Medicaid Issues for the 109th Congress

Medicaid Issues for the 109th Congress

Order Code RL33121
CRS Report for Congress
Received through the CRS Web
Medicaid Issues for the 109th Congress
Updated April 10, 2006
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicaid Issues for the 109th Congress
Summary
Medicaid is jointly financed by the federal and state governments, but each state
designs and administers its own state program under broad federal guidelines.
Accordingly, state variation in eligibility, covered services, and the delivery of, and
reimbursement for, services is the rule rather than the exception.
President Bush’s establishment of a Medicaid Commission in the spring of 2005
called on its members to advise the Secretary of the Department of Health and
Human Services (DHHS) on ways to modernize the Medicaid program so that it can
provide high-quality health care to its beneficiaries in financially sustainable ways.
The Commission was created in part in response to reconciliation instructions for the
2006 budget year from the budget committees of the House of Representatives and
the Senate recommending reductions in Medicaid spending. Congress since passed
an omnibus budget bill for 2006. The Deficit Reduction Act of 2005 (P.L. 109-171)
includes provisions intended to reduce program spending and, at the same time,
introduce significant new flexibilities for the state-run programs.
During the past few years, the nation’s Governors have asked Congress to
provide them with relief from the increasing costs of Medicaid programs and,
through the National Governors Association (NGA), have developed their own
Medicaid reform plan. Other health and advocacy organizations propose expanding
Medicaid to take on a greater role in providing access to medical care for the ever
increasing number of individuals without health insurance.
The different perspectives of Medicaid’s major stakeholders generate seemingly
opposing proposals to modify the program, and reflect what each group considers
the program’s major weaknesses. Those weaknesses, depending on the stakeholder’s
perspective, include overall high costs, the unpredictability of Medicaid’s budget, its
reliance on state funding, and its inability to do more for the uninsured. All of these
perceived weaknesses are likely to become exacerbated by the long-term
demographic outlook of the U.S. population. As more baby boomers retire and more
long-term care services are needed by an ever-growing population of elderly
individuals, Medicaid’s role and cost are likely to become even more scrutinized.
How is Congress to respond to the numerous proposals to move Medicaid
forward into the near and long term? This document lays out some of these issues,
explains the factors underlying them, and provides links to CRS products that can
help Members of Congress and their staff prepare to discuss Medicaid’s role today
and into the future. This report will be updated as legislative action occurs.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Behind the Calls for Medicaid Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medicaid’s Size and Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Medicaid Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
State-Federal Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Unresolved Mission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Proposals for Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
President’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Congressional Budget Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . 11
Medicaid Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
State Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
National Governors Association (NGA) Proposal . . . . . . . . . . . . . . . . 12
National Academy for State Health Policy (NASHP) Proposal . . . . . 13
Other Congressional Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Medicaid Issues for the 109th Congress
Medicaid is jointly financed by the federal and state governments, but each state
designs and administers its own state program under broad federal guidelines.
Accordingly, state variation in eligibility, covered services, and the delivery of, and
reimbursement for, services is the rule rather than the exception. President Bush’s
recent establishment of a Medicaid Commission1 in the spring of 2005, called on its
membership to advise the Secretary of the Department of Health and Human Services
(DHHS) on ways to modernize the Medicaid program so that it can provide
high-quality health care to its beneficiaries in financially sustainable ways. The
Commission was created in part in response to reconciliation instructions for the
2006 budget year from the budget committees of the House of Representatives and
the Senate that recommended reductions in Medicaid program spending.2 Congress
since passed an omnibus budget bill for 2006. The Deficit Reduction Act of 2005
(P.L. 109-171) includes provisions intended to reduce program spending and, at the
same time, introduce significant new flexibilities for the state-run programs.3
In addition, though, the Commission is a response to calls to overhaul the
Medicaid program. The annual budget proposals offered by the White House have,
for each year since President Bush took office, included Medicaid reform proposals.
Congress has, both recently and in the past, proposed making major structural
changes to the Medicaid program. During 2005, Medicaid was expanded to provide
immediate response for Hurricane Katrina and Rita victims.4 In contrast, Medicaid
block grants are being offered as a way to offset the increased spending in response
to the hurricanes.5 A previous attempt by Congress to cap the Medicaid program was
vetoed by then President Clinton in 1995.
Congress and the White House are not the only sources that have called for
major changes to Medicaid. During the past few years, the nation’s Governors have
asked Congress to provide them with relief from the increasing costs of Medicaid
programs and, through the National Governors Association (NGA), developed their
1 See the Medicaid Commission website at [http://www.cms.hhs.gov/FACA/].
2 The House and Senate agreed to the conference report to accompany the FY2006 budget
resolution (H.Con.Res. 95, H.Rept. 109-62) on Apr. 28, 2005.
3 The President signed the Deficit Reduction Act into law on February 8, 2006.
4 These expansions are being established through a special authority that allows the
Secretary of Health and Human Services to waive existing program limitations. That
authority exists in Section 1115 of the Social Security Act.
5 The Republican Study Committee, a group of 100 Republican Members of Congress have
offered “Operation Offset” to find savings in the federal budget to pay for hurricane relief.
See [http://johnshadegg.house.gov/rsc/RSC_Budget_Options_2005.doc].

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own Medicaid reform plan.6 Other health advocacy organizations propose expanding
Medicaid to take on a greater role in providing access to medical care for the ever
increasing number of individuals without health insurance.
The different perspectives of Medicaid’s major stakeholders generate seemingly
opposing proposals to modify the program, and reflect what each group considers
the program’s major weaknesses to be. Those weaknesses, depending on the
particular stakeholder’s perspective, include overall high costs, the unpredictability
of Medicaid’s budget, its reliance on state funding, and its inability to do more for the
uninsured. All of these perceived weaknesses are likely to become exacerbated by
the long term demographic outlook of the U.S. population. As more baby boomers
retire and more long-term care services are needed by an ever growing population of
elderly individuals, Medicaid’s role and cost is likely to become even more
scrutinized.
How is Congress to respond to the numerous proposals to move Medicaid
forward into the near and long term? This document lays out some of the issues
driving calls for reform, explains the factors underlying them, and provides links to
CRS products that can help Members of Congress and their staff prepare to discuss
Medicaid’s role today and into the future.
Background
In general, federal rules limit eligibility for Medicaid to certain categories or
groups of individuals: low-income children; pregnant women; parents of dependent
children; people with disabilities; and the elderly. To qualify for Medicaid coverage,
an individual must meet both categorical and financial eligibility requirements.
Financial requirements govern the amount of income and assets that individuals may
have and still qualify for Medicaid, as well as how these amounts are calculated (e.g.,
whether a portion of earned income or the value of a car may be disregarded).
Although Medicaid is targeted at individuals with low income, not all of the poor are
eligible, and not all those covered are poor.7
Individuals who do not meet categorical eligibility requirements (e.g.,
non-elderly adults who are not disabled and do not have children) generally cannot
qualify for Medicaid coverage even if they are poor. However, as discussed later in
this report, research and demonstration waivers available under Section 1115 of the
6 View the National Governors Association’s work on Medicaid reform at
[http://www.nga.org/Files/pdf/0508MEDICAIDREFORM.PDF].
7 For more information on Medicaid eligibility see CRS Report RL33019, Medicaid
Eligibility for Adults and Children, by Jean Hearne; and CRS Report RL31413, Medicaid
— Eligibility for the Aged and Disabled, by Julie Stone.

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Social Security Act8 allow for exceptions to these eligibility rules in states with
approved demonstrations.
State Medicaid programs cover a wide array of medical services and providers.
States are required to cover certain mandatory services listed in federal statute.
Examples of those include (1) inpatient and outpatient hospital services, (2) federally
qualified health center (FQHC) services, (3) lab and X-ray services, (4) physician
services, (5) certain nurse practitioner services, (6) pregnancy-related services
(including postpartum care), (7) early and periodic screening, diagnosis, and
treatment (EPSDT) for children under age 21, (8) nursing facility care for persons age
21 and over, and (9) home health care for persons entitled to nursing facility care.
The statute also lists additional services that are optional — that is, states can choose
to include them in their state Medicaid plans. Some of these optional benefits
include eyeglasses and prosthetic devices, the services of psychologists, physical
therapy, and prescription drugs.9
Medicaid is also an important financing mechanism for long-term care (LTC).
LTC refers to a wide range of supportive and health services generally provided on
an ongoing basis for persons who have limitations in functioning because of a mental
or physical disability or chronic condition. Both institutional services such as nursing
home care, and home and community-based care are covered by state Medicaid
programs.
The states and the federal government share the cost of Medicaid’s benefits by
way of a formula that takes into account each state’s average per capita income. The
federal government’s share of a state’s expenditures for Medicaid services is called
the federal medical assistance percentage (FMAP). Determined annually, the FMAP
is designed so that the federal government pays a larger portion of Medicaid costs in
states with lower per capita income relative to the national average (and vice versa
for states with higher per capita incomes). For FY2006, the FMAPs range from 50%
to 76% depending on the state.10
Behind the Calls for Medicaid Reforms
While Medicaid reform has been raised as an agenda item for this Congress,
deliberation over Medicaid reforms is not new. A Medicaid reform proposal has
been included in each of the annual White House budget plans since President Bush
took office. One reason for the recurring calls for Medicaid reform is that the stakes
of Medicaid failure are very high. If Medicaid’s funding mechanism is failing or in
8 Section 1115 allows the Secretary of Health and Human Services (HHS) to waive certain
statutory Medicaid requirements for purposes of conducting research and demonstration
projects so long as those projects are consistent with the objective of Medicaid statute.
9 See CRS Report RL32277, How Medicaid Works — Program Basics, by Elicia Herz, et
al.
10 For more information on the federal matching formula see CRS Report RL32950,
Medicaid: The Federal Medical Assistance Percentage (FMAP), by Christine Scott.

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jeopardy, it will affect at least three levels of government: federal; state; and local.
Medicaid impacts millions of health care providers, tens of millions of Medicaid
beneficiaries and provides what are often life-saving services for the destitute and
sickest in our country. With healthcare comprising one-seventh of the nation’s
economy, Medicaid plays a major role in many local job markets, particularly in rural
areas where the community hospital is often the largest employer.
The President’s budget proposals have not been specific enough to evaluate their
potential impact. The message they convey, however, is that the White House would
support Congress if it were to take up major Medicaid reform. In 2005, Congress
responded. The House and Senate agreed, in the conference report to accompany the
FY2006 budget resolution (H.Con.Res. 95, H.Rept. 109-62), to direct the authorizing
committees to develop proposals to reduce mandatory program spending. The
recommendations included significant budget reductions for the Medicaid program.
Those recommendations were addressed in the provisions of the Deficit Reduction
Act of 2005 (DRA 2005). The bill included both targeted reductions in specific
program areas and also significant new flexibilities for states on cost-sharing and
benefits. Nonetheless, it is instructive to understand why concerns remain regarding
Medicaid’s ability to sustain its current form into the future, to understand whether
fundamental program reform is possible, and what shape such a reform might take.
The impetus behind calls for Medicaid reforms fall under four general
categories: the program’s size and cost; certain features of its structure; the
relationship between the states and the federal government with respect to the
program’s administration and funding; and the program’s mission.
Medicaid’s Size and Expenditures
The Medicaid program is the third largest entitlement spending item in the
federal budget behind Social Security and Medicare. For states, it is the second
largest spending item after education. In almost every year since the program’s start,
Medicaid’s costs have grown faster than inflation, and recently those growth rates
have accelerated.
The cost of Medicaid is shared by the federal government and states, and at
states’ option, local governments. Before the disastrous 2005 hurricane season,
Medicaid was expected to cost $329 billion this year, making it as large as Medicare.
Even more striking is the rate of growth. Medicaid is expected to represent 2.6% of
GDP this year, 13 times its share in 1966, its first full year of operation. It has grown
partly because medical care keeps getting more expensive, and partly because it now
covers far more people for far more benefits than its founders ever envisaged.
Program spending has grown by more than 49% since 2000, exceeding growth in
general and medical inflation, and the rates of growth in spending for both Medicare
and Social Security.11
11 Congressional Budget Office Analysis, Monthly Budget Review, Nov. 4, 2004, at
[http://www.cbo.gov/showdoc.cfm?index=6002&sequence=0].

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Medicaid’s cost is not the program’s only large feature.12
! In 2002, the last year for which data are available, Medicaid covered
51.5 million enrollees, almost 18% of the U.S. population.
! Medicaid is now the primary insurer for almost 40% of all births.13
! In many states, coverage for children has been extended to those in
families with income above the federal poverty level.14
! Almost one-half of all long-term care services provided in the U.S.
are paid by Medicaid.15
The challenges of funding Medicaid’s state share has driven states to make
trade-offs between meeting the program’s financial requirements and meeting the
health care needs of the states’ population. In recent years, many states have enacted
program changes that have reduced benefits, tightened eligibility rules, and/or
established documentation requirements intended to restrict eligibility. Many of
these changes were implemented during the 2000-2003 recession. States also
requested and received fiscal relief from Congress. In 2003, Congress passed the
Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27)
which provided temporary fiscal relief to states through a combination of grants and
an increase in the federal medical assistance percentage.16
In addition, states have been experimenting with broader changes intended to
bring more budgetary discipline to Medicaid. For example, Vermont is operating the
state’s Medicaid program, and Florida has just received approval from HHS to
operate their Medicaid program, under expenditure ceilings. South Carolina has
submitted a proposal to make Medicaid beneficiaries more financially responsible for
their medical care. Under the South Carolina proposal, beneficiaries would be
provided with health spending accounts coupled with high deductible Medicaid
coverage. Utah has implemented a demonstration program that provides a limited
benefit plan, which excludes inpatient hospital services, to Medicaid enrollees.
Despite its rapid cost growth and large budget, Medicaid is viewed as a cost
efficient program. For Medicaid’s non-disabled populations, per person costs are no
higher than private health insurance.17 The percentage of the program’s spending on
administrative costs (3 to 4%) are small compared to the administrative costs of
12 [http://www.kff.org/medicaid/upload/Key%20Medicare%20and%20Medicaid%
20Statistics.pdf].
13 [http://preview.nga.org/Files/pdf/0508MCHUPDATE.PDF].
14 The federal poverty level in 2005 equals $16,090 for family of three in the 48 contiguous
states.
15 CRS analysis of National Health Expenditure Data, Centers for Medicare and Medicaid
Services (CMS), CY2003.
16 For more information on the fiscal relief under JGTRRA, see CRS Report RL31773,
Medicaid and the Current State Fiscal Crisis, by Christine Scott.
17 [http://www.cbpp.org/2-4-05health.pdf].

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private health insurance plans (often in excess of 20%).18 Because Medicaid covers
high-cost populations, primarily people with disabilities and those needing long-term
care services, insurance costs are held down for all others who are covered under
private plans. Many of the people who are on Medicaid, however, would be rejected
from private coverage if they were to seek private health insurance coverage on their
own.
Nonetheless, the cost and growth issue makes Medicaid a target for budget
cutters and those who are concerned that government spending is out of control.
Medicaid Structure
A number of structural features of the Medicaid program contribute to the
perceived need for reforms. The federal statute describes Medicaid as an entitlement
program that states operate under broad federal rules. The impact of the entitlement
combined with the challenge of meeting the many and complicated federal rules fuel
many of the states’ calls for reforms. Some reform proposals would address
categorical eligibility rules that keep certain poor people off the program regardless
of their income. Those proposals would extend Medicaid to all of those below
poverty and/or ensure uniform availability of health benefits.
In general, federal Medicaid law establishes an entitlement to Medicaid covered
services. Individuals who are determined to be eligible for the program are entitled
to receive the benefits described in the states’ Medicaid plans. The “entitlement
nature” of Medicaid creates for states, however, a budgetary environment for which
there is little control from the top. By entitling Medicaid’s beneficiaries to coverage
under state programs, the program’s original authors intended to ensure that medical
care be available to the most vulnerable Americans. On the other hand, the
entitlement nature of the program prevents states from being able to set a budget and
keep the program spending within those budgeted amounts. In an entitlement
environment, if more Medicaid beneficiaries meet the eligibility requirements, then
the state is obligated to provide coverage whether or not the costs of such coverage
exceed any particular budgeted amount. This feature of the program raises
considerably more difficulty for states when there is an economic downturn. During
such periods, states may experience reduced revenues at the same time that residents
lose their jobs, thus raising the number of people who may become entitled to
Medicaid.
Medicaid’s federal requirements generate complaints from state officials about
the program’s perceived inflexibility and contribute to the governors’ calls for
reform. Medicaid is a state-administered program in each state that chooses to
participate — and at this time all states do. Each state makes a large number of
choices on how to define eligibility, which benefits to offer, how to manage care
provided to enrollees, and how much to pay providers. The state choices, however,
must be consistent with a broad federal outline established in Title XIX of the Social
Security Act. The broad federal outline is actually comprised of a large number of
18 Private insurance administration includes a number of functions, such as marketing and
advertising, that are not included in Medicaid administrative expenditures.

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requirements. For example, there are over 50 different eligibility groups identified
in federal statute alone. Most of those requirements were established by Congress
and the Centers for Medicare and Medicaid Services (CMS), and its predecessor, the
Health Care Financing Administration, to reduce variation among the states and
create more consistency in the coverage provided under the programs — but can be
complicated to administer. For example, federal rules regarding Medicaid benefits
and coverage conflict with many of the Medicare program rules. The conflicts
sometimes impede states from enrolling “dual eligibles” — people eligible for the
benefits of both programs — into cost controlling managed care organizations. Other
rules require states to effectively apply two separate sets of eligibility rules to the
same individuals. For children qualifying for the State Children’s Health Insurance
Program (SCHIP), states must prove that they are NOT eligible for Medicaid, and for
low-income families who qualify through liberalized income and assets rules, states
must determine whether they would have also been eligible under Aid for Dependent
Children (AFDC) programs that existed in 1996.
Based on the work of the NGA and many testimonies before Congress over the
years, states’ experience of federal “inflexibility” stem from both the number of
federal requirements and from particular rules that limit states’ ability to experiment
with benefits and delivery systems. State officials want greater flexibility to decide
how Medicaid money should be spent because Medicaid constitutes such a large part
of their budgets. Particular rules that are often included in discussion of the
inflexibility of the program include federal limitations on the cost-sharing (such as
co-payments, deductibles, premiums and enrollment fees) that states may require of
beneficiaries, and federal requirements that comparable benefits be provided to all
beneficiaries within each eligibility group statewide. Both of the areas of cost
sharing and benefits flexibilities were addressed in DRA 2005 as enacted earlier in
the year.19 Once implemented, these provisions will be watched carefully to
determine if they resolve some of the complaints about inflexibility and to evaluate
the impact of the new options on Medicaid’s beneficiaries.
The complex rules have contributed to efforts among states to reorganize
Medicaid programs without congressional reforms, efforts that have been supported
and even encouraged by recent White House occupants. A number of states have
enacted statewide demonstration programs that have established more simplified
eligibility and benefits, sometimes with less variation by eligibility group.20 A
number of other major reforms are currently under consideration through Section
1115 demonstration waivers, raising the question of whether such large scale reform
of the third largest federal entitlement program should proceed without congressional
oversight or involvement. With the announcements of several new and controversial
19 States were given new options for raising cost sharing amounts for certain Medicaid
enrollees and for implementing more narrow benefits packages. For a complete description
of the provisions of DRA 2005, see CRS Report RL33131; Budget Reconciliation FY2006:
Medicaid, Medicare, and State Children’s Health Insurance Program (SCHIP) Provisions.
20 For more information on research and demonstration waivers, see CRS Report RS21054,
Medicaid and SCHIP Section 1115 Research and Demonstration Waivers, by Evelyne
Baumrucker.

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waiver plans, there are indications that oversight of the waiver approval process may
be an important issue for the remaining session of the 109th Congress.
State-Federal Relationship
Medicaid’s shared financing and administration requires the cooperation and
concerted efforts of federal, state, and often local units of government. The
relationship has created an uneasy alliance. Because the program is financed in part
by the federal government, but administered by states, states have incentives to
administer their programs in ways that maximize federal reimbursements of program
expenses. Approaches to maximize the federal share of Medicaid costs have varied
from clever interpretations of current law to what some in Congress have seen as
outright fraud and abuse.21 “Medicaid maximization” is not new, but over the years
billions of federal funds have been claimed by states in what the Inspector General
of HHS and the Government Accountability Office (GAO) say undermines the
federal-state Medicaid partnership and the program’s fiscal integrity.22
Two of the mechanisms states have used in the past to maximize federal
reimbursements in questionable ways have involved making excess Medicaid
payments to certain providers and requiring those providers to return some or all of
the state and/or federal share of those payments back to the state. Payments made
under the Medicaid upper payment limit rules and disproportionate share payments
to hospitals are described further in two CRS reports.23 Medicaid reforms could
involve re-structuring the federal/state funding relationship of Medicaid entirely, or
targeting only those questionable funding mechanisms. As described below, the
President’s Budget proposal for FY2006 includes several provisions targeting these
particular funding approaches. The targeted approach may be less controversial than
a complete overhaul of Medicaid’s financing rules, but such targeted reforms are still
controversial. While these funds are viewed by the federal government as leaving the
federal treasury under questionable circumstances, they are often perceived by states
as essential to maintaining medical benefits and access to providers for residents.
21 U.S. Congress, Senate Committee on Finance, Medicaid Waste, Fraud and Abuse, June
29, 2005; U.S. Congress, House Energy and Commerce Committee, Oversight and
Investigations Subcommittee, Medicaid Drugs Reimbursement, Dec. 7, 2004; U.S. Congress,
House Energy and Commerce Committee, Health Subcommittee, Inter-governmental
Transfers: Violations of the Federal-State Medicaid Partnership or Legitimate State Budget
Tool?, March 18, 2004; U.S. Congress, House Committee on Commerce, Subcommittee on
Oversight and Investigations, Nov. 9, 1999.
22 Statement of Kathryn G. Allen, U.S. Government Accountability Office, provided before
the Subcommittee on Health, Committee on Energy and Commerce, House of
Representatives, on Mar. 18, 2004, GAO-04-574T; U.S. Department of Health and Human
Services Office of Inspector General (U.S. DHHS OIG), Review of Medicaid Enhanced
Payments to Local Public Providers and the Use of Intergovernmental Transfers, Sept.
2001.
23 CRS Report RL31021, Medicaid Upper Payment Limits and Intergovernmental Transfers:
Current Issues and Recent Regulatory and Legislative Action, by Elicia Herz; and CRS
Report 97-483, Medicaid Disproportionate Share Payments, by Jeane Hearne.

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Unresolved Mission
Not all of those wishing to reform Medicaid are interested in making Medicaid
a smaller program. Some propose extending Medicaid to provide health care
coverage to more individuals, building on Medicaid’s traditional role as the
comprehensive insurer of last resort.
What is Medicaid’s role today? Under current law, the nation’s health care
insurer of last resort was built piecemeal over time to meet a number of special needs
left unmet by the nation’s ad-hoc system of private, job-based coverage. As a result,
Medicaid’s enrollees, their medical needs, and the services used to meet those needs
range widely across states. Medicaid’s coverage of low-income families, children
and pregnant women reflects consensus that the health care of our children and
prenatal care are essential and worthy of government funding. But Medicaid also
plays a critical role in providing health care to individuals with chronic physical and
mental disabilities. Long term care for the physically frail and elderly and
prescription drug coverage for all Medicaid’s beneficiaries have become essential to
many. The program also covers many items and services that private insurance tends
not to cover, such as eyeglasses, dentures, transportation, and nursing home services.
In addition to its role as insurer of last resort, Medicaid also plays a major role
in keeping certain kinds of health care providers available to the nation’s low-income
and uninsured populations.24 Medicaid compensates hospital providers for treating
large numbers of people without health insurance and pays relatively higher rates to
safety net providers of primary care (e.g., federally qualified health centers and rural
health centers.) In many communities where the local hospital or nursing home is the
largest employer, Medicaid plays a critical role in helping to maintain the local
economy.
Some reformers see Medicaid as doing too little, while others see it as having
grown too large. These divergent views of the program reflect a lack of consensus
about Medicaid’s past success and its future mission. Is Medicaid, as some say, the
nation’s largest and successful medical safety net that can be relied upon to meet the
ever changing and possibly expanding medical needs of the nation’s poor? Or is
Medicaid, as say others, an incompetent bureaucratic behemoth, greedily swallowing
up federal, state and other local government revenues?
Indeed, the clashing assessments of today’s Medicaid program and its future
mission may reflect a larger lack of consensus on the nation’s health care system, as
well. Is there a public duty for government to pay for medical care for to those who
cannot afford to pay for it? No clear consensus has emerged to resolve this question,
and therefore, Medicaid continues to serve as the default solution.
24 For more information on Medicaid payments to safety net providers, see CRS Report 97-
483, Medicaid Disproportionate Share Payments, by Jeane Hearne; and CRS Report
RL32644, Medicaid Reimbursement Policy, by Mark Merlis.

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Proposals for Reform
If Medicaid is to undergo fundamental reform, what would the changes look
like? Most agree that program’s role as safety-net program should be protected. But
should that role be expanded, or should a leaner version of Medicaid be made
available to more individuals? Should the focus of reform be on making the program
a smaller budget item? Fundamental reforms could include changing the federal/state
relationship for funding the program, removing the categorical eligibility
requirements, or changing the way that the state and federal governments jointly
regulate and administer the programs.
Other reforms could focus on targeted needs or issues. For example, reforms
could address those questionable financing mechanisms that inflate federal
reimbursements, or could change certain program features to reduce future program
costs. The following section summarizes current proposals put forth by some of
Medicaid’s major stakeholders.
President’s Budget. The President’s budget for FY2006 contains a number
of proposals that would impact the Medicaid program. Some of the proposals would
expand Medicaid, others would reduce current or future federal spending for the
program.25 The Medicaid proposals include provisions in four broad categories:
! Medicaid and SCHIP Modernization — would provide more
flexibility for states to expand Medicaid coverage for low-income
families and individuals without creating additional cost to the
federal government.
! New Freedom Initiative Proposals — would increase the ability of
individuals with a disability to live in a home or community-based
setting instead of an institution.
! Other Medicaid Legislative Proposals — would expand the Vaccines
for Children program, temporary medical assistance and Medicare
premium assistance. In addition there are other proposals designed
to reduce federal spending on Medicaid.
! Other Legislative Proposals with a Medicaid Impact — would make
changes in other federal programs including a Social Security
Administration management proposal to establish a standard for
Supplemental Security Income (SSI) disability awards, and an
outreach program for children eligible, but not enrolled, in Medicaid
or SCHIP.
The details of the Medicaid modernization proposal are not specified, but its
description uses such terms as increasing “flexibility” and increasing the use of
SCHIP principles in Medicaid. Both of these ideas are consistent with the NGA
proposal for Medicaid reform (see description below.) In addition, the budget plan
includes several proposals intended to specifically target Medicaid maximization.
25 For more detail on the Medicaid Proposals in the President’s Budget for FY2006, see CRS
Report RL32771, Medicaid and SCHIP: The President’s FY2006 Budget Proposals, by
April Grady, et al.

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The budget proposes to restrict the use of certain intergovernmental transfers that
allow providers to “pay back” the states’ share and sometimes federal share of
program reimbursements to the states. Second, the budget proposes to cap Medicaid
payments to individual state and local government providers to no more than the cost
of providing services to Medicaid beneficiaries.
Congressional Budget Reconciliation. The House and Senate are both
working toward a budget reconciliation bill for FY2006 that would reduce Medicaid
spending in a number of significant ways. The House and the Senate have
conferenced on a bill, S. 1932, The Deficit Reduction Act of 2005. The House
passed one version of the conference report on November 18, 2005. The Senate later
passed a slightly modified version (on December 19, 2005.) The bill awaits final
House action. S. 1932 would achieve Medicaid savings by modifying the federal
upper limit for reimbursement of certain Medicaid outpatient prescription drugs,
would make improvements in the prescription drug rebate system to achieve rebates
on drugs formerly left out of the rebate system, and would further limit the ability of
individuals in need of nursing home care to transfer assets to qualify for Medicaid
coverage. The bill also would establish greater cost-sharing options and allow
greater flexibility on Medicaid benefits for states to enact.26
Medicaid Commission. The Medicaid Commission provided its first report
to the Secretary of Health and Human Services (HHS) on September 1, 2005. In the
report, the Commission made recommendations to achieve $10 billion in savings
consistent with the budget reconciliation instructions. Recommendations included
changes to rules on reimbursement of Medicaid prescription drugs and asset transfers
for individuals needing long term care; increasing copayments for Medicaid
prescription drugs and expanding the Medicaid drug rebate program. The
Commission is required to submit a second report by December 31, 2006 that will
include recommendations intended to ensure the long-term sustainability of the
program. The recommendations are expected to include proposals relating to
eligibility, benefits design and delivery, expanding coverage in a constrained
budgetary environment, long term care, quality, and administration.27
State Actions. In the absence of federal reforms, a number of states have
moved ahead with plans to restructure their Medicaid programs. Under the authority
provided in Section 1115 of the Social Security Act, the Secretary of DHHS can
allow states to conduct research and demonstration projects under the Medicaid
program. Under the provisions of Section 1115, states can waive many of
Medicaid’s rules to conduct a demonstration as long as the demonstration promotes
the purposes of the Medicaid program — providing medical assistance to low-
26 For more detail on the Medicaid provisions in the House and Senate reconciliation bills,
see CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid, and SCHIP
Provisions in the Deficit Reduction Act of 2005,by Karen Tritz, et. al, and CRS Report
RL33131, Budget Reconciliation FY2006: Medicaid, Medicare, and State Children’s Health
Insurance Program (SCHIP) Provisions, by Evelyne Baumrucker, et al. For more
information on the FY2006 budget reconciliation process, see CRS Report RL33132, Report
Budget Reconciliation Legislation in 2005, by Robert Keith.
27 [http://www.cms.hhs.gov/FACA/].

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income families, blind and disabled individuals. A number of the waivers have
extended coverage to people who would not otherwise be eligible for Medicaid under
federal rules.28 Some demonstrations, however, have been structured so that program
costs are more controllable. Most waivers are subject to federal funding ceilings and
many impose higher cost sharing for beneficiaries than allowed under Medicaid rules.
Other waivers include benefit packages that can be adjusted annually to keep costs
below a pre-determined target, enrollment waiting lists, or reduced benefit packages.
During 2000-2003, many states faced budget shortfalls and state-level policy
makers were required to make trade-offs between program costs and coverage of
populations and services. Some examples include tightening of program eligibility
rules — coverage for low-income working parents was deeply reduced in several
states including California and Georgia; Colorado and Maryland reduced coverage
for legal immigrants; and Mississippi significantly reduced coverage for the elderly
and persons with disabilities. A number of states also implemented or raised
beneficiary cost sharing — some of those states include Oregon, Vermont, Rhode
Island, and Utah. Covered services were reduced in Michigan. Missouri’s governor
has threatened to drop the state’s Medicaid program altogether. Georgia restricted
access to nursing home coverage for the elderly.
While program changes were made to limit the program, a number of other
states expanded parts of their Medicaid programs during this period as well.
Coverage for children, especially, continued to be expanded in many states despite
the budget troubles.
National Governors Association (NGA) Proposal. The NGA has
developed a set of guiding principles for Medicaid reform, a Medicaid long term
restructuring strategy, and a set of proposals for the short-run that are consistent with
the reform principles and the long term strategy. The principles, strategy and
proposals are available in more detail on the NGA website.29
NGA’s principles for Medicaid reform include:
! The federal government should assume full responsibility for the
acute, primary, long-term, and pharmaceutical care of the dual
eligibles (i.e., individuals who are eligible for both Medicare and
Medicaid services);
! Alternative sources of long-term care coverage should be developed;
! States should have greater ability to manage the Medicaid program
with respect to eligibility, benefits, cost-sharing, and coordination
with private sector insurance;
28 [http://www.cms.hhs.gov/MedicaidStWaivProgDemoPGI/MWDL/list.asp#TopOfPage].
29 NGA Principles for Medicaid Reform at [http://www.nga.org/portal/site/nga/menuitem.
8358ec82f5b198d18a278110501010a0/?vgnextoid=e5ff0640e8e34010VgnVCM1000001
a01010aRCRD]; Medicaid Reform at [http://www.nga.org/Files/pdf/0506medicaid.pdf],
S h o r t - r u n M e d i c a i d R e f o r m a t [ h t t p : / / w w w . n g a . o r g / F i l e s / p d f /
0508MEDICAIDREFORM.PDF].

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! Medicaid reform proposals that provide states broader Medicaid
program authority should weigh fiscal and health policy implications
of the current financing structure;
! Efforts to reduce fraud and abuse by Medicaid beneficiaries and
providers are essential but any effort to develop error rates to
measure state performance should be strongly opposed;
! To the extent possible, all current waivers should be replaced with
clear statutory authority;
! The federal government should pay 100% of the cost of any new
Medicaid mandates; and
! The federal contribution for commonwealths and territories should
be modified.
Those principles are translated into proposals that include a greater reliance on
wellness and health promotion via care management and coordination; more
consumer choice; changes to federal rules for reimbursement of Medicaid
prescription drugs and asset transfers for individuals needing long term care; greater
discretion for states to establish premiums, deductibles and copayments for all
Medicaid populations; more flexibility on benefits; and greater ease in the
demonstration waiver approval process.
National Academy for State Health Policy (NASHP) Proposal. The
NASHP is a non-profit, non-partisan organization whose mission is to help states
achieve excellence in health policy and practice. NASHP brought together a working
group comprised of state officials and national experts representing a broad range of
stakeholder interests in Medicaid to develop recommendations regarding reform.
One of the group’s recommendations is to replace the current system of categorical
eligibility, and expand Medicaid eligibility to all individuals with incomes at or
below the federal poverty level. The proposal would maintain the current
comprehensive package of benefits for those beneficiaries with income below the
federal poverty level, but allow states the flexibility to offer a reduced set of benefits
to those with income above those amounts. The group also recommends that
revisions be made in the FMAP formula so that each annual update better reflects
recent changes in the states’ economies and fiscal capacity.30
Other Congressional Proposals. A number of bills have been introduced
in the 109th Congress that would expand eligibility for a single group or category of
individuals; add a new eligibility pathway to Medicaid; change eligibility
documentation requirements; enhance outreach; provide temporary fiscal relief, or
provide for a special federal matching percentage for a particular group or service.
All of these bills essentially retain the existing structure of the Medicaid program and
are too numerous to describe each in detail here.
Few bills have been introduced that would fundamentally reform Medicaid and
the plans of the Senate Finance and House Energy and Commerce Committees to
meet the reconciliation budgets have not yet been made public. The only bill that
would provide an entirely new direction for the Medicaid program is H.R. 3757.
30 [http://www.nashp.org/Files/Making_Medicaid_Work_for_the_21st_Century.pdf].

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H.R. 3757 would amend the Medicaid program to provide states with an option to
establish “health opportunity accounts” for selected beneficiaries enrolled in
Medicaid. During the first five years after enactment, the “health opportunity
accounts” would be established under demonstration projects in no more than 10
states. After five years, if the Secretary finds that the demonstrations were
successful, “health opportunity accounts” would become an option for all states.
Under the bill, certain Medicaid beneficiaries would be provided with Medicaid
coverage for medical expenses after a deductible has been met. The state would fund
an “health opportunity account” in an amount (including both state and federal
shares) that does not exceed, on an annual basis, $2,500 for each individual (or
family member) who is an adult and $1,000 for each individual (or family member)
who is a child. Deductibles may be set at an amount that is equal to the amount in
the health opportunity account or no more than 110% of that amount. The health
opportunity funds in the account would be available for each beneficiary to pay for
medical items and services obtained before the Medicaid program deductible has
been met. Funds remaining in the account after the annual funding period ends roll
over to the next year, and after that time, may become available for other uses as
described in the bill and specified by states.
Two other bills would extend Medicaid’s provision of health care to children
and modify the usual combined federal/state financing arrangement for those
benefits. S. 114, the Kids Come First Act of 2005, would give states the option to
receive a 100% FMAP for all medical assistance provided to children in families
with income below the federal poverty level in exchange for expanding coverage for
children in working poor families under Medicaid or SCHIP. The bill would also
provide for a refundable tax credit for health insurance coverage of children and the
forfeiture of the personal tax exemption for any child not covered by health
insurance. A similar bill, H.R. 1668, the Kids First Act of 2005, was introduced in
the House of Representatives.