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States in Crisis:
The Grassroots Response

Medicaid Overview
February 2002
Who is Eligible

In the Medicaid program, states must provide all mandatory services and may provide optional services. States must provide the same benefits to all mandatory and optional client groups and may not pick and choose which client groups to provide which services.

Mandatory Services under Federal Medicaid Law
  • Inpatient hospital services (other than services in an institution for mental diseases)
  • Outpatient hospital services
  • Rural health clinic services
  • Federally qualified health center services
  • Laboratory and x-ray services
  • Nursing facility services for individuals age 21 or older
  • EPSDT (Early and Periodic Screening, Diagnosis and Treatment for children)
  • Family planning services and supplies
  • Physician services
  • Nurse-midwife services
  • Home health services for individuals entitled to nursing facility services
  • Nurse Practitioner services
  • Emergency services for noncitizens
  • Pregnancy-related services
Optional Services that states may cover include
  • Prescription drugs
  • Institutional care for individuals with mental retardation
  • Home and community based care for the frail elderly, including case management
  • Personal care and other community based services for individuals with disabilities
  • Dental care and vision care for adults
  • Assertive Community Treatment
  • Psychiatric Rehabilitation (and other rehabilitation services that are not vocational)

States may choose to cover additional groups under Medicaid, such as children and other people whose medical expenses reduce their income to the state's ceiling to qualify as medical needy. Almost two-thirds of Medicaid spending (1998) is "optional".

Upper Payment Limit (UPL)

In the early 1990s many states through DSH (disproportionate share hospital program) captured millions of dollars of additional federal Medicaid funds. Congress then imposed DSH restrictions and the growth of DSH slowed dramatically. Since then 28 states have used the UPL (Upper Payment Limit) loophole to maximize federal funding by claiming federal matching funds at the "upper payment limit" for hospitals and nursing homes.

The UPL, which is set by Medicare, may in reality be higher than the actual costs of providing care. States would massively inflate their payments to state or county owned hospitals and nursing homes. When those payments were averaged with the lower payments made to private facilities, the state as a whole would be at the maximum charge, making the situation technically legal. In many states, however, those overpayments were not being used to improve or increase access health care. States tended to bring in the difference and spends it elsewhere in the budget. In FY 2000 HCFA (now CMS) estimated that $1.9 billion was expended by the use of UPL.

In November 2001, the Centers for Medicare and Medicaid Services announced that it would phase out UPL by 2010 with 14 states being cut off this winter. These states are:

ColoradoKentuckyNew York
FloridaMichiganSouth Carolina

Fourteen other states will lose the additional money when the new reimbursement rule becomes final, probably late winter 2002. California and Illinois, which rely heavily on DSL payments, will not be affected for three years and will receive some inflated payments over the short term. The phase out of UPL, while expected, comes at a very difficult time. This action will further deepen the budget hole in the states impacted by the phase out of this Medicaid loophole.

Health Insurance Flexibility and Accountability Demonstration Waivers (HIFA)

Medicaid is at a crossroads. Concerns by states over shrinking revenues and rising costs in general and Medicaid in particular come at a time when the Center for Medicare and Medicaid Services (CMS) has promised State leaders at the October 2001 National Council of State Legislature's Annual Health Conference in Seattle that all requests for 1115 waivers would be reviewed quickly.

To receive federal funds, a state must comply with consumer protections in federal Medicaid law relating to health care benefits, co-payments and premiums, and enrollments. Section 1115 waivers when approved allow states to use different rules for demonstration, pilot, or experimental projects.

CMS has introduced the new Health Insurance Flexibility and Accountability Demonstration Initiative (HIFA). The purpose of the HIFA demonstration is to encourage states to expand coverage to new populations, but does not offer states any new federal funds with which to help finance such expansions. States must finance any expansions that they adopt with "savings" that they generate by reducing spending on current beneficiaries or by drawing on unexpended SCHIP monies.

In the Medicaid program, states must provide all mandatory services and may provide optional services. States must provide the same benefits to all mandatory and optional client groups and may not pick and choose which client groups to provide which services. Under HIFA waivers, these protections can be lifted. HIFA will enable states to redesign their Medicaid programs by slashing benefits for optional beneficiaries. States could be permitted to provide less than the mandatory benefits package and to cut services to adults and children in optional groups. As these waivers are rolled out they will require close attention, as many adults and children with mental illness are served in Medicaid as optional beneficiaries.

Nine states have applied or are in the application process for HIFA waivers. Options under consideration include capping enrollment by imposing waiting lists for clients in certain client groups, cost-sharing (co-payments and premiums), and reducing access to some services for certain client groups.

States in application for HIFA waivers include:
ArizonaWashingtonNew Mexico

Trends: Prescription Drugs

In November 2001, The National Conference of State Legislatures (NCSL) reported that in 44 states revenue collections were below forecast levels. Medicaid costs continue to balloon in the health care sector. Faced with mounting costs and declining revenues, states are looking for ways to control costs and scale back Medicaid.

Reports from the Kaiser Commission on Medicaid and the Uninsured indicated that in 48 states Medicaid officials reported that the cost of prescription drugs was the #1 cost driver in Medicaid. Other factors increasing Medicaid expenditures include provider rate increases, long term care costs and enrollment increases driven by the recession, the S-CHIPS expansion and efforts to cover uninsured workers.

In virtually every state Medicaid officials have been directed by the Governor to prepare proposals to reduce Medicaid spending. Reflecting the urgency of the budget problem, states are considering every possible action that might reduce expenditures.

In FY 2002 efforts to reign in the costs of prescription drugs will include increased restrictions on prescription drug costs and utilizations. Some of the more common cost management strategies will be:

  • Prior authorizations of selected brand name products to encourage the use of generics
  • Increased use of managed care, care coordination and other actions to contain costs.
  • Use of co-payments
  • Use of care management for clients who are high utilizes of service
  • Increased fraud control
  • Contracting with PBMs (First Health) to negotiate deep supplemental rebates and run the Medicaid system (Florida, Michigan)
  • Preferred (referenced priced) formulary (Oregon).
  • Drug purchasing co-ops
  • Price reductions

Basic Facts

  • Federal State-State entitlement Program

  • 51 different programs: eligibility, benefits and provider payment payments vary

  • Covers low income Americans: elderly, disabled, parents & children

  • Currently accounts for 50% of state/local spending on mental health: expected to rise to more than 69% over the next ten years

  • 50% of beneficiaries are children

  • Covers over one fourth of the children in America

  • 66% of all Medicaid spending is paid out on behalf of the elderly and disabled

  • Federal government pays at least 50% of the cost of Medicaid in every state

  • Affects tens of thousands of health care providers and millions of health care workers

  • Services must be offered statewide

  • States must cover a minimum set of benefits for certain groups and at their option cover additional types of services.

  • States have the discretion to vary the amount, duration, or scope of the services that they cover, but in all cases the service must be "sufficient in amount, duration, and scope to reasonably achieve its purpose"

  • Co-payments can be imposed on some services on some groups

  • States may not vary the amount, duration, or scope of a covered service "solely on the basis of an individual's diagnosis or condition".
STATE GOVERNMENT: State Budget Outlook Bleak

The fiscal condition of states has worsened substantially over the past six months. 44 states report that revenues are already below forecasted levels. Budgets that were passed in the spring of 2001 are already in jeopardy. The only states holding steady are those with significant oil, gas or mineral industries, and even they show signs of weakening. States are now confronted with higher expense (unemployment, new security and public health expenditures) at a time that fewer tax dollars are coming in. It is important to note that these shortfalls and spending spikes do not include the impacts from the September 11 terrorist's attacks. The degree of the shortfalls varies from state to state, region to region.

The large number of states struggling with tight budgets is reminiscent of the recession on the early 90s. State Legislatures will again be challenged to keep FY 2002 budgets balanced and enact budgets for FY 2003 under the worst conditions in a decade. To deal with this squeeze states all across the nation have begun to make budget cuts and/or to freeze spending or have plans to do so. As 2002 is an election year, it is not anticipated that new taxes will be part of the strategies to fill these gaps.

According to the National Conference of State Legislators (NCSL) expenditures are exceeding budgeted levels and/or revenues are below projections in the following states:

States facing Budget Cuts
AlaskaIllinoisMississippiRhode Island
ArizonaIndianaMissouriSouth Carolina
ArkansasIowaNebraskaSouth Dakota
CaliforniaKansasNew JerseyTennessee
ColoradoKentuckyNew MexicoUtah
ConnecticutLouisianaNew YorkVermont
DelawareMaineNorth CarolinaVirginia
FloridaMarylandNorth DakotaWest Virginia
GeorgiaMassachusettsOhio Wisconsin

States Tapping Reserves
(including rainy day funds and tobacco settlement monies)
HawaiiNew JerseyPennsylvania
KentuckyOhioSouth Carolina

States considering freezes, layoffs, slowing down tax cuts and/or purchasing delays
ColoradoMarylandRhode Island
IllinoisNevadaSouth Carolina
IndianaNew JerseyVermont
KansasNorth CarolinaVirginia

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