October 14, 2005

AN ANALYSIS OF THE NATIONAL GOVERNORS ASSOCIATION’S
PROPOSALS FOR “SHORT-RUN MEDICAID REFORM”
By Victoria Wachino, Leighton Ku, Edwin Park and Judith Solomon

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Executive Summary

On August 29, the National Governors Association released “Medicaid Reform:  A Preliminary Report,” a set of recommendations for Congress as it develops budget legislation this fall to reduce projected federal Medicaid expenditures.  These NGA proposals are intended to build on longer-term Medicaid recommendations the governors made in June.

Congress is likely to give these NGA proposals serious consideration.  The Medicaid Commission that the Administration established this summer included several NGA proposals in recommendations it made to Congress on September 1 for achieving Medicaid reductions of $10 billion over five years.  In this paper, we analyze the major NGA proposals.  We evaluate whether the proposals would reduce expenditures without harming the low-income children, families, senior citizens, and people with disabilities whom Medicaid serves. 

The NGA proposals include constructive suggestions to reduce Medicaid expenditures for prescription drugs.  Those proposals would produce significant savings, enabling Congress to achieve nearly all of its requirement to cut health-care entitlement expenditures by $10 billion over the next five years, and would do so in ways that would not adversely affect low-income patients.  Many NGA proposals in other areas, however, risk reducing access to needed health services for vulnerable low-income beneficiaries.  Particularly problematic are NGA’s proposals to allow substantial increases in the co-payments and premiums that Medicaid beneficiaries could be charged and to allow covered health care services to be scaled back significantly for many beneficiaries.  Also troubling is an NGA proposal to count the value of an individual’s home as an asset in determining eligibility for Medicaid coverage for long-term care.

• NGA’s proposals to reduce the amounts that Medicaid pays for prescription drugs hold promise.  Giving states new tools to reduce the amounts that their Medicaid programs pay for prescription drugs could save substantial sums without harming beneficiaries.  There appears to be growing consensus on the need for reforms in Medicaid drug pricing procedures.  Useful proposals in this area have been made by NGA, the Administration, its Medicaid Commission, health care providers, and advocates for beneficiaries.
  
  NGA recommends a number of changes in this area.  One such proposal calls for an increase in the minimum rebate that manufacturers of brand-name drugs pay to Medicaid.  Such a reform is overdue; the minimum rebate has not been raised since 1996, and there is evidence that the federal government could establish higher minimum rebates.  This proposal would save $3.2 billion over five years, according to the Congressional Budget Office.  NGA also proposes specific improvements in how the rebate is calculated and how the rebate program is carried out, which would help respond to problems that have been identified by the Government Accountability Office (GAO) and the HHS Office of Inspector General.
  
  In addition, NGA proposes to extend the rebate to drugs that managed care plans purchase for Medicaid patients.  When the federal drug rebate law was designed, it was assumed that Medicaid managed care plans could negotiate discounted drug prices as favorable as those available under the rebate.  In fact, managed care plans may be obtaining smaller discounts than those the rebate system provides.  Extending the rebate to Medicaid managed care plans would ensure they obtain more favorable drug prices, saving about $2 billion over five years, according to the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS).
  
  NGA also proposes to establish a limit on how much states may pay pharmacies for prescription drugs dispensed to Medicaid beneficiaries.  Most states base their payments to pharmacies on a drug’s Average Wholesale Price (AWP), which is like a car’s “sticker price” and substantially exceeds what pharmacists pay to acquire a drug from a manufacturer or wholesaler.  The NGA proposal would establish a new federal requirement that these payments be based on the Average Manufacturer Price (AMP), the average actual price that manufacturers charge wholesalers.  The Office of the Actuary estimates savings from this proposal of $4.3 billion over the next five years.  (The Administration proposed a similar provision that would require pharmacy payments to be based on the Average Sales Price.)
  
  Finally, NGA proposes changing the reimbursement rates paid to pharmacies for generic drugs.  The federal government sets limits (called “Federal Upper Limits” or FULs) on state Medicaid pharmacy reimbursement rates for generic drugs.  The NGA proposes to use the AMP rather than the AWP as the basis for these rates.  Because the AMP is based on the actual price at which manufacturers sell to wholesalers, using the AMP would be more accurate and cost-effective.  This provision would produce savings of $3 billion over five years according to the CMS Office of the Actuary.

• NGA’s cost-sharing proposals, by contrast, risk making coverage unaffordable for many low-income beneficiaries and would likely lead to reduced access to needed care.  NGA proposes to scale back many of the federal standards that limit beneficiary cost sharing in Medicaid.  A longstanding body of research demonstrates that when cost sharing is increased significantly for low-income people, their use of essential health care services declines and their health status worsens.  The NGA proposals allowing substantial increases in co-payments for many beneficiaries carry a high risk of inducing some beneficiaries to scale back markedly the use of needed health services.  The proposals relating to premiums would likely cause some beneficiaries to lose coverage altogether and become uninsured.
  
  Under the NGA proposals, there appear to be no limits on the co-payment and premium amounts that states could charge to most beneficiaries with incomes modestly above the poverty line, including children, except that total cost-sharing changes for a beneficiary could not exceed 5 percent of income for beneficiaries with incomes below 150 percent of the poverty line and 7.5 percent of income — nearly one month’s income — for beneficiaries above 150 percent of the poverty line.  Beneficiaries with incomes below the poverty line, and children under six with incomes between 100 percent and 133 percent of the poverty line, would be shielded from the changes in cost sharing for health care services.  Pregnant women also generally would continue to be exempt from such co-payments.  These beneficiaries could, however, be required to pay substantially more for prescription drugs.
  
  NGA proposes authorizing states to increase co-payments significantly for prescription drugs through tiered co-payment systems.  Under a tiered co-payment system, the co-payments charged for drugs that a state does not designate as “preferred drugs” would be set higher than the co-payments charged for preferred drugs.  In a sharp departure from current Medicaid law, under which co-payments charged to Medicaid beneficiaries for prescription drugs may not exceed $3 per prescription, the NGA proposal would set few upper limits on the tiered co-payments that could be imposed for both non-preferred and referred drugs, with the exception of co-payment charges for preferred drugs prescribed for beneficiaries below the poverty line.  This proposal could lead to a very substantial escalation in co-payment charges for prescription drugs for many beneficiaries.  In some states, co-payments could be set at levels beyond what significant numbers of beneficiaries could afford, especially beneficiaries who need multiple prescriptions — as many elderly and disabled people do — and thus face multiple co-payments.
  
  For beneficiaries with incomes below the poverty line, the co-payments charged for generic or preferred drugs would be nominal (e.g., $3 or less).  Even for these beneficiaries, however, there would apparently be no limits on the co-payment amounts that could be charged for non-preferred drugs.  There also appear to be no limits on the amounts that could be charged for either preferred or non-preferred drugs for most beneficiaries above the poverty line.
  
  Moreover, co-payments for medications could be charged to all beneficiaries — including those currently exempt from co-payments such as children, pregnant women, and people in nursing homes or other institutions.  This represents a major change from current Medicaid requirements and could make it harder for these individuals to obtain medications they need.
  
  Finally, in another striking departure from current law, providers would be permitted to deny services and medications to people who are unable to meet the cost sharing charges.  This change would increase the likelihood that significant numbers of Medicaid beneficiaries would go without needed health care or medications because they could not afford the co-payments.  Research suggests that the health of low-income beneficiaries could deteriorate as a result.  The need for subsequent emergency room or hospital care also would be likely to increase.

• Restrictions on benefits could diminish access to needed care.  NGA also proposes to permit states to reduce the current Medicaid benefit package, limiting it to a narrower set of benefits that is “actuarially equivalent” to the benefits provided under certain private or state employee insurance programs that operate in the state.  Some categories of beneficiaries, such as pregnant women and children in “mandatory” Medicaid eligibility categories, as well as SSI recipients and individuals who are dually eligible for Medicare and Medicaid, would be exempt from this change.  States would, however, be authorized to restrict benefits for other groups, such as children, pregnant women, and parents in the “optional” eligibility categories.
  
  Allowing states to restrict benefit packages for substantial numbers of beneficiaries, as NGA proposes, would likely diminish access to care by making certain health care services unavailable to broad groups of Medicaid beneficiaries.  Moreover, this proposal appears to eliminate the requirement that all children in Medicaid receive all of the health care services they need for healthy development, as is currently provided through Medicaid’s Early and Periodic Screening, Diagnosis and Treatment (EPSDT) component.  (EPSDT guarantees that children be covered for all health care services they are found to need.)  The loss of the EPSDT guarantee for large numbers of children would be particularly risky for children with disabilities or other special health care needs.  Under the NGA proposal, there also is a risk that long-term care services would no longer be available to some low-income beneficiaries.

• NGA’s long-term care proposal would treat a person’s home as an asset in determining his or her eligibility for Medicaid, which would likely force some seniors to sell their homes to qualify for Medicaid coverage for long-term care.  Another far-reaching NGA proposal would count home equity as an asset in determining seniors’ eligibility for Medicaid long-term care services, including home- and community-based services and nursing home care.  In most states, seniors are eligible for Medicaid only if their countable assets — which do not include their homes — are below $2,000 for an individual and $3,000 for a couple.  Counting home equity against these limits could present many seniors with the agonizing choice of selling their home or going without Medicaid coverage for long-term care.
  
  To address this problem, NGA proposes that seniors obtain “reverse mortgages” and use the mortgages to pay for long-term care expenses.  There is little research, however, which suggests that reverse mortgages would work adequately for low-income seniors.  Some seniors might not be able to secure such mortgages.  In addition, there are important unanswered questions about how the use of reverse mortgages would affect spouses and dependent disabled children who live in the home.  Reverse mortgages must be repaid once the home is no longer the borrower’s primary residence, raising questions about whether a spouse and dependent children would be forced out of the home if an individual had to enter a nursing home.  Finally, research in the field raises questions about whether requiring reverse mortgages would be more effective in controlling costs than the current policy that requires states to recover costs from the estates of beneficiaries who received long-term care services.

• Some of NGA’s proposed changes in asset transfer policies could prove detrimental.  To prevent people from transferring assets that could be used to pay for long-term care by transferring those assets to family members or others, NGA proposes both to extend the period of time that is examined to determine whether transfers of assets occurred and to change the way that penalties are set when a wrongful transfer is found.  These changes could have the unintended effect of penalizing people who make relatively small gifts or donations without any intention of doing so to qualify for Medicaid.  The NGA proposal also lacks adequate protections to ensure that people are not inappropriately penalized.  Congress could provide states with more targeted tools, some of which are described in the body of this analysis, to help curb the sheltering of assets by people of means.
  
  To the degree Congress relies on the NGA reforms in putting together reconciliation legislation, it should look to those proposals that do not harm low-income beneficiaries.  NGA’s proposals to reduce prescription drug prices could achieve significant savings without adverse effects on low-income patients.  Targeted tools to address some of the practices that individuals with significant resources may be using to qualify inappropriately for Medicaid coverage for long-term care also could achieve some savings.  Many of the remaining NGA proposals, however, and in particular the proposals made with respect to increased cost-sharing and reduced benefits, would make health coverage through Medicaid less affordable and accessible for low-income families and individuals.

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