February 25, 2003 

THE MEDICAID-MEDICARE LINK:
STATE MEDICAID PROGRAMS ARE SHOULDERING A GREATER SHARE OF
THE COSTS OF CARE FOR SENIORS AND PEOPLE WITH DISABILITIES
by Leighton Ku

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 Summary

The two main publicly-funded health insurance programs are Medicare — the federal insurance program for seniors and people with disabilities — and Medicaid — the joint federal-state insurance program for low-income people.  Each program pays for health insurance coverage of low-income seniors and people with disabilities.  This “partnership” has become strained in recent years, however, as Medicaid expenditures have surged, in large measure because of the rapidly rising costs of providing care for elderly and disabled beneficiaries who are also enrolled in Medicare.  Structural gaps in coverage offered by Medicare have led state Medicaid programs to bear an increasing share of the overall costs of health care for seniors and people with disabilities.

Almost all elderly Medicaid beneficiaries and about two-fifths of disabled Medicaid beneficiaries are also on Medicare.  Both programs contribute to the costs of health care for those who are enrolled in both programs, a group of beneficiaries referred to as “dual eligibles.”  For the low-income individuals fully enrolled in both programs, Medicaid pays for services that Medicare does not cover — like prescription drugs and long-term care — and also covers the deductibles, coinsurance and premiums that Medicare assesses beneficiaries.  In addition, federal law requires that state Medicaid programs provide partial coverage for Medicare beneficiaries with incomes below 120 percent of the poverty line ($10,780 in annual income for a single person and $14,540 for a couple).  Some 35 percent of all Medicaid expenditures are on behalf of dual eligibles.

Medicaid programs, and therefore the states, are bearing a growing share of the financial responsibility for health care for seniors and people with disabilities, while the federal share under Medicare is lightening.  Medicaid expenditures for care for seniors and people with disabilities have grown much faster than Medicare expenditures in recent years and the growth rates are projected to remain unequal in the future.

• In 1984, Medicaid paid for 30 percent of the total public expenditures for health insurance for the aged and disabled and Medicare paid for 70 percent.  Projections from the Congressional Budget Office (CBO) indicate that, by 2012, Medicaid’s share will rise to 45 percent, while Medicare’s share will fall to 55 percent.

• CBO projects that Medicaid expenditures for seniors will grow at an average rate of 8.9 percent each year from 2002 to 2012, while Medicare expenditures are projected grow an average of 6.7 percent annually.  If the Medicaid growth rates for seniors could be brought down to the levels projected for Medicare, cumulative state expenditures for Medicaid would be $47 billion lower over the period 2003 to 2012.  If Medicaid growth rates for people with disabilities could be brought down to Medicare levels, the savings for states could be even larger.

The growing expenditure gap between the programs is primarily caused by structural deficiencies in Medicare coverage:

• Medicare does not cover outpatient prescription drugs, so Medicaid must cover all prescription drug costs for Medicare beneficiaries fully enrolled in both programs.  The cost of prescription drugs is the fastest growing segment of health care spending.  More than half (about 57 percent) of all Medicaid expenditures for prescription drugs are incurred for beneficiaries who are enrolled in Medicare.

• Medicaid covers long-term care, while Medicare does not (aside from short-term costs to help those recuperating after being hospitalized).  A majority of the Medicaid expenditures for seniors and people with disabilities are for long-term care services, such as nursing home or home health care services.  As baby boomers age and retire, Medicaid’s long-term care costs will grow heavier.

• Changes in medical practices over time have reduced the length of time that people are hospitalized and increased the use of ambulatory care and prescription drugs.  While these shifting medical practices can reduce overall health care costs, they have the paradoxical effect of increasing Medicaid expenditures while lowering Medicare costs.  This is because reducing hospital expenditures for a dual eligible saves substantial sums for Medicare (which is the “primary payer” for hospital expenses for dual eligibles) but not Medicaid, while additional expenses for prescription drugs are borne by Medicaid but not Medicare.

• Medicaid expenditures are not growing faster than Medicare expenditures because state Medicaid programs are less efficient or pay providers more generously.  Medicaid generally pays health care providers less than Medicare and Medicaid payment rates have risen more slowly.  Moreover, a far greater share of Medicaid beneficiaries are in managed care plans than in Medicare.

The rising costs of health care for elderly and disabled beneficiaries and the shift in costs from Medicare to Medicaid are the primary forces driving up state Medicaid expenditures, which are, in turn, the fastest growing component of state budgets.  Three-quarters of the projected growth in total Medicaid expenditures, as projected by CBO, is caused by the rising costs of care for the aged and disabled.  As the baby-boom generation ages, these costs are likely to prove unsustainable by state governments.  The federal government could act to restore the balance of financial responsibilities between Medicaid and Medicare and redress the shifting of costs from the federal government to states, as a mechanism to help reduce long-term fiscal burdens for states and to improve care for Medicare beneficiaries.

In the coming year, the Administration and Congress have announced their intention to address important changes in the Medicare program, including a Medicare prescription drug benefit and other structural reforms in Medicare.  The Medicare policies adopted could have a profound effect on the long-term costs of the Medicaid program and, therefore, on state budgets.  A Medicare prescription drug benefit could, depending on how it is designed, greatly reduce Medicaid outlays because Medicare could assume the great majority of drug costs for the dually eligible.  On the other hand, structural changes to Medicare — like a “premium support” arrangement, one Medicare reform approach often raised — could increase beneficiaries’ share of costs and thereby force state Medicaid costs higher, since Medicaid covers such costs for low-income Medicare beneficiaries.  Another strategy that could be considered would be to increase federal financing for the care of dual eligibles by increasing the federal Medicaid matching rate for services received by this group, for selected services such as prescription drugs, or for selected groups such as Qualified or Specified Low-income Medicare Beneficiaries (those with incomes above full Medicaid eligibility levels but below 100 percent of the poverty line or between 100 percent and 120 percent of the poverty line, respectively).

In establishing future policies for Medicare and health care for seniors and people with disabilities, federal policy-makers will consider a number of factors, including the cost to the federal government and the well-being of Medicare beneficiaries.  Federal policy-makers also ought to consider the budgetary impact of Medicare reforms on states, their partners in care for seniors and people with disabilities.  In so doing, federal policy-makers should bear in mind that while certain changes in Medicare could provide substantial relief to states in the long term, they might not do little to ease the immediate crises states are experiencing during the current economic downturn.  Congress could consider complementary policies to offer temporary relief to states as part of a short-term economic stimulus package, along with longer-term policy changes that improve health care coverage for seniors and people with disabilities in a manner that provides some relief to states from the escalating health care costs they otherwise would have to shoulder for these groups.

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