Overview of Medicaid Provisions in
the Balanced Budget Act of 1997, P.L. 105-33
by Andy Schneider

I. Summary

The Balanced Budget Act signed into law by the President on August 5, 1997 contains the largest reductions in federal Medicaid spending in Medicaid since 1981. The legislation is projected to achieve gross federal Medicaid savings of $17 billion over the next five years and $61.4 billion over the next ten years. After the legislation's offsetting increases in Medicaid spending are accounted for, the legislation is estimated to achieve net federal Medicaid savings of $7.3 billion over the next five years and $36.9 billion over the next ten years. These net Medicaid reductions account for 9.2 percent of the $402 billion in net reductions in federal outlays that the Congressional Budget Office (CBO) estimates will result from all of the Balance Budget Act's provisions over the next ten years.⁽¹⁾

Accompanying these spending reductions are provisions that represent the most significant set of structural changes in Medicaid since 1991. The legislation greatly expands the substantial discretion that states already enjoyed in administering their Medicaid programs. It eliminates minimum payment standards that states must currently meet in setting reimbursement rates for hospitals, nursing homes, and community health centers. It also allows states to require most Medicaid beneficiaries to enroll in managed care organizations that do business only with Medicaid. Over time, these provisions are likely to have a substantial impact on how and whether Medicaid beneficiaries have access to needed health care of adequate quality. Because Medicaid currently covers 22 million children, these changes could ultimately have as large or larger an impact on the access of low-income children to health care than the changes resulting from the new child health block grant.

The legislation leaves most of the critical structural elements of the Medicaid program unchanged. It does not convert Medicaid into a block grant, as proposed by the leadership in the last Congress, and it does not impose a "per capita cap" on federal Medicaid matching payments to states, as urged by the Administration in its budget earlier this year.⁽²⁾ The legislation leaves undisturbed Medicaid's individual entitlement to basic health care coverage. It also maintains the current mandatory and optional Medicaid eligibility categories.

In addition, despite calls for greater state "flexibility" with respect to the scope of the Medicaid benefit package, the legislation does not alter the program's current minimum benefits guarantees (including the early and periodic screening, diagnostic, and treatment (EPSDT) benefit for children), and it does not undo any of the current cost-sharing protections for low-income families. Although the legislation makes major changes in the program, Medicaid will continue to function as the nation's largest health insurer for children, the largest insurer for maternity care (covering 40 percent of the nation's births), and the largest insurer for nursing home care (paying for more than 50 percent of all nursing home care).

This analysis provides an overview of the major Medicaid changes in the new legislation. The key findings and conclusions are summarized below, followed by a more detailed discussion of these issues.⁽³⁾

• The legislation achieves federal Medicaid savings from three areas. Two-thirds of the savings over the next ten years are attributable to limitations on federal matching payments to states for reimbursements to "disproportionate share" (DSH) hospitals. The next largest source of federal savings — 20 percent of the savings over the ten year period — is a provision allowing states to shift the cost of Medicare deductibles and coinsurance requirements for low-income Medicare beneficiaries from their Medicaid programs to physicians and other providers. Most of the remaining savings derive from repeal of the "Boren amendment" and other minimum payment guarantees for hospitals, nursing homes, and community health centers that serve Medicaid patients. These payment provisions could prove problematic over time, particularly with respect to the quality of care at nursing facilities with large numbers of residents supported by Medicaid.

• The legislation contains a dramatic expansion in state authority with respect to the use of managed care. It enables states to require most Medicaid beneficiaries to enroll in managed care organizations (MCOs) that only do business with the Medicaid program without obtaining a waiver from the Secretary of HHS. It also enables states to select two MCOs from among all the qualified MCOs seeking to participate and to confer an exclusive franchise to the state's Medicaid managed care business on those two MCOs. Although the Congressional Budget Office does not attribute any federal savings to these provisions, they are likely to have a major impact on access to covered hospital and physician services by low-income families. These provisions also have important implications for the hospitals, physicians, and health centers from which low-income families have traditionally obtained needed care.

• The legislation contains some new federal Medicaid expansions as well. These initiatives are modest in size.⁽⁴⁾ The budget legislation restores Medicaid eligibility for legal immigrants who entered the country on or before August 22, 1996 and who become disabled and qualify for Supplemental Security Income (SSI) benefits thereafter. It also restores Medicaid coverage for certain disabled children who would lose their eligibility as a result of changes in last year's welfare law. The legislation gives states the option of guaranteeing that children who have been determined to be eligible for Medicaid will continue to receive Medicaid coverage for up to 12 months without a redetermination of eligibility. In addition, it allows states to extend Medicaid coverage to children on the basis of "presumptive" eligibility until a formal determination of eligibility is made. These and other Medicaid initiatives in the legislation will increase federal spending by $4.9 billion over five years and $9.6 billion over ten years.

• The legislation establishes a new child health block grant, through which $20.3 billion in new federal funds will be made available to states over the next five years for the purpose of reducing the number of uninsured low-income children.⁽⁵⁾ This block grant has important implications for Medicaid. At a minimum, it gives states an incentive not to reduce their current Medicaid eligibility levels for children; states that adopt income or resource standards or methodologies more restrictive than those in effect on June 1, 1997 may not qualify for any federal child health block grant funds. In addition, states may use the block grant funds to expand coverage under their state Medicaid programs to reach additional low-income children. Prior to enactment of this block grant, most states that sought to reduce the number of uninsured children were doing so by expanding their Medicaid programs rather than establishing a separate state child health insurance program.⁽⁶⁾ This legislation gives states that do not want to use their Medicaid programs to cover more low-income children the option of using federal block grant funds to set up separate state programs for this purpose. If a state uses its block grant funds to expand Medicaid, the newly eligible children will be entitled to coverage for needed basic health care services, just as children currently eligible for Medicaid are. If a state uses block grant funds to establish or expand a separate state program, no individual child will be entitled to coverage. Over time, such separate state programs are likely to compete with state Medicaid programs for state and federal funds, particularly during economic downturns.

• The legislation establishes a new block grant to the states, funded at $1.5 billion over five years, to help cover the Medicare Part B premiums of certain low-income Medicare beneficiaries. Under the Medicare provisions of the new legislation, the monthly Part B premium will increase from $43.80 this year to $65.10 in 2002 and $105.40 in 2007. The block grant dollars are intended to be used to pay these escalating premium costs for low-income Medicare beneficiaries between 120 percent and 135 percent of the poverty line.
  
  Although the Part B premiums continue to increase after 2002, federal block grant funding ends that year. During the years that funding is available, participation in the block grant is at the discretion of each state. In those states electing to participate, no individual Medicare beneficiary is entitled to have all or a portion of his or her monthly Part B premium paid. The legislation directs participating states to limit the number of Medicare beneficiaries eligible for assistance each year on a "first-come, first-served" basis.

II. The Budgetary Effects of Medicaid and Related Changes in the New Legislation

Table 1 shows the five- and ten-year Medicaid budget effects of the legislation. It includes not only the provisions in the Medicaid subtitle of the legislation, all of which amend the Medicaid statute, but also the federal Medicaid costs associated with provisions in other subtitles of the legislation that make changes in Medicare, veterans programs, and the immigration provisions of last year's welfare law and that establish the new child health block grant. CBO estimates that the provisions in the Medicaid subtitle would achieve net federal savings of $14.6 billion over five years and $56.4 billion over ten years. When the Medicaid budget effects of changes in other programs are taken into account, the net Medicaid savings drop to $7.3 billion over five years and $36.9 billion over ten years.⁽⁷⁾

The legislation roughly follows the outlines of the budget agreement between the White House and the Congressional leadership in May. ⁽⁸⁾ The agreement called for gross federal Medicaid spending reductions of $17.8 billion over five years; the legislation achieves $17 billion over this period. The agreement also provided funding for restoration of Medicaid coverage to disabled legal immigrants and for enhanced federal matching payments to the District of Columbia and Puerto Rico.

The legislation departs from the May agreement in some respects. The agreement contemplated $16 billion over five years to reduce the number of uninsured children; the legislation provides $20.3 billion in funding for a new child health block grant and an additional $3.6 billion in new Medicaid spending for children over the same period. In addition, the agreement called for $1.5 billion in new federal Medicaid spending to help ease the burden of increasing Part B premiums on low-income Medicare beneficiaries. The legislation provides $1.5 billion in Medicare dollars over the next five years to states in the form of a block grant for this purpose.

Gross Medicaid Savings

The gross federal Medicaid savings come from three main sources: (1) limits on federal matching payments to states for payments to "disproportionate share" (DSH) hospitals; (2) authorization for states to avoid paying deductibles and coinsurance on behalf of many low-income Medicare beneficiaries; and (3) repeal of minimum payment standards for hospitals, nursing homes, and community health centers.⁽⁹⁾ The majority of these savings — 61 percent over five years and 66 percent over ten years — come from the DSH limits. The legislation also allows states to require most Medicaid beneficiaries to enroll in managed care organizations (MCOs) that do business exclusively with Medicaid, and to limit to two the number of MCOs that can participate in the program and offer coverage to Medicaid beneficiaries. These managed care provisions are likely to have a large impact on the access of Medicaid beneficiaries to needed care, but CBO does not attribute any federal savings to this additional state flexibility.⁽¹⁰⁾

• Limitations on Federal Matching Funds to States for Payments to DSH Hospitals. Under current law, states are required to make additional payments to hospitals serving a disproportionate share of low-income Medicaid and uninsured patients. Unfortunately, substantial amounts of federal Medicaid matching funds intended for DSH hospitals have been diverted through state treasuries to other purposes. To protect the federal treasury from state abuses, Congress in 1991 enacted state-specific limits on the amount of federal Medicaid matching funds states may draw down for payments to DSH hospitals each year. The new legislation lowers these state-specific limits to achieve $10.4 billion in federal Medicaid savings over the next five years and $40.4 billion over the next ten years. The legislation also limits the amount of a state's federal Medicaid matching fund allotment for DSH that the state can use for payments to state-operated mental hospitals. Other than limiting payments to state mental hospitals, the legislation does not retarget federal DSH matching funds on those public, children's, and other hospitals that serve the largest numbers of Medicaid-eligible and uninsured low-income patients.⁽¹¹⁾ States could choose to distribute most of their federal DSH funds to their own university hospitals or to facilities that do not serve the largest numbers of low-income patients.

• Medicare Cost-Sharing for Poor Medicare Beneficiaries. Under provisions already in law, states through their Medicaid programs must pay the cost of Medicare deductibles and coinsurance required of certain low-income Medicare beneficiaries. These include Medicare beneficiaries who are eligible for full Medicaid benefits ("dual eligibles") as well as Medicare beneficiaries known as Qualified Medicare Beneficiaries (QMBs), who are not dually eligible but whose income is at or below 100 percent of the poverty line ($7,890 for an individual) and whose countable resources are less than $4,000. The new legislation allows states not to pay these deductible and coinsurance amounts to the extent that the payment made to a physician or other provider by Medicare exceeds the Medicaid payment rate for the service. Because the payment that Medicare makes is net of any coinsurance requirement, a state will now be able to avoid paying the coinsurance by setting its Medicaid payment rate below the Medicare payment amount.⁽¹²⁾
  
  CBO estimates that as a result of this provision, a substantial number of states will no longer pay deductibles and coinsurance on behalf of poor Medicare beneficiaries, yielding $5.0 billion in federal Medicaid savings over five years and $12.6 billion over ten years.⁽¹³⁾ When the state share of these savings is accounted for, the total amount of Medicare cost-sharing that states will no longer pay on behalf of poor Medicare beneficiaries equals $8.8 billion over five years and $22.1 billion over ten years. Cost shifts of this magnitude are likely to create significant financial incentives for physicians, hospitals, nursing homes, and other providers to avoid treating poor Medicare beneficiaries, because the legislation bars them from seeking recovery of the deductible or coinsurance amounts from the beneficiaries themselves. The disincentive to treat would be strongest in the case of those poor Medicare beneficiaries who are the sickest or most disabled and have a corresponding need for extensive medical care. From a provider standpoint, these beneficiaries would carry the largest risk of causing significant amounts of deductibles and coinsurance to go unpaid.

• Nursing Home Payment Levels. The legislation repeals the "Boren amendment" requirement that states pay for nursing facility services covered under Medicaid using rates that are "reasonable and adequate."⁽¹⁴⁾ Effective October 1, 1997, states will be able to set rates that do not meet this minimum standard. They will simply be required to provide for a "public process for determination of rates of payment" for covered nursing home care, under which proposed rates and final rates are published along with their underlying methodologies and justifications. This process must give providers and beneficiaries a "reasonable opportunity for review and comment" on the proposed rates and payment methodologies. This will provide advocates for nursing home residents a formal procedural route through which to make their case for the use of reimbursement systems that encourage and enable facilities to provide quality care while reducing administrative expenses unrelated to patient care. CBO estimates that repeal of the Boren amendment with respect to nursing homes will achieve about $0.7 billion in federal savings over five years and $4.1 billion over ten years. CBO assumes that Medicaid nursing home payment rates will increase more slowly than in the past because facilities will no longer have the leverage of litigation to enforce the "reasonable and adequate" payment requirement against the states.
  
  The legislation does not amend the landmark nursing home reform provisions enacted in 1987. These quality standards would continue to apply to all nursing homes participating in Medicaid (or Medicare). If the states use the repeal of the Boren amendment as an opportunity to freeze or reduce payment rates to nursing homes, pressure for dilution or repeal of these standards — a result already requested by the National Governors' Association⁽¹⁵⁾ — will intensify as facilities argue they should not be held to standards for which the government is unwilling to pay. Extended freezes or reductions of Medicaid payment rates could also lower the quality of care provided by nursing facilities that are heavily dependent on Medicaid revenues because many of their residents are Medicaid eligible. On the other hand, to the extent that litigation enforcing the Boren amendment has resulted in excessive Medicaid payments to nursing facilities that are not being applied to patient care, the repeal of the amendment may have the effect of allowing states to free up resources that they can then redirect to improving the quality of care for nursing home residents or funding alternatives to institutionalization for the frail elderly and disabled.⁽¹⁶⁾ (Note that the legislation also reduces Medicare payments to nursing homes by $9.5 billion over five years and $32.4 billion over ten years by imposing a prospective payment system. This makes it less likely that nursing homes will be able to make up for any shortfalls in Medicaid payments by increasing their revenues from Medicare).

• Hospital Payment Levels. The legislation also repeals the Boren amendment "reasonable and adequate" requirement with respect to the rates that states pay for inpatient hospital services covered under Medicaid. Effective October 1, 1997, states will have the discretion to set rates that do not meet this minimum standard, so long as they provide for a "public process" comparable to that required with respect to nursing home payment rates. (This "public process" requirement appears to apply to rates for both inpatient and outpatient hospital services). Whatever final rates states decide to set, they still will be required to make additional payments to DSH hospitals (subject to the new state-specific limits on federal DSH funding). CBO estimates that repeal of the Boren amendment with respect to hospitals will achieve about $0.5 billion in federal savings over five years and $2.8 billion over ten years. As in the case of nursing home rates, CBO assumes that payment rates to hospitals will increase more slowly due to the industry's loss of litigation leverage under the Boren amendment.
  
  The repeal of the Boren amendment with respect to hospitals is unlikely to have much practical effect in geographic areas where most Medicaid beneficiaries are enrolled in managed care organizations (MCOs). That is because, under prior law, MCOs that contracted with Medicaid were not required to pay hospitals using rates consistent with the Boren amendment for services delivered to their enrollees. However, in areas where most Medicaid beneficiaries still receive covered services on a fee-for-service basis, the repeal of the Boren amendment could lead over time to extended freezes of or substantial reductions in hospital payment rates. The fiscal effect of such freezes or reductions would be greatest on those facilities serving the largest numbers of Medicaid beneficiaries. If DSH payments to these facilities are not adjusted to compensate for reimbursement shortfalls, the scope and quality of services available at high-Medicaid-volume hospitals could be compromised.

• Health Center (FQHC and RHC) Payment Levels. State Medicaid programs are currently required to cover primary care and other outpatient services delivered by community and migrant and Indian health centers (referred to as Federally-qualified health centers, or FQHCs) and by rural health clinics (RHCs). States also are required to pay FQHCs and RHCs 100 percent of the cost of providing their services to Medicaid patients. There is a parallel requirement under Medicare. The legislation maintains the requirement that states include FQHC and RHC services in their Medicaid benefit packages but phases out the 100 percent cost reimbursement requirement. The phase-out begins in fiscal year 2000, when states are allowed to pay only 95 percent of costs, continues through fiscal year 2003, when states are allowed to pay only 70 percent of costs, and ends with the repeal of the requirement on October 1, 2003. CBO estimates federal savings of $0.3 billion over five years and $1.3 billion over ten years from this provision. This implies a reduction in combined federal and state Medicaid payments to FQHCs and RHCs of $0.5 billion over the next five years. FQHCs are unlikely to be able to make up these reimbursement losses from their annual Public Health Service Act grants from the federal government due to the tight spending caps the budget legislation imposes on total federal expenditures for non-entitlement programs. This will make it increasingly difficult for FQHCs to provide needed care to the uninsured low-income populations that they currently serve.

New Medicaid Spending

The legislation also contains some changes to the Medicaid program that will increase federal Medicaid expenditures. These fall into three broad groupings: (1) restorations of Medicaid coverage for certain disabled children and legal immigrants; (2) options for states to expand Medicaid coverage for children; and (3) increases in federal Medicaid matching payments to certain states and territories. The legislation also establishes a new block grant to states funded with Medicare dollars that is intended to help defray the cost of Medicare Part B premiums for certain low-income Medicare beneficiaries.

• Restoration of Medicaid Coverage for Disabled Legal Immigrants. The most costly of the new Medicaid spending provisions is the restoration of Supplemental Security Income (SSI) eligibility — and therefore Medicaid coverage — for all low-income immigrants legally in the country as of August 22, 1996 who were elderly or disabled and receiving SSI benefits as of that date or who subsequently become disabled and qualify for SSI. This represents a reversal of the provisions in the 1996 welfare law that terminated SSI (and in many cases Medicaid) eligibility for legal immigrants, with certain exceptions. CBO estimates that this Medicaid restoration will affect about 110,000 legal immigrants this coming fiscal year and will increase federal Medicaid spending by $2 billion over five years and $3.5 billion over ten years. (The welfare law's five-year ban on eligibility for Medicaid coverage for immigrants, other than refugees and asylees, who enter the country legally after August 22, 1996 is not altered by the legislation and remains in force.

• Restoration of Medicaid Coverage for Certain Disabled Children. The 1996 welfare legislation narrowed the definition of childhood disability for purposes of determining eligibility for SSI benefits. A minority of the disabled children who are expected to lose SSI eligibility due to the more restrictive definition would not be able to qualify for continued Medicaid coverage on a basis other than receipt of SSI. The new legislation addresses this issue by requiring states to extend Medicaid coverage, retroactive to July 1, to all disabled children who were receiving SSI benefits as of the date of enactment of the welfare law (August 22, 1996) and who would continue to be eligible for SSI were it not for the more restrictive disability definition. CBO estimates that under this provision, Medicaid coverage will be maintained or restored for about 20,000 disabled children who otherwise would lose coverage at a cost to the federal government of $0.1 billion over ten years.

• Optional 12-month Continuous Eligibility for Children. Under current law, states must redetermine the eligibility of a Medicaid beneficiary whenever the beneficiary's financial circumstances change. Because monthly or even weekly income fluctuations are common in low-income families, this requirement has contributed to frequent interruptions in Medicaid coverage for children. (CBO estimates that children stay enrolled in Medicaid for about nine months in any year). The new legislation gives states the option to extend Medicaid coverage to children under age 19 for up to 12 months after a determination of eligibility regardless of any intervening change in circumstances. CBO estimates this option will increase the average number of children enrolled in Medicaid in a year by 130,000, at a cost to the federal government of $0.7 billion over five years and $1.6 billion over ten years.

• Optional "Presumptive" Eligibility for Children. The legislation gives states the option of extending Medicaid coverage to children from the time they are found to be "presumptively" eligible for Medicaid until the state Medicaid agency makes a final determination as to whether they are eligible for Medicaid. (Under prior law, states had this option only with respect to pregnant women during the prenatal period). States can designate children's hospitals, FQHCs, and other child health providers, as well as Head Start programs, child care agencies, and WIC agencies, to make these "presumptive" eligibility determinations and assist families in filing applications for Medicaid. Experience in Massachusetts indicates that the "presumptive" eligibility process can be an effective outreach strategy for increasing enrollment of eligible children in Medicaid.⁽¹⁷⁾
  
  CBO estimates that this provision will increase the number of children enrolled in Medicaid by 70,000 per year at a cost of $0.4 billion over five years and $0.9 billion over ten years. These expenditures represent the costs of Medicaid coverage after a final eligibility determination is made. CBO also estimates there will be an addition $0.1 billion in federal costs over five years for the Medicaid services delivered between the time a child is found to be "presumptively" eligible and the time a final determination of eligibility is made. Under the legislation, the federal expenditures incurred in a state during this "presumptive" eligibility period are deducted from the state's child health block grant allotment.

• Increased Medicaid matching payments to certain States and Territories. The legislation permanently raises the federal Medicaid matching rate for the District of Columbia from the current 50 percent level to 70 percent, at a cost of $0.9 billion over five years and $2.3 billion over ten years. The legislation also raises the federal Medicaid matching rate for Alaska from 50 percent to 59.8 percent for the next three fiscal years at a cost to the federal government of $0.2 billion. In addition, the legislation provides $25 million for each of the next four years to reimburse the 12 states with the highest numbers of illegal immigrants⁽¹⁸⁾ for costs they (or their counties) incur in delivering emergency health services to these individuals. The cost of this provision is $0.1 billion over five years. Finally, the legislation exempts the state of New York from the application of provisions in current law designed to assure the legitimacy of any taxes a state imposes on health care providers to raise revenues to satisfy the state's Medicaid matching requirements. CBO estimates that this provision, which affects provider tax revenues New York collected prior to June 1, 1997, will cost the federal government $0.2 billion over five years. On August 11, President Clinton canceled this provision under the Line Item Veto Act.

• Medicare Part B Premium Block Grant. The legislation raises the monthly Part B premium from $43.80 this year to $67.00 in 2002 (compared to $51.50 under prior law). States are currently required to pay the costs of Part B premiums for all Medicare beneficiaries with incomes below 120 percent of the poverty line ($9,468 for an individual, and $12,732 for a couple) and countable resources of less than $4,000. The May budget agreement stipulated that $1.5 billion should be provided "to ease the impact of increasing Medicare premiums on low-income beneficiaries." Under CBO estimates, this amount is sufficient to raise the income threshold for this entitlement to premium assistance from 120 percent to 150 percent of the poverty line by 2000 and to maintain it at that level with the federal government assuming the entire cost.
  
  The new legislation, however, does not provide this protection. ⁽¹⁹⁾ Instead, it establishes a block grant to the states with $1.5 billion in funding from the Medicare Part B Trust Fund over the next five years. The funds are intended to be used to pay the costs of Part B premiums for Medicare beneficiaries between 120 and 135 percent of the poverty line and countable resources of less than $4,000.⁽²⁰⁾ No individual Medicare beneficiary in this block grant income corridor is entitled to premium assistance; the legislation stipulates that states choosing to participate in this block grant must limit the number of beneficiaries to whom they extend premium assistance on a "first come, first served" basis.
  
  The legislation provides no funding for the block grant beyond fiscal year 2002, at which time this premium assistance will presumably end. Under the new legislation, Part B premiums continue to increase from $67.00 in 2002 to $105.40 in 2007. The $1.5 billion in funding for the block grant represents less than two percent of the ten-year savings of $92.7 billion resulting from the legislation's increases in the Part B premium.

Changes in Other Programs that Raise Medicaid Costs

A significant amount of the new federal Medicaid spending in the legislation results from provisions that create or amend other programs. In fact, the single largest Medicaid spending item in the legislation, accounting for $8.3 billion in costs over ten years, is an increase in the federal Medicaid costs for premium assistance provided to poor and near-poor Medicare beneficiaries. Federal costs for this premium assistance will automatically rise as a result of provisions in the legislation that increase the Medicare Part B premium.

• Medicare Part B Premium Increase. Under current law, states are required through their Medicaid programs to pay the costs of monthly Part B premiums for Medicare beneficiaries with incomes below 120 percent of the poverty line and countable resources of less than $4,000 and any other Medicare beneficiaries who also are eligible for Medicaid benefits. CBO estimates that in 1996, some 4.9 million individuals — about 12 percent of all Medicare beneficiaries — fell into one of these premium assistance categories and that by 2002, this number will increase to 6 million, or 15 percent of all Medicare beneficiaries.⁽²¹⁾ The federal government pays, on average, 57 percent of the Medicaid premium assistance costs for these Medicare beneficiaries. The increase in the Medicare Part B premium contained in the legislation will raise the cost of Part B premium assistance to the Medicaid program. CBO estimates the federal share of the increased cost for this premium assistance will total $1.3 billion over five years and $8.3 billion over ten years.

• Child Health Block Grant. The second largest Medicaid spending item in the legislation — totaling $5.5 billion over ten years — is the effect CBO estimates the new child health block grant will have on participation of eligible children in Medicaid. States opting to receive child health block grant funds are required to inform low-income families of the coverage they offer through the block grant. States have a choice of offering coverage with block grant funds through their state Medicaid programs or through other state health insurance programs. In states that use block grant funds to offer coverage through state programs other than Medicaid, the legislation requires that states ensure those children found through outreach activities who are eligible for Medicaid are enrolled in Medicaid. CBO estimates this "outreach effect" will result in an increase in Medicaid enrollment of about 460,000 children each year, at an additional federal cost of $2.4 billion over five years and $5.5 billion over ten years.

• Veterans' Pensions in Nursing Homes. Under current Medicaid law, nursing home residents who qualify for Medicaid must apply all but a small portion of their monthly income from pensions, Social Security, and investments toward the cost of their care. Medicaid pays the difference between the amount the beneficiary contributes and the nursing home's Medicaid reimbursement rate. Under current veterans' law, veterans' pensions are limited to $90 per month for any veteran without a spouse or child (and for any survivor of a veteran) who is eligible for Medicaid and resides in a nursing home. The veteran is allowed to retain this $90 payment for personal needs rather than apply it toward the cost of nursing home care. This provision, which affects an estimated 16,000 veterans and 27,000 survivors, was due to expire on September 30, 1998. The new legislation extends this expiration date to September 30, 2002. Because veterans and their survivors will contribute less toward the cost of their care than they would if they received their full pensions and were subject to the same rules as other Medicaid beneficiaries, the Medicaid program will pay more on their behalf. CBO estimates the additional federal Medicaid cost at $1.1 billion over five years. This federal cost offsets federal savings of $1.8 billion over five years accruing to the Department of Veterans Affairs from lower pension payments; CBO estimates net federal savings from this provision at $0.7 billion over five years. ⁽²²⁾

III. Medicaid Managed Care Provisions

Missing from the gross Medicaid savings items listed in Table 1 is any reference to the legislation's extensive changes regarding managed care. CBO does not expect the legislation's Medicaid managed care provisions is reduce federal Medicaid costs.⁽²³⁾ The absence of any significant budget effect masks the potential impact that the new legislation's managed care provisions are likely to have on Medicaid beneficiaries, especially children.

The managed care provisions will enable states to redefine the terms of health care coverage for most of the 22 million children eligible for Medicaid by identifying the MCOs in which they will be enrolled and specifying through contract the services the MCOs are required to offer to these enrollees. If, as seems likely, states make use of this new flexibility, the number of children affected by these provisions is likely to exceed substantially the 2.7 million children that CBO estimates will be covered through state health insurance programs under the new child health block grant. As Sara Rosenbaum and her colleagues at the George Washington Center for Health Policy Research have observed, the specification and enforcement of the terms of the contract between a state and an MCO can have profound implications for the access of Medicaid beneficiaries to covered services.⁽²⁴⁾ For example, MCOs control the access of their Medicaid enrollees to the core Medicaid children's benefit, early and periodic screening, diagnostic, and treatment (EPSDT) services. A recent HHS Inspector General analysis of 12 Medicaid MCOs in 10 states concluded that 60 percent of eligible children enrolled in Medicaid MCOs receive no EPSDT services.⁽²⁵⁾

Prior to the enactment of the new legislation, states already had substantial discretion in using various forms of managed care to deliver covered services to Medicaid beneficiaries. According to the Health Care Financing Administration, 13.3 million Medicaid beneficiaries, or 40 percent of all Medicaid eligibles, were enrolled in managed care plans as of June 30, 1996, up from 9.5 percent of all beneficiaries in 1991.⁽²⁶⁾ The large majority of these enrollees — 85 to 90 percent in CBO's estimation — were children and women of child-bearing age. Few states have in the past enrolled significant numbers of elderly or disabled beneficiaries in Medicaid managed care, although many states are now making efforts to enroll these relatively high-cost populations.

The new legislation gives states broad flexibility to require most Medicaid beneficiaries to enroll in MCOs that do business only with Medicaid. This additional flexibility is likely to accelerate current Medicaid managed care enrollment trends. As it does, the proportion of federal Medicaid benefits dollars flowing through MCOs will increase substantially. (Even before the enactment of the Balanced Budget Act, CBO projected that federal matching payments to MCOs would increase at an average annual rate of over 15 percent between 1996 and 2002.⁽²⁷⁾ The rapid expansion in Medicaid spending on managed care will in turn create significant commercial opportunities for entrepreneurs⁽²⁸⁾ and major management challenges for the federal government and the states.⁽²⁹⁾

Enrolling Medicaid beneficiaries in MCOs that do business only with Medicaid

In contrast to the legislation's Medicare provisions, which offer voluntary enrollment in MCOs as one of several coverage choices to Medicare beneficiaries, the basic thrust of the legislation's Medicaid managed care provisions is to allow states to require most Medicaid beneficiaries to enroll in Medicaid managed care organizations (MCOs) or in Primary Care Case Managers (PCCMs).⁽³⁰⁾ In urban areas, a state will be allowed to limit a beneficiary to a choice between two MCOs, a choice between two PCCMs, or a choice between an MCO and a PCCM. In rural areas, the state no may restrict the beneficiary to one MCO or to one PCCM, so long as the MCO or PCCM offers the beneficiary a choice between two physicians or two case managers.

Of particular significance, the legislation allows states to restrict beneficiary enrollment to MCOs or PCCMs that contract exclusively with Medicaid and have no other enrollees. Under previous law, federal Medicaid funds were not available for state payments to an MCO if 75 percent or more of the MCO's enrollees were eligible for Medicaid or Medicare. This "75/25 rule" was enacted over 30 years ago in response to widespread marketing abuses and diversion of federal Medicaid funds by managed care plans in California. To enable Medicaid beneficiaries to protect themselves against MCO denials of covered services, Congress also required that beneficiaries enrolled in MCOs be allowed to disenroll without cause upon one month notice. States could obtain waivers of these provisions from the Secretary of Health and Human Services, but only as part of a comprehensive statewide demonstration project under section 1115 of the Social Security Act.⁽³¹⁾

The new legislation repeals both the "75/25 rule" and the "one month disenrollment" rule and allows states, without obtaining a waiver from the Secretary, to "lock in" beneficiaries to a particular MCO or PCCM for up to 12 months. Beneficiaries will be able to disenroll during the "lock in" period only if they can show cause to the satisfaction of the state. The MCOs or PCCMs with which states contract will not be required to do business with employers or with Medicare.

Only three groups of beneficiaries are exempt from a state's requirement that Medicaid beneficiaries enroll in MCOs: (1) children with special needs, including children receiving SSI benefits and children receiving foster care or adoption assistance under Title IV-E of the Social Security Act; (2) Medicare beneficiaries, including both "dual eligibles" and Qualified Medicare Beneficiaries; and (3) Indians.⁽³²⁾ Individuals in these groups may enroll voluntarily in MCOs or PCCMs with which the state contracts. The legislation does not exempt from mandatory enrollment other vulnerable populations who may have particular difficulty accessing needed care in an MCO, such as migrant farmworker families and homeless individuals. (States will be able to seek waivers of this prohibition against mandatory enrollment from the Secretary under the section 1115 statewide demonstration authority. States will also be able to seek permission from the Secretary to require these groups of beneficiaries to enroll in MCOs or PCCMs under the waiver authority at section 1915(b) of the Social Security Act.)

Limiting the number of qualified MCOs that may participate

In addition to allowing states to require most Medicaid beneficiaries to enroll in MCOs without obtaining a waiver from the Secretary, the legislation also allows states to limit the number of MCOs with which it will contract to deliver care to Medicaid beneficiaries. Subject to the minimum "choice of two" rule described above, the legislation authorizes states to restrict the number of contracts with MCOs or PCCMs "if such restriction does not substantially impair access to services." This policy stands in contrast to the rules the new legislation applies to Medicare, under which all entities that meet Medicare qualifications may participate and offer coverage to Medicare beneficiaries. (Both the House and Senate bills contained language allowing any qualified entity to participate in Medicaid as an MCO or PCCM, but this language was dropped in conference.)

This flexibility, if used by the states, could put the integrity of the contracting process at risk in some cases. By enabling states to refuse participation by MCOs that are qualified and are willing to accept the program's payment rates, the legislation may create troublesome incentives for MCOs. The MCO owners and managers in states that limit the number of MCOs participating will know that to capture some or all of the Medicaid market, they do not have to compete for business among beneficiaries on the basis of the accessibility or quality of care. Instead, they have to compete for one of a limited number of Medicaid managed care contracts to be let by the state that will confer geographic franchises on the winners. This competition could occur on the basis of price — which organization tenders the lowest bid. In some cases, however, it could occur on the basis of influence — which organization has the best access to Medicaid contracting officials, key state legislators, or the Governor. Competition for a limited number of geographic franchises awarded by the state is less likely to result in the availability of quality coverage to Medicaid beneficiaries than competition among all qualified plans for beneficiaries. The legislation applies federal conflict-of-interest standards to state officials involved in Medicaid managed care contracting and requires prior approval by the Secretary of HHS of all Medicaid managed care contracts in excess of $1 million. Whether these safeguards will be sufficient to protect the integrity of the state contracting process remains to be seen.

Protecting Medicaid beneficiaries against underservicing by MCOs

Enrollment in managed care puts beneficiaries at risk for "underservicing" — the delay or denial of covered, medically necessary care. GAO has noted that, "[i]n contrast to fee-for-service care — where the incentive is to oversupply services to increase revenues — capitated managed care, with its fixed payment system, contains incentives to provide fewer services to maximize short-term profits."⁽³³⁾ This risk of underservicing is elevated where a beneficiary is required to enroll in an MCO that enrolls only Medicaid eligibles and where the beneficiary is prohibited from disenrolling (other than for cause) for as long as 12 months. In such circumstances, if the state does not have sufficient monitoring capacity, or if the state does not want to enforce compliance with statutory and contractual requirements against an MCO because the MCO, eager for market share, has accepted a very low rate, the MCO's incentives to provide fewer services may prevail, and beneficiaries enrolled in such MCOs may as a practical matter be without an effective remedy.

The new legislation contains a number of provisions intended to protect Medicaid beneficiaries enrolled in MCOs from the delay or denial of covered services.

• The legislation requires that contracts between the state Medicaid agency and the MCO specify the benefits the MCO is responsible for providing and require the MCO to make this information available to its enrollees on request. This will enable beneficiaries to know what services they are entitled to receive from the MCO. The legislation bars MCOs from prohibiting their affiliated physicians from advising a patient concerning the tests or procedures or treatment that the physician believes the patient needs. The legislation requires MCOs to establish internal grievance procedures under which beneficiaries can challenge the denial of coverage or payment. It also leaves undisturbed the prior law entitlement of Medicaid enrollees to a timely administrative "fair hearing" outside of the MCO before an impartial hearing officer in the event of a denial of a medically necessary covered service. This right to a "fair hearing" is constitutional in nature and applies regardless of whether a beneficiary elects to invoke the internal MCO grievance procedures. ⁽³⁴⁾

• The legislation strengthens the prior law requirement that MCOs contracting with Medicaid be subject to an annual external review of the quality of care they provide. These reviews must be performed by an entity independent of the state Medicaid agency that selected the MCO and required beneficiaries to enroll in it. In the past, these reviews have been an important source of data that has allowed investigative journalists and consumer advocates to document underservicing and poor quality care on the part of particular Medicaid MCOs.⁽³⁵⁾ The legislation requires that these reviews focus on "quality outcomes and timeliness of, and access to, the items and services for which the organization is responsible under the contract" with the state. Results of each external independent review are to be available to, among others, enrollees and potential enrollees. After January 1, 1999, these reviews must be performed using federal protocols developed for the Secretary of HHS by an independent quality review organization. If competently developed and implemented, these protocols could promote consistency of reviews among MCOs and comparability of results within and among different states. This information is likely to be crucial to ensuring the quality of MCO services and the integrity of the state contracting process.

• The legislation requires that states establish intermediate sanctions (i.e., other than contract termination) to be applied if a Medicaid MCO "fails substantially to provide medically necessary items and services that are required to be provided to an enrollee covered under the contract," including suspension of new enrollment, permitting enrolled beneficiaries to disenroll without cause, suspending capitation payments to the MCO, and imposing civil money penalties. Of course, the establishment of intermediate remedies does not ensure that a state will apply them when appropriate. But because the legislation prohibits states from terminating a Medicaid contract with a noncomplying MCO without a prior hearing, these intermediate sanctions will provide state officials with important practical alternatives to a lengthy pre-termination hearing for enforcing compliance with contractual or statutory requirements.

• The legislation allows states to impose deductibles, copayments, or other cost-sharing on Medicaid beneficiaries enrolled in MCOs, but only to the same extent that states are allowed to impose cost-sharing requirements on Medicaid beneficiaries not enrolled in MCOs. Eligible pregnant women and children under 18 enrolled in MCOs are completely exempt from any cost-sharing requirements for any services. States may impose cost-sharing requirements on other groups of beneficiaries for services other than emergency care, family planning, inpatient hospital care, or nursing home care, so long as the copayments or coinsurance requirements are "nominal" as defined by the Secretary of HHS in regulation. Of particular importance, MCOs and their subcontracting providers, like their fee-for-service counterparts, may not withhold needed services from a beneficiary due to inability to pay a required cost-sharing amount. Beneficiaries remain liable for any unpaid cost-sharing amount that was lawfully imposed.⁽³⁶⁾

End Notes

1. CBO, Budgetary Implications of the Balanced Budget Act of 1997, August 12, 1997, Summary Table.

2. See Andy Schneider and Sam Elkin, The Administration's Medicaid Proposals, Center on Budget and Policy Priorities, April 17, 1997.

3. For a detailed description of all the Medicaid provisions see Sara Rosenbaum and Julie Darnell, A Comparison of the Medicaid Provisions in the Balanced Budget Act of 1997 with Prior Law, George Washington University Center for Health Policy Research, prepared for the Kaiser Commission on the Future of Medicaid, forthcoming.

4. The Medicaid expansions and other social program initiatives in the new legislation are dwarfed by the tax cuts enacted as part of the budget agreement. By 2007, the estate tax reductions, which will benefit the heirs only of the wealthiest two percent of decedents, will alone cost more than all of the Medicaid and other social program initiatives in the budget legislation combined. Robert Greenstein, Looking at the Details of the New Budget Legislation: Social Program Initiatives Decline over Time While Upper-Income Tax Cuts Grow, Center on Budget and Policy Priorities, August 12, 1997.

5. See Cindy Mann and Jocelyn Guyer, Overview of the New Child Health Block Grant, Center on Budget and Policy Priorities, August 6, 1997. The spending level often attributed to the child health initiative is $24 billion. However, the block grant itself provides for only $20.3 billion in federal payments to the states over the next five years. CBO estimates that the provisions in the subtitle of the legislation where the block grant is authorized will result in an additional $2.9 billion in federal Medicaid spending over the next five years, for a total of $23.2 billion. CBO, Budgetary Implications of the Balanced Budget Act of 1997, August 12, 1997, Table 4E.

6. Cindy Mann and Laura Cox, The Medicaid Program Has Been The Program of Choice for Most States that Have Expanded Coverage for Uninsured Children, Center on Budget and Policy Priorities, June 4, 1997.

7. In Robert Greenstein, Looking at the Details of the New Budget Legislation, Center on Budget and Policy Priorities, August 12, 199 7, Medicaid savings are described as $14 billion in the first five years and $39.9 billion in the second five years. This calculation reflects Medicaid savings exclusive of the effects of the Medicaid initiatives, which for purposes of that report are treated as part of the legislation's social program expansions. In addition, that report follows CBO's accounting convention of netting out the Medicare outlay effects of the Medicaid provision relating to cost-sharing for low-income Medicare beneficiaries (QMBs). In this analysis of federal Medicaid spending, these Medicare costs ($2.9 billion over the first five years and $4.4 billion over the second five years) are not considered.

8. See Andy Schneider, Medicaid and Child Health Provisions of the Bipartisan Budget Agreement, Center on Budget and Policy Priorities, May 28, 1997.

9. The legislation also repeals the current law requirement that states annually submit to the Secretary of HHS data demonstrating that their Medicaid payment rates for obstetrical and pediatric services are sufficient to assure that Medicaid-eligible children and pregnant women have access to obstetricians, pediatricians, and other primary care practitioners comparable to that of the general population. CBO does not attribute any federal savings to this repeal.

10. CBO, Preliminary Staff Estimate of Potential Savings from Medicaid Flexibility Options, April 8, 1997.

11. See Andy Schneider, Stephen Cha, and Sam Elkin, Overview of Medicaid "DSH" provisions in the Balanced Budget Act of 1997, P.L. 105-33, Center on Budget and Policy Priorities for the Kaiser Commission on the Future of Medicaid, August, 1997.

12. For example, if the Medicare fee for a physician visit is $100, Medicare will pay $80 and the beneficiary's coinsurance obligation is $20. A state which reimburses for physician visits at a rate of $70 per encounter would have no obligation to pay any part of the beneficiary's coinsurance amount. See Andy Schneider, The Senate Budget Bill Would Shift $8.8 Billion in Cost-Sharing onto Poor Medicare Beneficiaries and the Health Care Providers that Treat Them, Center on Budget and Policy Priorities, July 23, 1997.

13. CBO estimates net federal savings from this provision at $2.1 billion over five years and $5.3 billion over ten years due to increased Medicare costs resulting from "behavioral responses" by providers.

14. The full statement of the Boren amendment is that rates must be "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable State and Federal laws, regulations, and quality and safety standards." In the case of nursing home services, the rates must also be "determined in accordance with methods and standards developed by the State which....take into account the costs (including the costs of services required to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each resident eligible for benefits under this title) of complying with [the nursing home reform quality standards]...."

15. The Governors have called upon the Congress to "reconsider" the nursing home reform "mandates" because "the statutory language permits limited state flexibility and puts Congress in the position of micro-managing the program." NGA, EC-8. Medicaid, revised, Winter Meeting 1997.

16. See Gordon Bonnyman, "Deciding Who Swims with the Sharks: Boren Amendment Litigation," 26 Clearinghouse Review 302-305 (1992).

17. Donna Cohen Ross, Presumptive Eligibility for Children: A Promising New Strategy for Enrolling Uninsured Children in Medicaid, Center on Budget and Policy Priorities, August 5, 1997.

18. Based on October, 1996 estimates by the Immigration and Naturalization Service, these states (in order of most to fewest illegal immigrants) are: California, Texas, New York, Florida, Illinois, New Jersey, Arizona, Massachusetts, Virginia, Washington, Colorado, and Maryland.

19. See Andy Schneider, The Senate Budget Bill Does Not Adequately Protect Low-income Medicare Beneficiaries from Increasing Part B Premium Costs, Center on Budget and Policy Priorities, July 10, 1997.

20. Block grant funds also may also be used to pay, for beneficiaries with income between 135 and 175 percent of the poverty line, the portion of the increase in the Part B premium that is attributable to the shift of the home health benefit from Part A of Medicare to Part B. This amount is projected by CBO to be $8.10 per month in 2002. It is unlikely that many Medicare beneficiaries will be willing to subject themselves to income and resource testing in order to qualify for such nominal amounts of assistance.

21. CBO, Behind the Numbers: An Explanation of CBO's January 1997 Medicaid Baseline, April 1997, p. 11.

22. The legislation also contains a provision that will reduce the amount Medicaid pays toward the cost of nursing home care for certain veterans, at a savings to the federal government of $0.1 billion over five years and $0.2 billion over ten years. The provision would count aid and attendance benefits in excess of $90 per month paid to veterans residing in state veterans homes as income for purposes of computing the amount to be applied to the cost of care by veterans in these facilities who are eligible for Medicaid.

23. CBO attributes a slight federal cost — $0.1 billion over five years and $0.3 billion over ten years — to the legislation's requirement that MCOs contracting with Medicaid pay for hospital emergency room visits whenever a "prudent layperson" would seek emergency care.

24. Sara Rosenbaum et al., Negotiating the New Health Care System: An Analysis of Contracts Between State Medicaid Agencies and Managed Care Organizations, George Washington Center for Health Policy Research, February, 1997.

25. HHS IG, Medicaid Managed Care and EPSDT, Report No. OEI-05-93-00290, May 1, 1997. Participation of eligible children in the EPSDT benefit has historically been low in both fee-for-service and managed care. To improve the participation rate, the Congress in 1989 directed the Secretary of HHS to establish annual EPSDT participation goals for each state. The goal set by the Secretary is that, as of 1995, each state provide 80 percent of the annual screening services recommended by the American Academy of Pediatrics.

26. HCFA, National Summary of Medicaid Managed Care Programs and Enrollment, June 30, 1996.

27. CBO Memorandum, Behind the Numbers: An Explanation of CBO's January 1997 Medicaid Baseline, April 1997, p. 9.

28. The Medicaid managed care business can be extraordinarily lucrative. A recent report on a Medicaid MCO operating in Philadelphia found that between 1989 and 1996, the organization has paid its four founders $26.8 million in bonuses and has paid $36 million in management fees to affiliates controlled by the owners. Craig McCoy and Karl Stark, "An HMO finds lots of money in poverty," Philadelphia Inquirer, August 3, 1997.

29. Among these management issues are the "revolving door" issues raised by state Medicaid officials who accept employment or consulting arrangements with MCOs contracting with state Medicaid programs. See Fred Schulte, Steady stream of state officials joining HMOs creates concerns about conflict of interest, State Health Watch, June 1997.

30. In general, under the legislation a Medicaid MCO covers hospital as well as physician and laboratory services. A PCCM, in contrast, coordinates and monitors the provision of physician and laboratory services to enrollees.

31. The "75/25" rule was initially enacted in 1976 as a "50/50" rule — i.e., no more than 50 percent of the MCO's enrollees could be eligible for Medicaid or Medicare. In 1981 Congress altered this rule to "75/25."

32. The legislation allows states to require eligible Indians to enroll in Medicaid MCOs or PCCMs if the MCO or PCCM is an Indian Health Service entity, a tribally operated health program, or an urban Indian health program.

33. GAO, Medicaid Managed Care: Challenge of Holding Plans Accountable Requires Greater State Effort, May, 1997, p. 7.

34. Daniels v. Wadley, 926 F. Supp. 1305 (M.D. Tenn., May 14, 1996).

35. Fred Schulte and Jenni Bergal, "The Medicaid Game: Poor care, Big Profits," Fort-Lauderdale Sun-Sentinel , November, 1995.

36. Providers subcontracting with MCOs may bill Medicaid beneficiaries for any unpaid cost-sharing amounts that the state has lawfully imposed. The legislation, however, prohibits subcontracting providers from balance billing beneficiaries for the difference between the rate the provider agreed to accept from the MCO for serving the Medicaid enrollee and the provider's usual fee.