JULY 5, 2005 -- Optional spending by state Medicaid programs is the target of administration and congressional budget cutters—and a very big target it is, at least in one sense. Optional spending totals 60 percent of Medicaid outlays, seemingly making the job of controlling Medicaid spending straightforward—just trim some of the frilly extras.
To some, "those who are optional probably have other alternatives and don't really need Medicaid's help," Senate Aging Committee Chairman Gordon H. Smith, R-Ore., observed at a hearing last week. But Smith and others at the hearing argued otherwise.
"In fact, if we allow optional beneficiaries to lose Medicaid coverage, they will simply join the ranks of the millions of uninsured Americans and end up costing taxpayers far more in the long run," he said.
Smith's views are influential in the Medicaid debate. As one of a handful of Senate Republicans wary of Medicaid cuts, Smith was instrumental in negotiating an agreement with the Bush administration to create a commission to study carefully how some $10 billion in cuts over five years should be made.
"We must proceed with caution and extreme sensitivity," he emphasized at a June 28 Aging Committee hearing questioning how optional the optional side of Medicaid really is.
The commission Smith seeks has yet to be announced, but a representative of an existing Medicaid commission testified that cuts in optional spending would inflict added pain on some of the most vulnerable Americans.
"Some of the sickest and poorest Medicaid beneficiaries are considered 'optional' and many of the 'optional' benefits provided under Medicaid, such as prescription drugs and rehabilitation services, often are integral to appropriate care and functioning of the population Medicaid services," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured.
Added Pamela S. Hyde, who heads New Mexico's Medicaid program, "We do not want to be in the situation where we have to reduce services or eligibility that will hurt the most vulnerable individuals with mental illness because the federal government wants to preserve services to 'mandatory populations' and reduce its own spending on so-called 'optional' ones."
HHS Secretary Michael O. Leavitt has emphasized the distinction between mandatory and optional Medicaid in making the case for overhauling the program. States should have more control to shape the optional side of Medicare, reducing benefits for some beneficiaries to open up Medicaid to more people, he says. But critics see in such flexibility a weapon to chop spending, not extend care to more people.
In what sense is Medicaid spending optional? Medicaid consists of mandatory populations and optional populations and mandatory benefits and optional benefits.
States that decide to take part in Medicaid "are required to cover all children under the poverty level, pregnant women and children under six with incomes at or below 133 percent of the federal poverty level, and most elderly and disabled recipients of cash assistance under the Supplemental Security Income cash assistance program," Rowland testified. All states have chosen to participate in Medicaid, and on average pay 43 percent of Medicaid costs while the federal government pays 57 percent.
In addition to these mandatory populations, "states have the option to extend coverage to children at higher incomes, their parents, and other low-income elderly and persons with disabilities in the community and in nursing homes and still receive federal matching funds for the cost of their coverage," said Rowland.
"If a state decides to extend Medicaid coverage to an optional population, it must generally offer the same benefits package that it makes available to its mandatory populations," according to a Kaiser Medicaid Commission fact sheet. "In every state, this benefits package includes both mandatory and optional services."
Mandatory benefits for both mandatory and optional populations include hospital, physician, and lab service. "Many of the 'optional' benefits, such as prescription drug coverage and intermediate care facilities for the mentally retarded are integral to Medicaid coverage and offered in all states," Rowland testified. The facilities provide diagnostic, treatment, and rehabilitation services for the mentally disabled in a residential setting.
Most children in Medicaid—79 percent—qualify on the basis of mandatory population coverage while 48 percent of the elderly qualify for optional eligibility groups, Rowland said.
The term "mandatory population" dates back to Medicaid's roots in 1965 as the medical coverage program for people on welfare.
"The populations historically eligible for cash assistance are 'mandatory' under Medicaid law, while most populations not eligible for cash assistance were made eligible for Medicaid through new laws enacted over the program's 40-year history," said Rowland.
As eligibility opened up to new groups, it did so on an optional basis. Optional status does not "imply a lesser standard of need or worthiness than coverage for mandatory groups and services," said Rowland.
"Given the range of disabilities covered by Medicaid, many of the 'optional benefits are essential to appropriate care and management of people with disabilities on Medicaid," she said. "For the aged and disabled who rely on Medicaid to fill Medicare's gaps, 'optional' benefits like prescription drugs, dental and vision care, and home and community-based services are the most important gaps Medicaid fills."
Individuals covered at the state's option account for 60 percent of Medicaid outlays, and of those outlays, 86 percent is for services to the elderly and disabled, said Rowland.
State flexibility to alter benefits to optional populations, without added federal resources, "will not achieve significant savings for states or facilitate Medicaid's ability to meet the health needs of the low-income population and adequately pay their providers nor will they help address the increasing long-term care needs of an aging population." And "given the extremely limited incomes of most Medicaid beneficiaries, nominal co-payments and cost-sharing are likely to lead to reduced access to early care and potentially more costly hospitalizations for untreated conditions," Rowland said.
But leaving Medicaid spending untouched is untenable, says the National Center for Policy Analysis. "Left unreformed, Medicaid will bankrupt every state is as little as 20 years, possibly absorbing 80 to 100 percent of all state revenues," a NCPA position paper states. "Delay is not an option. States and the federal government must act now to avoid a real human and fiscal disaster."
"In virtually every state, Medicaid pays for inputs rather than outputs. This means that the more physicians and facilities do, the more they earn—even if patients would have been better off if less were done." NCPA urges that Medicaid be converted from a defined benefit to a defined contribution program "under which the state determines how much it is willing to spend and patients (along with their doctors) choose how to spend it."
Private sector plans should be able to compete for these dollars, leading to coverage that would respond to changing medical science and changing consumer preferences, NCPA said.