Medicaid extreme makeover: with growing numbers of uninsured people and costs out of control, states are looking at radical changes to Medicaid.

States are scrambling to slow Medicaid growth and reform a troubled system that is devouring their budgets.

Medicaid covers about $3 million low-income Americans, including 13 million elderly and disabled people. Costs are increasing by 10 percent a year.

Enrollment growth and increases in health care costs contribute to Medicaid spending growth as do rising hospital and prescription drug costs. A growing number of beneficiaries, including the low-income elderly and individuals with disabilities have greater medical and long-term care needs.

"Without question, public officials believe that under the current course, Medicaid will not be sustainable in the long run," says Vernon Smith of Health Management Associates, an author of a 50-state survey released in October by the Kaiser Commission on Medicaid and the Uninsured.

States across the country want to change the program fundamentally. The reforms are unprecedented in scope and design. "States are proposing remedies that have never been tried before," Smith says.

IT TAKES FEDERAL OK

Substantial Medicaid innovations require approval through a Section 1115 Medicaid reform waiver from the Centers for Medicare and Medicaid Services (CMS).

Twenty-five states plan this year to seek a new waiver or amend one already in place, according to the Kaiser study. Their goals are to manage costs, improve access to care and improve the system and the care it delivers to its beneficiaries. Fourteen states want to reduce the number of people without health coverage and 13 states want to reduce growth in Medicaid costs.

ON THEIR WAY

Florida ranks among the top five states in both Medicaid enrolment and overall spending, which has grown in the state by 12.5 percent annually for the past five years. The average monthly caseload increased from 1.8 million in 2000 to 2.2 million today, according to the Winter Park Health Foundation. The Florida Agency for Health Care Administration estimates that if something isn't done, Medicaid will consume more than half of all state spending within 10 years.

"We have a responsibility to try to slow the rate of growth," says Senator Mike Fasano. In May, Florida lawmakers approved a reform package that creates a fixed payment--or capitated--delivery system that initially would operate in two counties of the state. The state received a 1115 waiver for its Florida Medicaid Reform from CMS in October. Officials believe the capitated delivery system will lower costs. The fixed payment system offers greater predictability in spending, and proponents believe that infusing free market principles into the Medicaid system--competition among plans and enhanced consumer choice, as well as responsibility--will curb costs.

"The fundamental difference will be that participating companies will have the flexibility to decide the kind and amount of benefits that beneficiaries receive," says Joan Alker, senior researcher at Georgetown University Health Policy Institute. Eligible beneficiaries will be able to choose among participating managed care organizations. A health plan will receive a risk-adjusted premium on behalf of a beneficiary. The plans must cover all federally mandated services, but they can vary in the scope, amount and duration of benefits they offer.

The state Agency for Health Care Administration will evaluate the plans to ensure that they are sufficient and that they are equivalent to the benefits enrollees currently receive. Those designing the plans say their flexibility will benefit enrollees. Participants will be able to choose the plan that is right for them, and a care counselor will be available to help them make informed decisions.

Under Florida's reform, participating companies have the option to customize benefits to match enrollee needs--by offering one specialized package for people with AIDS and another for children with chronic illnesses, for example. Enrollees also will be able to use their premium to buy into their employer-sponsored health insurance or private insurance. Beneficiaries can earn credits for healthy behaviors that they can use to pay for certain health-related services or products, such as eyewear, hearing aids and smoking cessation programs. Giving consumers choices "forces the private sector to do a good job," Fasano says.

PRIVATE CONCERNS

But some dispute the idea that private health plans can deliver better services at a better price. Spiraling health care costs have hit the private sector, too. Monthly premiums for employer-sponsored health insurance grew 13.9 percent between 2002 and 2003.

"The whole thing doesn't add up," says Alker. She argues that assuming private health insurance plans can save money without trimming benefits is an untested notion. Alker says the reform will work "only if Medicaid beneficiaries are now using benefits they don't need--and that's just not true."

Opponents of the change question whether private insurance plans will join in the game. Florida's success, according to Smith, "will depend on the private sector deciding it's worth it to participate."

Legislative oversight is an important component, supporters believe "There is always concern when turning things over to the private sector," Fasano says. "If there are bumps in the road, they can be worked out before the process goes statewide."

VERMONT PLAYS, TOO

Florida is not the only state shaking up the Medicaid community.

Vermont sought--and in September received--federal approval for its Section 1115 demonstration waiver, known as the "Global Commitment to Health." The waiver gives the state new flexibility to coordinate programs and resources, according to Susan Besio, director of planning for the Agency for Health Services. By pulling most of the Medicaid population into one comprehensive effort--there used to be several waivers in place for different groups of people or services--the new design will improve coordination of programs and funding, and mitigate problems of "who pays for what services."

Vermont hopes to expand coverage, improve the quality of care and manage costs. "If you can come up with structures and systems that work," says Senator Susan Bartlett, "it's a good bet that it'll work for not only Medicaid, but for the rest of the health care system." Among the systemic changes she hopes to see is a "flip in how we pay for services." By focusing the state's resources on chronic care and early prevention, providers will get paid to keep people healthy, not just treat them when they become sick. "It's a fundamental shift," she says.

Unlike Florida, which focused on unleashing private market forces, Vermont's Global Commitment places reform in the state's hands by expanding the scope of the state Medicaid agency--the Office of Vermont Health Access--into a public managed care organization. The Vermont Agency of Human Services will pay a comprehensive premium to the state managed care group, which in turn will use the premium to draw down the federal match of 60 percent. The design is unique, but the state has already operated its own public managed care organization, though on a smaller scale.

Vermont is drawing attention because it is the first state to accept an overall cap on federal expenditures for Medicaid. The state previously had a cap on each enrollee's expenditures, but the cap could expand if enrollment expanded. Under the global cap, this is no longer possible. The state will receive $4.7 billion over the next five years, which it calculates will exceed costs resulting in a projected $155 million savings. Vermont intends to manage beneficiaries' care actively and use the money saved on existing health programs to reduce the number of uninsured, and on disease prevention services that promote health. Just as private managed care companies invest their profits in extras, Besio believes that the reform will give the state the same ability. Vermont can invest savings into programs that "can improve the health of Vermonters who otherwise wouldn't be part of our overall system."

CONCERNS ARISE

Critics worry, however, that Vermont's decision to accept a global cap will set a precedent for other states that may not receive one as generous as Vermont. But in Vermont the new waiver no longer includes a per-member-per-month cap that goes up if enrollment expands. "We had a cap in the past," Bartlett says. The new waiver, however, has sparked a "tremendous distrust in why the federal government is allowing this," she says.

Other states are watching Vermont, "concerned that the [federal] direction might be one of shifting fiscal responsibility to the states," Smith says. But Bartlett believes state officials and policymakers must examine the pros and cons of Vermont's approach thoroughly. State legislators and the governor "don't want this to fail," she says.

All eyes are on Florida and Vermont. Chuck Milligan, director of the Center for Health Program Development and Management warns that the reforms "are the equivalent of plans on a drawing board, and states need to be thoughtful in how they use the evidence to develop their own potential reforms."

A critical task for states, Milligan believes, is "to think through how the proposed changes will ripple through the rest of the system." The challenge is daunting, for sure, but as Fasano sees it, "If you don't try, you'll never know. If you don't do anything, then we're in chaos."

RELATED ARTICLE: Details of Florida Medicaid reform.

Florida legislators had specific goals for the state's Medicaid reform. These were reflected in the 1115 waiver approved in October.

* Create a defined contribution managed care model. The state will provide a fixed premium to a managed care organization for each plan member, rather than reimbursing providers for a defined set of benefits, as in the past. This new system applies primarily to adults, and excludes children with chronic medical conditions, Medicaid-eligible children in foster care, and people with developmental disabilities.

* Create three categories of care: comprehensive, catastrophic and enhanced benefits.

Comprehensive Care: The state will provide a risk-adjusted premium for each plan member, and this premium is expected to "cover most services needed by most people, most of the time," according to Senator Mike Fasano. The plan is responsible for paying for care up to a certain dollar threshold.

Catastrophic: Individuals who exceed the threshold for comprehensive care will move to catastrophic coverage, which will cover all services up to a maximum benefit limit. This limit will be set at an "extremely high" level, according to the Florida waiver application. If an individual exceeds the benefit limit, his or her additional health care services will shift to uncompensated care.

Enhanced Services: Participants who take care of themselves--managing their weight or diabetes, for example--will accumulate points in an account that they can use to pay for other health needs, such as over-the-counter medicine, eyeglasses or routine dental appointments.

* Allow Medicaid recipients to opt out of Medicaid plans, and use premiums to help them purchase health coverage through their employers.

* Require guaranteed funding by the federal government to compensate safety net providers. Under the agreement reached with the federal government, Florida will spend up to $1 billion each year for the next five years on payments to safety net hospitals--a significant increase from the $688 million spent in 2005.

* Implement reform in phases--starting in two counties--and require legislative oversight of expansion.

* Evaluate the program after two years.

RELATED ARTICLE: Other states following suit.

The reform wheels are in motion around the country. Although specifics vary, the goals from state to state are remarkably similar. In addition to managing costs and improving Medicaid, states want the program to do a better job of giving consumers choice about their coverage and rewarding them for positive behavior.

Many states believe that one way to slow the growth in spending is to "require or reward greater personal responsibility," says Vernon Smith of Health Management Associates, an author of a 50-state survey released in October by the Kaiser Commission on Medicaid and the Uninsured. Some examples of reform proposals under consideration include the following.

Georgia is considering a comprehensive Section 1115 waiver that would increase cost-sharing for Medicaid and PeachCare enrollees. According to the concept paper the state submitted to the Centers for Medicare and Medicaid Services, "Everyone, including beneficiaries and providers, needs to share equitably in the solution." Its solution: a cap on federal spending for three to five years. The state would be at risk for managing costs within that amount, and, like Vermont, would be able to keep the savings.

Lawmakers in Missouri established a Medicaid Reform Commission in 2005 to investigate how to slow the growth in spending, increase access to care and eliminate waste and fraud. "Changing the focus to health and wellness will pay off," says Senator Charlie Shields, chairman of the commission. "We have the notion that quality doesn't cost, and in fact it pays for itself."

South Carolina's Healthy Connections proposal would offer state-funded "personal health accounts" that allow enrollees to purchase comprehensive health coverage from state approved plans and networks. As in Florida, recipients will have a good deal of personal choice and may "opt out" and use their health account to purchase group insurance through their employer. A small group of members--they must be adults with a primary care doctor--will be eligible to choose a self-directed plan. Under this option, members will use a portion of their accounts to purchase a major medical insurance plan that includes inpatient hospital coverage and related costs, as well as preventive services. Members will have flexibility in how they use the remainder of their accounts, and may use the funds to buy other medical services directly from health care providers. Members who spend more than they have in their account will be moved into a full-service plan--after they first pay out of their own pockets a defined "gap" amount.

The state will assess this demonstration to see if a self-directed plan is viable for Medicaid enrollees, and what impact such a model will have on health status and expenditures.

The West Virginia proposal will require members to agree--in a signed statement with the state--to abide by certain guidelines, such as keeping medical appointments and sharing in program costs through co-payments. The proposal also provides members with Healthy Rewards Accounts that they can use to pay for health-related costs such as co-payments. The state also proposes to streamline its administration and tailor benefits to specific populations' needs.

RELATED ARTICLE: Details of Vermont's global commitment.

Vermont's Global Commitment to Health section 1115 demonstration waiver was approved for five years in September.

Details of the plan:

* Caps overall state and federal Medicaid expenditures at $4.7 billion over the next five years. The state projects that spending will be at least $263 million less than the premiums paid to the managed care organization. With the new federal match, the state projects a savings of about $155 million. The state can use this money to reduce the Medicaid shortfall and also invest in health programs.

* Converts the state Medicaid agency--the Office of Vermont Health Access--into a public managed care organization.

* Permits Vermont to continue programs for the uninsured, prescription drug coverage and case management that were developed under the previous 1115 waiver. It can also keep programs approved under various 1915 home- and community-based waivers that support children with severe emotional disturbances, people with traumatic brain injuries and people with disabilities who need personal care services.

* Managed care savings can be used in the following ways: to reduce the number of uninsured and underinsured people; to increase access to good health care for the uninsured; to invest in health promotion activities that improve the health of Medicaid-eligible people; and to encourage public-private partnerships.

* Reductions in benefits for optional populations are allowed, as long as they do not result in more than a 5 percent increase or decrease in annual Medicaid expenditures.

* Benefits for mandatory populations must comply with federal rules; reductions in mandatory or optional benefits require a waiver amendment.

Kristine Goodwin, a former NCSL employee, freelances from her home in Colorado.