State Health Reform: Converting Medicaid Dollars into Premium Assistance
by Dennis G. Smith
States have the capability to increase the value of Medicaid for recipients and taxpayers alike through premium assistance. Linking public dollars to private coverage would increase access to needed services for recipients and reduce costs for taxpayers. Coverage for a family of three on Medicaid (one adult and two children) will cost $9,830 next year. In most states, this is likely to be significantly higher than the averÂage annual premium for family coverage in the priÂvate market. Using Medicaid dollars to pay the employee share of employer-sponsored insurance would also stretch public dollars.
State policymakers can improve Medicaid by using the flexibilities provided by the Deficit Reduction Act of 2005 (DRA) to redesign Medicaid coverage of low-income working families into a system of premium assistanceâ€”a government contribution to private health insuranceâ€”that would reconnect much of the Medicaid population to the private health insurance markets that serve the majority of Americans. TaxpayÂers would benefit directly, both by sharing the cost of Medicaid with employers when possible and as a result of competition in the marketplace. Reform would also result in a number of significant benefits for the low-income working families who rely on Medicaid for coverage.
The Biggest Program
Medicaid serves more people than Medicare and is estimated to spend nearly $350 billion on behalf of 64 million people enrolled at least for some period (“ever enrolled”) during the year. It is proÂjected that federal, state, and local government spending on Medicaid will total $5.1 trillion between 2009 and 2018.
Properly understood, Medicaid is not a single program. It is a combination of several programs spread across 56 jurisdictionsâ€”the 50 states, the District of Columbia, and U.S. territoriesâ€”includÂing direct payment for health care services, health insurance, public assistance income support, and long-term care that serves four distinct population groups: low-income children and able-bodied adults, generally parents or caretaker relatives (“moms and kids”); low-income people who are not eligible for Medicaid (served through the DisproÂportionate Share Hospital [DSH] program and emergency services); people with disabilities; and low-income seniors.
Each of these different Medicaid groups requires workable solutions that match their needs. MemÂbers of these groups will resist any attempt at change, and understandably so, unless and until they can be sure that the changes will improve their lives and the lives of their families.
The DRA included several modest improvements in Medicaid that created opportunities for states to begin reform, especially in the area of premium assistance, but much remains to be done. ConvincÂing elected officials at the federal and state levels to take on the challenge of modernizing Medicaid is a difficult task.
How Medicaid Spends Taxpayer Dollars
Costs and spending patterns vary greatly among the different population groups. In fiscal year (FY) 2009, the per capita cost for a full year of coverage is projected to be $2,876 for a child, $4,078 for an able-bodied adult, $15,347 for a senior, and $17,336 for a disabled person.
The traditional “moms and kids” and other indiÂgent populations generally rely on Medicaid for acute care needsâ€”the same type of care purchased through private health insurance. Together, they represent about 75 percent of the Medicaid populaÂtion and account for $117 billion, or 34 percent, of Medicaid expenditures.
The State Children’s Health Insurance Program (SCHIP) and the DSH program should be considÂered a part of public assistance to low-income workÂing families. Indeed, within the same family, one child can be eligible for Medicaid and another eligiÂble for SCHIP. DSH provides direct payments to hospitals for uncompensated care due to either low Medicaid reimbursement rates or care provided to indigents. Adding SCHIP spending ($9 billion) and DSH spending ($16 billion) to the $117 billion in Medicaid expenditures, more than $142 billion will go to individuals who generally are in families with income below 200 percent of the federal poverty level ($42,400 for a family of four).
Seniors represent about 10 percent of enrollÂment but $79 billion, or 23 percent, of expendiÂtures. Individuals with disabilities account for $151 billion, or 43 percent, of expenditures but just 15 percent of the Medicaid population. Many seniors and people with disabilities are also served by Medicare.
A Policy Paradox. Medicaid is a paradox. It is criticized as both too stingy and too generous; comÂprehensive but incomplete; unreliable yet essenÂtial; too complex and too inflexible; a program that is both shunned and embraced by individuals and providers.
Medicaid promises rich benefits but restricts access, promotes welfare dependency, and creates new inequities among working families who pay for a welfare program. It is generally a state’s largest budgetary expenditure, and it is a big government program that is least understood by the general public and state policymakers alike.
Perverse Incentives. In Medicaid, government is financier, purchaser, regulator, and competitor. Government hospitals, nursing homes, and local governmental mental health agencies often receive preferential treatment.
Flaws in the current system include the “proÂvider entitlement” that thwarts competition, special deals often hidden from public view, institutional bias, and rewards for inefficiency. States that try to innovate or make positive changes in their existing Medicaid programs are often penalized by “losing” federal dollars. Government often assumes the role of consumer. As a result, people must follow the money, often into more expensive and less approÂpriate types of health care because that is where the government has already allocated taxpayer dollars.
State Reform for Low-Income Working Families
For policymakers, there is plenty of work to be done on behalf of low-income families, especially at the state level. State lawmakers already have ample opportunity under current law to develop a workÂable solution for coverage while improving the financing, delivery, and quality of care for low-income families.
This can be done through an innovative system of premium assistance: using existing Medicaid funding to offset the cost of health insurance premiÂums for an employer-sponsored insurance (ESI) plan or a private health plan of the beneficiary’s choice. Premium assistance would not only broaden and improve the risk pool of a state’s private insurÂance market, but also result in a number of signifiÂcant improvements for low-income people now enrolled in Medicaid.
Improvements Resulting from Transition. Enabling these young and healthy recipients (about 34 million are below age 19) who are now enrolled in Medicaid and SCHIP to take advantage of private health insurance through a stable stream of public funding would have a number of positive consequences:
A Healthy Population. States should refill the risk pool by moving Medicaid and SCHIP populaÂtions into the market in which private health plans will compete for their coverage. Most of these indiÂviduals are generally healthy: In FY 2005, 77 perÂcent of children and 73 percent of able-bodied adults used less than the $2,500 provided by Medicaid. Only 4.5 percent of children and 3.5 percent of able-bodied adults used more than $5,000 in services.
Using Employer Coverage. The objective of health insurance is to provide access to health care and protect individuals and families against the financial devastation of serious illness. A key funcÂtion of health insurance is therefore to spread costs and risk: The larger the insurance pool, the lower the cost per person.
One way to broaden the spread of risk and reduce per capita costs is to open the private health insurance market to those who are currently getting acute care coverage through Medicaid, most of whom are young and healthy. Those who have lost private coverage because of a change of employÂment or who have found themselves with lower income and thus eligible for Medicaidâ€”more than 30 million children and 16 million able-bodied adults (mostly parents or caretakers of Medicaid children) and 6 million children served by SCHIPâ€” could be integrated into the mainstream private health insurance system.
Medicaid no longer serves only a welfare populaÂtion. Urban Institute researchers studying the charÂacteristics of Medicaid and SCHIP enrollees in California and North Carolina found that more than 70 percent of children on Medicaid and 90 percent of children on SCHIP have at least one parent in the workforce. In an analysis of employer-sponsored health insurance for 1996 to 2004, Tom BuchmuelÂler, a business professor at the University of MichiÂgan and visiting scholar at the Federal Reserve Bank of San Francisco, and Federal Reserve research adviser Rob Valletta found that “[d]eclining employee participation in ESI programs may relate to rising costs.” They concluded that:
[M]ost of the drop in [ESI] coverage has occurred because employees are increasingly declining coverage that is offered to them, suggesting that cost increases are directly affecting employees’ participation decisions. This view is supported by recent research findings that use formal statistical analysis to investigate the link between rising costs and declining coverage.”
Researchers in 2005 found that “most of the decline in ESI coverage between 1987 and 2002 is attributable to declining affordability (i.e., more rapid growth in premiums than in personal income); Chernow et al. (2005) also found that rising health insurance costs are the dominant explanation for falling coverage over time.”
A family of four with income at the FPL ($21,200) would have to spend 12 percent of its income to pay the average employee contribution for family coverage available through the employer ($2,585 in 2005), while a family at 300 percent of FPL ($63,600) would have to spend just 4 percent of its income on employer-sponsored premiums. The average family will also typically face additional cost-sharing through co-payments, deductibles, and co-insurance, making the total price tag around $3,000 a year.
There really is no mystery, then, as to why low-income families, even when employer-sponsored insurance is available, decline such coverage. To participate, low-income individuals will need a source of subsidy in order to make coverage affordÂable to them.
With an estimated $142 billion in combined Medicaid, DSH, and SCHIP spending to cover low-income working families, there is no reason why a substantial portion of these funds should not be redirected to eligible persons to enable them to secure health coverage of their choice, either through their employers or through the states’ health insurance markets. To a limited extent, this is already happening, but while Medicaid is projected to spend $70 billion in FY 2009 in capitation payments(most of it on the “moms and kids” population), Medicaid and SCHIP recipients are still separated from rest of the health insurance pool in the states under the existing terms of governmental contracts. As a result, key advantages of premium assistance for the state health insurance markets are lost.
A new publicâ€“private partnership that included state officials, private health plan providers, and employers could significantly improve and expand coverage for low-income Medicaid and SCHIP popÂulations through the private sector. Government funding could follow the employed and into employer-sponsored insurance where available.
Using a Health Insurance Exchange
Where ESI is not available, recipients should buy private health plans, using Medicaid and SCHIP subsidies. To facilitate the purchasing of private health plans, state officials could set up a stateÂwide health insurance exchange: in effect, a single market for health insurance in which health plan organizations would compete directly for conÂsumer dollars. The exchange could allocate govÂernment subsidiesâ€”including premium assistance based on Medicaid and SCHIP fundingâ€”to help eliÂgible recipients buy private health insurance. The exchange could also serve all state employers and employees as well as those who are enrolled in MedÂicaid and SCHIP. The collection of insurance preÂmium payments, transmittal of plan payments, and processing of related paperwork would be the responsibility of the exchange’s administrators.
Most Americans cannot afford to be uninsured. An exchange helps individuals to join a group that can offer health insurance plans at competitive prices.
In either case, premium assistance would simÂplify health care options for families. Rather than having a parent covered by one plan through her employer, one child through SCHIP, and another child through Medicaid, the entire family could now be served through one plan and a streamÂlined system of financing. When a family moved either onto or off of Medicaid, it would not lose its coverage; the only change would be in the level of subsidy it receives from either the governÂment or the employer. This policy would also have positive social consequences by enhancing family cohesion.
Overcoming Barriers to Private Coverage
The concept of premium assistance is not really new to Medicaid, as states have had the authority to pay for group health insurance under Section 1906 of the Social Security Act under certain conditions for some time. Premium assistance, however, has been more a mirage than a reality under those conÂditions that have proven to discourage states from adopting it.
States faced three major barriers under the requirements of Section 1906 before they could provide premium assistance in lieu of traditional Medicaid: (1) conduct an “individual cost effectiveÂness” test, which is administratively burdensome and expensive; (2) supplement the employer health plan by providing “wrap around” benefits and cost-sharing up to the uniform and more generous MedÂicaid benefit package provided under the state plan; and (3) allow children, the majority of the populaÂtion, to opt out of the employer’s health plan. States faced a fourth barrier in Section 1916, which preÂvented them from requiring families to participate in cost-sharing.
Nonetheless, Illinois, Maine, Massachusetts, Oregon, and Rhode Island have gamely sought to use premium assistance aided by waivers under Section 1115 authority that allowed the states to vary benefits, apply cost-sharing, and avoid retroacÂtive eligibility. Arkansas, Oklahoma, and Texas are pursuing premium assistance for low-income indiÂviduals who are not eligible for Medicaid by encourÂaging small employers to offer insurance backed by public subsidies. But these efforts are still on a small scale, and waivers are subject to changes depending on how the federal policymakers view them.
New Opportunities for Innovation
States today are in a much better position to purÂsue innovative premium assistance programs thanks to the reforms provided through the DRA that allow states to overcome the three major barriers under Section 1906 as explained above. Specifically, SecÂtion 1937 of the DRA permits states to enroll the majority of the low-income working population in “benchmark coverage,” which resembles private insurance benefits more closely than it resembles traditional Medicaid. No additional “wrap around” benefits are required if the private plan meets one of the required benchmarks. However, children under age 19 will still qualify for medically necessary serÂvices not covered by the benchmark plan under Medicaid’s Early Periodic Screening Diagnosis and Treatment (EPSDT) provision.
Moreover, the language of Section 1937 is delibÂerately broad (“Notwithstanding any other proviÂsion of this titleâ€¦”); therefore, states should properly use their authority to interpret Section 1937 to supersede the previous barriers related to the individual cost-effectiveness test and the child opt-out in Section 1906.
Available Coverage Options. The benchmark coverage under Section 1937 matches the benchÂmark coverage under the SCHIP program (Section 2103), so the two programs can be integrated, and premium assistance can be applied to both. A state is permitted to require certain individuals to enroll in health plans that meet one of five different coverÂage options:
For the greatest number of options, state officials can adopt each of these benchmark packages. With the potential for attracting more members that comes with a stable source of funding, employers and health plan providers would have an incentive to demonstrate that the products they offer meet at least one of these benchmarks so that Medicaid and SCHIP populations can join their health plans.
To date, only a handful of states are using the benchmark plans to increase premium assistance. Much of this inaction is simply rooted in political or bureaucratic inertia. It would be a relatively small investment of time and resources to invite private health plans to demonstrate that they provide the level of benefits provided under benchmark plans or to obtain actuarial certification of the private health plans that meet the actuarial equivalence.
Replacing Individual Cost-Effectiveness Test with Average Cost-Effectiveness Test. To proÂmote and expand the use of premium assistance, the programs need to be simplified to ensure that benchmark plans and cost-effectiveness tests are properly synchronized. Accordingly, states should submit state plan amendments to the federal govÂernment to adopt benchmark plans. Furthermore, they should adopt a cost-effectiveness test for MedÂicaid and SCHIP that could be based on average costs as described below. This is only one example of how a state could construct a new cost-effectiveÂness test.
In general, enrollment in a group plan is more likely to be cost-effective if there is more than one family member who is eligible for public assistance. Every year, each state would publish the statewide average of the Medicaid/SCHIP per-member, per-month (PMPM) rates for a child and for an adult. For the examples below, the PMPM is assumed to be $150 for a child and $275 for a non-disabled adult.
Each state would also publish the cost of the average net family premium contribution (ANFPC) for the state each year. The ANFPC is defined as the average total family premium per enrolled employee at all private-sector establishments within the states that offer health insurance minus the averÂage single-employee premium minus the employer share (to avoid cost paid by the employer). It may be based on a state survey or a federal survey such as the Medical Expenditure Panel Survey (MEPS).
Table 1 assumes that the total family premium is $12,000, the average total single premium is $4,500, and the average employer share of family coverage is 35 percent. The ANFPC therefore is $4,875 per year, or $406.25 per month.
Examples of How Cost-Effectiveness Is Applied. Using an average cost-effectiveness test, a state can quickly determine at the time of appliÂcation whether a family with at least three eligible children (even if the children are divided between Medicaid and SCHIP) or one eligible child and one eligible adult should be required to use the insurance (which the state already has determined meets the criteria of a benchmark plan) available through their employers or through other private coverage.
Example 1: Only one child in the family is eliÂgible. Enrollment is not cost-effective because the ANFPC ($406.25) would be more than the PMPM ($150).
Example 2: Two children in the family are eligiÂble. Enrollment is not cost-effective because the ANFPC ($406.25) would be more than the PMPM ($150 x 2 = $300).
Example 3: One child and one adult are eligible. Enrollment is cost-effective because the ANFPC ($406.25) is less than the combined PMPMs ($150 + $275 = $425).
Example 4: Three children in the family are eligiÂble. Enrollment is cost-effective because the ANFPC ($406.25) is less than the cost of the combined PMPMs ($150 x 3 = $450).
The state would then pay the amount of the emÂployee’s share for family coverage (to the employer, employee, or health plan) each month and advise the family as to its responsibilities for any cost-sharÂing (a share of the premium, any deductibles, co-payments, or co-insurance up to the statutory limit of 5 percent of family income). With the family members enrolled in private insurance, the regular third-party liability rules apply to ensure that MedicÂaid or SCHIP are not used inappropriately to reimÂburse the health care provider for services directly.
These examples also reveal that Medicaid may be paying too much to cover low-income families. Medicaid pays on an individual basis rather than a family basis as is typical in private insurance. Under the PMPM example, Medicaid would spend a total of $6,900 for one adult and two children on an annual basis. The average annual premium for famÂily coverage on the individual market for the nation for 2006â€”2007 was $5,799. The average annual premium for family coverage on the individual marÂket exceeds $6,900 in only nine states.
Moreover, the PMPM example used in Table 1 is probably too low compared to the projected per capita expenditures in Medicaid. The cost per capÂita for a full year in FY 2009 is $2,876 for a child and $4,078 for an able-bodied adult, so a MedicÂaid family of three would cost $9,830. Adopting a family approach could stretch public dollars in a variety of ways, including as a means of spreading risk. This comparison also suggests that Medicaid is paying too much to cover the low-income workÂing population.
Flexible Cost-Sharing in Public Programs Key to Premium Assistance. For almost its entire hisÂtory, the federal government has not allowed states to require non-institutionalized Medicaid recipients to participate in the cost of the program. Cost-sharÂing generally could be only “nominal” and not enforceable; that is, a provider could not refuse to provide the service if the Medicaid recipient refused to pay. The opposite is true for institutionalized individuals who are required to surrender virtually all of their income and permitted to keep only a “personal needs” allowance for themselves.
The prohibition on cost-sharing may have made sense when Medicaid was serving only a welfare population that was not in the workforce, but times have changed. As indicated previously, more than 70 percent of children on Medicaid have at least one parent who is employed.
Since its creation in 1997, SCHIP has always allowed states to require cost-sharing for its populaÂtion up to 5 percent of family income, though few states currently require the maximum amount of cost-sharing for families below 200 percent of FPL ($42,400 for a family of four).
Through the DRA, Congress again gave states new authority to coordinate their Medicaid and SCHIP policies to include more reasonable cost-sharing levels. Under Section 1916A, Congress has allowed states to require certain Medicaid populaÂtions to accept some personal responsibility for the cost of their care. Under current law, for this popuÂlation with family income above 100 percent of FPL ($21,200 for a family of four), states can require families to contribute up to 5 percent of income. Families between 100 percent and 150 percent of FPL ($31,800) cannot be charged premiums but can be required to pay other forms of cost-sharing, such as a co-payment, also capped at 5 percent of income. In determining cost-sharing, states can use a gross-income determination and sliding-scale levels of cost-sharing.
Applying at least some level of cost-sharing to families with income above 100 percent of FPL would not only help to involve families in rational decision-making about their medical services and benefits, but also establish a measure of equity with non-Medicaid families of similar income. This addiÂtion of a cost-sharing requirement would also be an important element in assessing actuarial equivaÂlence (differing benefits, but the same dollar value) for purposes of premium assistance, simply because most private health plans require some amount of cost-sharing on the part of their subscribers.
Cost-Sharing Guidelines. Table 2 shows how much states could require in cost-sharing on a monthly basis for a family of four at different income levels.
A Medicaid/SCHIP family at 150 percent of FPL would face potential cost-sharing of $1,596 per year ($133 x 12 = $1,596) if required to contribute up to the maximum 5 percent of income. Considering that a privately insured family typically pays about $3,000 directly under ESI (employee share of preÂmium, co-payments, deductibles, and co-insurance), a Medicaid/SCHIP family is still getting a good deal.
Reversing the comparison, non-Medicaid famiÂlies with similar income but paying part of their costs may begin to wonder why state officials decline to require Medicaid families with income above the poverty level to participate in the cost of insuring their families. Health care is not “free” as often advertised in public outreach activities. SomeÂone is bearing the cost, and states have an important role in establishing fairness and equity.
How Congress Can Help the States
To expand the use of premium assistance, states must be able to administer their programs through their state plans (rather than relying on waivers) and level the playing field between premium assistance and regular Medicaid and SCHIP. Accordingly, ConÂgress should amend Medicaid and SCHIP to:
Congress should not adopt the premium assisÂtance provisions from last year’s SCHIP legislaÂtion. Those provisions provide states with less flexibility than does current law and would be a step backward.
For state lawmakers who want to improve the quality of health care for low-income people, there is ample opportunity to establish a premium assisÂtance program, using Medicaid and SCHIP funds, within the legal guidelines already established by Congress. This could significantly broaden access to private coverage, including employer-based coverÂage, for millions of Americans.
Premium assistance would benefit the populaÂtions currently covered under Medicaid and SCHIP. These benefits would include a higher level of contiÂnuity of care and coverage, thus greatly improving people’s prospects for maintaining their health; increased access to doctors, dentists, and other medÂical professionals through the superior networks of the private health insurance markets; reducing the stigma that so often accompanies dependence on public assistance; and integrating Medicaid recipiÂents into the private health insurance markets just as far-reaching welfare reform initiatives are integrating low-income people into the economy. In addition, the infusion of a large cohort of relatively young and healthy members would have a positive impact on health insurance pools, broadening the risk pools and lowering per-person costs.
There are a variety of options state officials can use to pursue a premium assistance strategy for Medicaid and SCHIP. A combination of imaginaÂtion, a zeal for innovation, and the political will to improve the financing and delivery of care for low-income Americans can bring about a transformaÂtional change.
Federal officials need to take a fresh look at how the mission of Medicaid has changed, aided by the growth in SCHIP, and understand the potential for integrating the low-income working families of Medicaid and SCHIP into the mainstream. ComÂbined spending over the next 10 years on Medicaid, DSH, and SCHIP for the able-bodied, non-elderly populations will total about $2 trillion.
Policymakers should examine how this fits into the broader national debate over how to achieve the mutually inclusive goals of increasing the number of Americans with health insurance and slowing the rising cost of health care. A path could be constructed if combined with a wider approach such as addressing the issue of the “uninsured” through tax credits.
Integrating the $142 billion that will be spent on low-income working families in FY 2009 with tax credits and state risk-pooling mechanisms would go a long way toward strengthening and stabilizing our health insurance system and addressing the issues of the “uninsured.” But for these efforts to be successful, all Americansâ€”the public as well as Congressâ€”need to stop viewing these public proÂgrams as outside the rest of the American health insurance system.
Dennis G. Smith is Senior Fellow in the Center for Health Policy Studies at The Heritage Foundation and formerly Director of Medicaid and State Operations at the U.S. Department of Health and Human Services.