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Ending Medicaid As We Know It

Is Medicaid in its current form sustainable? And if not, is welfare reform the right model for change?

Getty Images. (c) Thomas Barwick
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It would be easy to miss the significance of Utah’s 100-person, $600 Medicaid pilot. When Gov. Gary Herbert signed it into law in March, it was less than a tiny tick on the back of the state’s $1.6 billion Medicaid program.

But there’s a good reason to pay attention. The idea that animates this pilot program might one day transform Medicaid. The Medicaid beneficiaries in the pilot program will have to meet a work or community-service requirement. The goal, says Utah state Rep. Ronda Menlove, who shepherded the bill through the Legislature, is “to get at the concept of ‘I get something for nothing. I am entitled.’” Inspiration came, Menlove says, from a couple of places: the Mormon Church’s practice of extending help to needy members but requiring service in return, and from “Republican principles of self-sufficiency, self-reliance, personal ownership of your life and taking responsibility.”

There was another influence too -- the example of welfare reform.

The original welfare program -- Aid to Dependent Children -- was crafted in 1935 to provide financial assistance to children whose families had low or no income. In 1962, the program was rechristened Aid to Families with Dependent Children (AFDC). Six decades later, Congress passed and President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act, replacing AFDC with Temporary Assistance to Needy Families (TANF). TANF was block-granted, and it limited the duration of benefits and gave states the leeway to require recipients to find employment, seek education or job training. Today, the TANF cash assistance program -- and the work and job training programs that support it -- are a fiscal footnote, accounting for about 0.6 percent of state general fund spending, or approximately $11 billion.

Medicaid was created in 1965 to address a specific shortcoming of AFDC, namely its failure to provide medical assistance. Today, Medicaid is the largest state expenditure, accounting for nearly 22 percent of state spending in fiscal 2010. (Focusing only on state general funds, it’s the second largest item, after elementary and secondary school spending.)

Not surprisingly, a growing chorus of conservatives is saying that it’s time to do to health assistance what was done to cash assistance: End it as we know it. “The Medicaid program is broken from both budget and health outcomes perspectives,” says Mississippi Republican Gov. Haley Barbour, one of the more outspoken leaders for change.

Increasingly the conservative critique of Medicaid resembles the arguments made about the old AFDC program. In a recent Wall Street Journal op-ed column, Scott Gottlieb, a resident fellow at the conservative American Enterprise Institute for Public Policy Research, argued that Medicaid beneficiaries would “do just as well without health insurance.” Others have pointed to studies to suggest that having Medicaid might even harm beneficiaries. Critics such as Alice Rivlin, former director of the Office of Management and Budget under the Clinton administration, have also argued that the way the federal government funds Medicaid -- by matching state spending with a larger federal match -- effectively encourages states to increase spending. States that want to tailor benefits for specific populations must seek approval from the federal Centers for Medicare & Medicaid Services (CMS) to do so. What is needed, critics say, is a new deal: greater flexibility for states in exchange for a defined contribution -- or block grant -- from the feds.

Thirty states had piloted welfare reform programs before Clinton ended the old AFDC program. But with Medicaid, only one state has been allowed to experiment with greater flexibility -- Rhode Island. Its unique waiver, in exchange for operating under a cap, was authorized by CMS on the last day of the George W. Bush administration. Other offers, however, are now at hand. In April, the Republican-controlled U.S. House of Representatives passed a budget resolution drafted by Budget Committee Chairman Paul Ryan that would convert all state Medicaid programs into a block grant and give states the freedom to manage the program as they see fit. The Ryan proposal would also reduce the federal contribution by $771 billion over 10 years, a cut that the Congressional Budget Office has predicted would reduce federal Medicaid spending by 35 percent by 2022.

“Bipartisan efforts in the late 1990s transformed cash welfare by encouraging work, limiting the duration of benefits, and giving states more control over the money being spent,” Ryan wrote in his budget resolution, called The Path to Prosperity. “These reforms worked because the best welfare program is one that ends with a job and a stable, independent life for the individual. Now it is time to implement these same reforms across other areas of the social safety net, especially Medicaid.”

That approach sits well with several Republican governors. Barbour in Mississippi, Chris Christie in New Jersey, Robert McDonnell in Virginia and Rick Perry in Texas have endorsed the proposal on behalf of the Republican Governors Association. Earlier this spring, Barbour told the House Energy and Commerce Committee that, in exchange for managing its Medicaid program, his state would agree to cap the federal medical assistance match to Mississippi at 2 or 3 percent per annual increase. Such a deal, Barbour noted, would save the federal government $10 billion if other states followed suit.

A cynic might say that it’s easy for Republican governors to support such a proposal because there’s no chance of it becoming law: President Obama has already promised to veto it. However, even liberal critics of the proposal say it would be a mistake to dismiss the seriousness of this idea. “The Medicaid block grant is not likely to be enacted as is,” says Edwin Park of the left-leaning Center on Budget and Policy Priorities. “But there are other proposals on the table that would inevitably result in things like a Medicaid block grant.” One is the proposal by Republican Sen. Bob Corker of Tennessee and Democratic Sen. Claire McCaskill of Missouri to cap total federal spending at 20.6 percent of overall gross domestic product. Moreover, if the GOP wins control of the U.S. Senate in 2012 -- something many political forecasters predict -- and if a Republican wins the presidency as well, then block-granting Medicaid could well follow.

In short, a serious debate over the future of Medicaid has begun, and states will have to consider their positions on some fundamental questions. Is Medicaid in its current form sustainable? And if not, should states glom onto welfare reform as the right model for Medicaid reform?

There are few state leaders who don’t see Medicaid as a program that’s devouring state budgets and one that will become even more disruptive when the Medicaid expansion portion of the health-care reform law -- the Affordable Care Act (ACA) -- is implemented. For the past 10 years, Medicaid’s costs have risen at a rate of approximately 8 percent per year -- well beyond state revenue growth which, for the 30 years before the Great Recession, averaged 6 percent per year. Few economists see a return to such robust growth even when the states have recovered from the long and deep downturn. Meanwhile, CMS estimates that average annual health expenditure growth between 2009 and 2019 will be 6.1 percent per year. This means that over the long term, states face a widening gap between their expenses and revenues -- in 2010, state revenue growth was 2 percent.

In April, the Government Accountability Office (GAO) took a look at what it called “the fiscal gap.” Its findings were sobering. The GAO estimated that in order to meet statutory and constitutional requirements to balance their budgets, state and local governments would have to cut expenditures (or raise taxes) by 12.5 percent a year -- every year.

“From where I sit, the so-called Great Recession is a game changer,” says Ray Scheppach, former director of the National Governors Association. “Probably states can’t handle the current Medicaid program going forward.”

In short, if the question is, “Is the current Medicaid program sustainable?” The answer is no.

That raises another question. Can state-managed Medicaid programs do more with less?

The poster child for the conservative model of Medicaid reform is the state that accepted a cap on federal funding from the Bush administration. To conservatives, Rhode Island’s experience suggests that block granting Medicaid would work out in much the same, successful way as welfare reform. To Gary Alexander, former Rhode Island Executive Office of Health and Human Services secretary -- who managed Rhode Island’s turnaround (and who is now the acting secretary of the Pennsylvania Department of Public Welfare) -- it suggests something else: a way out of the deeply dysfunctional relationship between states and CMS.

Before he undertook Rhode Island’s experiment in reform, Alexander worked for the Massachusetts Legislature, then moved south to join Rhode Island’s Department of Health and Human Services. When then-Gov. Donald Carcieri wanted someone to tackle Medicaid reform, he turned to Alexander.

Carcieri believed that reforming Medicaid was central to addressing his state’s structural deficits. The centerpiece of Alexander’s reform agenda -- shifting resources away from expensive nursing homes and toward less expensive home and community care settings -- wasn’t controversial. Car-cieri and Alexander believed that other ideas to delete or modify benefits across the population wouldn’t be either. “If there is an elderly population that needs podiatry, we want to be able to offer it to them rather than to the entire population,” Alexander says.

The problem was that every time the state tried to put in such changes to the state program, it would hit a stone wall with the federal government. CMS was not uncooperative. On the contrary, sometimes it was too helpful, inundating Alexander’s office with e-mails, regulations and expert consultations. The real problem was the state Legislature’s budgetary cycle. In January or February, the governor would present his budget to the Legislature. That budget would include delivery changes or cost containment measures relating to Medicaid. By the time the Legislature made its decisions, it was usually June, with implementation mandated for July. While Alexander’s office could talk to CMS about how it might view proposed changes earlier, it couldn’t formally ask for amendments to its state plan or to existing waivers until the Legislature had acted. So instead of implementing what the Legislature had passed, Alexander and his office had to wait and negotiate with CMS.

“Some things the feds would approve in a month or two months; other times it was three to six months,” Alexander recalls. “There were times that we had initiatives tagged as savings, and all the paperwork back and forth, the phone conferences, the experts on the phone, take six to eight months.” By that time, the savings had failed to materialize and the Carcieri administration had to go back to the Legislature, hat in hand, for supplemental appropriations.

“The governor kept getting frustrated,” says Alexander. “‘I don’t understand this,’ he’d tell me. ‘Who deals like this in real, everyday life?’” Ultimately Carcieri got so frustrated that he decided to do something radical. He approached CMS with an unusual proposal. The state would accept a block grant in exchange for the ability to retain 20 percent of any savings it produced from real delivery reforms -- “not just cutting people,” Alexander says.

Unfortunately that proposal was incompatible with existing federal law. So instead, Rhode Island and CMS agreed on an alternative arrangement: Rhode Island’s 11 existing waivers would be consolidated into one global waiver, and CMS would commit to responding to requests in 45 days. In return, Rhode Island would agree to a cap on federal contributions to the state Medicaid program -- $12 billion over five years.

Advocates were horrified by the proposal and warned of dire consequences. Those have not materialized. Moreover, state spending on Medicaid has proven to be much lower than predicted. According to Alexander, reform efforts related to the move to a global waiver saved the state $100 million over the course of the first 18 months and reduced the growth of Medicaid from 8 percent to 3 percent.

Liberals take issue with Alexander’s math and with seeing the Rhode Island approach as a model for other states. “Rhode Island lucked out because the cap was set at such a high amount,” says Linda Katz, policy director of the Poverty Institute at the Rhode Island College School of Social Work. That’s a deal, she cautions, that other states are unlikely to get. She also suggests that Rhode Island could have undertaken many of its reform initiatives without a global waiver.

She also sees disturbing parallels between Medicaid reform and welfare reform. At the same time Carcieri and Alexander were pursuing a block grant, she argues, the state “radically reformed our cash assistance program in ways that are extraordinarily detrimental to our families. If you think about something like that in Medicaid, which is paying for long-term care for people, it is extraordinarily frightening.”

To Alexander, the experience of alarmist warnings followed by anticlimactic outcomes has a familiar ring. “The analogy with welfare reform isn’t exact,” he says, “but we need to take principles of that model and apply that to Medicaid in a way that gives states greater flexibility to design programs for its people and gives the federal government an oversight role for performance measurement and outcomes.”

As he sees it, Rep. Ryan’s block-grant proposal is a step in the right direction. “States are broke,” he says. “The only way you can fix it is to tame entitlement spending.”

So what is more frightening? A future where Medicaid isn’t curbed, or a future where it is? The answer to this question lies in the answer to another one: Is the problem Medicaid itself or is it rising health-care costs? Medicaid has problems, to be sure. Provider reimbursement rates in many states are almost certainly too low, access to specialists is spotty and in the long run, Medicaid in its current form isn’t sustainable. But that’s probably true of overall health spending as well.

“Medicaid is not an out-of-control program,” says Park of the Center on Budget and Policy Priorities, noting that on a cost-per-beneficiary basis, Medicaid is cheaper than private insurance or Medicare. “Is there a long-term issue in terms of the sustainability of health-care spending overall?” he continues. “The answer is yes. We have to slow the rate of health-care cost and make structural changes, but that’s true for private markets and public programs too.”

The real threat to the budget, he says, “comes from projected increases in health-care spending. The practical question is, what do we do about it and when do we do it?”

Ryan’s answer -- capping the annual growth rate of federal contributions to Medicaid and voucherizing Medicare -- addresses the federal government’s long-term health-care spending problem. But it’s hard to see how it’s a good deal for the states. Ryan’s proposal would peg annual increases in federal Medicaid spending to the consumer price index plus 1 percent. However, medical price inflation has historically increased at more than twice the rate of the Consumer Price Index (CPI). By pegging federal increases to the CPI at a time when the population is poised to age rapidly, the Ryan proposal would make a state burden that is already crushing “untenable,” in the words of Josh Barro, the Walter B. Wriston fellow at the Manhattan Institute. “[T]he rate of spending growth that Ryan envisions is too low,” wrote Barro recently.

Of course, Congress could offer states a more generous block grant arrangement. According to Scheppach, virtually any block grant arrangement would have “pretty significant problems to overcome.” Because one-third of Medicaid’s costs come from treating the elderly and disabled, a formula must be developed that takes the age of the population into account. Then there’s the problem of high-cost states and low-cost states. Finally, there’s the issue of who defines and sets regulations. Even if you block-grant the program, Scheppach warns, “somebody in interpreting the law or in writing the regulations, will define the benefit package.” Instead of the flexibility that should come with a block grant, states might end up with less money and less discretion.

Liberals offer a different alternative for resolving Medicaid’s problems -- systemic health-care reform. That may help over the long run. But in the short term, health-care reform will impose new costs on states at a time when they can ill afford them. Greater flexibility would help. But, says Matt Salo, executive director of the National Association of Medicaid Directors, “while greater flexibility is necessary, broadly speaking, I would stop short of saying that’s it’s sufficient for ensuring the sustainability of the program.”

Instead, Salo sees the need for a “fundamental rethinking” of the relationship between Medicaid and Medicare, as well as some relief for the states from the burden of providing long-term care through the Medicaid program. “States have kind of innovated their way into an increasingly large and permanent role as the only provider of long-term care, and that’s got to stop,” he says. For now, however, there’s no sign of that kind of help from the federal government.

“The bottom line on this is that the states who make the investments in elementary and secondary education and the infrastructure we need to be competitive and productive -- that’s what’s really going to lose out,” Scheppach says. “You are already seeing that in state after state, and it’s going to get worse. From a long-term economic growth perspective, it’s scary.”

It’s a scenario Menlove spells out as part of her rational for Utah’s welfare-reform-like pilot. “Eighteen percent of our state budget is consumed by Medicaid costs,” she says. “We anticipate that by 2014” -- when the Medicaid expansion mandated by the federal ACA goes into effect -- “that number will double to 36 percent. We will have a whole new population qualifying,” including childless, non-elderly adults whose family incomes fall below 138 percent of the federal poverty level. Menlove is concerned about what the implications of that are for budget dollars to support public education. Utah has added 28,000 students to its public schools over the past two years, but has not been able to provide additional funding for them. Instead, it’s raising tuitions at public universities and cutting state support. “We are raising K-12 class sizes just unbelievably,” she says. “How much more can we raise college tuitions before we start to completely discourage people from getting educated?”

That is the dilemma an untamed Medicaid poses.

Caroline Cournoyer is GOVERNING's senior web editor.
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