Special ed squeeze: the feds are cutting the Medicaid funds many states rely on to provide health services for disabled students.

It seemed like a good idea," says Senator Ed Olson of South Dakota. Use Medicaid funds to provide health services mandated under federal special education legislation to disabled students.

So that's what South Dakota and other states did: maximize their resources for special education. But soon states will see a sharp decline in federal support for special education, especially health-related services required by law that have been paid by Medicaid.

"The feds tell us that these services must still be provided, but the money is yanked away from us," Olson says. "As a principal, school administrator and chair of the Senate Education Committee, this disappoints me greatly."

The president's budget proposal for FY '07 would eliminate nearly $3 billion from the nation's special education system over three years by reducing or eliminating reimbursements for administrative and transportation services. Who will then pay for these required services? States and local school districts.

Federal law mandates that every child, including children with disabilities, receive a "free and appropriate public education." But providing education for students with disabilities has proved to be anything but free for states and localities. On average, 22 percent of K-12 education funds are allocated for special education students, who account for about 13 percent of the total student population.

"The feds are mandating that states will provide a free and appropriate education, and then not following through with the resources they promised" says Senator Robert Plymale, chair of the West Virginia Senate Education Committee.

Historically, states have had two sources of federal funds to help pay for educating students with disabilities. Federal grants under Part B of the Individuals with Disabilities Education Act (IDEA) fund a portion of the education. States can also use Medicaid reimbursements to cover health related services identified in a child's individual education plan (IEP). But administering these services under two revenue streams has generated confusion, frustration and difficulty in an already underfunded system.

IDEA MOSTLY UP TO STATES

The federal government set ambitious goals under the Individuals with Disabilities Education Act, but left states and localities to pay for the bulk of a child's education and related services.

"We get hammered because the feds say we are not in compliance, but their rules are inconsistent and their resources insufficient," says Senator Olson.

States must comply with the act to receive federal funding in the form of Part B grants. They could conceivably opt out of participating in IDEA without federal sanctions. But states are still obligated to ensure that students with disabilities receive public education, whether or not the state receives federal funding.

JUGGLING MEDICAID

Each state has its own Medicaid system, which includes a federally approved state plan. Although states have considerable flexibility in designing and operating their Medicaid programs, they must comply with federal requirements specified in Medicaid statute and regulation.

Most states use Medicaid funds to pay for reimbursable health-related school-based services for children who have an IEP and are enrolled in Medicaid. These services are divided into two categories: medical assistance--which includes transportation; physical, occupational and speech therapies; and diagnostic, preventive and rehabilitation services--and administrative activities, including outreach, application assistance, and coordination and monitoring of health services.

States can't use Medicaid funds to pay for health services that the state provides to all students.

STATE-FEDERAL CONFLICTS

Although Medicaid was originally the payer of last resort, statutory changes in 1988 changed it to payer of first resort. The U.S. Department of Health and Human Services maintains that the changes in the law allow, but do not require, Medicaid to pay for services identified in a child's individual education plan. This fundamental disagreement serves as the shifting foundation for the current dispute.

States, districts and schools, unfamiliar with murky Medicaid procedures, initially had a difficult time with the federal rules regarding reimbursement for medical and administrative services. In fact, to help schools and districts with billings, many states used contractors, who were more familiar with Medicaid processes. Some of these agents submitted claims that raised federal suspicion. Although there was no evidence of fraud, some states' agents billed Medicaid for administrative services arguably beyond the scope of federal regulations.

During the late 1990s, the Government Accountability Office looked at 17 states and cited at least two for improper administrative billings and seven for improper "bundling"--an approach that combines services under a single rate. For example, if a child receives services for a physical therapist, speech therapist and psychologist, a state would file one claim, instead of three separate claims. The major advantage of bundling was that it reduced paperwork, always a goal in process-heavy special education programs. Although there were no clear guidelines on bundling, the federal government found the practice unacceptable for claiming federal Medicaid funds for school-based services.

Another conflict between IDEA and Medicaid stems from the use of private insurance. When a special education child with access to private insurance is enrolled in Medicaid, the private coverage is used first and Medicaid pays the remainder. However, under IDEA's "free and appropriate education" requirement, states cannot require parents to use their private insurance.

A new administrative burden, imposed by the recent reauthorization of IDEA, is the requirement that parents be notified of each billing for medical services. Previously, schools had parents sign off on services when they signed off on the student's individual education plan.

THE GRIPE 

"Once again, the reds are not holding their end of the deal," says South Dakota's Olson. In a system already strapped for funds, federal statutory and regulatory change further erodes federal support for special education. The current federal Part B contribution is about $11 billion. Medicaid provides states with an additional $3 billion. In essence, instead of clarifying or explaining changes, the federal government is proposing to eliminate administrative and transportation Medicaid reimbursements, reducing the overall federal commitment to states for special education by 22 percent.

"This is supposed to be a partnership," says Senator Plymale of West Virginia. "States are trying to meet the educational needs of disabled students and expect Medicaid to pay for health services for eligible students. But with states at the bottom of a top-down approach by our federal government, that is not happening."

FUNDING SPECIAL EDUCATION

Under the Education for All Handicapped Children Act (EHA) of 1975 (P.L. 94-142), the federal government estimated that it would cost 40 percent more to educate children with disabilities than other students, which the reds promised to reimburse. The federal government, however, is contributing less than 18 percent of the average per pupil expenditure, about half of what was promised. This translates into a shortfall of $12 billion. Added to all of this is the fact that the actual excess cost is more like 95 percent. Using actual expenditures, the shortfall between excess costs and federal appropriations is $39 billion, all of which is born by state and local governments. With current federal appropriations for IDEA Part B and Medicaid totaling only $14 billion, a loss of $3 billion ill Medicaid funds is a significant reduction in overall federal funding.

PAYING FOR SPECIAL ED

Federal Estimate vs. Actual Costs

However it's calculated, the federal government is not meeting its commitment to special education. The federal government originally promised to pay 40 percent of special education costs, but has never come close to that. By its own figures (blue bars) it is $12 billion short this year. By using the actual expenditures paid by states and school districts (purple bars), it is $39 billion short.

Federal IDEA shortfall under the 40%
average per pupil expenditure (APPE)
excess cost calculation (in billions)

Actual Excess                   $23
Cost above APPE

Current Federal                 $11
Contribution

Federal                         $12
Shortfall

Note: Table made from bar graph.

Federal IDEA shortfall under "actual"
average per pupil expenditure (APPE)
excess cost calculation (in billions)

Actual Excess                   $50
Cost above APPE

Current Federal                 $11
Contribution

Federal                         $39
Shortfall

Note: Table made from bar graph.

Diana Hinton Noel and David Shreve are NCSL experts in federal education policy.