Easing The Pain

To blunt the impact of deep Medicaid cuts, a few states are experimenting with ways to control the program's costs.
by | May 2003

Doug Porter has bragging rights: As assistant secretary for Washington State's Medical Assistance Administration, he was one of the first to face down the Medicaid money monster.

He had no choice. Two years ago, when most states were just beginning to realize they had a revenue crisis, Washington had already hit the skids, made the "easy" budget cuts and was moving into the hard stuff. That included a directive to Porter to slash at least $50 million a year in state Medicaid spending.

"Nobody knew how to go about it," Porter says. Two years and several idea implementations later, Porter can rightfully boast that Washington "is ahead of many, if not most, states in the area of cost containment."

It's an approach other Medicaid officials are studying. With most states facing significant budget shortfalls for the third year in a row, legislatures are considering major reductions in health care services for the poor. Exactly how states go about targeting their cuts can affect not only those dependent on the government for their health care but a state's economy as well.


Governors, legislators and budget analysts have Medicaid in their sights because that's where the money is. Medicaid has become the second largest component (after education) of state general-fund expenditures. But it's also because Medicaid spending is not sustainable. The program is growing faster than any other and at a rate--12.5 percent last year--that is far in excess of state revenue growth. In a December survey by the National Conference of State Legislatures, 44 states reported shortfalls in the Medicaid portion of their budgets.

The dilemma facing states is that Medicaid beneficiaries are a vulnerable population, and throwing poor, sick people off the health care rolls is not an easy thing to do politically, nor is it good public policy. Meanwhile, as the economy weakens, more people become eligible for the program and caseloads increase, further aggravating the problem.

But that's only the beginning of the fiscal pressures. Nationally, overall spending on health care increased 8.7 percent in 2001, the fastest rate of growth in a decade. Medicaid is stuck operating in this environment of rampant inflation.

In addition, the Medicaid program has been experiencing a seismic shift in burdens. Where the federal Medicare program, originally designed to care for the elderly, paid for 70 percent of the elderly health care bill in 1984, that percentage is expected to contract to 55 percent by 2012. Leighton Ku, a health care economist at the Center on Budget and Policy Priorities, notes that 75 percent of overall Medicaid cost growth is due to caring for the aged and disabled, the majority of whom are eligible for Medicare, and at least 50 percent of the drugs Medicaid buys--at an annual cost of more than $6 billion--is for these dual eligibles.

"States need to be concerned that so much of their Medicaid budgets and growth are being driven by people who are technically insured by Medicare," says Barbara Edwards, Ohio's Medicaid director. Ohio, she points out, would save more money from Medicare coverage of pharmaceuticals than it would save from all the cost-containment measures her state's program has proposed to lower its growth rate from 13.6 percent to 9.6 percent in the next two years.

But even if the U.S. Congress passed a Medicare prescription bill this summer, it would take three to four years before all the rules were written and implementation was in place--too late to help states through this or next year's budgets.


Slowing Medicaid spending is a tricky business. Given the federal match, in order to save $1 in general fund money, a state has to cut between $2 and $4 from the program. A study released in January by Families USA looks at the multiplier effect of such cuts on a state's economy: Every $1 million a state invests in Medicaid generates on average $3.4 million in economic impact since a portion of the money is used to pay hospital and nursing home staff; these workers take out mortgages, buy food and go to the movies, which boosts the income of everybody down the line. "Because of the multiplier effect," the study notes, "the aggregate impact of Medicaid spending on a state's economy is much greater than the value of services purchased directly by the Medicaid program."

Containing Medicaid costs is frustrating for other reasons as well: Cuts can only slow the rate of growth slightly. "We're still going to see Medicaid grow faster than any other program in Ohio in the next two years," says Ohio's Edwards. "Yet we have to make incredibly painful policy changes to keep that growth down to under 10 percent."

Beyond trying to maximize the federal match, typical cost-cutting moves include modifications to reimbursement schedules, eligibility limits, benefit coverage and the way services are delivered.

The least attractive option is to reduce eligibility and benefits. "You want to try to protect the services you're providing to families," says Debbie Chang, Maryland's former deputy secretary for health care financing. Nevertheless, a recent survey by Leighton Ku found that eligibility and benefit restrictions proposed in the 22 states he surveyed would push 1.7 million people off the Medicaid rolls. "It's scary to see the cuts coming all over the place-- children, parents, disabled and the elderly," Ku says. "Last year, the states did the easy cutbacks and now they are talking about serious pain."


What a handful of states have been seeking with some success are cost- containment strategies that are less harmful to their Medicaid population and the program's providers. Washington State went about finding these "opportunities" systematically. The legislature set up a Utilization and Cost Containment Initiative and charged it with developing new procedures and redirecting existing resources to reduce Medicaid spending. Porter's staff looked first at what the program was already doing that could be expanded, if more resources were available, to save significant sums of money.

Topping the list was coordination of benefits (COB)--making sure that Medicaid is the payer of last resort and that if any other party, such as private insurance, is liable for a Medicaid beneficiary's bill, that party is made to pay it. Washington found that in many cases there are other insurance resources for Medicaid recipients. One example Porter cites is casualty insurance. If a Medicaid beneficiary is injured in a car accident that is someone else's fault, the other driver's liability coverage should repay Medicaid for any hospital or other treatment bills. Recently, the program began placing items in state legal publications to notify attorneys that they are required to contact the state health department when their clients are involved in personal injury cases and have received medical assistance payments for their care.

Porter had to staff up to go after COB monies, but the return has been worth the outlay. In its first year, the COB goal for state savings was $9 million; the COB staff came in with $13.7 million, and the program continues to bring in money in excess of targeted amounts.


Prescription drugs are a major source of escalating Medicaid expenses, with inflation rates well into double digits. In an effort to control these costs, a number of state Medicaid programs are setting up preferred-drug lists. This entails a committee of doctors and pharmacists looking at particular classes of medications and deciding which are clinically equivalent and where it would be safe to recommend that a lower-cost drug be used in preference to a higher- cost treatment. Preferred lists are not formularies, in that they do not require doctors to use only the drugs on the list, but depending on a state's rules, a physician might need prior authorization to use a drug not on the list.

This approach is widespread in the private sector--and has been effective at reducing costs. According to Chang, who is now with the National Academy for State Health Policy, Maryland estimates savings of between $8 million and $10 million in state funds from its recently developed preferred-drug list.

Washington State put together a preferred-drug list and added a Therapeutic Counseling Service. Similar to a program in Florida, Washington's TCS contracts with an Atlanta-based company--ACS--to monitor the monthly drug-prescription practices of its Medicaid providers. When a prescriber uses a more costly therapy than one on the preferred list or prescribes more than four brand-name drugs a month for a particular patient, a flag goes up at the point of sale. The pharmacist calls the doctor to let her know that if she wants to use the more expensive therapy, she has to call the consultant in Atlanta and explain why.

In addition, ACS scans the state's database to identify the physicians who prescribe the most. Then, two full-time pharmacists go out and, in effect, ride the circuit: They visit the doctors, talk to them about their prescription profiles and try to educate them about lower cost alternatives. "This is our best effort at counteracting what drug manufacturers do, which is send out salesmen with free samples and give doctors pens and calendars and nifty stuff and say, 'Prescribe our drug,'" Porter says. "We're just saying, 'Here's the clinical evidence. You should know about this when you're prescribing.'"

Arkansas' Medicaid program takes a similar approach. Rather than send letters of admonition to doctors who prescribe pills outside the state's parameters--a method some states use when they review databases--it sends pharmacists to visit the doctors. The personal contact, says Ray Hanley, the state's former Medicaid director, has a much more profound impact on future behavior.

Washington's TCS program has been, along with COB and other steps, a major way of meeting its $50 million challenge. But it isn't popular with drug manufacturers. Their lobbyists have tried to kill it in the legislature, arguing that the approach was not saving the money lawmakers thought it was saving.

As a result, the legislature commissioned an outside health consultant--the Lewin Group--to review the cost-containment activities and assess how much money was actually being saved. The Lewin Report, which was completed this past February, verified that the savings were as substantial as the Medicaid office claimed.


One other area several states are tapping is co-payments--asking beneficiaries to pay for a small portion of the bill. Under Medicaid rules, states can impose a co-payment of up to $3 on prescription drugs and several optional benefits, such as hearing, vision and dental services. A few states are also imposing a co-payment for in- patient hospital stays. However, Medicaid patients do not have to pay the fee if they can't afford it.

When Kentucky imposed a $1 co-pay on prescription drugs, patients were willing to pay the fee, so it was money in the bank for the state, according to state Representative Paul Bather.

Other states have had a different experience, especially when they tried to impose a higher co-pay: They discovered that patients know they don't have to pay it and don't. And that, in effect, means that the imposition of a co-pay is an assessment on the provider who can't deny service and has to absorb the cost of the unpaid co-pay.

There is one piece of comforting news as Medicaid programs scramble for savings and squeeze various parts of the program for revenue: Despite enrollment growth, the program is holding the cost line as well as, if not better than, private health plans. Premiums for commercial insurance are growing by 10 to 15 percent a year, and that escalation has nothing to do with caseload increases--it's just about costs going up. "Medicaid as a health plan is not out of control," says Ohio's Edwards. "Our problem is that even a well-managed program like Medicaid is more than state revenues can handle--the program is growing faster than state economies. And that's the dilemma."