May 28, 1997
Medicaid and Child
of the Bipartisan Budget Agreement
The budget agreement requires $13.6 billion in net reductions in federal Medicaid spending over the fiscal year 1998-2002 period, and $65.5 billion in net reductions over the fiscal year 1998-2007 period. However, only the five-year savings target is enforced through reconciliation instructions to the authorizing committees.(1) The agreement requires no net Medicaid savings in fiscal year 1998. Nearly three fourths of the $13.6 billion in net savings are required in the last two years of the five-year period. It also assumes new federal spending of $16 billion over this same five-year period on health care coverage for children. This new federal spending, which is not specified but could include new Medicaid spending, begins in fiscal year 1998.
This analysis describes what is known about the policy assumptions underlying the budget agreement. It finds that both the Administration and National Governors' Association (NGA) Medicaid budget policy proposals with respect to "disproportionate share" (DSH) hospital payments and additional state flexibility fall substantially short of achieving the net Medicaid savings called for in the agreement. It concludes that there will be pressure on both of the committees with jurisdiction over Medicaid the House Commerce Committee and the Senate Finance Committee to modify some of the terms of the budget agreement during the reconciliation process.
The budget agreement requires gross reductions in federal Medicaid spending totaling $17.8 billion over five years.
The $13.6 billion in five-year reductions are net of new federal Medicaid spending totaling $4.2 billion over this same period. Thus, the budget agreement requires gross federal Medicaid savings of $17.8 billion. As the accompanying table indicates, the new Medicaid spending is attributable to four proposals:
The budget agreement does not assume the enactment of a "per capita cap" on federal Medicaid payments to the states. Instead, it assumes reductions in federal Medicaid matching payments to disproportionate share (DSH) hospitals and savings from increased state flexibility.
The Administration's Medicaid budget would have imposed a "per capita cap" on federal Medicaid matching payments to states.(2) The budget agreement does not include this proposal. Instead, it assumes that the $17.8 billion in gross federal Medicaid savings will be achieved through a combination of reductions in federal Medicaid matching payments to disproportionate share (DSH) hospitals and savings resulting from additional state flexibility. The agreement does not identify what proportion of the total reductions it assumes from federal Medicaid DSH spending, and it does not specify precisely how these reductions are to be achieved. With respect to additional state flexibility, the agreement indicates only that these provisions include "repeal of the Boren amendment, converting current managed care and home/community-based care waiver process to State Plan Amendment, and elimination of unnecessary administrative requirements." No further policy guidance is provided.
The Administration's proposals to reduce payments to DSH hospitals and increase state flexibility will not achieve $17.8 billion in gross savings over five years.
The Administration's fiscal year 1998 budget included proposals to reduce federal Medicaid payments to DSH hospitals as well as proposals to increase state flexibility.(3) CBO estimated that the Administration's DSH proposal would have achieved savings of $16.5 billion over five years assuming the enactment of the Administration's per capita cap policy.(4) CBO has made clear, however, that in the absence of a per capita cap, it would reduce the savings attributable to reductions in federal DSH payments by 25 percent.(5) Applying this factor to the CBO estimate of the Administration's proposed reductions in Medicaid DSH payments shows that in the absence of a per capita cap, the Administration's DSH proposal would yield a reduction of $12.4 billion over five years.
CBO incorporated the savings from the Administration's state flexibility proposals into the $7.5 billion in savings it estimated to flow from the Administration's per capita cap proposal. CBO has not estimated the Administration's state flexibility proposals in the absence of a per capita cap. However, preliminary CBO staff estimates suggest that CBO would attribute no savings whatsoever to the Administration's managed care proposals, only $1.2 billion over five years to its proposals to repeal the "Boren amendment" requirement that states pay "reasonable and adequate" rates to hospitals and nursing facilities serving Medicaid beneficiaries, and only $0.4 billion over five years to the repeal of cost-based reimbursement for community and migrant health centers.(6) Thus, the total federal savings that CBO would attribute to the Administration's DSH and state flexibility proposals in the absence of a cap are likely to be much closer to $14.0 billion than to the $17.8 billion total in gross savings required under the agreement.(7)
The NGA's proposals to increase state flexibility will not achieve $17.8 billion in gross federal Medicaid savings over five years.
In March, the NGA testified before the Congress in opposition to both a Medicaid per capita cap and reductions in federal Medicaid DSH payments. The Governors argued that states could achieve $8 billion in federal Medicaid savings over the next five years through additional flexibility.(8) The Governors advanced a number of proposals, including greater authority to require beneficiaries to enroll in managed care organizations that serve only Medicaid patients; elimination of current reimbursement requirements relating to hospitals, nursing homes, and community and migrant health centers; increased cost-sharing by Medicaid beneficiaries; and additional fraud and abuse controls.
As CBO has noted, states have "a great deal of flexibility" under current law: "In addition to providing mandatory acute care and long-term care services, states have chosen to cover a wide array of optional services. They set reimbursement rates to providers and have broad discretion over the amount, duration, and scope of the services provided. That flexibility fosters a great deal of variation among state programs." (9) Because of this current law flexibility, CBO estimates that the additional flexibility proposals advanced by the NGA would yield federal savings of only $2.9 billion over five years. In CBO's view, "Medicaid spending levels are determined primarily by state choices, not by federal requirements, and our federal spending projections implicitly incorporate changes in benefit packages or efficiency gains that states will strive to make within the bounds of current law."(10)
The budget agreement includes Medicaid initiatives relating to legal immigrants and veterans that are not paid for by the gross Medicaid savings of $17.8 billion.
There are other proposals in the budget agreement that will increase federal Medicaid outlays. One of these would restore Medicaid (and SSI) eligibility to legal immigrants who entered the U.S. on or before August 22, 1996, and who are or become disabled. Another would extend from five to seven years the exemption from the ban on Medicaid (and SSI) assistance for refugees and asylees. A third proposal would extend the expiring current law limit on the amount of VA pension benefits that can be paid to eligible veterans who are residents in nursing homes and who qualify for Medicaid. (The limit means that the Medicaid program pays more because the veteran's full pension is not available to be applied to the cost of care in the nursing home before the Medicaid program begins to pay).
As indicated in the accompanying table, the combined five-year federal cost of these provisions would be $2.8 billion. Under the agreement, this cost would not be offset by federal Medicaid savings. Instead, this costs would be offset by other unspecified federal savings.
The budget agreement includes $16.0 billion in new federal spending over the next five years to reduce the number of uninsured children.
In response to bipartisan concern regarding the large number of children without health care coverage, the budget agreement provides an additional $16.0 billion over the next five years, and $38.9 billion over the next ten, for the stated purpose of extending coverage up to an additional five million children by 2002. As indicated in the accompanying table, the spending on child health coverage would start in fiscal year 1998. (The net Medicaid reductions are not required to be achieved until fiscal year 1999).
The budget agreement indicates that this $16.0 billion could be used for one or more of the following purposes:
The agreement provides no further detail on any of these options, deferring to the authorizing committees to draft the specific policy changes. The agreement stipulates only that the funds will be used "to expand coverage and services for low-income and uninsured children with a goal of up to five million currently uninsured children being served."
In the House, the $16.0 billion in new funding for child health coverage has been assigned to both the Committee on Commerce and the Committee on Ways and Means. The budget resolution does not allocate the funding between the two committees; it stipulates only that spending for this purpose reported by both committees may not exceed $2.3 billion in fiscal year 1998, $3.9 billion in fiscal year 2002, and $16.0 billion over the five-year period.(12) In the Senate, the child health funds are assigned to the Finance Committee.
During the budget reconciliation process, there will be pressure on the Medicaid authorizing committees to modify the budget agreement.
The reconciliation instructions set forth in the budget resolution direct the committees of jurisdiction the House Commerce Committee and the Senate Finance Committee to report changes in Medicaid law that will result in net reductions in federal Medicaid spending of $13.6 billion over five years. (13) As discussed above, the budget agreement assumes a combination of Medicaid initiatives and spending cuts that would, on net, achieve that result. However, the actual reconciliation instructions contained in the budget resolution, which can be enforced by the budget committees in both the House and the Senate, set forth only targets for federal outlays, not the particular policies in the agreement. In addition, the agreement itself leaves many important policy details unresolved. Finally, nearly all members of the committees of jurisdiction were not parties to the negotiations leading to the budget agreement.
There will be pressure from various quarters on the members of these committees to modify the terms of the budget agreement relating to Medicaid. For example, Governors from those states receiving large amounts of federal Medicaid DSH funds may urge that the level of gross savings from DSH be lowered. One way of lowering the required DSH savings would be to replace some of those savings with savings from state flexibility proposals. The difficulty with this approach is that, because states already have what CBO describes as "a great deal of" flexibility, it is not likely that CBO will attribute large savings to flexibility proposals. Another way of lowering the level of required DSH savings would be to postpone or reject altogether one or more of the Medicaid spending initiatives contemplated by the budget agreement. This would reduce the gross savings required to achieve the net savings target of $13.6 billion. Yet another way to lower the required DSH savings would be to reduce the amount of spending on child health care coverage contemplated by the agreement.(14) Proponents of this approach may argue that it would make little sense to cut federal Medicaid payments to states for DSH hospitals serving, among others, uninsured children while at the same time sending new funds to those same states (through Medicaid or through a mandatory capped grant program, or both) for children's health care coverage.
1. In the House version of the budget resolution, reconciliation targets are specified for fiscal year 1998, fiscal year 2002, and the five-year period through fiscal year 2002. Section 201(c)(4), H. Con. Res. 84. In the Senate version, targets are specified for fiscal year 2002 and for the five-year period, but not for fiscal year 1998. Section 104(a)(5), S. Con. Res. 27.
2. Center on Budget and Policy Priorities, The Administration's Medicaid Proposals, April 17, 1997, pp. 20-29.
3. Center on Budget and Policy Priorities, The Administration's Medicaid Proposals, April 17, 1997, pp. 16-19, 31-38.
4. CBO Staff Memorandum, Updated Estimate of the President's Medicaid/Children's Health Policies, May 5, 1997, Table 1.
5. CBO, Reducing the Deficit: Spending and Revenue Options, March, 1997, pp. 322-323.
6. CBO Staff Memorandum, Preliminary Staff Estimate of Potential Savings from Medicaid Flexibility Options, April 8, 1997.
7. This estimate may understate the shortfall. The Administration budget also proposed a $1.4 billion, five-year supplemental payment pool to help cover the costs of care delivered to Medicaid patients by community and migrant health centers following repeal of the requirement that states pay the full costs of caring from Medicaid patients. Offsetting the cost of this pool would require additional Medicaid reductions of $1.4 billion, raising the total gross Medicaid savings required under the Administration's policies to $19.2 billion over five years. The budget agreement does not specify repeal of the cost-based reimbursement requirement and does not include any supplemental payment pool for community and migrant health centers.
8. NGA, Statement of Governor Bob Miller and Governor Michael O. Leavitt on Medicaid Reform before the Senate Finance Committee, March 11, 1997, p. 4.
9. CBO Memorandum, Behind the Numbers: An Explanation of CBO's January 1997 Medicaid Baseline, April, 1997, p. 7.
10. CBO Staff Memorandum, Preliminary Staff Estimate of Potential Savings from Medicaid Flexibility Options, April 8, 1997, p. 1.
11. As reported by the Senate Budget Committee, the budget resolution contained the following sense of the Senate regarding children's health coverage: "It is the sense of the Senate that the provisions of this resolution assume that from resources available in this budget resolution, a portion should be set aside for an immediate 100 percent deductibility of health insurance costs for the self-employed. Full-deductibility of health expenses for the self-employed would make health insurance more attractive and affordable, resulting in more dependents being covered. The government should not encourage parents to forego private insurance for a government-run program." Section 303(b), S. Con. Res. 27.
12. Section 201(f), H. Con. Res. 84.
13. Section 201(c)(3), H. Con. Res. 84; section 104(a)(5), S. Con. Res. 27.
14. The House Budget Committee report states that the child health coverage funds "may not be used to decrease required savings," H. Rept. 105-100, p. 25. Neither the text of the budget agreement nor the Senate Budget Committee report, S. Rpt. 105-27, contains such language.
Other budget agreement analyses:
The Budget Agreement: An Overview
Analysis of the Tax Cuts Authorized in the Budget Agreement