Advisory Group Identifies Medicaid Cuts

Published October 1, 2005

The federal government’s Medicaid Advisory Commission, charged with identifying reforms necessary to stabilize and strengthen Medicaid, voted in August on six recommendations designed to save more than $10 billion over the next five years in federal Medicaid spending.

Some changes involve the intricacies of Medicaid pricing formulas, and others set out new incentives that plant the seeds for bigger changes to come.

Members of the commission, named by Health and Human Services Secretary Mike Leavitt in July, met in Washington, DC to work out short-term proposals due in a report to Congress September 1.

Former governors Don Sundquist of Tennessee and Angus King of Maine, chair and co-chair of the panel, created a chairman’s mark, a suggested package of options that served as a starting point for deliberations, which was approved unanimously but only after considerable debate.

Changes Coming Soon

The biggest expected savings are to come from a change in the prescription drug reimbursement formula, from the much-criticized Average Wholesale Price to the reportedly more accurate Average Manufacturers Price. Savings: $4.3 billion.

One of the most hotly debated issues before the commission was whether to allow states to create and enforce tiered co-payments for drugs for Medicaid beneficiaries. Tiered co-payments long have been employed in the private sector to encourage cost efficiency. The recommendation sets the tone for Medicaid to begin operating more like private plans while giving the states broad authority to waive the co-pays in hardship cases. Savings: $2 billion.

Two items would make it more difficult for middle-income Americans to transfer assets so that they can qualify for Medicaid. Savings: $1.6 billion.

The commission voted to stop one of the newest tactics states use to draw more money from the federal government through matching funds. The commission said states should stop imposing taxes on Medicaid Managed Care Organizations and then kicking those taxes back to the organizations after the states collect their federal match money. The proposal sends a message that this scamming of the system must stop. Savings: $399 million.

Additional, Alternate Proposals Offered

Meg Murray of the Association for Community Affiliated Plans, a trade association of nonprofit, Medicaid-focused health plans, made a presentation to the commission arguing the current pharmaceutical manufacturer drug rebates available to fee-for-service Medicaid plans should be extended to Medicaid managed care organizations. Potential savings: $2 billion.

Another speaker, Robert Helms of the American Enterprise Institute, offered two substitutes for the chairman’s proposals that would have curtailed the most significant gaming of Medicaid by the states.

“Sundquist and King proposed saving $2 billion by extending the Medicaid drug rebate to the Medicaid managed care program, which is currently exempt from the rebate scheme,” said Helms. “It would be better to capture this money by doing more to stem the scamming of Medicaid,” Helms said. “Also, extending the rebate program to managed care essentially extends the price control system into managed care, which upsets all of the incentives for the managed care organizations to create overall efficiency in their care management.”

The commission postponed decisions on both speakers’ suggestions, mostly because members felt they needed more information.

Others making presentations at the meeting included Congressional Budget Office Director Douglas Holtz-Eakin and Dennis Smith, director of the Centers for Medicaid and State Operations, both of whom reviewed federal Medicaid proposals for the fiscal year 2006 budget. Ray Scheppach, executive director of the National Governors Association, presented that group’s recommendations.

Observers Cautiously Optimistic

One reaction to the commission’s actions came jointly from the American Health Care Association (AHCA) and National Center for Assisted Living (NCAL).

“Under Secretary Leavitt’s leadership, the Commission is moving forward with what appears to be a responsible, sensible approach toward achieving its goals and objectives. We are cautiously optimistic regarding the tone, direction and substance of the debate,” said Hal Daub, president and CEO of AHCA/NCAL, in a statement released after the commission met.

“From the way in which it carried out its mandate this past week, we continue to view the Medicaid Commission’s creation as a positive step toward resolving systemic problems surrounding long-term care financing, and helping the nation’s long-term care community preserve and sustain recent gains in America’s nursing home care quality,” Daub said. “We all have an obligation to help bolster an inadequate, unstable long-term care financing structure that will not have the capacity to meet the needs of the 77 million baby-boomers on the cusp of entering their retirement years.”

AHCA/NCAL represents more than 10,000 nonprofit and proprietary facilities providing care for 1.5 million frail, elderly, and disabled Americans.

Long-Term Reform Next

The commission’s major report concerning broader restructuring of Medicaid is due in December 2006. The commission plans to hold several hearings across the country between now and then and has a long list of ideas it wants to explore and experts it wants to hear from.

According to the commission’s September 1 report, its future proposals will address long-term issues such as:

  • eligibility, benefits design, and delivery;
  • expanding the number of people covered with quality care while recognizing budget constraints;
  • long-term care;
  • quality of care, choice, and beneficiary satisfaction; and
  • program administration.

The report concluded, “The Commission shall consider how to address these issues under a budget scenario that assumes federal and state spending under the current baseline; a scenario that assumes Congress will choose to lower the rate of growth in the program; and a scenario that may increase spending for coverage. The Commission shall assume that the basic matching relationship between the Federal government and the states will be continued.”

Program Costs Continue to Grow

Medicaid has become the nation’s largest health insurance program, spending more than $300 billion last year and covering 15 percent of the U.S. population. Medicaid is consuming an increasing share of state budgets, and the nation’s governors have expressed great concern that it is beginning to crowd out other essential state services.

There are 13 voting members on the commission, including health policy leaders from both sides of the political aisle, and 15 non-voting members.

Grace-Marie Turner ([email protected]) is president of the Galen Institute and a member of the Medicaid Advisory Commission.

For more information …

The report of the Medicaid Advisory Commission is available online at