1 What does the Bush Administration’s Medicaid Reform Proposal Mean for Home and Community-Based Services? Joan Alker Senior Researcher Institute for Health Care Research and Policy Georgetown University

2 Medicaid serves as a critical health care safety net for specific groups of low-income people  Provides health care coverage to 47 million low-income people in the United States  Serves over 8 million people with disabilities  Covers more than 1 in 5 children and pays for 40% of all births in the United States  Largest source of financing for long-term care and covers nearly 70% of nursing home residents  Largest source of coverage for HIV/AIDS care  Largest funder for state and local spending on mental health services

3 Medicaid is a federal/state matching program  Federal government matches state spending on an open-ended basis  Formula for reimbursement depends on states per capita income  Matching rates vary from 50 percent in high per capita income states to 77 percent in low per capita income states like Mississippi

4 Medicaid Fills Medicare’s Gaps Over One-Third of Medicaid Benefit Spending -- $68 billion – is for Services for Medicare Beneficiaries This Grows Over Time with the Baby Boomers’ Retirement Spending on Medicare Beneficiaries 35% Spending on All Other Beneficiaries 65% Source: Secretary’s Advisory Committee on Regulatory Reforms, June Data for 1999.

5 Medicaid Long Term Care Spending (1998) Source: Urban Institute estimates, based on HCFA-2082 and HCFA-64 reports. Total = $58.7 billion

6 “Mandatory" Groups “Optional” Groups Children under age 6 ≤ 133% FPL Children age ≤ 100% FPL Children in foster care Pregnant women ≤ 133% FPL Parents with incomes below state- established minimums (median = 60% FPL) People with disabilities and the elderly receiving SSI (incomes ≤ 74% FPL) Low-income Medicare beneficiaries Children and parents above minimum requirements Pregnant women  133% FPL People with disabilities and the elderly  74% FPL, including those in nursing homes Disabled and elderly people served under Home and Community Based waivers Women with breast and cervical cancer Certain disabled people who are employed and buy into coverage Medicaid has both mandatory and optional eligibility groups

7 Care for Older People and People with Disabilities is the Most Costly (Medicaid Expenditures Per Enrollee, 2001) Source: CBO January 2002 Baseline.

8 Mandatory Services Optional Services Physician, nurse practitioner and nurse midwife services Laboratory and x-ray services Inpatient and outpatient hospital services Screening and treatment services for children (EPSDT) Family planning services Federally-qualified health center (FQHC) and rural health clinic (RHC) services Prescribed drugs Medical care or remedial care furnished by licensed practitioners under state law Diagnostic, screening, preventive, and rehabilitative services Clinic services Dental services, dentures Physical therapy and related services Prosthetic devices Eyeglasses TB-related services Primary care case management services Other specified medical and remedial care Source: Kaiser Commission on Medicaid and the Uninsured, “The Medicaid Resource Book”, July 2002 Medicaid Statutory Services Acute Care Long-term Care Nursing facility services for people 21 years of age or older Home health care services (for people entitled to nursing facility care) Intermediate care facility for people with mental retardation (ICF/MR) services Inpatient and nursing facility services for people 65 or over in an institution for mental diseases (IMD) Inpatient psychiatric hospital services for children Home health care services Case Management services Respiratory care services for ventilator-dependent individuals Personal care services Private duty nursing services Hospice care Services furnished under a “PACE” program Home and community-based (HCBS) services (under budget neutrality waiver)

9 Medicaid plays a major role in the health care system and is a major contributor to state economic activity  Program is projected to be larger than Medicare in 2003  $155 billion in federal dollars, $116 billion in state dollars in 2003  Accounts for nearly 17% of the nation’s health care expenditures  Single largest source of federal financing to states (43%)  Provides key financial support to safety net health centers, hospitals and other providers  Economic engine in many communities

10 Medicaid is a significant source of national health spending SOURCE: Heffler, S. et al., Based on National Health Care Expenditure Data, Centers for Medicare and Medicaid Services, Office of the Actuary. Total National Spending (billions) $1,130$412$422$92$122 Medicaid as a share of national spending (2000):

11 States are experiencing severe fiscal challenges

12 State budget problems are leading to Medicaid cuts  49 states and the District of Columbia will cut Medicaid spending in the current fiscal year  32 states have had to cut Medicaid spending twice during the year  States are:  Freezing or cutting payments to providers  Controlling prescription drug costs  Reducing Medicaid benefits  Restricting Medicaid eligibility  Increasing beneficiary co-payments

13 Looking to the future, states are worried  Many states say they cannot continue to afford Medicaid if costs rise as projected  Medicaid pays for costs that should be covered by Medicare—35% of Medicaid spending is for services for “dual eligibles”, persons who receive both Medicaid and Medicare  Prescription drug costs are increasingly rapidly  The need for long-term services and supports will increase significantly

14 States need immediate help  States need short-term funding so that they can maintain their commitment to Medicaid and avoid further cutting services and eligibility – Congress has been debating a temporary increase in the “FMAP”  Current recession means that since more people are out of work, more people count on Medicaid for health care coverage  After fixing short-term problems, there are long-term challenges to be addressed

15 Bush Administration’s response  The Administration has consistently opposed a temporary increase in the FMAP  The President’s FY2004 budget includes a radical restructuring of the way Medicaid is paid for and run

16 The President’s Medicaid proposal At least 2/3 of the spending (and possibly all) will be “block granted”. States choose to participate – if they don’t however, they get no fiscal relief. States that choose to participate receive capped federal payments that they have to pay back in later years. The proposal is “budget neutral” – offering $12.7billion over 7 years that is paid back in years Eliminates the SCHIP program as we know it. No required state matching payments/ a “maintenance of effort” system instead “Carte blanche” flexibility

17 How does block grant proposal work? States would receive 2 annual, capped allotments from federal govt; one for acute care and one for LTC States could move some portion of the funds between 2 accounts (10%?) Up to 15% of each allotment for DSH and admin

18 Key features of the President’s proposal Capped federal payments to states  Payments front loaded to provide fiscal relief, but reductions in later years - $12.7 billion over 7 years; “budget neutral” over 10 years.  In comparison 80 Senators voted for a Sense of the Senate in March which would provide states with at least $15billion in increased FMAP over 1 year.

19 Capped Federal Payments  Based on 2002 spending, adjusted forward using 10-year growth projections  Funding no longer based on actual changes in enrollment  Funding no longer based on actual changes in health care costs, utilization, new technology

20 Bush plan would allow for “complete” flexibility for “optional” beneficiaries What does this mean?: Optional services could be provided for some groups of people but not others Some services could be covered in some parts of the state but not others States could adopt closed formularies for drugs: high cost drugs could be excluded even if needed Federal standards on cost sharing could be relaxed or eliminated Current “mandatory” services, such as mental health care or hospital care, could be cut out of the benefits package for “optional” people States might not have to meet nursing home quality standards Impact on mandatory beneficiaries is unclear

21 Risk #1:Difficult to predict spending changes in Medicaid over time

22 CBO Federal Medicaid Spending Projections, Variance in actual 2002 expenditures vs. projections is $17 billion or 12% of all 2002 federal payments. Source: Congressional Budget Office historical budget tables, previous editions of its Economic and Budget Outlook. (billions of dollars)

23 Medicaid Long Term Care Average Annual Expenditure Growth Rates Source: Urban Institute estimates, based on HCFA-2082 and HCFA-64 reports.

24 Risk #2: Capped Funding Inevitably Results In Winners and Losers Among States  Base year differences  Differences in growth rates  States do not have to take the block grant option  But states may not be able to predict if they will be a winner or a loser  No fiscal relief if state does not opt in

25 Risk #3: States likely to withdraw a significant portion of their funding

26 Under Current Law When A State Cuts State Spending, It Loses Federal Funds Amount of federal dollars lost if a state reduces state Medicaid spending by $125 million, at different match rates Federal Dollars Lost (millions) $125 $232 $375 Match Rate State Funds Saved (millions) 50% 65% 75% $125 Under The Proposal, A State Could Cut State Spending Without Losing Federal Funds (as long as it meets the MOE requirement) Federal Dollars Lost (millions) $0 State Funds Saved (millions) $125 Amount of federal dollars lost if a state reduces state Medicaid spending by $125 million Bush plan could lead to lost state support for Medicaid

27 Under Current Law When a State Invests State Funds to Expand Coverage, Federal Funds Grow Amount of federal dollars gained if a state expands state Medicaid spending, at different match rates Match Rate New State Investment (millions) 50% 65% 75% $125 Additional Federal Funds (millions) $125 $232 $375 Under The Proposal, If A State Invests State Funds To Expand Coverage, Federal Payments Do Not Grow (assuming the state is receiving its full federal allotment) Additional Federal Funds (millions) New State Investment (millions) $125$0 Amount of federal dollars gained if a state expands state Medicaid spending Bush plan would diminish state incentives to invest in Medicaid

28 What Spending Would be Under the Cap?

29 Most Spending in Medicaid is “Optional” (1998) Mandatory Expenditures For Mandatory Groups 35% Optional Services for Mandatory Groups 21% All Services for Optional Groups 44% Optional Expenditures 65% Source: Urban Institute estimate, based on data from federal fiscal year 1998 HCFA2082 and HCFA-64 reports, 2001 Note: Expenditures do not include disproportionate share hospital (DSH) payments, administrative costs, or accounting adjustments.

30 Most “Optional” Spending is for the Elderly and Disabled (Optional Spending by Eligibility Group, 1998) Source: Urban Institute estimate, based on data from federal fiscal year 1998 HCFA2082 and HCFA-64 reports, 2001 Optional Spending = $100 billion Note: Expenditures do not include disproportionate share hospital (DSH) payments, administrative costs, or accounting adjustments.

31 ElderlyDisabledChildrenParents Distribution of Medicaid Spending by Eligibility Group and Type of Service, % 20% 65% 41% 14% 45% 34% 32% 73% 17% 10% Note: Expenditures do not include disproportionate share hospital (DSH) payments, administrative costs, or accounting adjustments. Source: Urban Institute estimates, based on data from federal fiscal year 1998 HCFA 2082 and HCFA-64 reports, 2001

32 Optional Spending for Long Term Care (1998) Source: Urban Institute estimate, based on data from federal fiscal year 1998 HCFA2082 and HCFA-64 reports, 2001 Note: Expenditures do not include disproportionate share hospital (DSH) payments, administrative costs, or accounting adjustments. Total = $58.7 billion

33 Other solutions?  Increasing the Medicaid “FMAP”  Medicare prescription drug benefit  Increasing the Medicaid Drug Rebate  Other controls on prescription drug costs  Federalizing “duals”/federalizing LTC