-income people in their Medicaid programs because they recognize these people have no other coverage options. And states cover many optional Medicaid services because they are essential, such as prescription drugs and treatment at intermediate care facilities for people with mental retardation. Limiting federal funding for those people and services would create serious hardship and block access to needed health care services.

Optional Medicaid Services

Program integrity can be assured without reducing overall Medicaid spending. The Administration contends that its proposed Medicaid reductions can be achieved through the elimination of inappropriate payments. But the Centers for Medicare and Medicaid Services was only able to identify $119 million in Medicaid fraud in Fiscal Year 2003.²⁴ All can agree that ensuring the program's integrity is important. But to the extent that savings can be achieved — through changes in allowable state financing mechanisms, changes in how prescription drugs are paid for, or changes in how assets can be transferred to qualify for Medicaid — these savings should be fully reinvested back into the Medicaid program. At a time when states are still struggling to maintain their Medicaid programs, the federal government should not be taking funds out of the program.

Conclusion

Medicaid spending is increasing because of factors largely out of the program's direct control: a reduction in the availability of affordable private health insurance, a rise in costs throughout the health care system, and gaps in Medicare coverage. Extracting substantial savings from Medicaid without addressing these underlying factors would likely harm the poor and the sick who depend on the program. Medicaid helps assure the dignity of every person by providing the services necessary to prevent, treat, and recover from illness. This essential safety net should not be cut in an effort to meet an arbitrary budget number.

Endnotes

¹ Weil, Alan, "There's Something About Medicaid," Health Affairs, January/February 2003.

² Congressional Budget Office, March 2004.

³ American Academy of Pediatrics, statement for the record for House Energy and Commerce Subcommittee on Health, March 23, 2003.

⁴ Kaiser Family Foundation, Issue Brief on Medicaid's Role for Women, November 2004.

⁵ Kaiser Family Foundation, The Medicaid Program At A Glance, January 2004.

⁶ The Campaign for Mental Health Reform, "Whither Medicaid?," 2004.

⁷ Crowley, Jeffrey and Risa Elias, "Medicaid's Role for People with Disabilities," Kaiser Commission on Medicaid and the Uninsured, August 2003.

⁸ American Health Care Association, Issue Brief on Medicaid, June 2004.

⁹ Muskie School of Public Service at the University of Southern Maine with the Kaiser Commission on Medicaid and the Uninsured, "Health Coverage in Rural America," September 2003.

¹⁰ Taylor, Jessamy, "The Fundamentals of Community Health Centers," National Health Policy Forum, August 31, 2004.

¹¹ Holahan, John and Arunabh Ghosh, "Understanding the Recent Growth in Medicaid Spending, 2000-2003," Health Affairs web exclusive, January 26, 2005.

¹² U.S. Census Bureau, www.census.gov/hhes/poverty/histpov/hstpov9.html.

¹³ Holahan, John and Arunabh Ghosh, "The Economic Downturn and Changes in Health Insurance Coverage, 2000-2003," Kaiser Commission on Medicaid and the Uninsured, September 2004.

¹⁴ Holahan and Ghosh, January 26, 2005.

¹⁵ Smith, Vernon et al., "The Continuing Medicaid Budget Challenge: State Medicaid Spending Growth and Cost Containment in Fiscal Years 2004 and 2005," Kaiser Commission on Medicaid and the Uninsured, October 2004.

¹⁶ Strunk, Bradley and Paul Ginsburg, "Tracking Health Care Costs: Spending Growth Slowdown Stalls in First Half of 2004," Center for Studying Health System Change, December 2004.

¹⁷ Smith, Vernon et al., October 2004.

¹⁸ Holahan and Ghosh, January 26, 2005.

¹⁹ Bruen, Brian and John Holahan, "Shifting the Cost of Dual Eligibles: Implications for States and the Federal Government," Kaiser Commission on Medicaid and the Uninsured, November 2003.

²⁰ Smith, Vernon et al., "Implications of the Medicare Modernization Act for States," Kaiser Commission on Medicaid and the Uninsured, January 2005.

²¹ Connolly, Ceci, Washington Post, January 20, 2005.

²² Mann, Cindy, Samantha Artiga and Jocelyn Guyer, "Assessing the Role of Recent Waivers in Providing New Coverage," Kaiser Commission on Medicaid and the Uninsured, December 2003.

²³ Ku, Leighton and Judith Solomon, "Is Missouri's Medicaid Program Out-of-Step and Inefficient?" Center on Budget and Policy Priorities, April 5, 2005.

²⁴ CMS response to request from Senate Finance Committee, January 14, 2005.