Kentucky First State to Implement New Medicaid Reform Plan

Published August 1, 2006

In early May, Kentucky became the first state to redesign its Medicaid benefits under provisions in the federal Deficit Reduction Act of 2005 (DRA), signed by President George W. Bush in February.

Under the plan, known as KyHealth Choices, Kentucky will transition most of its 700,000 Medicaid beneficiaries into one of four benefit packages customized for different beneficiary groups. Beneficiaries will be required to make co-payments on certain prescriptions and medical services, with annual out-of-pocket spending capped at $450.

Immediately after its passage on May 3, the new benefit design was implemented in all areas of Kentucky except Jefferson County, where 135,000 beneficiaries already participate in Passport, an existing Medicaid managed care demonstration project.

“We have worked in partnership with the federal government to achieve the unprecedented flexibility needed to transform our Medicaid program,” Kentucky Gov. Ernie Fletcher (R) said in a May 3 statement, “[and] we are leading the way for the national transformation of Medicaid as the first state to put a program such as this in place under the new Deficit Reduction Act.”

Waiver Process Simplified

Several states, including Florida and South Carolina, have petitioned the federal government for market-based “waivers” of federal Medicaid rules. Traditionally, states submitting Medicaid waiver proposals are required to enter into a five-step negotiating process with the Centers for Medicare and Medicaid Services (CMS)–the federal agency charged with administering the Medicaid program–and outline benchmarks and implementation timeframes. More than $100 billion of Medicaid spending is currently delivered through waivers and demonstrations.

But thanks to provisions in the DRA, CMS announced in April that states can overhaul their Medicaid benefit packages without seeking a federal waiver of Medicaid rules. Instead, CMS will provide preprinted State Plan Amendments (SPAs) through which states can complete a standardized form and amend their Medicaid “state plan.”

“The fact is that the Deficit Reduction Act shows that our elected representatives and the federal government have listened and recognized the needs of state Medicaid programs,” Kentucky Health and Family Services Cabinet Secretary Mark D. Birdwhistell said in a May 3 statement.

Budget Was Strained

Policy experts say Medicaid’s skyrocketing expenditures have reached the breaking point in Kentucky’s budget, and reforms were needed to change the way the state finances and delivers the Medicaid program.

“If we didn’t get our arms around reducing the cost of Medicaid in the near future, it would have consumed the entire Kentucky budget,” said Chris Derry, president of the Bluegrass Institute for Public Policy Solutions, a think tank based in Kentucky, “because there are more people on Medicaid in Kentucky than in the K-12 education system.”

Under KyHealth Choices, Kentucky will enroll each of its Medicaid beneficiaries in one of four specialized managed care plans: the “Family Choices” program to serve healthy children, the “Comprehensive Choices” program to serve the elderly and brain-injured who require nursing care, the “Optimum Choices” program to serve the mentally and developmentally disabled, and the “Global Choices” program to serve the general Medicaid population. The plan also will allow beneficiaries to opt out of Medicaid and purchase health insurance though their employers.

“This plan allows flexibility because Kentucky’s [previous] Medicaid system was one-size-fits-all, and everyone doesn’t need everything Medicaid has to offer,” said state Sen. Richard “Dick” Roeding (R-Lakeside Park), who supports the plan. “Those that need a full suite of Medicaid services will still get them, and with reform, we will teach all Medicaid recipients to be better, more responsible health consumers.”

Cost-Sharing Added

In addition to customized benefits packages, Kentucky Medicaid enrollees will get enhanced disease-management benefits and earn “Get Healthy” credits such as dental and vision coverage, nutritional counseling, and smoking cessation programs that will provide incentives toward healthy lifestyles.

The plan’s most controversial provision imposes income-based co-payments on certain medical services and prescriptions, with maximum annual out-of-pocket costs totaling $450. The plan also limits some beneficiaries to four prescriptions per month, with exemptions for chronic disease management.

Roeding explained the changes will give Medicaid beneficiaries a stake in their own health spending and help preserve the program for future generations.

“Without this plan, Kentucky would have to raise taxes or cut benefits to pay for its bloated Medicaid program,” Roeding said. “Through reform, we are trying to continue to serve Kentucky’s needy without cutting benefits.”

Further Reforms Sought

Derry denounced critics’ claims that Kentucky’s market-oriented reform will cause a “race-to-the-bottom” of higher costs and worsening health outcomes.

“For the first time in a generation, we have people [on Medicare] questioning the cost and quality of their medical care,” Derry said, “and under market reforms, the ultimate beneficiary will be the Medicaid consumer.”

Roeding agreed KyHealth Choices is a “good first step,” but said he thinks Kentucky would benefit from even more comprehensive market-based reforms.

“I would hope that our reform plan would spur more private-sector involvement in the Medicaid program,” Roeding said. “That’s because the private-sector health care industry has always done it so much better than the bloated, out-of-control Medicaid bureaucracy.”

Christie Raniszewski Herrera ([email protected]) is director of the Health and Human Services Task Force at the American Legislative Exchange Council.