Balancing Act

Lori Griffin's voice was shaky as she mustered the courage to challenge Tennessee Gov. Phil Bredesen. The Democratic governor had called a June 23 news conference in Washington to explain his bold new plan to save his state's faltering Medicaid program, TennCare, which advocates hailed a decade ago as a model for the future. In order to provide medical assistance to more poor people, Tennessee had put all of its Medicaid beneficiaries into HMOs, a strategy that kept costs down for a

But Griffin, a 41-year-old mother of two from Morristown, Tenn., received notice earlier this year — as did 323,000 other state Medicaid beneficiaries — that the state would cut her from TennCare in August. A consumer group, called the Tennessee Health Care Campaign, had flown Griffin and several other residents to Washington to crash the governor's press conference. Their goal was to appeal to Bredesen, and to the national press corps, by telling their heart-wrenching stories.

Griffin, who suffers from thyroid cancer and a long list of other ailments, stood up at the press conference and explained that her doctor did not want to remove her thyroid and begin further treatment if the care would have to cease before completion. "I depend on TennCare for my survival, and my family does too," said Griffin, who cares full-time for her husband, who is dying of a connective-tissue disease called Marfan syndrome. "If I don't get my prescriptions, I will die," she
added, "and I don't know what would happen to my family."

Contacted by telephone on August 5, Griffin told National Journal that the state had dropped her from TennCare on August 4, rather than waiting until August 31, as she had originally been notified. Her doctor had wanted to spend the month identifying the extent of her thyroid cancer, performing a needed hysterectomy on her, and talking to pharmaceutical companies about helping her with the cost of her 17 medications, which total more than $1,000 a month, she said. "I was scheduled for appointments" in August, Griffin said, but now, without health insurance, "I'm going to have to start using the emergency room."

Griffin's husband remains on Medicaid because the federal government requires states to cover disabled people like him who receive Supplemental Security Income checks. Her children also stay in TennCare because states must cover kids whose family incomes fall below the federal poverty line. Until now, Tennessee had gone beyond federal requirements for Medicaid and covered Lori Griffin as a so-called "optional" beneficiary. She doesn't qualify as a mandatory beneficiary because her husband's disability check puts her family $10 a month beyond the income limit.

Budget pressures and spiraling health care costs have forced many states into the uncomfortable position of cutting people like Lori Griffin from Medicaid, the federal-state health care program for the poor. States are also eliminating or reducing Medicaid benefits — from dental care to mental health services to hospital care — and many states are imposing premiums and other new costs on beneficiaries.

States can make some of these changes without federal permission. But in many cases, states must seek waivers, as Tennessee did, from the Health and Human Services Department to bypass federal laws that define minimum Medicaid eligibility and benefits. Cash-strapped governors are stepping up demands for these and a new breed of controversial waivers, bringing front and center the debate over just how much flexibility states should have in administering Medicaid.

This issue will receive considerable attention this fall, when Congress must decide how to slow the growth of federal spending on Medicaid by as much as $10 billion over the next five years as part of the budget reconciliation process. Policy makers say it's inevitable that, at that time, governors will win some increased flexibility in administering Medicaid, because loosening the rules for the states can save the federal government money as well.

Members of Congress will be tasked with finding the right balance of power in this federal-state partnership. "We need to define the area of [state] flexibility more precisely, and there needs to be transparency" in the process for waiving federal law, Sen. Max Baucus, D-Mont., the ranking member on the Finance Committee, said in an interview. "Governors need discretion, but not so we poke holes in the safety net." Finance Committee Chairman Charles Grassley, R-Iowa, supports the concept of state flexibility in Medicaid, although he, too, has expressed concern that it is difficult for Congress to monitor HHS's decision-making on waivers.

Republicans in Washington, and many governors of both parties, argue that flexibility in managing Medicaid is essential if states are to adopt newer, consumer-based insurance practices that they say are beginning to improve health care quality and save money in the private sector. Governors complain that it can take years to obtain a waiver; in fact, the National Governors Association contends that states shouldn't need waivers at all for changes that other states have already tried with success. "States still need waivers to provide home- and community-based alternatives to nursing home care," complained Matt Salo, director of the NGA's Health and Human Services Committee.

Many Democrats, though, fear that giving the states too much leeway could endanger the people that Medicaid is supposed to care for. "The federal government puts money on the table and has the obligation of seeing that the money is well spent," said Marina Weiss, who is a senior vice president of the March of Dimes and was a Democratic aide on the Senate Finance Committee in the 1980s, when the panel pushed through bills expanding Medicaid. "The governors say, 'Trust us, we're doing a good job, and we're close to the people,' " Weiss added. "But there's a desire on the part of some [governors] to throttle back [on coverage]. One in three kids is relying on this program."

Indeed, Medicaid today covers 53 million children, people with disabilities, seniors, and other adults (mostly parents and pregnant women). Most of the program's beneficiaries have incomes that fall below the federal poverty line, which is now about $19,000 for a family of four.

Total Medicaid spending this year is expected to hit $329 billion, including $197 billion from the federal government, and $132 billion from the states. (Medicaid has just surpassed K-12 education as the largest single portion of state spending, according to the NGA.) By contrast, the government will spend $309 billion this year on Medicare, the federal health care program for senior citizens.

An Early Haze

Congress will have a difficult job this fall in trying to plan Medicaid's future at a time when the program's very mission is rapidly fluctuating. Before settling on a balance of power between the federal and state governments, policy makers need to redefine Medicaid's purpose, in the view of many experts. Should the program cover only the poorest of the poor, as it did when it was conceived in 1965? Or should Medicaid continue to also cover the low-income people who have been added to its rolls over the last three decades — those who don't have access to, or cannot afford, health insurance? Should it continue to promise the same coverage to each beneficiary?

What is clear is that 40 years after its birth, Medicaid has grown far beyond its initial mission. "Medicaid is no longer just a welfare program," said Salo of the NGA. "It's not a program just for people in abject poverty. It's paying for more than half of mental health services, more than half of HIV/AIDS [care], 90 percent of HIV/AIDS services for kids, 40 percent of all births, 25 percent of all kids, 50 percent of all long-term-care dollars, two-thirds of all nursing home residents.

"The consistent vision is that Medicaid will solve the health system problems that no one else can — or wants to — figure out," Salo contended. "But it's an ad hoc, flying-by-the-seat-of-your-pants health policy."

In fact, Medicaid has been flying by the seat of its pants ever since Congress created it in 1965 as an afterthought to the Medicare program. From the time that President Kennedy took office in 1961, he pushed hard for a federal health care program to cover hospitalization for the elderly. The American Medical Association resisted the move, saying that it would lead to socialized medicine. But after Kennedy was assassinated in 1963, and after Lyndon Johnson was elected in 1964 with a two-thirds Democratic majority in Congress, enacting the late president's domestic agenda got easier.

Still, most of the power in Congress at that time belonged to conservative Southern Democrats such as Rep. Wilbur Mills of Arkansas, then the chairman of the House Ways and Means Committee. Mills opposed the notion of a social-insurance entitlement, out of the prophetic concern that the program would grow and quickly become unaffordable.

In 1960, to pacify proponents of a Medicare system, Mills and Sen. Robert Kerr, D-Okla., had ushered through Congress the so-called Kerr-Mills bill to help low-income seniors with health care costs. It was a federal-state matching program "designed deliberately as an alternative to Medicare," Robert Ball, who was a high-ranking Social Security Administration official in 1960 and who moved up to the top job in 1962, recalled in an interview. "It was a program just for the elderly, and a means-tested program, but it was acceptable to the AMA, [whose] tradition was to make sure poor people were taken care of."

But the Kerr-Mills legislation didn't pacify those pushing for Medicare, and it didn't bring relief to poor, Southern states, as Mills had hoped. Nearly all of the program's federal funding went to New York and a handful of other large states.

In the mid-1960s, Ball said, "suddenly, Johnson enjoyed 80 percent popularity; he passed the landmark Civil Rights Act, and the AMA saw the handwriting on the wall" that Medicare was inevitable. That's when Mills called an executive session of the Ways and Means Committee and proposed a three-tier program: hospital insurance for seniors under Social Security; a voluntary insurance program to cover seniors' doctor bills, subsidized out of general federal revenues; and an expanded medical-welfare program for the indigent, administered by the states. Republicans and the AMA were pleased with the voluntary nature of the physician coverage, and Southern Democrats could boast about expanding Kerr-Mills beyond the poor elderly, and about bringing home federal money.

Johnson signed the Social Security Act amendments creating the Medicare and Medicaid programs on July 30, 1965. While the debate had raged for a decade about how Medicare would work, "there wasn't any thought given to Medicaid," Max Fine, a representative of Kennedy's task force on health and Social Security, said in an interview. "There wasn't a hell of a lot of forethought to what the package meant."

As Medicaid was conceived, the federal government would match state expenditures, and it would require states to provide a minimum package of health care benefits to the poor. Anyone receiving cash benefits under welfare was entitled to Medicaid coverage. But at that time, states were responsible for establishing eligibility for welfare, and they typically drew the line to exclude people living on incomes above 20 or 30 percent of the federal poverty level, which was then about $1,500 a year for an individual. Consequently, many people who fell well under the federal poverty line didn't qualify for either welfare cash assistance or for Medicaid.

Within a few years, the federal-state tug-of-war over Medicaid was under way. Early on, when funding was available,governors sought to cover more people, particularly women and children. At the same time, the elderly began to increasingly turn to Medicaid to cover the cost of nursing home care. Eventually, the program was covering not only the poor but also many middle-class seniors who had run out of money to pay for lengthy stays in nursing homes or who had shielded their assets in order to qualify for Medicaid.

In 1981, President Reagan, a longtime opponent of social insurance, responded to budget pressures by trying to cap federal Medicaid contributions to the states. Congress rejected his plan but did agree to a deep funding cut.

After that, Congress took more control of the program, expanding coverage as the ranks of the uninsured grew. "People would say, 'Look, we've got all these sick people, and we can't have them without a place to turn,' and people would say, 'Let's find a way to shoehorn them into Medicaid,' " Sen. Ron Wyden, D-Ore., a Finance Committee member, said in an interview.

Not everyone agreed that Medicaid should be covering people who weren't in poverty, but as health care costs rose, small businesses and other employers began to stop providing health care coverage to their employees. "There has been pressure in the last couple of decades to expand Medicaid, but was it designed to be a substitute to fill the larger problems in the health system?" asked Grace-Marie Turner, the president of the Galen Institute, a conservative research group that focuses on
health care and tax policy; she is a member of the Presidential Advisory Commission on Medicaid, recently formed by the Bush administration to examine the program's future.

Throughout the 1980s, as pots of federal money became available, Rep. Henry Waxman, D-Calif., then the chairman of the Commerce Health and Environment Subcommittee, would steer the funds to Medicaid, mostly to cover kids and pregnant women. Waxman was often assisted by former Sen. Lloyd Bentsen, D-Texas, who became Finance Committee chairman in 1987. The strategy was to first allow states to cover a group of people as optional Medicaid beneficiaries, and then come back later and require states to cover those people.

"I always thought the Medicaid program was trying to help low-income people get access to health care, and that it was a program we needed until such time as we have national health insurance," Waxman said in an interview. Ironically, to meet his expansionary goals for Medicaid, Waxman frequently made his demands as part of budget reconciliation — the same process that Congress will use this fall to trim spending on the program.

In 1989, for example, Congress mandated that Medicaid provide an Early and Periodic Screening, Diagnostic, and Treatment benefit, to ensure that children get immunizations and important medical screenings for problems with vision, hearing, lead poisoning, and other health issues. If an EPSDT screening turns up a problem, the child receives treatment, even if Medicaid doesn't otherwise cover it.

Medicaid steadily served around 22 million Americans annually from 1975 though 1985. By 1990, the number of beneficiaries had risen to 25 million, and by 1995, it had shot up to 36 million, compared with today's 53 million beneficiaries.

In the early 1990s, the Clinton administration opened the door for the states to seek waivers from federal law to expand their Medicaid programs and to move beneficiaries en masse into HMOs. The 1997 Balanced Budget Act allowed states to put most of their Medicaid beneficiaries into managed care plans without getting waivers from HHS. As in the private sector, moving patients to HMOs helped to control spending for a while, but health care costs nonetheless continued to spiral out of control after that.

Power to the States

States dramatically stepped up their requests for Medicaid waivers when President Bush's first HHS secretary, Tommy Thompson, made the process quicker and easier. As Wisconsin governor, Thompson had been a vocal critic of what he said was a cumbersome and lengthy waiver process.

In 2001, the Bush administration launched its Health Insurance Flexibility and Accountability initiative to grant states even greater authority to try new approaches. The initiative allows states to seek waivers to cut benefits, increase costs, and cap enrollment for current mandatory and optional Medicaid beneficiaries, and then to use savings from these changes to expand coverage to new groups – without spending any new money.

HHS has approved 17 comprehensive waivers since then. Because of fiscal constraints, though, several states never implemented their waivers or did so only in part, according to a March report of the Kaiser Commission on Medicaid and the Uninsured, a research group. Kaiser's conclusion? "Without additional federal financing, increased programmatic flexibility [for the states] does not appear to be sufficient to support ongoing substantial coverage expansions."

In 2002, Utah received a waiver to increase cost sharing (through new enrollment fees and co-payments) and to reduce benefits for 17,600 Medicaid-covered parents who had incomes below 50 percent of the poverty level. The state used the savings to expand Medicaid eligibility for other poor and near-poor adults. Under this program, enrollment is capped at 19,000 adults, a cap that Utah reached in 2003. Benefits are limited to primary care — hospital coverage is only for emergency-room visits, and specialty and mental health services are not covered — and beneficiaries must share a significant part of the cost.

"One year later, we surveyed those people [who had been added with limited coverage], and there were two schools of thought," Mike Leavitt, a former Utah governor who is now HHS secretary, said in an interview. "One [group] was grateful, and the other said they needed more. But one year earlier, people were saying they had nothing."

Meanwhile, HHS granted Oregon a Medicaid waiver in 2003 to reduce benefits and to increase premiums and costs. Oregon faced worse-than-average budget problems, according to Kaiser. The state had planned to also use the waiver to expand Medicaid eligibility for some parents and for other adults with incomes up to 185 percent of the poverty level, but the money squeeze delayed that expansion.

Within a year, half of Oregon's Medicaid recipients facing the new $6-to-$20 monthly premium had left the program (about 55,000 people), and nearly three-quarters of those people were left with no insurance. Emergency-room use increased as a result, according to a June 2004 Kaiser report, which also concluded that many of the Oregonians affected by the waiver had very limited incomes and suffered from serious physical and mental health problems. The state saved money not because of the new premiums, according to Kaiser, but because of reduced enrollment.

Oregon's waiver application stated that its intention was not to reduce Medicaid enrollment. Indeed, as Oregon and other states consider increasing beneficiary cost-sharing, their hope is that it will both lower state expenditures and make beneficiaries more cost-conscious.

New Market Ideas

The newest Medicaid waiver proposals from the states go beyond the nipping-and-tucking of recent years. Lowering costs is still a major goal. But the new waivers are also based in conservative ideology, and are meant to align Medicaid more closely with free-market ideas that are gaining acceptance in the private health insurance sector.

The Bush administration has indicated its general support for these waivers, but officials have also emphasized the need to restrain federal Medicaid spending. In the past, Bush has proposed giving states more flexibility in Medicaid in return for their acceptance of a cap on federal contributions.

Currently, the federal government requires states to provide all Medicaid recipients with the same minimum package of benefits, whether they are seniors in nursing homes, pregnant women, or healthy kids. The idea behind the new waivers is to tailor Medicaid benefits to different groups of people — on the basis that they have different needs — and to give beneficiaries more responsibility for controlling the spending of their Medicaid and personal health care dollars.

Leavitt sees Medicaid as serving three distinct populations: people on welfare, people with low incomes, and people who need long-term care. "To use the same program for all three, and treat them the same way, has created a situation of nonsustainability," he said.

Newt Gingrich, the former House speaker, also subscribes to this "tailored benefit" model. In an interview, Gingrich advocated providing health benefits to the poor and uninsured through vouchers, tax credits, and health savings accounts, depending on individual income levels. (Under HSAs, beneficiaries receive a set amount of money in a private, tax-favored account to spend on medical services; once the money runs out, the beneficiary pays some additional costs before a catastrophic health insurance policy kicks in.)

"If you're eligible for Medicaid, you get a voucher. If you're above [the income limit], you get a large tax credit" to buy insurance on your own, Gingrich explained. Such an approach could get the country to "100 percent of insurance for all Americans," he said. "For a modest amount of money, we could do HSAs for every poor person on Medicaid. Within a few years, we would have real savings, and people would be involved in the consumer health system like everyone else in America."

Republican Govs. Mark Sanford of South Carolina, Jeb Bush of Florida, Ernie Fletcher of Kentucky, and Sonny Perdue of Georgia are "all talking in this direction," Gingrich said. "What we don't have in Washington is any kind of understanding about how big the change has to be — lots of talk about how big the problem is, but not about how big the change has to be." In 1995, when Gingrich was House speaker, he unsuccessfully tried to turn Medicaid into a block grant to the states.

In Florida, Jeb Bush is crafting a Medicaid waiver request that seeks an absolute cap on federal dollars, which the governor has said he is willing to take to get out from under the federal bureaucracy and run his program as he sees fit. Although he has not yet submitted his waiver proposal, the governor has "also been clear about wanting to restrict Medicaid growth to the rate of growth in state general revenue, and to cap spending on individuals," according to Joan Alker, a senior program director at Georgetown University's Center for Children and Families. "This is a very hot issue in Florida," she said. "They get upset if you say they're capping their program, but they clearly are."

A funding cap could mean that some of Florida's Medicaid beneficiaries could end up without important benefits, like the EPSDT benefit for kids, according to Alker. "The concept is that they wouldn't have to provide all of the mandatory services," she said. Health plans covering Medicaid beneficiaries would have "unprecedented flexibility in the benefits that people get," she added.

South Carolina, meanwhile, is working on a waiver proposal that would similarly cap overall Medicaid spending. All beneficiaries would be given HSAs, which they could use as a personal spending account to finance their health care, or could use to buy a private insurance policy. "There's not a lot of detail," Alker said of the South Carolina plan, "but it's clear the beneficiary is at risk. Say you need physical therapy. The catastrophic policy probably wouldn't cover it. So what do you do?"

In Waxman's view, allowing states such leeway on Medicaid is ultimately unfair. "Why should a poor child in one state be able to have access to life-saving health care, and a poor child who's just as poor in another state not get access – with federal dollars going into it?" Waxman asked. The real need, he said, is for more federal dollars.

Conservatives see things differently. John Goodman, president of the National Center for Policy Analysis, a conservative think tank in Dallas, argues that some federal Medicaid rules "make it hard to do sensible things … like to have co-payments or set up HSAs. To duplicate what other [private] insurance is doing is hard in Medicaid." Goodman added that the federal government has become so restrictive that it's hard to offer what was first intended in Medicaid," that is, to match Medicaid beneficiaries' coverage to that available in the private sector.

September Stress

In September, key congressional committees will be looking for ways to cut federal spending on Medicaid by $10 billion as part of the broader budget reconciliation that Congress is undertaking to shave $35 billion off the growth of entitlement programs over the next five years. In the process, some Republicans are closely eyeing the Medicaid proposals in the works in Florida, South Carolina, and other states.

"There's interest on the House side for pursuing [these states' proposals] as a model for federal reform," Alker said. She added that Republicans on the House Energy and Commerce Committee may try to use the budget reconciliation legislation to make it easier for Florida and other states to obtain waivers for their Medicaid plans.

Sen. Jay Rockefeller IV, D-W.Va., a Finance Committee member who heads a Senate Democratic task force on Medicaid, worries that Congress might give governors too much flexibility, either by making it easier to get waivers, or by making it possible to make some program changes without waivers.

"Grassley is a very good chairman, very fair, and he tries his very best to be bipartisan," Rockefeller said in an interview. "But the Senate Finance Committee is made up of a lot of 'true believers' that people should exercise personal responsibility, that the governors will do the right thing… For them, it's about balancing the budget. For me, it's about taking care of a huge chunk of West Virginia… I was a governor, and this makes me very nervous."

On September 1, the president's Medicaid commission is due to issue an initial round of recommendations for Congress to consider as part of reconciliation. (For more on the commission, see pp. 2578-79.) Congress is eyeing two of Medicaid's leading cost drivers — prescription drugs and nursing home care – to cut back on federal spending.

Both Republicans and Democrats seem to agree that Medicaid's drug payment system, which is supposed to discount prices based on pharmaceutical companies' reporting of their average wholesale prices, doesn't work. The Congressional Budget Office and the Office of Management and Budget estimate that adjusting the formula that determines how Medicaid pays for prescription drugs would lower federal spending by more than $5 billion over five years.

Rep. Nathan Deal, R-Ga., the chairman of Energy and Commerce's Health Subcommittee, complained at a June 22 hearing that Medicaid pays "artificially high" prices, even for generic medications. "In many instances, the [average wholesale price] bears little or no resemblance to what pharmacists really pay for drugs," said Deal, who argued for a more accurate and "fair" formula.

Congress will also probably try to save about $1.5 billion by making it harder for wealthier seniors who need nursing home care to transfer assets to family and friends in order to qualify for Medicaid. Currently, seniors cannot qualify if they have transferred certain assets within three years. Republicans — and some Democrats — are supporting Bush's proposal to increase the so-called "look-back" period to five years. (For an in-depth analysis on the plight of nursing homes, see "Long-Term Trouble," NJ, 5/7/05, p. 1378.)

These two cost-cutting proposals are really short-term attempts to side-step Medicaid's broader problems. This fall's reconciliation debate will not serve as the venue to look at a complete overhaul of the program. The Medicaid commission will continue working after reconciliation is complete on more far-reaching recommendations, to be issued by the end of December 2006.

Many Republicans involved with Medicaid policy agree that the long-term solution is to give states more flexibility, which they believe should lead to lower spending. Children and healthier adult beneficiaries could be hit the hardest. Seniors and people with disabilities could end up having to depend more on home services rather than on institutional care.

As the House and Senate committees proceed, experts are urging them to consider Medicaid in the context of the nation's broader health care system. These experts see employer-sponsored health care at one end of the health insurance spectrum, and Medicaid at the other. As private-sector insurance programs and Medicaid both cut back their coverage, the insurance gap in the center of the U.S. population grows larger. Everything is connected, Alker contends: Cutting Medicaid spending will only force other parts of the health care system to pick up the cost.

"These proposals can achieve budget certainty — but at the expense of children, parents, the people who rely on the program for health care," she said. "Their needs are not going to go away, so the costs are still going to be there. They're going to get shifted to other payers in the system, be that hospitals, community health centers, county clinics, and also private insurance."

Energy and Commerce ranking member John Dingell, D-Mich., is among the Democrats who are skeptical of Republicans' Medicaid fixes. The overriding goal of the Bush administration is to "shunt costs off from the federal government to the states," he complained in an interview.

"Flexibility? That's all hooey," Dingell said. "The intent is to dump costs on the states… We'll end up without enough federal oversight [of Medicaid], and that's a major problem, but nobody's talking about that."

Sen. Edward Kennedy, D-Mass., one of the few members who, like Dingell, was in Congress when Medicaid was created in 1965, is similarly concerned. "We need to make sure that so-called flexibility is not just a way to cut eligibility and benefits, and that the federal guarantee of health care for low-income Americans is not undermined, as many of the proposals that have been discussed would do," Kennedy said in an interview.

On the contrary, many Republicans argue that if Medicaid is to survive, it must act more like the private insurance system. "Medicaid was a 1965 add-on to Medicare — an afterthought," Gingrich said. "It functions like an afterthought. We couldn't have designed a greater invitation to unhappiness."