Medicaid: 105th Congress

Medicaid: 105th Congress

98-132 EPW
CRS Report for Congress
Received through the CRS Web
Medicaid: 105th Congress
February 4, 1998
Melvina Ford and Richard Price
Specialists in Social Legislation
Jennifer Neisner
Analyst in Social Legislation
Education and Public Welfare Division
Congressional Research Service ˜ The Library of Congress

Medicaid: 105 Congress
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Summary
Medicaid is a joint federal-state matching, open-ended entitlement program that
pays for medical assistance for low-income persons who are aged, blind, disabled,
members of families with dependent children, and certain other pregnant women and
children. Through the use of special income standards, states may provide Medicaid
to certain non-poor persons who are in nursing facilities or other institutions, or who
would require institutional care if they were not receiving alternative services at
home or in the community. Within federal guidelines, each state designs and
administers its own program. Total program outlays in FY1997 were $167.6 billion.
Federal outlays were $95.6 billion; state outlays were approximately $72.1 billion.
The federal government shares in a state’s Medicaid costs by means of a statutory
formula based on the state’s per capita income. Adjusted annually, federal matching
rates currently range from 50% to 79% of a state’s expenditures for Medicaid items
and services. Overall, the federal government pays for about 57% of all Medicaid
costs.
Two major factors have prompted Congress to consider fundamental
restructuring of the Medicaid program in recent years. First, Medicaid has been one
of the fastest growing items in federal and state budgets. Second, many state
Governors said their federal-state Medicaid partnership was being eroded by
increases in federal requirements regarding eligibility, benefits, and reimbursement
to providers. The 104th Congress considered but did not enact proposals for
Medicaid reform. The proposals considered by the 104 Congress would hav
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transformed the program into a capped block grant to states and reduced program
funding to the states by approximately $72 billion over 6 years.
The 105 Congress made important changes to the
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Medicaid program though
H.R. 2015, the Balanced Budget Act of 1997 (BBA 97, P.L. 105-33). BBA 97 is
less far-reaching in its reform of the Medicaid program than proposals considered in
the 104 Congress, leaving the program’s existing structure largely intact. The Act
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achieves net Medicaid savings of about $13 billion between FY1998 and FY2002,
largely from reductions in supplemental payments to hospitals that serve a
disproportionate share of Medicaid and low-income patients. The new law
significantly increases the flexibility that states have to manage their Medicaid
programs. In particular, it gives states the option of requiring most beneficiaries to
enroll in managed care plans without seeking a federal waiver and replaces federal
financial requirements imposed by the Boren amendments with a public notice
process for setting payment rates for institutional services. Spending items in the Act
include Medicaid coverage for additional children, and increased assistance for low-
income people to pay Medicare Part B premiums.
As part of his FY1999 budget, President Clinton proposes giving states
additional funds to find and cover uninsured children by expanding Medicaid
outreach funds and making it easier to grant immediate coverage to children who
have not yet enrolled. The budget also proposes to streamline the Medicaid
application process by simplifying eligibility; to allow states to provide Medicaid

coverage to legal immigrant children; and to reduce the federal share of state
administrative costs.

Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicaid in the 105 Congress
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Reduction in Payments to Disproportionate Share Hospitals (DSH) . . . . . . 4
Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Payment Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Repeal of Boren Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Reimbursement to Obstetricians and Pediatricians . . . . . . . . . . . . . . 11
Treatment of State Taxes Imposed on Hospitals . . . . . . . . . . . . . . . . 11
Medicare Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
State Option of Continuous Eligibility for 12 Months . . . . . . . . . . . . 12
Option to Accelerate the Expansion of Eligibility . . . . . . . . . . . . . . . 12
Payment of Home-Health Related Medicare Part B Premium Amount for
Certain Low-Income Individuals . . . . . . . . . . . . . . . . . . . . . . . . 12
Coverage for Disabled Working Individuals . . . . . . . . . . . . . . . . . . . 13
Aliens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Medicaid Eligibility for SSI Children . . . . . . . . . . . . . . . . . . . . . . . . 14
Programs of All-Inclusive Care for the Elderly (PACE) . . . . . . . . . . . . . . 14
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1115 Waiver Renewals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Federal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Funding for Emergency Health Services Furnished to Undocumented
Aliens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Federal Payment to the District of Columbia and Alaska . . . . . . . . . . 15
Federal Payment Cap for Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . 16
FY1999 Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Increase Outreach Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Expand Qualified Entities for Presumptive Eligibility . . . . . . . . . . . . 17
Simplify Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Cover Immigrant Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Reduce FMAP for Administrative Costs . . . . . . . . . . . . . . . . . . . . . . 17
List of Tables
Table 1. Medicaid Outlays, FY1988-2003* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. DSH Allotment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Medicaid: 105th Congress
Overview
Medicaid is a joint federal-state matching, open-ended, entitlement program that
pays for medically necessary health care services provided to eligible beneficiaries
by qualified providers. Eligible Medicaid beneficiaries must be both categorically
and financially eligible. Generally, Medicaid eligibility is limited to low-income
children and women, low-income people with disabilities and low-income elderly
persons. Through the use of special optional income standards, states can extend
coverage to certain non-poor persons. For some groups, age and income
requirements for Medicaid eligibility are mandated by federal law, but for others the
state may decide who is eligible.
Medicaid covers one quarter of the Nation’s children. Of the 42.4 million
people who were enrolled in Medicaid in FY1996, nearly 21 million were children
under age 21. An additional 9.6 million people were adults in families with children.
Together, these adults and children comprised 74% of the Medicaid population and
accounted for 26% of total benefit costs. The elderly and disabled made up 26% of
the population but accounted for 72% of total benefit costs. Much of the spending
for elderly and disabled recipients is for long-term care. Medicaid is a major source
of public support for nursing home care and a range of home care services. It is also
the largest payer of services, both institutional and community-based, needed by
persons with mental retardation and developmental disabilities. In FY1996, over $50
billion, or 41% of Medicaid spending for services, was for long-term care. In
addition to nursing home and other long-term care services, Medicaid is the country’s
largest single purchaser of maternity care.
Within broad federal guidelines, each state designs and administers its Medicaid
program. Federal law requires that states offer certain services including hospital,
physician, nursing facility, and laboratory and x-ray services. States have the option
of offering other services such as prescription drugs, dental care, or eyeglasses. Each
state determines what services it will provide, and what it will pay for services.
Considerable variation exists in terms of persons covered, types and amounts of
services offered, and payments for services. The variation among states is so great
that some speak of Medicaid as 51 separate programs. To control costs, states are
increasingly delivering services to their Medicaid populations through managed care.
Approximately 40% of the Medicaid caseload was enrolled in some form of managed
care in 1996, up from 12% in 1992.
At the federal level, Medicaid is administered by the Health Care Financing
Administration (HCFA) in the Department of Health and Human Services (HHS).
Federal law requires that each state operate its Medicaid program through a single
state agency. Usually this is the state human resource or welfare agency, the health

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department, or a combination of the two. The single state agency sets policies,
certifies providers, pays for services, and oversees eligibility determinations. Each
state’s Medicaid policies are set forth in a Medicaid state plan that is subject to
approval by the Secretary of HHS.
The federal government reimburses states for their Medicaid expenditures by
means of a statutory formula designed to give a higher matching rate to states with
lower per capita incomes. Matching rates for services range from 50% to 79% and
are adjusted annually. Matching rates for administrative costs are generally 50%,
though rates ranging from 75% to 90% are available for certain management and
control activities. For Puerto Rico and other outlying areas, the federal share of all
costs is 50% with a maximum dollar limit placed on the amount each area can
receive. Overall, the federal government pays about 57% of total Medicaid program
expenditures.
In FY1997, total program outlays were $167.6 billion. Federal outlays were
$95.6 billion; state outlays were approximately $72.1 billion. Under the Medicaid
provisions of the BBA, the Congressional Budget Office (CBO) estimates that there
will be a net reduction of $13 billion in federal Medicaid expenditures between
FY1998-FY2002. As of January 1998, CBO projects annual average Medicaid
growth of 6.7% through 2003. CBO estimates that FY1998 federal Medicaid
expenditures will be $99 billion and total expenditures will be $170 billion.
Table 1. Medicaid Outlays, FY1988-2003*
($ in billions)
Annual %
Fiscal year
Federal
Statea
Total
change
1988
$30.5
$23.7
$54.1
—
1989
34.6
26.6
61.2
13.2%
1990
41.1
31.1
72.2
17.8%
1991
52.5
41.9
94.5
30.9%
1992
67.8
50.3
118.2
25.1%
1993
75.8
56.2
132.0
11.7%
1994
82.0
61.8
143.8
8.2%
1995
89.1
67.2
156.3
8.6%
1996
91.3
68.3
159.6
2.1%
1997
95.6
72.1
167.6
5.0%
1998
100.5
75.8
176.3
5.2%
1999
108.4
81.8
190.2
7.9%
2000
115.0
86.8
201.8
6.1%

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Annual %
Fiscal year
Federal
Statea
Total
change
2001
122.6
92.5
215.1
6.6%
2002
130.9
98.7
229.6
6.8%
2003
140.7
106.2
246.9
7.5%
Source: Office of Management and Budget, Dept. of the Treasury Financial
Management Service, and Congressional Budget Office..
* FY1998-FY2003 figures based on Congressional Budget Office
projections, January 1998.
a State outlays are based on percentage estimates furnished by the HCFA,
Office of the Actuary.
Two major factors prompted the 104th Congress to consider fundamental
restructuring of the Medicaid program. First, Medicaid had been one of the fastest
growing items in federal and state budgets. (Note the annual percent change in the
table above.) Second, many state Governors said their federal-state Medicaid
partnership was being eroded by increasing federal requirements that the states
regarded as unfunded mandates.
Due to a combination of factors including enrollment increases, health care
inflation, and creative state financing practices, federal Medicaid outlays rose
dramatically from FY1989 to FY1992, increasing at an average annual rate of over
25%. Some states said Medicaid was the largest single item in their budgets, using
resources that states wanted to put into education or other state programs. Although
outlay growth slowed to 12% in FY1993 and to 8% in FY1994, lawmakers saw the
reduction of Medicaid growth as an essential part of reducing the federal deficit and
providing relief to states.
The 104th Congress considered fundamental reform of the Medicaid program,
not only because of the growth rate of Medicaid spending but also because of the
relationship between the federal and state governments in administering and
financing the program. Beginning in the mid-1980s, Congress gradually added to the
federal requirements regarding eligibility, benefits, and reimbursement to providers.
The population required to be served was expanded to include pregnant women,
children, and Medicare beneficiaries with incomes substantially higher than those of
other Medicaid recipients. New and more extensive standards for nursing home care
were established by federal legislation. “Boren amendments” established federal
payment requirements for state reimbursement to hospitals and nursing homes. In
addition, states pointed to an unnecessarily complex and cumbersome process they
were required to go through in order to serve more of their population through
managed care and to expand coverage to populations not otherwise eligible for
Medicaid. States have asked for more flexibility and fewer federal constraints. The
proposals considered by the 104 Congress would h
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ave transformed the program into
a capped block grant and reduced federal funding to the states by approximately $72
billion over 6 years.

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Although no Medicaid reform legislation was enacted by the 104th Congress,
there was general agreement that measures to reduce Medicaid growth and increase
state flexibility were needed.
Medicaid in the 105 Congress
th
In the 105 Congress, President Clinton’s FY1998 budget, the concurren
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t
budget resolution for FY1998, and H.R. 2015, BBA 97, passed by Congress on July
31, 1997 all echoed the sense of the 104 Congress regarding Medicaid, this time
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,
however, without major structural reforms, and with much smaller reductions in
program spending. BBA 97 (P.L. 105-33), signed into law August 5, 1997, reduces
program growth and increases state flexibility.

The President released a plan in February 1997 that included proposals for
savings through a per capita cap on federal funds and a reduction in payments to
hospitals that serve a disproportionate number of Medicaid and low-income patients,
offset by various spending initiatives. The National Governors Association (NGA)
asked for flexibility that the Governors believed would result in Medicaid savings
without a per capita cap. The concurrent budget resolution assumed lower
disproportionate share hospital (DSH) payments and rejected a cap on federal
funding for Medicaid, incorporating instead an increase in state Medicaid flexibility.
P.L. 105-33 is estimated to result in Medicaid savings of about $13 billion
between FY1998-FY2002, largely through reductions in payments to DSHs. The law
adopts many of the flexibility provisions that were recommended by the President
and by the NGA. These provisions allow states to require managed care enrollment
without obtaining waivers, ease some other managed care requirements, and repeal
or modify some of the current provider payment rules. The law eliminates or
modifies some existing administrative requirements and codifies quality assurance
requirements for managed care. It adds new Medicaid benefits for children, disabled
workers, and Medicare beneficiaries who receive some Medicaid benefits. This
report describes the major savings provision and the new spending provisions, then
discusses other items in the Medicaid portion of P.L. 105-33.
Reduction in Payments to Disproportionate Share Hospitals (DSH)
Since 1981, states have been required to make supplemental payments to
hospitals that serve a disproportionate number of Medicaid recipients and low-
income patients. These payments are referred to as DSH payments. Each state
determines which hospitals receive DSH payments and the payment amounts to each.
States that contract with health maintenance organizations (HMOs) or other prepaid
capitated managed care providers may include DSH expenses in the payment rates
to contractors. The DSH adjustment was intended to offset the costs to hospitals of
treating unsponsored low-income patients, and to protect access to care for
vulnerable populations. However, studies have shown that only a portion of DSH
expenditures benefit low-income people or reduce uncompensated care.

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Federal Medicaid DSH payments were $10 billion in 1995. By statute, DSH
payments in the national aggregate, as well as in each state, are permitted to equal up
to 12% of total Medicaid spending applicable to a fiscal year, excluding
administrative costs. The 12% limit is being phased in through the use of state-
specific DSH allotments (limits on federal matching payments) for each federal fiscal
year. States with DSH payments at 12% of their costs or more (classified by HCFA
as “high” DSH states) have a fixed allotment and cannot increase their DSH
payments until the fixed amount is less than 12% of the state’s Medicaid spending.
States with DSH payments below 12% of their Medicaid costs (classified as “low”
DSH states) can receive allotments increasing their DSH adjustments up to the 12%
limit.
The BBA lowers DSH allotments by imposing freezes and making graduated
proportional reductions. It establishes additional caps on the state DSH allotments
for fiscal years beginning in 1998 and specifies those caps for 1998 to 2002 as shown
in Table 2.
Table 2. DSH Allotment
(in millions of dollars)
State or District
FY1998
FY1999
FY2000
FY2001
FY2002
Alabama
293
269
248
246
246
Alaska
10
10
10
9
9
Arizona
81
81
81
81
81
Arkansas
2
2
2
2
2
California
1085
1068
986
931
877
Colorado
93
85
79
74
74
Connecticut
200
194
164
160
160
Delaware
4
4
4
4
4
District of Columbia
23
23
23
23
23
Florida
207
203
197
188
160
Georgia
253
248
241
228
215
Hawaii
0
0
0
0
0
Idaho
1
1
1
1
1
Illinois
203
199
193
182
172
Indiana
201
197
191
181
171
Iowa
8
8
8
8
8
Kansas
51
49
42
36
33
Kentucky
137
134
130
123
116
Louisiana
880
795
713
658
631
Maine
103
99
84
84
84
Maryland
72
70
68
64
61
Massachusetts
288
282
273
259
244
Michigan
249
244
237
224
212
Minnesota
16
16
16
16
16
Mississippi
143
141
136
129
122
Missouri
436
423
379
379
379

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State or District
FY1998
FY1999
FY2000
FY2001
FY2002
Montana
0
0
0
0
0
Nebraska
5
5
5
5
5
Nevada
37
37
37
37
37
New Hampshire
140
136
130
130
130
New Jersey
600
582
515
515
515
New Mexico
5
5
5
5
5
New York
1512
1482
1436
1361
1285
North Carolina
278
272
264
250
236
North Dakota
1
1
1
1
1
Ohio
382
374
363
344
325
Oklahoma
16
16
16
16
16
Oregon
20
20
20
20
20
Pennsylvania
529
518
502
476
449
Rhode Island
62
60
58
55
52
South Carolina
313
303
262
262
262
South Dakota
1
1
1
1
1
Tennessee
0
0
0
0
0
Texas
979
950
806
765
765
Utah
3
3
3
3
3
Vermont
18
18
18
18
18
Virginia
70
68
66
63
59
Washington
174
171
166
157
148
West Virginia
64
63
61
58
54
Wisconsin
7
7
7
7
7
Wyoming
0
0
0
0
0
Source: P.L. 105-33.
Thereafter, the DSH allotments for a state will be equal to the allotment for the
preceding fiscal year increased by the percentage change in the medical care
component of the consumer price index for all urban consumers as estimated by the
Secretary for the previous fiscal year, subject to a ceiling of 12% of the total amount
of expenditures under the state plan for medical assistance during the fiscal year.
P.L. 105-33 imposes a new cap on DSH payments to institutions for mental
disease (IMDs — facilities that are largely long-term care mental hospitals).
Medicaid law prohibits federal financial participation for services provided to
individuals between the ages of 21 and 65 who are in IMDs. Mental health services
to these individuals have traditionally been considered a state and local
responsibility. These facilities may be reimbursed for services provided to patients
under age 21 or age 65 or over and they are also eligible for DSH payments. There
was concern that state Medicaid programs were using DSH payments to IMDs to pay
for some of the costs of providing institutional services for those persons between the

CRS-7
ages of 21 and 65 that Medicaid is prohibited from covering.1 The provisions in
BBA 97 limit DSH payments to IMDs and other mental health facilities to the lesser
of the amount of such payments made in 1995 or a specific percentage of the state’s
DSH allotment for the current fiscal year. For FY1998-FY2000, federal IMD DSH
payments may not exceed the lesser of (1) a state’s total DSH spending in 1995 for
such facilities or (2) the same percentage of DSH expenditures their IMD spending
2
represented in 1995. For FY2001 and beyond, IMD DSH payments may not exceed
the lesser of (1) a state’s total DSH spending in 1995 for such facilities; (2) the same
percentage of DSH expenditures their IMD spending represented in 1995; or (3) 50%
of DSH payments in 2001, 40% in 2002, and 33% for succeeding years. The
provision does not apply to DSH payments made under payment arrangements in
effect on July 1, 1997.
The law also requires states to develop a methodology and submit to the
Secretary a description of the methodology to be used by the state for prioritizing
payments to DSHs, including children’s hospitals, on the basis of the proportion of
low-income and medicaid patients served by such hospitals. Finally, the law requires
states to pay disproportionate share adjustments on behalf of individuals in managed
care entities directly to the hospitals rather than to the managed care entities and not
to include such payments in the capitation rate.3
Managed Care
A major flexibility measure involves states’ use of managed care organizations
for delivering services to Medicaid beneficiaries. Under prior law, states had to
obtain waivers of certain Medicaid provisions to require that Medicaid beneficiaries
get their services through managed care organizations. P.L. 105-33 eliminates the
need for waivers that many states have complained are unnecessarily complex and
time-consuming.
As states increasingly move to provide services through managed care
arrangements and Congress seeks to ease state requirements with respect to managed
care, lawmakers have also been looking at the quality of managed care services. The
Act includes managed care provisions that establish standards for quality and
solvency, and provide protections for beneficiaries.
To control costs and quality of care, states are increasingly delivering services
to their Medicaid populations through HMOs and other managed care arrangements
such as primary care case management (PCCM). Managed care organizations
(MCOs) provide or arrange for a defined set of benefits in exchange for a fixed
monthly premium called a capitation payment. Under such arrangements,
1 U.S. General Accounting Office. Medicaid: Disproportionate Share Payments to
State Psychiatric Hospitals. GAO/HEHS-98-52, January, 1998. Washington, 1998.
FY
2
1995 DSH payments to IMDs are defined in the law as those reported by the state
on HCFA Form 64 no later than January 1, 1997.
3For further information, see CRS Report 97-483, Medicaid Disproportionate Share
Payments, by Jean Hearne.

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beneficiaries have a regular source of coordinated care and states have predictable,
controlled spending per beneficiary. This is in contrast to the traditional fee-for-
service arrangements used by Medicaid beneficiaries where Medicaid pays for each
service used. Under PCCM, a Medicaid beneficiary has a primary care provider that
provides or arranges for all covered services. The primary care case manager is paid
a small monthly “management” fee in addition to fees for any health care services
that the case manager provides directly to a beneficiary.
A state may offer MCO services on a voluntary basis. However, to mandate that
a beneficiary enroll in an MCO, or to limit MCO services to a specific population or
geographic area, a state had to first obtain a waiver of certain provisions of Medicaid
law. These renewable waivers, as authorized under section 1915(b) of Medicaid law,
are initially good for 2 years. (The 1915(b) waiver is more restrictive than the
Section 1115(a) waiver under which a state can undertake a statewide demonstration
program that may include mandatory managed care.)
P.L. 105-33 eliminates the need for the 1915(b) waiver process and permits
states to require that individuals enroll with managed care entities. Managed care
entities are defined to include both MCOs and PCCMs. The new law establishes a
statutory definition of PCCM, adds it as a covered service, and sets contractual
requirements for both PCCM and MCOs. The Act prohibits states from requiring
children with special health care needs and certain Medicaid-eligible Medicare
beneficiaries to enroll with managed care entities. Additionally, it stipulates that
Native Americans/Alaskan Natives may only be required to enroll in a participating
Indian Health, urban Indian, or tribally operated managed care entity. The new law
requires that beneficiaries have a choice between at least two plans or two primary
care providers, and establishes special rules for beneficiaries living in rural areas.
The Act adds measures intended to safeguard the quality of care provided under
managed care arrangements. For example, managed care entities must provide
information on providers, enrollee rights and responsibilities, grievance and appeal
procedures, and covered items and services to enrollees and potential enrollees.
States must, on an annual basis, provide individuals required to enroll with managed
care entities with a list identifying the managed care entities available and
comparative information about each entity’s benefits and cost-sharing, service area,
and quality and performance. PCCM contracts must provide that hours of operation
are reasonable and adequate, including 24-hour availability of information, referral,
and treatment with respect to medical emergencies; that a sufficient number of
providers are employed to meet the needs of enrollees; and that individuals aren’t
discriminated against in enrollment, disenrollment, or reenrollment based on health
status or need for care. Managed care entities are required to provide assurances of
adequate capacity; to establish internal grievance procedures; and to comply with the
mental health parity and maternity length-of-stay requirements enacted by the Mental
Health Parity Act of 1996 and the Newborns’ and Mothers’ Health Protection Act of
1996 (P.L. 104-204).
Among other changes to Medicaid managed care arrangements, P.L. 105-33
eliminates the current law provision that requires MCOs to have no more than 75%
of their enrollment be Medicaid and Medicare beneficiaries and raises the threshold
for federal review of managed care contracts from $100,000 to $1 million. The Act

CRS-9
eliminates the current law prohibition on cost-sharing for services furnished by
HMOs.
As more states deliver Medicaid benefits through managed care arrangements,
there is also heightened interest in assuring that MCOs are solvent and that states
have quality standards that must be met, and sufficient data to monitor the quality of
care provided under managed care. The new law sets requirements for quality and
access, solvency, and consumer protections. It requires a state entering into contracts
with MCOs to establish a quality assurance program, consistent with standards that
the Secretary would establish and monitor. State quality assurance programs would
be required to include (1) standards that ensure covered services are available within
reasonable timeframes and that ensure adequate access to primary care and
specialized services, (2) procedures for monitoring and evaluating quality of care that
includes submitting quality assurance data using requirements for entities with
Medicare contracts or other requirements as approved by the Secretary and, (3)
examination of other aspects of care and services directly related to the improvement
of quality of care (including grievance procedures and marketing and information
standards). The Act requires MCOs to obtain an annual external independent review
of the quality outcomes and timeliness of, and access to, the services included in the
organization’s contract with the state. MCOs must make results of the reviews
available to participating providers, enrollees and potential enrollees.
The Act requires Medicaid MCOs to meet the same solvency standards set by
the states for private HMOs not participating in Medicaid, or have state licensure or
certification as a risk-bearing entity. This requirement would not apply under the
following circumstances:
! The organization does not provide inpatient and physician services;
! The organization is a public entity;
! The organization is a federally qualified health center; or
! The organization’s solvency is guaranteed by the state.
P.L. 105-33 applies a “prudent layperson” standard to whether a Medicaid MCO
would have to pay for services provided to an enrollee in an emergency room. The
provisions defines emergency service for the enrollee as service needed to evaluate
or stabilize an emergency medical condition. An emergency medical condition is
defined as one manifested by acute symptoms of sufficient severity, including severe
pain, such that a prudent layperson, who possesses an average knowledge of health
and medicine, could reasonably expect the absence of immediate medical attention
to result in (a) placing the health of the individual in serious jeopardy (and in case of
a pregnant woman, her health or that of her unborn child), (b) serious impairment to
bodily functions or, (c) serious dysfunction of any bodily organ or part. The Act also
includes a ban on so-called “gag rules,” prohibiting interference with physician
advice to enrollees.
The Act contains provisions that protect Medicaid beneficiaries against false or
misleading HMO marketing materials and practices, and includes several provisions
to protect beneficiaries and providers. These include requiring managed care entities
to make assurances that enrollees will not be held liable for the entity’s debts in the
event of insolvency, balanced billing limitation requirements, prohibiting entities

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from discriminating against providers, and establishing sanctions for entities that fail
to comply with program rules.
Payment Methodology
Traditionally, each state has established its provider payment methodologies and
rates. Legislation enacted in the 1980s, however, added federal requirements for
reimbursing certain providers. Among the most important of these are the so-called
Boren amendments and provisions requiring cost-based reimbursement to federally
qualified health centers (FQHCs) and rural health clinics (RHCs). P.L. 105-33
amends these payment methodologies and others as well.
Repeal of Boren Amendments. Prior to enactment of the Boren amendments,
states used Medicare cost-based reimbursement methods for paying institutional
providers. In response to concerns about the growth of spending to these providers,
and criticism that cost-based reimbursement provided few incentives for providers
to perform efficiently, Congress enacted the Boren amendments in the 1980s. The
amendments directed that payment rates be “reasonable and adequate” to cover the
cost of “efficiently and economically operated” facilities. Subsequently, a number
of courts found that state systems failed to meet the test of “reasonableness” and
some states have had to increase payments to these providers. The NGA has
repeatedly asked for relief from the Boren amendment.
P.L. 105-33 repeals the Boren amendment and establishes a public notice and
comment process for setting reimbursement methodology and rates for hospitals,
nursing facilities, and intermediate care facilities for the mentally retarded
(ICFs/MR). Some facilities and their trade associations have been concerned that
with repeal of the Boren amendments, states would lower their payments to rates
under which the facilities would be strained to provide specified levels of quality
service. Under the new provision, each state will be required to publish proposed
rates, the methodologies underlying the establishment of such rates, and
justifications for the proposed rates. The public will have an opportunity for review
and comment on the proposed rates. Final rates are to be published with the
underlying methodologies and justifications for the rates. The provision applies to
payment for services furnished on or after April 1, 1998. The bill requires the
Secretary to study the effect of states’ rate-setting methods on access to, and quality
and safety of, services and report to Congress within 4 years of enactment.
Federally Qualified Health Centers and Rural Health Clinics. Prior law
required that states’ payments for ambulatory services provided by FQHCs and RHCs
must be equal to 100% of the facilities’ reasonable costs for providing the services.
If an FQHC entered into a contract with an HMO that contracts with a state Medicaid
program, the HMO were required to pay the FQHC 100% of reasonable costs and the
state’s capitation payment to the HMO had to reflect the 100% rate that was due to
the FQHC.
The law defines FQHC as a center that receives, or meets the requirements to
receive, a certain grant under the Public Health Service Act. In addition, an entity is
an FQHC if, based on the recommendation of the Health Resources Services

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Administration (HRSA) within the Public Health Service, the Secretary determines
that the entity meets the requirement for receiving such a grant.
Under P.L. 105-33, the requirement to pay a percentage of FQHC and RHC
costs will be phased out over 6 fiscal years. States are required to pay 100% of costs
for services furnished during FY1998 and FY1999; 95% of costs for services
furnished during FY2000; 90% for services furnished during FY2001; 85% for
services furnished during FY2002; and 70% for services furnished during FY2003.
For services furnished on or after October 1, 2003, no required payment percentage
will apply.
To ease the transition from cost-based payment rates, the new law specifies two
special payment rules that would be applicable during FY1998-FY2002. In the case
of a contract between an FQHC or RHC and a managed care organization, the
managed care organization will have to pay the FQHC or RHC at least as much as
it would pay any other provider for similar services. States will be required to make
supplemental payments to the FQHcs and RHCs. Such payments will be equal to the
difference between the contracted amounts and the cost-based amount.
P.L. 105-33 amends the definition of FQHC to exclude from coverage an entity
that is owned, controlled, or operated by another entity.
Reimbursement to Obstetricians and Pediatricians. To assure the
availability of obstetrical and pediatric services to Medicaid beneficiaries, the
Medicaid law required states to assure adequate payment levels for services furnished
by these providers and to provide annual reports on their payment rates for the
services. The BBA repeals these requirements.
Treatment of State Taxes Imposed on Hospitals. States may not claim for
federal matching payments state spending generated from provider-related donations
or health care taxes that are not broad based. Health care provider-specific taxes are
not considered broad-based and, thus, may not be used to claim federal matching
payment for Medicaid spending. The effect of this provision is that if a state imposes
taxes on hospitals, it must tax all hospitals in the state including charity hospitals that
receive no revenues from Medicaid, insurers, or individuals. P.L. 105-33 amends the
definition of the term “broad-based health care related tax” to specify that taxes that
exclude hospitals which are exempt from taxation under Section 501(a) of the
Internal Revenue code and do not accept Medicare and/or Medicaid reimbursement
would qualify for federal matching payments if used as state Medicaid spending. The
provision also prohibits states from claiming federal matching payments for state
spending generated from health care taxes applied to these facilities.
This provision is important to Shriners Hospitals for Children. These hospitals
provide specialized care, free of charge, to children under age 18 who have
orthopedic or burn conditions. In many cases Medicaid coverage may be unavailable
for such care because it is not medically necessary.
Medicare Cost-Sharing. State Medicaid programs are required to pay
Medicare cost-sharing charges for individuals who are beneficiaries under both
Medicaid and Medicare (dual eligibles) and for qualified Medicare beneficiaries

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(QMBs). QMBs are individuals who have incomes not over 100% of the poverty
level and who meet specified resources standards. The amount of required payment
has been the subject of some controversy. State Medicaid programs frequently have
lower payment rates for services than the rate that would be paid under Medicare.
Program guidelines permit states to either (1) pay the full Medicare deductible and
coinsurance amounts or (2) pay cost-sharing charges only to the extent that the
Medicare provider has not received the full Medicaid rate for an item or service.
Some courts have forced state Medicaid programs to reimburse Medicare providers
for the full Medicare allowable rates for services provided to QMBs and dually
eligible individuals. P.L. 105-33 clarifies that a state Medicaid program is not
required to pay Medicare cost-sharing expenses if the Medicare payment for the
service exceeds the amount that the state Medicaid program would have paid for the
service to a recipient who was not a QMB. Under the new law, the Medicare
payment plus the state’s Medicaid payment, if any, will be considered payment in
full. The QMB will not be liable for payment to a managed care entity or other
provider.
Eligibility
State Option of Continuous Eligibility for 12 Months. Generally, Medicaid
coverage can be provided only to individuals who continue to meet all the
requirements for eligibility. For some individuals, or families, income fluctuations
result in frequent interruptions in eligibility status. Medicaid law includes
exceptions that provide for continuous eligibility for pregnant women and infants
regardless of changes in income. A pregnant recipient continues to be eligible for
Medicaid until 60 days after the pregnancy ends; a child born to a Medicaid recipient
remains eligible for 1 year so long as the child is a member of the mother’s
household and the mother remains eligible for Medicaid or would remain eligible if
pregnant. P.L. 105-33 gives states the option of providing a full 12 months of
eligibility for a child who is determined eligible for Medicaid
Option to Accelerate the Expansion of Eligibility. OBRA90 mandated that
states phase in Medicaid coverage to children living in households with incomes not
over 100% of the federal poverty level who were born after September 30, 1983, until
all children up to age 19 are covered. P.L. 105-33 permits states to accelerate the
expansion of eligibility to all children in poverty-level households through age 18.
Payment of Home-Health Related Medicare Part B Premium Amount for
Certain Low-Income Individuals. Prior law required states to pay Medicaid Part
B premiums for Medicare beneficiaries who had incomes up to 120% of the official
poverty line. The BBA includes Medicare provisions that increase monthly premium
payments as a result of the transfer of certain home health visits from Part A to Part
B. Under the Act, states will be required to pay Part B premiums for beneficiaries
with incomes up to 135% of poverty. For Medicare beneficiaries with incomes
between 135% and 175% of poverty, state Medicaid programs will be required to
cover that portion of the Medicare Part B premium attributable to the transfer of
home health visits. These new state requirements apply to premiums payable
between January 1998 and December 2002.

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The federal government will pay 100% of the costs associated with expanding
Medicare Part B premium assistance from 120% to 135%, as well as the extra
premium cost attributable to the home health transfer for persons between 135% and
175%. The Act establishes a capped allotment to states to cover these costs. The
Secretary will be required to provide for allocations to states based on the sum of (1)
a state’s number of Medicare beneficiaries with incomes between 135% and 175%
of poverty and (2) twice the number of Medicare beneficiaries with incomes between
120% and 135% of poverty, relative to the sum for all eligible states. Total amounts
available for allocations are $200 million for FY1998, $250 million for FY1999,
$300 million for FY2000, $350 million for FY2001, and $400 million for FY2002.
The federal medical assistance percentage (FMAP) for each participating state would
be 100% up to the state’s allocation. If a state exceeded its allocation, the FMAP for
any “excess” assistance would be zero.
During a calendar year, a state will allow all qualifying individuals to apply for
assistance. For receipt of premium assistance, the state will select individuals in the
order in which they apply, up to the number the state has estimated will use, but not
exceed, the state’s allocation for Part B premium assistance. Although this provision
of BBA 97 does not establish an entitlement for individuals, an individual selected
by the state to receive assistance for a month is entitled to assistance for the
remainder of the year so long as the individual continued to be a qualifying
individual. However, an individual selected to receive assistance at any time during
a year is not entitled to continued assistance for any succeeding year.
Coverage for Disabled Working Individuals. Currently, states must continue
Medicaid coverage for “qualified severely impaired individuals under the age of 65.”
These are disabled and blind individuals whose earnings reach or exceed the
supplemental security income (SSI) benefit standards. (The current law threshold for
earnings is $1,053 per month.) This special eligibility status applies as long as the
individual (1) continues to be blind or have a disabling impairment; (2) except for
earnings, continues to meet all the other requirements for SSI eligibility; (3) would
be seriously inhibited from continuing or obtaining employment if Medicaid
eligibility were to end; and (4) has earnings that are not sufficient to provide a
reasonable equivalent of benefits from SSI, state supplementary payments (if
provided), Medicaid, and publicly funded attendant care that would have been
available in the absence of those earnings. To implement the fourth criterion, the
Social Security Administration compares an individual’s gross earnings to a
“threshold” amount that represents average expenditures for Medicaid benefits for
disabled SSI cash recipients in the individual’s state of residence.
Under P.L. 105-33, states have the option of creating a new eligibility category
for disabled SSI beneficiaries with incomes up to 250% of poverty. Beneficiaries can
“buy into” Medicaid by paying a sliding scale premium based on the individual’s
income as determined by the state.
Aliens. The Personal Responsibility and Work Opportunities Act (PRWORA,
P.L. 104-193), established significant restrictions on the eligibility of legal aliens for
needs-based public assistance. Under PRWORA, legal immigrants arriving in the
United States after August 22,1996 are ineligible for Medicaid benefits for 5 years.
Coverage of such persons after the 5-year ban is a state option. States are required

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to provide Medicaid coverage to legal immigrants who resided in the country and
were receiving benefits on August 22,1996. States are also required to provide
coverage to: refugees for the first 5 years after entry into the United States; asylees
for the first 5 years after asylum is granted; individuals whose deportation is being
withheld by the Immigration and Naturalization Service for the first 5 years after
grant of deportation withholding; lawful permanent aliens after they have been
credited with 40 quarters of coverage under Social Security; and honorably
discharged U.S. military veterans, active duty military personnel, and their spouses
and unmarried dependent children. Qualified aliens and non-qualified aliens who
meet the financial and categorical eligibility requirements for Medicaid may receive
emergency Medicaid services. BBA 97 modifies these restrictions somewhat. BBA
97 requires states to provide Medicaid coverage to legal immigrants who resided in
the country on August 22, 1996 and who become disabled in the future and extends
the period that states must provide coverage to refugees, asylees, and individuals
whose deportation has been withheld from 5 to 7 years.4
Medicaid Eligibility for SSI Children. P.L. 104-193 included several
provisions that changed the SSI program with respect to disabled children. The law
established a new definition of disability for children, which resulted in making
approximately 100,000 children who formerly received SSI ineligible for benefits.
These children also would have lost Medicaid eligibility. BBA 97 reinstates
Medicaid eligibility for those children who lost coverage as a result of the new
disability definition.
Programs of All-Inclusive Care for the Elderly (PACE)
The Omnibus Budget Reconciliation Act of 1986 required the Secretary of HHS
to grant waivers of certain Medicare and Medicaid requirements to not more than 10
public or non-profit private community-based organizations to provide health and
long-term care services on a capitated basis to frail elderly persons at risk of
institutionalization. These projects, known as the Programs of All-Inclusive Care for
the Elderly, or PACE projects, were intended to determine whether an earlier
demonstration program, On Lok, serving frail elderly, could be replicated across the
country. The Omnibus Budget Reconciliation Act of 1990 expanded the number of
organizations eligible for waivers to 15. P.L. 105-33 permits states to offer PACE
as an optional benefit. States will be allowed to limit the number of persons enrolled
in PACE programs.
Administration
P.L. 105-33 includes a number of measures that would change or eliminate
requirements that some states have found burdensome. Among these are repeal of
the requirement that states identify cases in which it would be cost-effective to enroll
a Medicaid-eligible individual in a private insurance plan and, as a condition of
eligibility, require the individual to enroll in the plan. Instead, states will have the
option of identifying cases and purchasing private insurance for Medicaid-eligible
4For further information, see CRS Report 96-617, Alien Eligibility for Public
Assistance, by Joyce C. Vialet and Larry M. Eig.

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individuals. States will no longer be required to submit annual reports on their
payment rates for obstetricians and pediatricians. Inspection of care requirements
with respect to patients in ICFs/MR and mental hospitals will be eliminated in favor
of other requirements that many regard as duplicative. States are allowed to establish
remedies to deter noncompliance and correct deficiencies in ICFs/MR. More
changes are discussed below.
1115 Waiver Renewals. Under Section 1115 of the Social Security Act, a state
may obtain waivers of compliance with a broad range of Medicaid requirements in
order to conduct an experimental, pilot or demonstration project that is likely to
promote the objectives of Medicaid. In the absence of established conditions for
these projects, each request receives individual consideration from HCFA. In the
past, 1115 waivers have been granted for research purposes, to test a program
improvement or investigate an issue of interest to HCFA. Except for the Arizona
Health Care Cost Containment System which operates a medical assistance program
as a demonstration project, projects generally run for a limited period of 3 to 5 years
and are not renewable. Recently, more states are using the 1115 waiver authority to
completely revamp their Medicaid programs and the delivery of health care to their
state residents.
P.L. 105-33 provides a mechanism for extension of a state-wide comprehensive
1115 waiver project for up to 3 years. Slightly over a year before a waiver project is
due to expire, the chief executive officer of a state may submit to the Secretary a
written request for extension for up to 3 years. Such a request will be deemed to
have been granted if the Secretary does not respond within 6 months. Generally,
extension of a project will be on the same terms and conditions that applied to the
project before the extension.
Federal Payments
Funding for Emergency Health Services Furnished to Undocumented
Aliens. State Medicaid programs are required to cover emergency services furnished
to undocumented aliens who otherwise meet Medicaid eligibility standards. Some
states, especially border states, say they bear a disproportionate burden for this type
of costs. To help defray the costs of emergency services to undocumented aliens,
P.L. 105-33 makes $25 million available for grants to the 12 states with the highest
number of undocumented aliens for each of the FY1998-FY2001. For each year, the
Secretary would compute allotments based on a state’s share of undocumented aliens
relative to the undocumented aliens in all states. Numbers of undocumented aliens
would be based on estimates prepared by the Statistics Division of the Immigration
and Naturalization Services as of October 1992.
Federal Payment to the District of Columbia and Alaska. Under Medicaid
law, the District of Columbia is treated as a state. States are required to pay at least
40% of the non-federal share of Medicaid expenditures. A state, by law, can require
local jurisdictions to share Medicaid costs instead of bearing the entire nonfederal
share. The District’s federal Medicaid matching rate is 50%, i.e., 50% of total
Medicaid expenditures (100% of the nonfederal share). Under agreements reached
between the District of Columbia, the District of Columbia Financial Responsibility
and Management Assistance Authority (Authority, commonly known as the control

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board), and the Office of Management and Budget, the District’s federal Medicaid
matching rate was to be increased to 70%. The provision would reduce the District’s
share of Medicaid costs to 30%, the maximum amount that the District, as a local
government, could be required to contribute if it were located within a state with a
federal matching rate of 50%. P.L. 105-33 increases the federal share of the
District’s Medicaid costs to 70%. The Act also includes a provision that increases
Alaska’s federal Medicaid matching rate to 59.8% for FY1998-FY2000.
Federal Payment Cap for Puerto Rico. For Puerto Rico and the territories,
the federal Medicaid matching rate is 50% up to statutory limits that are specified in
section 1108 of the Social Security Act. Beginning with FY1994, the federal
Medicaid limit increases annually by the percentage increase in the medical care
component of the consumer price index for all urban consumers, rounded to the
nearest $100,000 for Puerto Rico and rounded to the nearest $10,000 for the other
outlying areas. For FY1998, BBA 97 would increase the federal Medicaid funding
limits to these islands over current law amounts by $30 million for Puerto Rico,
$750,000 each for the Virgin Islands and Guam, and $500,000 each for American
Samoa and the Northern Mariana Islands. For FY1999 and after, the islands would
be allowed the amount certified for the preceding year increased as under current law.
FY1999 Budget
President Clinton’s FY1999 budget, which was released February 2, 1998,
proposes giving states additional funds to find and cover uninsured children by
expanding Medicaid outreach funds and making it easier to grant immediate coverage
to children who have not yet enrolled. Over 5 years, the proposal is expected to cost
$900 million in new federal spending. The budget also proposes to streamline the
Medicaid application process; allow states to provide Medicaid coverage to legal
immigrant children; and reduce the federal share of state administrative costs. The
budget proposes to reduce overall federal Medicaid spending by $210 million in
FY1999.
Increase Outreach Fund. Under P.L. 104-193, $500 million was made
available to states over a 3 year period to identify and enroll children and parents who
lost eligibility for welfare under the law, but may still be eligible for Medicaid.5 The
5Prior to the enactment of the P.L. 104-193, states were required to provide Medicaid
to all persons receiving cash assistance under the Aid to Families with Dependent Children
(AFDC) program. P.L. 104-193 repealed the AFDC program, replacing it with the block
grant program Temporary Assistance for Needy Families (TANF). Unlike AFDC, TANF
eligibility does not confer automatic Medicaid eligibility. However, the new law preserves
Medicaid entitlement for individuals who meet the requirements for the AFDC program that
were in their state on July 16, 1996, even if they do not qualify for assistance under TANF.
States are required to use the eligibility determination process already in place for AFDC
and Medicaid, including the same income and resource standards and other rules formerly
used to determine if a family’s income and composition made them eligible for AFDC and
Medicaid. States are allowed to modify their “pre-reform” AFDC income and resource
standards as follows: (1) states may lower their income eligibility standards, but not below
those it used on May 1, 1988; (2) states may increase their income and resource standards
(continued...)

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President’s FY1999 budget proposes to increase the size of this fund; to allow states
use the fund and to receive a 90% matching rate for most outreach activities for all
uninsured children, not just children whose parents are no longer eligible for welfare;
and to make the fund available to states beyond 2002, the year it is scheduled to
sunset.
Expand Qualified Entities for Presumptive Eligibility. Current law allows
certain entities, such as Medicaid providers and eligibility workers for Head Start and
child care, to enroll children into Medicaid on the presumption that they are eligible
(presumptive eligibility). The presumptive eligibility period begins when a qualified
entity determines, based on preliminary information, that the child’s family income
is below the applicable income eligibility level for the state Medicaid program, and
ends when a formal determination is made. The Administration proposes expanding
the category of qualified entities who can make the presumptive eligibility decisions
to include organizations such as public schools, child care resource and referral
centers, child support enforcement agencies, and eligibility workers for the new State
Children’s Health Insurance Program (S-CHIP). This proposal is expected to cost
$570 million over 5 years.
Simplify Enrollment. The budget proposes to streamline the Medicaid
application process by simplifying eligibility and encouraging states to use mail-in
applications to determine eligibility.
Cover Immigrant Children. Under current law, states can provide Medicaid
coverage to legal immigrant children who entered the country before August 22,
1996, the date P.L. 104-193 was enacted, but children who entered the country after
that date are ineligible for benefits for 5 years. The President’s budget would allow
states to disregard the 5 year ban for children who enter the country after August 22,
1996. Under the proposal, states could provide health coverage to legal alien
children through Medicaid or through S-CHIP.
Reduce FMAP for Administrative Costs. The federal government pays 50%
of most administrative costs associated with the Medicaid program. The
Administration’s budget would reduce the FMAP for administrative costs from 50%
to 47%. This proposal is designed to offset expected cost increases as states begin
to charge Medicaid for administrative costs that were formerly charged to the AFDC
program and are now included in TANF block grants.
Prior to the enactment of the welfare reform law in 1996, states charged most
of the common costs of administering AFDC, Medicaid, and Food Stamps to the
AFDC program, because the reimbursement policy was the same for all three
programs (states received 50% of administrative costs). However, P.L. 104-103
altered that by replacing the open-ended AFDC program with the capped TANF
program. Administrative expenses were included in TANF’s funding base. Because
administrative expenses have been rising since the enactment of the new law, a
5(...continued)
up to the percentage increase in the Consumer Price Index (CPI); (3) states may use less
restrictive income and resource standards than those in effect on July 16, 1996.

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number of states requested permission from the Administration to charge
administrative costs to the Medicaid and Food Stamps programs (which are still
open-ended) rather than to TANF (which is capped). Such a change is estimated to
cost $3 billion over 5 years. The Administration’s proposal to reduce Medicaid’s
FMAP for administrative expenses from 50% to 47% is designed to allow states to
shift costs to Medicaid and Food Stamps without greatly increasing federal outlays.