Managing Medicaid in tough times: states are struggling with soaring Medicaid costs. Some are using short-term solutions, others have launched bold reforms.

Arizona voters want the working poor to have health care coverage. They said so when they passed Proposition 204 in November 2000 making more people eligible for Medicaid and prescription drugs.

But today--less than two years later--Arizona's severe budget crisis is putting the entire Medicaid program at risk.

Lawmakers are looking at several different proposals "including reducing services, decreasing the eligibility limit and capping enrollment," says Representative John Loredo. But he fears that cutting Medicaid in a tough economy "will have an adverse effect on the entire health care system."

Legislators around the nation are finding themselves in the same predicament. Many took advantage of strong state finances to expand Medicaid programs. But deteriorating fiscal conditions coupled with rising Medicaid costs are making it almost impossible for states to pay for those programs.

That's the irony of Medicaid; The program has a difficult time doing its job when its services are most needed. A sour economy increases demand for coverage and spending, at the same time revenues are eroding and putting heavy pressure on state budgets.

What can legislators do? How can they sustain and even expand health care coverage for the most vulnerable Americans when the well runs dry? Some states are rising to the challenge and implementing bold reforms. Others are relying on short-term solutions to weather the drought.

BETTER MEDICAID

States have made huge strides in providing health care coverage in recent years. "Medicaid has evolved from a safety net program to one that covers families when employer coverage is not available," says Representative Garnet Coleman, vice chair of the Texas House Committee on Public Health.

The 1997 State Children's Health Insurance Program, which in 21 states is simply an expansion of Medicaid, set in motion an unprecedented wave of activity to expand health coverage to uninsured, low-income children. More than a third of states have gone further, extending coverage to poor working parents with incomes greater than the federal poverty level. A few states even extended Medicaid to adults without children.

Many lawmakers adopted new federal Medicaid options to cover people with disabilities who work, but can't get health insurance, and uninsured women who need treatment for breast or cervical cancer.

State policymakers didn't stop there. They used federal waivers to expand benefits, such as community-based care and services to people with HIV. Lawmakers also simplified the application process for Medicaid and increased outreach efforts, again with the goal of expanding coverage.

FINDING THE RIGHT BALANCE

But the economic downturn has shifted the focus from expanding Medicaid to maintaining current levels. Lawmakers face the immediate problem of making sure the most vulnerable people aren't hurt by problems in the economy.

Unlike the federal government, nearly all states have balanced budget requirements. Lawmakers must raise taxes, reduce spending or tap reserve funds when revenues don't cover expenditures. Forty-three states had budget shortfalls in early April. The outlook for FY 2003 remains much the same, with at least 37 states facing potential budget gaps.

State policymakers are under tremendous pressure to limit Medicaid spending, Because the program makes up such a large and increasing share of state budgets--an average of 13 percent of state general Funds--lawmakers have no choice but to examine Medicaid as they address shortfalls. The budget problem is particularly dire in those states that underestimated the cost of Medicaid, even though they approved considerable increases. Twenty-seven states and the District of Columbia reported to NCSL in April that Medicaid was over budget in the course of FY 2002. Another five expressed concern that it could exceed budgeted levels in the coming months.

When states reduce Medicaid funding, however, they lose federal money as well. State expenditures for medical benefits are matched by federal payments. The size of the match is determined by the state's per capita personal income. In states with low per capita income and thus with higher federal matching rates, the consequences are the most significant. For example, if Mississippi were to cut $1, it would lose more than $3 in federal funds.

With the federal match and the potential increase in uncompensated health care costs, cutting Medicaid budgets is the "most counterproductive thing one could do in difficult economic times," says Sara Rosenbaum, professor of health law and policy at the George Washington University School of Public Health and Health Services. Medicaid not only provides health care to more than 40 million of the nation's most vulnerable people, but it also pumps money into the health services industry. "Medicaid is one of the pillars that holds up the American health care system," Rosenbaum says.

WEATHERING THE DROUGHT

Legislators in Idaho demonstrated their commitment to Medicaid when they implemented a reform package that holds down spiraling costs without reducing the number of recipients.

Idaho's reform package tackles rising drug costs by insisting patients use up most of their prescriptions before they can be refilled and requiring special authorization before a patient can have more than four prescriptions at once. It also increases the number of people in managed care, reviews hospital stays after three days, reduces reimbursements to medical and transportation providers, and eliminates nonemergency dental coverage for adults on Medicaid.

"This is the best thing that happened in my 10 years in the Senate," says Senator Grant Ipsen, chairman of the Health and Welfare Committee. "Recipients will get the necessary benefits. We will fulfill needs not wants. It's going to work. We should have been questioning our practices and doing these things all along."

Mississippi had a twofold approach to its $158 million FY 2002 Medicaid shortfall. The state used tobacco settlement money to increase funding while it reduced certain costs. Specifically, lawmakers cut provider reimbursements by 5 percent, lowered dispensing fees to pharmacists for prescriptions by $1, increased copayments for prescription drugs from $1 to $3 and limited the number of monthly prescriptions.

Not everyone agrees with the cuts. The medical community believes that access to health care is going to be a huge problem, says Chairman Thompson, director of government affairs for the Mississippi State Medical Association. Since Mississippi already has more patients per physician than most states, Thompson believes a reduction in the rates to physicians will make it even more difficult to find doctors to accept new Medicaid patients. "We expect to see a decrease in physician participation in the Medicaid program, as well as a reduction in the number of Medicaid patients cared for by each physician."

Lawmakers talked about lowering income eligibility requirements for the elderly and disabled from 135 percent of the federal poverty level to 100 percent. Under this proposal, people wouldn't qualify for Medicaid if their annual income was above $8,860.

"We decided that instead of dropping people from the rolls entirely, we would rather spread the pain evenly and cut services a little for the whole group," says Representative Jim Ellington.

But now Mississippi must consider long-term solutions. Ellington says the next thing to tackle is prescription drug costs. The state faces a Medicaid deficit of between $157 million and $288 million for FY 2003.

A MAJOR COST DRIVER

Prescription drugs are a major cost driver in Medicaid spending in all states. Rising costs stem from increased use, replacement of older drugs with costly new ones and higher prices for existing drugs. In addition, legislators are helping poor and elderly people buy medications, given the federal government's inability to pass its own legislation to provide relief.

"The really expensive piece of Medicaid right now is not physicians or hospitals, but prescription drugs," says Coleman. "That's what is killing every part of the program." Coleman believes states can reduce costs without reducing the medications people need. He pushed several prescription drug reforms in the Legislature last year, but the key proposals were vetoed by the governor.

The good news is that states have some flexibility in how they manage prescription drugs. In fact, Medicaid prescription coverage is an optional service, although all 50 states have elected to provide it. And while costs have spiraled upward, most policymakers recognize that prescription drugs often prevent more serious illness and the need for hospitalization or surgery. Kentucky is one of the states overhauling its program.

"In determining how to address the Medicaid shortfall, our primary goal was to reduce the budget deficit, while maintaining quality of services and ensuring fair reimbursement for providers," says Senator Julie Denton, chair of the Committee on Health and Welfare. "Many factors contributed to the increased expenditures, but controlling the rising costs of pharmacy services was the focus of several bills that passed during the current session."

Kentucky legislators created a Pharmacy and Therapeutics Advisory Committee to conduct drug reviews and make recommendations on drugs that require prior approval from the state. They increased Medicaid's ability to control dispensing of the most expensive brand name prescription drugs, and initiated a copayment of $1 per outpatient prescription. Lawmakers also want Medicaid administrators to determine reasonable dispensing fees to pharmacists based on fees and costs in other states.

"Although the Medicaid shortfall has been solved for the short term, Kentucky will continue to evaluate the Medicaid program and consider ways to address the rising costs of health care over the long term," says Denton.

MAINE EXPANDS COVERAGE

Maine is doing more than protecting its current Medicaid program. Lawmakers are using Medicaid to expand coverage and access to health care and prescription drugs. The state won a major victory when a U.S. judge in March upheld its program to provide prescription drugs at Medicaid prices--a discount of about 25 percent--to about 110,000 seniors and people with disabilities otherwise ineligible for Medicaid. Under the program, individuals making up to $25,776 and couples earning up to $34,836 can apply for the discounted prescription drugs. (See State Legislatures, April 2002)

In addition to lowering the cost of prescription drugs, Speaker Michael Saxl is seeking federal waivers to extend Medicaid coverage to people who work for small businesses. Legislators are looking at further expanding prescription drug coverage for the elderly and people with disabilities. The state also submitted an application for a federal waiver to expand Medicaid coverage to low-income adults without children. It will pay for the change with a 6-cent increase in the state's tobacco tax.

"We're not stopping," says Saxl. "When times are bad, the challenge is how to move forward and still do good. We're trying to be innovative in how we address budget shortfalls, and we're going to do it."

To pay for its expansions, Maine has relied partly on the use of prior approval from the state on about 70 of the most commonly advertised drugs. "It has worked exceedingly well," says Kevin Concannon, commissioner of the Maine Department of Human Services. "It has saved millions of dollars at a time when we are providing more prescriptions to people."

GETTING HELP FROM THE FEDS

Flexibility is the new operative word at the Centers for Medicare and Medicaid Services (CMS)--the federal agency previously known as the Health Care Financing Administration. CMS is encouraging states to expand health insurance coverage using existing resources. While now may seem like the worst time to broaden programs because of the expense, the new flexibility makes it possible for states to cover additional people.

Utah is one of the first states in the nation to receive federal approval to limit Medicaid to some in order to provide basic health services to others. The state hopes to provide primary and preventive coverage for 25,000 low-income people who otherwise would not have access to health care. In order to fund the expansion, the state will reduce the benefits package and increase cost sharing for certain adults in Medicaid. New enrollees also will be required to share the cost of services and pay a $50 enrollment fee.

"The waiver allows Utah to reduce some benefits to current eligible adults in order to offer coverage to working people who don't have health care coverage," explains Spencer Pratt, Medicaid analyst for the Legislative Fiscal Analyst Office.

Not everyone agrees with the strategy. Steve Hitov, managing attorney at the National Health Law Program, questions the equity of a program, such as the Utah waiver, which leaves poor people "paying for the expansion of coverage for those financially more secure."

Illinois launched another innovative way to take advantage of the new federal flexibility this session. The feds have agreed to let the state use 50 percent matching federal Medicaid dollars to pay for prescription drug coverage to low-income seniors with incomes up to twice the federal poverty level. And while the state is still negotiating the details of the federal approval, the idea is to allow recipients to pay an annual enrollment fee of $5 or $25, depending on their income levels.

Many states are looking to ride on Illinois's coattails. Rhode Island lawmakers are pushing for a similar waiver. "There are far too many seniors in Rhode Island faced with the difficult decision of paying for life-saving medication or buying groceries or heat," says Representative Steven Costantino.

Although greater flexibility will no doubt help states, it's not clear if it will compensate for the lack of federal money. States can do only so much without additional funds, says Coleman.

"States are the innovators, but the reality is that if the federal government doesn't increase financial assistance or address the requirement that waivers can't cost the federal government more than they would have spent, it's going to be tougher and tougher for states to take advantage of the flexibility," warns Coleman.

LOOKING AHEAD

As is often the case, state fiscal conditions will recover more slowly than the national economy. At the same time, the Congressional Budget Office predicts that Medicaid costs will continue to rise by between 8 percent and 9 percent over the next several years, outpacing projections of state revenue growth.

The biggest challenge for legislators will be maintaining the health care gains they've made. "We don't have to cut benefits," says Coleman. "Our objectives should be to make sure people have coverage, to deal with our issues of the uninsured and deal with them in a smart way. Legislators have to look at their budgets and figure out what their priorities are and whether or not health care is one of them."

There are no simple solutions. States, however, have pursued a range of creative policies that make their programs more efficient while responding to the needs of their most vulnerable citizens. Legislators will continue to search for new solutions and remain committed to health care during tough times.

RELATED ARTICLE: STATES CONTINUE TO FIGHT INCREASING DRUG COSTS

With prescription drugs increasing as a share of Medicaid expenses and costs skyrocketing, states are seeking additional price concessions from drug companies and ways to steer physicians toward prescribing equally effective, less expensive medicines.

Medicaid expenditures for outpatient drugs increased by an average of 18.1 percent per year between 1997 and 2000, according to the Urban Institute, compared with 7.7 percent for total Medicaid medical expenditures. No state escaped the increases.

Driving higher drug costs are newer, more expensive medicines; more chronic health problems and expanded drug treatment for them; and more people taking more drugs.

Every state includes outpatient prescription drugs--an optional service under federal law--in its Medicaid benefit package. Under federal law, states are obliged to cover all FDA-approved drugs made by manufacturers who participate in a national Medicaid rebate program. This means that states generally cannot create restrictive formularies that deny payment for certain drugs. They can, however, create preferred lists of drugs and require a special approval process (prior authorization) for drugs not on the list.

Some states are asking drug manufacturers to offer additional rebates or discounts to get their drugs on a preferred list. Florida's approach, begun in 2001, requires manufacturers to offer the state a minimum supplemental rebate for each drug or an aggregate amount of dollar savings in order to be considered for the preferred drug list. Michigan sets a reference price based on the price of a preferred drug in each class and requires manufacturers of other drugs to meet that price in order to be on the list. The actions of both states have been challenged in court by pharmaceutical manufacturers, but have been upheld to date. (See State Legislatures, April 2002)

Building on these models, Minnesota, New Mexico and West Virginia have passed laws this year setting up preferred drug lists based on clinical efficacy, product safety and cost effectiveness, prior authorization for other drugs and endorsement of negotiated discounts or supplemental rebates from manufacturers.

"We need to be creative," says West Virginia Delegate Thomas Campbell. "Dramatic in-creases in drug prices drain too many resources. It's appropriate to give the state more ability to negotiate."

"The Medicaid price isn't always the cheapest," says New Mexico Senator Dede Feldman. "A formulary tied to discount prices or rebates is a way to help. Medicaid should have the same ability to influence the pharmaceutical industry as HMOs do."

Even without additional rebates, preferred drug lists can be a powerful tool to change the mix of drugs prescribed by doctors. Maine is saving $15 million by using prior authorization on about 70 of the most commonly advertised drugs. Georgia, Oregon and Vermont also plan to use preferred drug lists to influence prescribing behavior.

States continue to tinker with more traditional management tools, as well, including increased mandated use of generic drugs, monthly prescription limits, dispensing fee and drug payment rate changes, and client cost-sharing.

Over the long term, states see disease management programs, including medication management for people with chronic conditions, as a viable strategy. If programs already under way in such states as Florida and Oklahoma improve health while slowing the increase of expenditures, other states are likely to follow.

Donna Folkmer, NCSL

RELATED ARTICLE: NEW FLEXIBILITY IN MEDICAID

Since the advent of the Bush administration, flexibility has become the operative word at the Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees state programs. In fact, CMS has approved more than 1,500 Medicaid and State Children's Health Insurance Program (SCHIP) waivers--some that simply fine-tune earlier innovations and others that propose expansive changes.

Epitomizing the new attitude is the Health Insurance Flexibility and Accountability (HIFA) Initiative. Unveiled last August, the initiative--an 1115 waiver--encourages states to use existing Medicaid and SCHIP resources to extend health coverage to more uninsured people. Specifically, it targets people with incomes below 200 percent of federal poverty guidelines--$36,200 for a family of four. It gives states greater leeway to coordinate private and public health coverage and is less restrictive about cost sharing and benefits.

Unlike past waivers that often involved daunting documentation and administrative time, CMS is guaranteeing a simple HIFA application process and a 90-day expedited review for those states that meet the criteria. In exchange for the up-front flexibility, states will set goals for reducing the number of uninsured residents and document their progress.

The new initiative encourages states to supplement employer-sponsored health insurance to promote cost sharing with the private sector. Although SCHIP guidelines contained a similar provision, few states took advantage of it because of burdensome administrative requirements. Under HIFA, those are all but gone. In the current budget environment, "employer-sponsored insurance is a viable alternative for states," says Theresa Sachs, CMS technical director.

Two of the more controversial components of the initiative are the provisions to reduce benefits and increase cost sharing for certain beneficiaries. The most vulnerable recipients--poor children and pregnant women--will be largely protected from those provisions.

For optional beneficiaries (those who can be covered under Medicaid or SCHIP, but aren't required to be), minimum benefits must include inpatient and outpatient hospital services, physicians' surgical and medical services, lab and X-ray services, well baby and well child care and immunizations. States can also limit certain services or eliminate optional ones, such as prescription drugs or visits to a chiropractor.

There's even more flexibility with groups with higher incomes than Medicaid normally covers and who can be covered only under an 1115 waiver (expansion populations). The only rule is that the benefits must at least include basic primary care.

HIFA allows states to define their own cost-sharing programs for optional and expansion populations--one of the few restrictions is a cap on cost sharing for children at 5 percent of the family's income (the same guideline used for SCHIP). Many states already use cost sharing in their Medicaid and SCHIP programs, but federal regulations limit it to nominal amounts for limited beneficiaries.

The flexibility goes beyond the HIFA initiative. "HIFA is clearly our top priority because of the emphasis on covering the uninsured and experimenting with employer-sponsored premium assistance programs," says Sachs. But "we don't want to limit states to HIFA. We are open to any innovative state ideas to improve Medicaid and reduce the number of uninsured."

That has been the driving sentiment behind CMS's approval of new 1115 waivers in Utah and Illinois. Utah's program marks the first-ever Medicaid benefit package limited to primary and preventive care. The Illinois waiver, also an original, allows Medicaid to pay for prescription drugs for low-income seniors.

The waivers, however, are not tied to additional federal funds. Flexibility without additional dollars presents policymakers with tough choices in seeking solutions for the uninsured, says Arizona Senator Susan Gerard. "My hat is off to Utah for having the strength to try this experiment," she said. "The bottom line is that we have to keep trying new things to provide health coverage to more people, with our limited dollars."

Federal flexibility is key in allowing states to experiment with Medicaid to reduce the number of uninsured, but the current budget crisis and lack of additional federal financing will, no doubt, influence a state's decision to take advantage of this flexibility.

Laura Tobler, NCSL

COST-SAVING STRATEGIES

* Steering physicians toward equally effective, less expensive medicines.

* Developing lists of lower-priced drugs for "preferential" treatment.

* Implementing copayments for select services.

* Delaying expansions not yet implemented.

* Reducing optional eligibility or services.

* Reducing rates for providers (for example, doctors, hospitals, nursing homes and pharmacies).

* Increasing use of managed care.

* Reducing reliance on institutional placements for long-term care services.

* Taking advantage of federal flexibility.

LONG-TERM CARE TAKES BITE OUT OF MEDICAID BUDGET

Medicaid pays for about half of nursing home costs in this country, which are likely to rise as the baby boomers age. And states also struggle to control these long-term care costs that account for some 35 percent of the Medicaid budget.

States face the challenge of affording the long-term care needs of the low-income elderly and people with disabilities, while complying with the 1999 U.S. Supreme Court's Olmstead decision. That ruling says that states may not discriminate against people with disabilities by providing long-term care services only in institutions when certain people could be served in the community.

A number of states, including Alaska, Colorado, Kansas, Oregon, New Mexico, Rhode Island, Vermont, Washington and Wyoming, have a jump start in developing community-based services. They spend 40 percent or more of their Medicaid long-term care money on community-based care. Oregon serves 75 percent of its Medicaid long-term care clients in home- and community-based care. Its long-term costs are well below the national average and less than half that of the most costly states.

Trinity D. Tomsic covers Medicaid issues for NCSL's Fiscal Affairs Program. Also see her "Medicaid Woes Return in the January 2002 issue of State Legislatures.