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  1. McDonough, John E. DPH


Abstract: Medicaid has become the nation's most important health coverage program, covering more individuals and costing more than Medicare. Because Medicaid finances the health care for society's most challenging cases, it deserves the characterization: "the workhorse of the U.S. health care system." A chief difficulty is that the program is housed within state governments, which means its fiscal fate is tied to the well-being of state economies. State revenues tend to decline just when health care spending and Medicaid spending reach their highest points. States have numerous strategies they employ to reduce the rate of growth in Medicaid spending, though none have strategies to halt relentless cost pressures. The policy challenge today is to survive this difficult period with the least damage to vulnerable individuals, families, and safety net providers.


IN THE JANUARY 2002 EDITION of the policy journal Health Affairs, the Urban Institute's Alan Weil described Medicaid as "the workhorse of the U.S. health care system." By this characterization, he suggested whenever policy makers identify a new and difficult population it wishes to insure against health care risks, they turn to the 38-year program created as an afterthought to Medicare. "Medicaid's crises are an indication of the mismatch between our ambitions for the program and the resources we commit to it" (Weil, 2003). Rarely has a metaphor for this complex health financing program resonated so quickly and affirmatively throughout the policy community. The previous metaphor, familiar in the late 1980s and early 1990s, described Medicaid as the "Pac Man" of state budgets because of its tendency to crowd out other forms of state governmental spending.


Many in the state health policy community appreciate Weil's characterization because it provides Medicaid with a well-deserved and accurate identity. Medicaid lacks the high-profile panache of health programs such as Medicare and the Federal Employees Health Benefits Program and certainly does not share in the self-congratulatory advertising glitz afforded major private health insurance plans. At the risk of overkill, let me offer another image: Medicaid is the Cinderella of the U.S. health care system. You know-the one who does the serious cleaning up and heavy lifting; spurned and denigrated by less challenged, less worthy, and more advantaged stepsisters; appreciated only by lowly mice and farm animals who benefit from her true features; the one most genuinely deserving of respect and consideration even though least likely to receive it.


Medicaid gets little respect because, like Cinderella and so many of its clients, the program ended up in the wrong household. In Medicaid's case, the household is state government, a place where the program will not and can not get a fair shake. Rather than characterizing state governments as an "evil stepmother," let's look at this from the state point of view. State governments' fiscal fates are inextricably linked to those of the U.S. economy. Their yearly revenue stability is tied inextricably to the growth of income and sales taxes, which are tied to macroeconomic growth. When the underlying economy grows, state revenues rise, normally in the low to middle single-digit range. When the underlying economy deteriorates, state revenues drop accordingly, normally in the low single-digit range.


Health sector spending tends to be countercyclical, meaning it rises at the fastest rate just when macroeconomic trends decline. This has occurred during each national economic recession since the creation of Medicaid and Medicare in 1965: the recessions of the mid-1970s, the early 1980s, the late 1980s/early 1990s, and the early 2000s. Conversely, health spending tends to moderate the most during periods of economic stability and growth.


Although state government officials think of Medicaid as a state government program-and it is-it is more innately a health sector program in its financial behavior. Its inflationary behavior has far more to do with what's going on in the health sector at any given point and far less to do with what is going on inside state governments. If one thinks of the dog and its tail in the context of state government, Medicaid increasingly resembles the dog-as it heads toward being the single most expensive program in many state budgets. Yet in the health system context, Medicaid is only the tail-following macro trends affecting health spending at every level.


Thus the disconnect. In lean times, when state revenues grow at negative or small single-digit levels, Medicaid spending grows at double-digit rates. Medicaid's rate of growth over the past four years has not outpaced the growth of macro health spending; indeed, Medicaid's growth has been slightly less. Yet the combination of low state revenue growth and high Medicaid growth-albeit tied to larger health spending trends-has triggered genuine fiscal distress for states, as nearly every other state priority faces severe cuts to pay for Medicaid's incessant spending demands. These other state services include public education, local government aid, courts, environmental protection, roads, nonhealth human services, public health services, housing, and much more-all to feed a complex program about which fewer and fewer average citizens can make any sense. In this fiscal context, even the most compassionate state government feels compelled to act.


In the last fiscal downturn-the economic doldrums of 1989-1991-states embraced two strategies to avoid harsh benefit and eligibility cutbacks: first, Medicaid managed care, and second, new federal revenues through Disproportionate Share Hospital (DSH, pronounced "dish") spending. Eliminating most or all fee-for-service payments by compelling all or most Medicaid clients to enroll in health maintenance organizations (HMOs) would provide economic and clinical discipline to bring costs into line, or so states hoped. At the same time, states aggressively exploited new Medicaid flexibility provided by the DSH program that permitted states to draw down substantial new federal dollars using suspect matching fund ploys funneled through high-Medicaid providers. These two strategies-DSH in the short term and managed care in the medium/longer term-enabled most states to survive that recession without significantly undermining prior eligibility or benefit levels.


The DSH dollars were real, which is why the administration of President George H. Bush moved aggressively to convince Congress to cap the program in 1991 to avoid further raids on the federal treasury. The managed care revolution spread throughout Medicaid without the backlash that erupted over HMOs in private insurance and in Medicare. But if the backlash failed to erupt, so did expected savings. Medicaid managed care plans found they could not compete with the lower rates paid to fee-for-service providers. In many parts of the nation Medicaid managed care plans now are the more expensive care alternative (Hurley & Somers, 2003).


In the current fiscal environment, three overarching strategies exist for states unwilling or unable to pay the Medicaid piper (Smith et al., 2003). The following encompass the three strategies that will be detailed shortly:


* States can reduce or freeze provider payment rates.


* States can implement controls on prescription drugs.


* States can implement care/disease management and other clinical management strategies.


* States can reduce or eliminate optional benefits for targeted recipients.


* States can eliminate or freeze eligibility for selected optional populations.


* States can initiate or increase beneficiary copayments and/or premiums.


* States can seek additional federal dollars over and above the traditional federal matching rate.


1. Reducing provider rates is a familiar and commonly used strategy that was implemented in at least 37 states during fiscal year 2003. Because Medicaid rates tend to be the lowest of all public and private payment rates, these cuts tend to encourage providers to abandon the program and harm providers with high Medicaid patient loads, thus creating client access problems. Prescription drug spending has been another major focus, as states implemented multiple strategies to discourage use of higher cost drugs with minimal therapeutic advantage over lower cost substitutes. Done well, this strategy reduces costs while maintaining quality; done poorly, quality of care for certain classes of patients is diminished.Identifying the most expensive clients and services to develop focused approaches to reducing costs while improving or not diminishing quality is increasingly popular. Innovative strategies, backed up by sophisticated computer modeling programs, permit health plans to identify with increasing accuracy future high costs cases and to apply preventive care management techniques to lower expected rates of hospitalization. These "predictive modeling" tools, used with increasing frequency by private health plans, lower costs while improving client quality of life. Unfortunately, even when done well, this approach lowers program spending only marginally and does not eliminate the need for employing other more painful strategies.


2. Increasingly, states are cutting eligibility for classes of clients, eliminating benefits, and establishing new and higher copayments for services and higher premiums. By January 2003 at least 27 states were reducing or restricting eligibility, 25 states had taken measures to reduce acute care benefits, and 17 had already moved on recipient cost-sharing increases. One eligibility change had been to reinstate asset tests prior to eligibility, a requirement many states eliminated in the late 1990s in order to ease entry of low-income families into their programs. Prescription drug spending has been another major focus, as states implemented prior approval strategies to discourage use of higher cost drugs with minimal therapeutic advantage over lower cost substitutes. Done well, this strategy reduces costs while maintaining quality; done poorly, quality of care for certain classes of patients is diminished.


3. The final strategy is to reconfigure programs to qualify for additional federal matching dollars, especially through DSH spending. Once again, states have been innovative (federal officials would offer "devious" as a more accurate term) in devising means to increase federal spending. In May 2003 Congress and the president agreed to provide an additional $10 billion to states through a one-year increase in the federal Medicaid matching funds rate.



Unfortunately, there is no single-or even dual-strategy to address the relentless demands for Medicaid spending increases in the current epoch of negative or flat state revenue growth. States have little choice but to determine the balance of adjustments and changes among the full menu of options. In so doing, they need to keep in mind that no prior period of sluggish economic growth and high medical inflation has endured. Each economic downturn transforms into economic growth, and high medical inflation inevitably moderates. The policy challenge is to survive this difficult period with the least damage to vulnerable individuals, families, and safety-net providers.


Regrettably or not, U.S. attempts with employer mandates and single payer plans to reach universal coverage have all failed the critical test of political feasibility. The only strategy that has actually resulted in coverage increases and reduced levels of uninsurance has been the incremental strategy to increase Medicaid as far up the income ladder as possible. Nothing else has worked. When we emerge from current economic doldrums, this strategy will once again make sense. For most individuals and families, Medicaid provides a stable medical home; for states, the federal government picks up the major share of the tab; and for the federal government, states assume administrative and fiscal responsibility. Like it or not, until our political culture reaches a policy sea change, Medicaid remains our best bet.


We have a lot at stake in making sure the damage done in the current period is as limited as possible.