The Deficit Reduction Act of 2005: An Overview of Key Medicaid Provisions and Their Implications for Early Childhood Development Services

Executive Summary

The Deficit Reduction Act of 2005 (DRA) grants states flexibility to modify their Medicaid programs in ways that could negatively affect children and families' access to care. On the other hand, some of the provisions allow states to expand eligibility and thus access to services. This report analyzes key provisions of the DRA, including the latest guidance from the Centers for Medicare and Medicaid Services (CMS), and discusses their implications for early childhood developmental services.

The core provisions of the DRA that could affect young children's health and development are related to eligibility, premiums, cost-sharing, the benefit package, and targeted case management (Table ES-1).

Citizenship Documentation Requirements
Prior to DRA, U.S. citizens were not required to provide written proof of citizenship at the time of their application or eligibility review for Medicaid. Oral affirmation of citizenship status was sufficient. Legal residents were required to provide written proof of their residency status at the time of application. While DRA does not change documentation requirements for legal residents, it makes significant changes in these requirements for U.S. citizens.

• In general, eligible individual must show primary documents (i.e., a U.S. passport or certificate of naturalization or citizenship) or documents of citizenship (e.g., a birth record, American Indian card, health insurance record showing U.S. place of birth, census record, or written affidavit), plus documents of identity (e.g., driver's license, school identity card, or draft record).
• For children ages 16 and younger, other documents may suffice (e.g., a school identification card with a photograph, medical record with date of birth, or parental affidavit).
• Title IV Part E children (those in foster care) must have either: a declaration of citizenship; satisfactory immigration status and documentary evidence of the citizenship; or satisfactory immigration status claimed on the declaration.
• Supplementary Security Income (SSI) and Medicare enrollees who are also enrolled in Medicaid are exempted from the above requirements, as their enrollment in SSI and Medicare already require citizenship documentation. Enrollees in state programs that require citizenship documentation, including those receiving food stamps or child protective services, are also exempt.

Disabled Children with Low or Moderate Family Incomes
Prior to DRA, there were special rules for coverage of disabled children in families with low or moderate incomes that nonetheless exceeded SSI eligibility thresholds. The rules pertained to children in need of institutional care, medically needy coverage, and the use of general program flexibility to vary financial eligibility rules in order to recognize extraordinary costs of care. The DRA establishes a new eligibility category for such children.

• This new and explicit option is targeted to disabled children under age 19 with family incomes up to 300 percent of the federal poverty level (FPL). Federal financial participation phases in, beginning with children born on or after
  January 1, 2001.
• States may impose income-related premiums, capped at 5 percent of income for families below 200 percent of the FPL and 7.5 percent for families between 200 and 300 percent of the FPL. States have the right to terminate coverage for failure to pay premiums for more than 60 days and to waive premiums if they would create an "undue hardship."
• Children must enroll in employer-sponsored coverage for which they are eligible if the employer pays 50 percent of the premium. States must pay the remainder of the premium and treat employer coverage as third-party liability (TPL).

Premiums and Cost-Sharing
Prior to DRA, state Medicaid agencies were prohibited from charging premiums and enrollment fees, with very few exceptions. Cost-sharing was prohibited for children and limited to $3 copayments for prescription drugs for parents. Under the DRA, states may impose premiums, cost-sharing, or both. CMS guidance clarifies that the poorest children and parents (below 100% of the federal poverty level in the case of cost-sharing and below 150% of the poverty level in the case of premiums) should be exempt from these new options.

Premiums

• States can impose premiums on children and parents if their family income is above 150 percent of the FPL.
• Populations exempt from premium charges include: children under age 18 with mandatory coverage, Title IV Part B and E individuals (children in foster care or individuals to whom adoption or foster care assistance is made available), and pregnant women.
• Prepayment of premiums can be a requirement prior to Medicaid enrollment, and Medicaid coverage can be terminated (even for children) if premiums are not paid within 60 days of the due date. Payment can be waived if the state determines that it constitutes an "undue hardship."

Cost-Sharing

• Cost-sharing is allowed for non-exempt persons with family income above 100 percent of the FPL but at or below 150 percent of FPL. Cost-sharing may not exceed 10 percent of the cost of the service or item, and total cost-sharing, including prescription drugs and non-emergency use of emergency departments (EDs), may not exceed 5 percent of family income.
• Cost-sharing is allowed for non-exempt persons with family income above 150 percent of FPL, but may not exceed 20 percent of the cost of the service or item. The combined total costs of premiums and cost-sharing, including prescription drugs and non-emergency use of EDs, may not exceed 5 percent of family income.
• Services exempt from cost-sharing include: those provided to children under age 18 with mandatory coverage; services provided to Title IV Part B and E individuals; preventive services for all children under age 18, regardless of family income; services for pregnant women related to the pregnancy or to a medical condition that could complicate the pregnancy; family planning services; and emergent use of the ED.
• States can decide to exempt other services from cost-sharing and premiums or to reduce the amount of cost-sharing.

Benefit Standards
Under Medicaid law, health benefits are either mandatory or optional, and states determine their amount, duration, and scope. Benefits must be reasonable, medically necessary, comparable among different "categorically needy" groups (i.e., groups eligible for the program based on federally defined categories), non-discriminatory in terms of the types of conditions covered, and available on a statewide basis. States are required to cover EPSDT services for individuals under age 21.

The DRA gives states a new benefit option tied to a "benchmark" or "benchmark-equivalent" plan in use in the state.

• Parents and children may be enrolled in "benchmark" or "benchmark-equivalent" plans, except for Title IV Part B and E individuals, those receiving Temporary Assistance for Needy Families (TANF), and those whose Medicaid eligibility is based upon a disability. States are permitted to automatically enroll all beneficiaries in benchmark coverage, as long as they are informed of their right to opt out of benchmark plans into traditional Medicaid coverage. States can do so even for beneficiaries who were originally exempt under the statute.
• Benchmark plans include: the Federal Employees Health Benefits Program (FEHBP) Blue Cross/Blue Shield preferred provider organization (PPO); a state's employee coverage plan; the health maintenance organization (HMO) with the largest number of non-Medicaid enrollees in a state; or any other plan approved by the secretary of the U.S. Department of Health and Human Services (HHS).
• Benchmark-equivalent plans (BEPs) must have the equivalent or higher of the aggregate actuarial value of one of the above plans. BEPs must cover: 1) inpatient and outpatient hospital services; 2) physician surgical and medical services; 3) laboratory and X-ray services; 4) well-baby and well-child care, including age-appropriate immunizations, and 5) other appropriate preventive services, as determined by the HHS secretary.
• If the benchmark plan offers the optional services of prescription coverage, mental health services, vision services, or hearing services, then for each category of service the BEP must offer at least 75 percent of the actuarial value of the coverage offered in the benchmark plan. If the benchmark plan does not cover these optional services, the BEP is not required to cover them, though states may choose to do so.
• Individuals under age 19 with mandatory coverage must receive the full EPSDT benefit. If the benchmark plan or BEP does not provide the full benefit, the state must provide wraparound benefits.
• States have great flexibility in deciding whom to enroll in each plan. They can have multiple plans in a state, and their plans can vary by region within the state.
• States cannot use the benchmark option to expand coverage. It can be applied only to groups that were eligible for coverage prior to DRA enactment.

Targeted Case Management
EPSDT covers medical case management, including targeted case management (e.g., for people with HIV/AIDS or children with special needs) as well as administrative case management. The DRA makes several changes to the definition of targeted case management and the availability of federal funding for such services. While CMS has provided some guidance about these provisions, the modifications are confusing and require further clarification.

• The scope of permissible targeted case management services in a medical assistance context may be limited.
• Case management will and will not be recognized with respect to certain individuals. (For example, certain case management functions are no longer recognized for children in foster care.)
• The availability of federal financial participation in cases where third-party liability exists, i.e., when another entity has primary responsibility for payment, appears reduced.

IMPLICATIONS AND CONCLUSION
The DRA makes a number of significant changes in federal Medicaid policy. Some provisions only codify and formalize ongoing practice—a step that, while perhaps not significant in and of itself, nonetheless demands that we closely monitor how states go about implementing these choices that are now recognized in federal law. Some of the changes could negatively affect children and families' access to care, while others enable states to expand access to services. As the provisions of the DRA are implemented, it will be important to focus on how they affect the quality and availability of developmental services for young children and families. The following policy issues deserve particular attention:

• Safeguarding children's eligibility for coverage during and after the transition to Medicaid's new citizenship verification requirements.
• Configuring Medicaid coverage for children in states that opt to create benchmark plans so that the EPSDT guarantee, including access to developmental services, is preserved.
• Applying new cost-sharing flexibility to ensure that the exemption applicable to preventive services includes developmental services.
• Interpreting and applying the case management amendments through the development of a list of case management activities permitted and excluded by the legislation, to ensure that child welfare claims against Medicaid adhere to the new standards.

The DRA adds a new layer of complexity to state Medicaid program design, and there are many areas of uncertainty about its potential impacts. Federal guidance issued to date has helped to clarify some issues, but many require further clarification. Unresolved questions—such as the ambiguity in targeted case management provisions—will be answered by states as they implement the new provisions and decide how to modify and adjust their programs.