November 19, 1997

Why Not Medicaid ?
Using Child Health Funds to Expand Coverage Through the Medicaid Program

by Cindy Mann



The Balanced Budget Act of 1997 will provide states with up to $20.3 billion in federal payments over the next five years to provide health care coverage to uninsured children. These funds can be used to extend coverage to more children through the Medicaid program, to create or expand a separate state program that provides coverage to children, or to support a combination of these two approaches. While some states have already decided whether to expand coverage through Medicaid or through a separate state program, most states have yet to resolve this fundamental structural question.

Factors Favoring the Medicaid Option

Arguments for and against a Medicaid expansion tend to focus on the Medicaid benefit package and the Medicaid entitlement and are sometimes driven more by ideology than by consideration of the fiscal and programmatic ramifications of the Medicaid and separate state program options. On balance, the case for using the new child health funds to expand coverage through the Medicaid program is strong.

More than 22 million children are already receiving health care coverage under state Medicaid programs. The simplest way for a state to extend coverage to more low-income children is to raise the state's current Medicaid eligibility limits. A Medicaid expansion avoids the need to create and administer a separate program to cover children whose incomes are just above current state Medicaid standards. No new state bureaucracy is created, and funds that could be used for coverage are not spent on duplicative administrative costs or on new systems that will be required to coordinate enrollment and transfers between the new program and the state's existing Medicaid program.

The Medicaid option offers states an important fiscal advantage over the separate state program route. Under a separate state program, if a state uses up its federal child health allotment before the end of the fiscal year — because either enrollment or health care costs have exceeded projections — no additional federal dollars will be available to share the cost of covering additional children. The state will have to either stop enrolling children (for example, by creating a waiting list), reduce costs by cutting back on the health care coverage available to children, or pay for all of the costs of covering additional children with state funds.

By contrast, under the Medicaid option, if a state's new federal child health block grant funds are exhausted before the end of the fiscal year, the state can still draw down federal dollars at the regular Medicaid matching rate to help cover the cost of serving additional eligible children. A state could elect to roll back eligibility for the "expansion group" under the Medicaid option, but if it chose not to do so, the federal government would bear at least half of the cost of serving all additional children.

Under the new legislation, the total amount of funds allocated for child health block grant payments to states drops sharply beginning in 2002. Unless states underspend their federal allocation in the early years in anticipation of the drop in the total federal allocation, those states that establish separate state programs could find themselves with significantly less federal dollars a few years into implementation.

This is much less of a problem under the Medicaid option, because regular federal Medicaid matching payments will be available once a state's child health allotment has been exhausted. Therefore, the total level of federal funds available in 2002 to states that expand coverage under Medicaid will not decline by nearly as much as for states that establish separate state programs. By providing a back-up source of federal matching funds that is not subject to a federal cap, the Medicaid option provides a cushion for states and assures that the scheduled drop in the level of the federal block grant allocation will not impede state efforts to cover uninsured children.

With one of every four children in the country covered under Medicaid, states will spend about $27 billion during fiscal year 1998 purchasing coverage for children through their Medicaid programs. This massive purchasing power offers states a significant bargaining advantage in negotiations with health plans and providers and can help states get the most value for their child health dollars.

Moreover, states' Medicaid bargaining power is likely to increase as a result of the recent repeal of the Boren amendment and other federal law provisions that constrained states' ability to negotiate provider payment rates. The new flexibility accorded states regarding managed care will further enhance states' bargaining position; states can now direct all of their Medicaid managed care business to a small number of managed care plans. In exchange for steering a very large volume of business to only a few plans, states are likely to be able to negotiate even lower rates with plans bidding for Medicaid managed care contracts.

States that set up separate, and much smaller, child health programs will not bring this market share advantage to the bargaining table when they negotiate payment rates for the new program. As a result, states may pay more for less coverage. While some states might be able to take some advantage of their Medicaid purchasing power under a separate state program by negotiating with plans and providers jointly with respect to both programs, states have little experience with joint purchasing ventures. The simplest and most direct way to leverage Medicaid's market share into better rates and conditions for payments is to expand coverage under Medicaid.

A separate state program created alongside the Medicaid program is likely to result in a fragmented and somewhat confusing system for providing coverage to children. Families will not always know which program their child may be eligible for, and states will have to create new systems to help assure that children are enrolled in the appropriate program. Coordination challenges will continue even after enrollment; program transfers will be required whenever changes in family income — or in other family circumstances that affect income, such as marital status — result in a child losing eligibility under one program while gaining eligibility under the other program. Transfers will be difficult to accomplish without a disruption in coverage and care, particularly if the two programs use different methods for calculating income or different enrollment periods or if they contract with a different group of health care providers. While some of the issues relating to coordination can be addressed with new systems and careful planning, a dual-program system invariably runs the risk that some children will not find their way to the right program and that many children will suffer unnecessary gaps in coverage.

The Medicaid option, by contrast, gives states the ability to blend their new child health dollars with their Medicaid funds to create a seamless system for child health coverage. This is precisely the approach states have been pursuing in other areas, such as child care and job training. A single-program approach is easier for families to understand and navigate and much simpler for states to administer. Outreach and enrollment is more straight-forward, fewer children are likely to fall through the cracks because their families did not know which program to apply for, and children whose family income fluctuates will not be bounced from one program to another. A single-program system promotes continuity of coverage and of care.

Many states have recognized the importance of extending Medicaid coverage to low-income parents, particularly in connection with their welfare-to-work initiatives. In the past, states have received federal reimbursement for extending such coverage through the waiver process. Now a new option for covering certain low-income working parents under Medicaid, which was enacted as part of the welfare law, is available to states without relying on waivers. To the extent that states are interested in offering Medicaid coverage to working parents in low-income families, it would make little sense to cover the children in these families under a separate program that has its own eligibility rules, a different application process, and a distinct provider network.

The creation of a separate state program that serves children who are not eligible for Medicaid could result in a two-tier system of providing health care coverage that divides children based on their family's income. The Medicaid program would serve the poorest children, and the new program would serve children with somewhat higher incomes. Particularly over time, this kind of dual-program system could weaken support for the coverage provided to poor children.

States that create a new health insurance program for a more middle-class constituency are likely to rely on more streamlined procedures and a simpler application process than many states now use in their Medicaid program. While states could carry over these same improvements to Medicaid, it is likely that the new program would distract attention and resources away from Medicaid, leaving Medicaid behind in terms of system improvements. Differences in how the two programs operate could further stigmatize Medicaid and discourage participation among Medicaid-eligible children. In addition, over time, the new program and Medicaid could compete for state funds, especially during economic downturns when state revenues contract; in that event, it is likely that the program serving poorer children would not fare as well as the program with the more middle-class constituency.

A single-program system in which children from a relatively broad range of incomes participate on a common basis is likely to attract and maintain broad political support. This is already the case in many of the states that have expanded coverage for children through the Medicaid program. Under a single-program system, there would be no inter-program competition for funds, and states could devote their attention and resources to adopting procedures that would improve services for all eligible children. In the long run, a system that covers poor children and children with somewhat higher incomes under the same program is likely to better serve all groups of children more adequately.


Reasons Offered Against Expanding Coverage Under Medicaid

Given the fiscal and programmatic advantages that a Medicaid expansion offers, why might a state consider establishing a separate state program? The arguments against a Medicaid expansion tend to fall within one or more of the following five areas:

In exchange for the open-ended federal commitment of funds, states must assure that all children who qualify for coverage under a state's Medicaid eligibility rules are allowed to enroll. Under Medicaid, states cannot create waiting lists or otherwise deny coverage to eligible children. The entitlement offers an assurance of coverage for eligible children, but it also raises the issue of whether a Medicaid expansion may force states to spend funds they may not be prepared to commit.

In the context of an optional state expansion of coverage, however, states need not be locked into spending more than they choose to spend. Since states themselves will set the limits of any Medicaid expansion, states determine the scope and extent of the guarantee of coverage. The federal entitlement simply assures that all children who fall within the state-established eligibility limits have access to coverage under the program.

States can seek to avoid cost overruns by establishing the limits of their Medicaid expansion consistent with spending projections and budgetary constraints. Capitated payment arrangements that now are a part of most states' Medicaid programs allow states to predict costs with much greater certainty than was possible when Medicaid paid providers on a strictly fee-for-service basis. Participation rates may be more difficult to forecast precisely, but states can draw on the experience of other states that already have expanded coverage for children at higher income levels.

In the event that cost projections turn out not to be correct, states have the authority to reduce the scope of their Medicaid expansion at any time in order to limit expenditures. While even a partial rollback in coverage might cause political difficulties for a state, it could be just as difficult, and perhaps more difficult, for a state to freeze enrollment and create a waiting list for children — steps states are likely to take under a separate state program if costs exceed what the state is willing to assume. A rollback in eligibility limits at least assures that the neediest children will be aided with the limited dollars available, while a freeze necessarily draws arbitrary distinctions among children. Children with higher incomes who happen to have applied earlier in the year would be covered, while other children with somewhat lower incomes who might have a greater need for health care coverage would remain uninsured.

Because Medicaid is sometimes viewed as a "welfare" program, some have argued that newly eligible children should be offered coverage through a different program that does not have a stigma. The stigma, however, does not exist in all states, and to the extent that it does exist, it can be addressed through improvements in program operations and outreach strategies.

Until the late 1980's children were eligible for Medicaid based on their eligibility for cash assistance. However, since 1989, Medicaid eligibility has been gradually "delinked" from welfare. The pace of change in the Medicaid program has accelerated recently with the enactment of the federal welfare law. As a result of the new law, all children, other than disabled children who receive SSI, are eligible for Medicaid based on their age and their family income, not their receipt of cash assistance. Since Medicaid eligibility now reaches far beyond cash assistance income eligibility levels, almost half of all children enrolled in Medicaid are not receiving welfare. Medicaid is the single largest source of health insurance coverage for all children with family incomes below 200 percent of the poverty line.

Medicaid's transformation, from an appendage of the welfare system to a health insurance program that covers one of every four children in the country, however, has not always been apparent to the public or to policymakers. The lack of information about children's eligibility for coverage under Medicaid has been identified as a key reason why a large number of Medicaid-eligible children who are not receiving welfare are not enrolled in the program. To address the need to inform the public about children's eligibility for coverage under Medicaid, communities throughout the country have begun to promote the "new" Medicaid program through marketing strategies and outreach campaigns. These efforts have been undertaken in many of the states that have expanded coverage to a broader range of children, and have been most successful when coupled with improvements in program operations that have simplified the Medicaid application, streamlined the application process, and allowed families easier access to the program in community settings other than welfare offices. In those states that have expanded Medicaid coverage, adopted systems changes that make it easier for low-income families to apply for Medicaid, and publicized the coverage for children available under the Medicaid program, the stigma has been limited substantially, if not eliminated altogether.

The new child health block grant funds allow states to expand Medicaid coverage to a broader range of children, breaking further the association between welfare and Medicaid and couple this expansion in coverage with the kind of systems improvements that states are already making or will need to make in light of other changes occurring in their Medicaid and welfare programs. The "welfare" stigma should not serve as a justification for bypassing Medicaid. If there is a stigma attached to Medicaid in a particular state, it can be successfully addressed so that a Medicaid expansion can be an attractive option for families and for states.

Some have steered away from the Medicaid option on the grounds that the program is too expensive and offers children a "Cadillac" benefit package. The scope of benefits offered to children under the Medicaid program is comprehensive, which is appropriate for children in families with little or no disposable income with which to purchase necessary health care services the program does not cover. But the cost of the Medicaid benefits package for children is not what drives Medicaid costs and was not responsible for the spike in Medicaid spending that occurred in most states during the early 1990s. In fact, the Medicaid cost of covering children is relatively low—according to national data reported to HCFA by the states, total (state and federal) costs per child enrolled in the Medicaid program were about $1,100 per child in 1996. Although the cost of covering children varies among states, in all states the cost per child is only a small fraction of the cost of covering elderly and disabled Medicaid beneficiaries. Children make up almost half of all people enrolled in the program, but they account for only 14 percent of all Medicaid spending.

Furthermore, the average cost of covering a child under Medicaid is likely to overstate the cost of covering currently uninsured children under a Medicaid expansion. A state's "average" per child Medicaid costs includes expenditures for children who have higher-than-average medical needs, such as infants who require intensive neonatal care, pregnant teenagers, and children with significant medical problems. Many of the children with these health care needs whose incomes would otherwise put them in the expansion group are already covered under Medicaid; most states cover children with higher incomes and greater medical costs under the "medically needy" part of the program, and virtually all states extend Medicaid coverage to pregnant women (and teens) who have incomes above the standards applied to children. Since many of the most costly children are already covered under Medicaid, in most states, the state's average cost of covering a child under Medicaid should be adjusted downward when the state projects the cost per child of covering uninsured children through a Medicaid expansion.

While the cost of covering a child under a Medicaid expansion is relatively low, a state that sets up a separate state program might be able to pay less for each child covered if it provides a much more limited benefits package. But it is likely the state would lose the considerable bargaining advantage associated with Medicaid's market share, spend more on administrative costs for each new child covered, and, as a result, end up getting substantially less coverage for a relatively small difference in the cost per child.

Federal Medicaid law sets federal minimum standards relating to eligibility, benefits, and cost-sharing. But the Medicaid program also allows states broad flexibility regarding many aspects of the program.

The Balanced Budget Act of 1997 greatly expanded state flexibility in a number of areas. Most notably, the new law makes it possible for states to require beneficiaries to enroll in managed care and to restrict beneficiaries' choice of managed care plans without seeking a federal waiver. In addition, virtually all of the federal rules governing the level of state payments to plans and providers have been repealed, allowing states broad new authority to set payment rates.

Although the separate state program option allows states more choices with respect to cost-sharing and benefits, the new federal law establishing the child health block grant also sets minimum federal standards in these areas and in most other aspects of program operation. In addition, the new law imposes requirements for states that set up separate state programs that do not apply to states that expand coverage under Medicaid. For example, states with separate state programs must develop systems to coordinate their child health programs with their Medicaid program to ensure that Medicaid-eligible children are enrolled in Medicaid, and states must track cost-sharing payments made by families with incomes above 150 percent of the poverty line over the course of a year to assure that the family's aggregate out-of-pocket payments do not exceed limits the new law sets.

The U.S. Department of Health and Human Services (HHS) has already issued extensive preliminary guidance on the separate state program option and is expected to issue additional guidance, as well as regulations, new claims reporting procedures, and new data reporting requirements over the next several months. States will not escape federal rules and oversight by establishing separate state programs.

Since states can purchase coverage through private insurers if they use their child health funds to create a separate state program, some have argued that an advantage of the separate state program option is that it offers states the ability to rely more heavily on the private sector. There is, however, little difference between the two options in terms of the extent to which states may contract with private insurers and other private entities.

The Medicaid program has always operated by purchasing services primarily from private physicians, hospitals and other health care providers. In many states, the Medicaid program also relies on private contractors to process claims, monitor quality, and oversee enrollment into managed care plans. In addition, with the spread of managed care to Medicaid systems, private insurers now play a central role in the Medicaid program. In states that have implemented managed care, Medicaid operates by purchasing coverage primarily from private insurers—that is, through private managed care organizations. Thus, except with respect to core administrative functions relating to final eligibility determinations, a state is no less able or likely to rely on private firms and insurers under the Medicaid option than under the separate state program route.


I. Factors Favoring the Medicaid Option

The Medicaid program assures children comprehensive, affordable coverage. Although the Medicaid child health benefit package and the guarantee of coverage are generally cited as the main reasons for considering the Medicaid option, these same factors are often also cited as reasons not to expand coverage under Medicaid. This analysis begins by examining other factors favoring the Medicaid option and then addresses the arguments relating to benefits and entitlement that are most often offered by those who favor a separate state program.


A. The Medicaid Option Avoids the Need for, and Cost of, Duplicative Administrative Systems

Medicaid is an established program in all 50 states, currently insuring one of every four children in this country. Each state, therefore, has an administrative structure and delivery system in place and is currently managing all tasks associated with providing insurance coverage to children.(1) These tasks include, but are not limitedto:

Many, if not all, of these functions would have to be duplicated if a separate state program were established. While it might be possible for states setting up separate state programs to rely on some of the same administrative systems that operate in their Medicaid program, this could create other administrative complexities and costs. Shared systems are likely to result in additional costs because states would have to track their spending to comply with federal and state rules governing the different streams of funds and to maximize their federal payments.

For example, a state that uses its block grant funds to create or expand a separate state program can only spend a limited amount of these funds on administration. Therefore, under a shared system, the state would have to track the dollars spent on administration of the new program to be sure that its spending remained below the cap.(2) In addition, under a shared system, a close tracking of funding streams would be required because the administrative spending for the new program would be matched at the new enhanced matching rate but the administrative spending for Medicaid would generally be matched at 50 percent, the basic Medicaid matching rate for spending on administration. Certain Medicaid administrative costs, however, are matched at higher rates — a 75 percent or a 90 percent rate — depending on the activity. Thus, a state that wants to take full advantage of all sources of federal dollars would have to track its child health administrative spending, its regular Medicaid administrative spending, and the Medicaid administrative spending that is subject to the higher, enhanced Medicaid matching rates. A state with shared administrative systems, therefore, might have to track three or four streams of administrative dollars, as well as assure that administrative costs under the separate state program did not exceed the federal cap.(3)

Another administrative cost that would arise in states that operate separate state programs would be the cost of coordinating eligibility and enrollment between the separate state program and the Medicaid program. The new law specifically requires states to screen applicants to the new state program for Medicaid eligibility and to enroll all Medicaid-eligible children in the Medicaid program.(4) Although HHS has not yet issued guidance on the systems states will be expected to implement to satisfy this requirement, a fully coordinated system will require states to institute measures to evaluate eligibility under both programs regardless of which program the child first applies for, to enroll children in the appropriate program without requiring a second application for coverage, and to transfer children from one program to another when their incomes change in ways that make them ineligible for one program but eligible for the other program. These systems will be critical to surmount barriers and avoid gaps in coverage that otherwise would likely occur in a dual-program system, but they add to the administrative costs of states that choose to establish separate state programs.

In light of the fact that states are already operating a program that insures 22 million children, it will be inefficient for states that do not already administer a separate child health program to set up a parallel and necessarily somewhat duplicative system to extend coverage to the 2.7 million children expected to be served through the child health block grant funds.(5) The duplicative administrative costs associated with operating a dual-program system and the additional costs associated with promoting coordination between the separate state program and Medicaid will reduce the funds available to finance coverage for children.


B. A Medicaid Expansion Offers States Open-Ended Federal Matching Payments and Greater Protection Against Rising Health Care Costs

One of the most significant advantages of the Medicaid option is the availability of open-ended federal matching payments. Under the new child health law, a state receives federal matching funds based on the same enhanced matching rate regardless of whether it chooses the Medicaid option, the separate state program option, or a combination approach.(6) The amount of federal funds available to states establishing a separate state program, however, is capped. Once a state's block grant allotment is exhausted, no additional federal matching payments are available to that state to cover additional children.(7)

This means that states that create separate state programs will have to stop enrollment, cut back on the coverage provided to children, or cover children entirely at state cost once the federal allotment of child health funds is exhausted. By contrast, states that expand coverage under the Medicaid option will continue to receive substantial federal funding, at the state's regular Medicaid matching rate, for all children enrolled after the child health allotment is exhausted.

Table 1 below illustrates the advantages for states of the open-ended federal Medicaid matching payment. It uses the example of Missouri, which can receive a maximum federal child health allotment of $51.7 million in fiscal year 1998 (based on an enhanced matching rate of 72.48 percent). For each $100 dollars of coverage provided in Missouri, the federal government will contribute $72.48 and the state will pay $27.52, regardless of whether Missouri provides coverage under Medicaid or a separate state program. If the cost of covering children is such that Missouri exhausts its federal allotment prior to the end of the fiscal year, the state would not receive any federal funds for covering additional children under the separate state program option. Under the Medicaid option, however, the federal government would continue to pay a substantial portion of Missouri's cost of covering the additional children; the federal government would pay $61.65 for every $100 in coverage costs for those children.


(Example of Missouri: federal allotment = $51.7 million;
enchanced match rate = 72.48%; regular Medicaid match rate = 61.65%)

  For Each $100 in Coverage Until the Allotment is Used Up For Each $100 in Coverage After the Allotment is Used Up
  Medicaid Option Separate State Program Medicaid Option Separate State Program
Federal Share $72.48 $72.48 $61.65 0
State Share $27.52 $27.52 $38.35 $100

The availability of open-ended federal health care payments has been a matter of concern to states during recent federal budget deliberations. The concern was that a Medicaid block grant, or even a Medicaid per-capita cap, would leave states responsible for increases in health care costs that are largely beyond their control. The separate state program option is fundamentally a regulated block grant: like all block grants, it offers states no protection against higher-than-projected health care costs or program enrollment. By contrast, under the Medicaid option, the fall-back of regular Medicaid matching payments assures states continued federal payments whenever health care costs cause a state to exhaust its allocation of child health block grant funds.


C. The Medicaid Option Offers States a More Consistent Level of Federal Matching Payments Over Time

The child health block grant was enacted as part of the Balanced Budget Act of 1997, a large and complex law that includes other spending initiatives but that reduces overall federal spending, with the goal of eliminating the federal deficit by 2002. The annual level of funding for the child health block grant varies significantly over the next 10 years in keeping with Congressional budget targets.

Total block grant payments to states remain at $4.3 billion each year through 2001, but drop to $3.2 billion in 2002, 2003, and 2004. Even without accounting for the effects of health care inflation and other factors that would be likely to cause state health care costs to rise over time, the total amount of funds allocated to states under the child health block grant will be sliced almost 26 percent in 2002 and remain at that reduced level until 2005.(8) Allocations will rise to $4.1 billion in 2005 and 2006 — still below the 1998-2001 level even before inflation is taken into account — and then reach $5.0 billion in 2007.


(in fiscal years, in billions of dollars)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
4.3 4.3 4.3 4.3 3.2 3.2 3.2 4.1 4.1 5.0
Source: CBO

The scheduled drop in federal child health block grant funding could cause states that have established separate state programs significant hardship. Four years into running these programs, federal funding levels will fall fairly precipitously, forcing states either to cut back their programs or make up the federal shortfall with state funds.(9) While there may be pressure from states at that time for the federal government to increase the block grant funding level to prevent the drop in funds from occurring, federal budget targets and "pay-as-you-go" rules — which require that federal spending increases in "mandatory spending programs" such as the child health block grant be offset dollar for dollar by either tax or other revenue increases or cuts in another mandatory spending program — leave considerable doubt as to whether an additional commitment of federal funds will be forthcoming. Pressures to reduce federal spending further to finance tax cuts or reduce the federal debt also dampen any prospects for added block grant funding. In addition, if the economy weakens in the next few years, the federal budget for 2002 and the years immediately following could be in deficit; that could place an additional obstacle in the way of increased federal block grant funding.(10)

If the federal block grant allocation remains at the levels now set in law and drops as scheduled in 2002, the impact will not be nearly as severe for states that have opted for a Medicaid expansion as for states running separate programs. That is because states that expand coverage through Medicaid will receive federal Medicaid matching funds at the regular Medicaid matching rate after their federal block grant allocation is exhausted. Although the reduction in the matching rate could result in some increased state expenditures, the cost of maintaining overall expenditure and coverage levels would not be nearly as great for states expanding coverage through Medicaid as for states choosing the separate state program route. Similarly, if a state elected to limit its state costs to the levels expended in prior years, the cutback in coverage for children that would be necessary to achieve state budget neutrality would not be nearly as great under the Medicaid option as under the separate state program approach.

Consider the Missouri example discussed above. Assume that Missouri has established a separate state program in which total annual costs are $71.3 million, consisting of the full federal child health allotment available to Missouri ($51.7 million), and the corresponding state matching payment of $19.6 million. If in 2002, Missouri's federal payment were reduced 26 percent — from $51.7 million to $38.3 million — as a result of the scheduled drop in federal block grant funding, Missouri would have to increase state funding from $19.6 million to $33 million just to keep total program expenditures at the same level as prior years. That would entail an increase of nearly 69 percent in state spending.(11)

By contrast, under the Medicaid expansion option, Missouri could make up most of the loss in federal block grant funds by claiming regular Medicaid matching payments for the cost of covering children. Despite the drop in its block grant allocation, the state would have to increase its spending by only $2 million — from $19.6 million to $21.6 million — to maintain a consistent level of total spending on coverage for children. This is a 10 percent increase in state spending, compared to the 69 percent increase in state spending that would be necessary under a separate state program just to maintain overall spending levels for children's coverage.

(fiscal years, dollars in millions)


Separate State Program

Medicaid Option

Federal Funds Child health allotment 51.7 38.3 38.3
Regular Medicaid funds 0 0 11.3
State Funds   19.6 33.0 21.6
Percentage Increase in State Funds     69.0% 10.0%
Total Funds   71.3 71.3 71.3

Looked at another way, if Missouri did not choose to increase state spending to keep total program costs level relative to prior years, but instead simply maintained state spending at $19.6 million — the same level it expended when the federal block grant allocation was higher — it would have to reduce total spending for expanded children's coverage under the separate state program option by almost 19 percent, from $71.3 million to $57.9 million.

This would result in a much deeper cut in coverage for children than would be necessary under the Medicaid option. Under the Medicaid option, if the state maintained state spending at $19.6 million, it would have to reduce total program spending by only eight percent, to $66.5 million. This is because under the Medicaid option every state dollar spent to provide coverage to children continues to be matched, even after the child health block grant allocation is exhausted. Under the separate state program option, the $19.6 million in state expenditures will bring in only the reduced child health allotment of $38.3 million; under the Medicaid option, the same level of state spending will result in the $38.3 million in federal child health funds as well as an additional $8.6 million in regular federal Medicaid matching funds.


(fiscal years, dollars in millions)



Separate State Program

Medicaid Option

Federal Funds Child health allotment 51.7 38.3 38.3
Regular Medicaid funds 0 0 8.6
State Funds   19.6 19.6 19.6
Total Funds   71.3 57.9 66.5
Percentage Reduction in Total Funds   19% 8%

The Medicaid option will therefore offer states a very substantial cushion if federal block grant funds are reduced as the law provides. For states that attempt to maintain coverage levels for children, the Medicaid option will save large amounts of state dollars. In states that choose to maintain a consistent level of state funding, the Medicaid option will assure that cuts in coverage are not nearly as severe as they would be if the state were covering children under a separate state program.


D. The Medicaid Option Offers States a Stronger Negotiating Advantage with Plans and Providers

State Medicaid programs purchase a huge amount of health care services and account for a substantial portion of all health care expenditures. Combined state and federal funding for the Medicaid program is projected to be $181 billion in fiscal year 1998. Total state and federal Medicaid spending just for children will amount to approximately $27 billion.(12) Over the past several years, particularly with the growth of managed care, states have recognized the potential of their Medicaid purchasing power. Increasingly, managed care plans are competing for Medicaid's business, and states are able to use their market share advantage when negotiating with plans. Medicaid's bargaining power can translate into greater value for state (and federal) dollars through more favorable rates of payment, better standards for care, and other improvements that states may be seeking in their programs.

The recent Medicaid changes enacted as part of the Balanced Budget Act of 1997 will likely add to states' negotiating advantage. The law repealed federal rules relating to provider payments (for example, the "Boren" amendment) that many states believed forced them to pay providers higher rates than they would otherwise have had to pay. In addition, other federal changes enacted as part of the Balanced Budget Act allow states to limit the number of managed care organizations with which it contracts. This will permit states to steer all of its managed care business to as few as two plans; it is expected that many plans will be willing to accept significantly lower rates per enrollee in exchange for the very large volume of business that states now can direct their way.

The Medicaid funds states expend to purchase coverage and services dwarfs the $6 billion in state and federal dollars that will be spent through the new child health initiative if states take full advantage of the new block grant funds. A state that creates a separate state program — and negotiates with health plans and other providers by putting only the much smaller amount of child health block grant dollars on the table — does not have nearly the same bargaining advantage as a state that combines its new child health funds with its Medicaid dollars. Although states that set up separate state programs could pool the funds from these programs with their Medicaid dollars for the purpose of negotiating with providers and purchasing services for both programs, there is little state experience with such joint purchasing ventures. The Medicaid option assures every state added purchasing power and offers states a greater opportunity to achieve savings and get the most value for their money.


E. The Medicaid Option Promotes a Seamless System of Coverage and Continuity of Care

In many different contexts (for example, in their child care and job training systems), states have recognized the importance of blending funding streams to create seamless systems of care and services for families. The child health Medicaid option allows states to blend fully their new federal child health funds with their Medicaid funds to create a seamless system of health care coverage for children. By contrast, a separate state program layered on top of the existing Medicaid program creates a fragmented child health system likely to result in overlaps as well as gaps in coverage and disruptions in care. Even those states that work hard to avoid the pitfalls of a fragmented system will find it difficult to coordinate two separate enrollment and disenrollment systems fully, to assure continuity of coverage, and to promote continuity of care.

A dual-program approach can be difficult for low-income families to navigate. Families may have trouble identifying the appropriate program for their child and could get bounced from one program to another before their children are enrolled. To help assure that children are at least initially enrolled in the appropriate program without having to make multiple applications for coverage, the new law requires states to coordinate the application process between Medicaid and any separate program the state might create or expand.(13)

A fully coordinated and perfectly implemented system might assure that all children would be enrolled in the right program based on one application, regardless of where they entered the system, but the measures necessary to assure coordination will inevitably result in some complexity. The Medicaid program and the separate state program each would need to screen for eligibility under both programs and develop systems for enrolling children in whichever program was appropriate. While these kinds of procedures will minimize the number of children who get lost in the process, they add a layer of complexity and administrative cost to the application process that is unnecessary if a state simply expands coverage through the Medicaid option.

The problems navigating a multi-program system are not limited to the application stage of the process. If a separate state program is layered on top of Medicaid, many children in families whose income fluctuates could be forced to move from one program to another. For example, a family that becomes ineligible for welfare because the parent finds employment may be eligible for Medicaid for at least a 12-month period through Transitional Medical Assistance. After that point, if the state has not expanded coverage under Medicaid, the child may no longer be eligible for Medicaid, depending on the child's age, the family's income, and the state's Medicaid income standards. The child would likely, however, be eligible for coverage under a separate state program that covers children with incomes just above Medicaid standards. At the end of the Transitional Medicaid Assistance period, therefore, the child would need to be evaluated for continuing Medicaid eligibility and, if ineligible for Medicaid, evaluated for eligibility under the separate state program. If the child qualified for the separate program, coverage would need to be transferred to that program. But, if over the course of the next few months, the child's parent lost her job or her hours of employment were reduced, the child's eligibility for coverage could change yet again; this time a transfer to Medicaid from the separate state program might be necessary to assure no gap in coverage.

Transfer systems would be important to assure continuity in coverage. But like the coordination necessary at the application stage, such systems would create additional administrative burdens and costs. Moreover, transfers will not always be smooth, particularly if the two programs use different income counting rules or asset requirements or different certification periods. Gaps in coverage are almost certain to result in such cases.

Perhaps the most significant problem that arises in this context occurs when the two programs rely on different plans or provider networks. Unless the provider systems are identical, a child who transfers from one program to another due to changes in family income will lose continuity of care and the benefits of staying with one health provider for an extended period of time. This kind of disruption of care runs directly counter to the goal of providing children with preventive health services and a consistent "medical home" through new managed care arrangements.

The problems caused by changes in eligibility status are likely to be experienced by a significant number of children. Income fluctuations due to new employment, job loss, variations in hours of employment, and changes in expenses (such as child care) that are typically allowed as deductions against income in determining program eligibility are common among families with low and moderate incomes.(14) Marriages, separations and divorces also frequently affect a child's income status. A dual-program system is far less likely to accommodate these income fluctuations in ways that assure uninterrupted health care coverage for children whose parents are in low-wage, less stable jobs, including many parents who have received welfare in the past but are now employed. The support these new health care dollars could effectively offer states in their welfare reform initiatives may be compromised by a dual-program approach that fails to keep children covered.

Eligibility churning within the Medicaid program has been a source of dissatisfaction, particularly among Medicaid managed care providers. The Congressional Budget Office estimates that on average, children stay enrolled in Medicaid for about nine months in any given year.(15) This Medicaid problem, however, was recently addressed in the Balanced Budget Act by a new option allowing states to enroll children in the Medicaid program for 12-month periods regardless of changes in eligibility status.(16) Thus, under a Medicaid expansion, not only does a child remain in the same program for as long as his or her income is below the increased income eligibility standard, but the state also can assure enrollment for a minimum 12-month period by taking advantage of this new federal Medicaid option.


F. Medicaid Provides States with Options for Covering Low-Income Parents

According to Census Bureau data, some 43 percent of all parents in working poor families with children were uninsured during the mid-1990's. This is in part because only a small portion of low-wage workers have employer-based coverage.(17) In addition, minimum federal Medicaid eligibility standards for parents in single-parent households are very low, and in many states only a small portion of parents in low-income two-parent families are eligible for Medicaid.(18)

That however, can now change. States have the opportunity to take advantage of federal financial participation in the Medicaid program to provide coverage to low-income working parents.

The most common way that states have extended coverage to parents under Medicaid has been to expand the scope of "Transitional Medical Assistance" (TMA). TMA is provided for a limited period of time to members of a family who would otherwise become ineligible for Medicaid due to income from earnings or child support. As of January 1997, some 23 states had approved waivers to extend the TMA period or otherwise to expand coverage under TMA.(19)

A provision adopted as part of last year's welfare law offers states a new option to expand coverage to working poor parents without having to seek a federal waiver. Under section 1931 of the Social Security Act, states now can extend Medicaid coverage to working poor and near-poor parents in single-parent families and, in some cases, to parents in two-parent families.(20) This provision opens up a significant new opportunity for states to extend health care coverage to working poor parents, without the complications of TMA and without going through the waiver process.

State interest in extending Medicaid coverage to parents has heightened in the wake of welfare reform. Only a small proportion of the women who leave welfare for employment have private health insurance, and the rate of insurance coverage remains low for such women even after they have been in the labor market for a considerable period of time. Evidence from several studies shows that less than half of the women who leave welfare for work have health insurance three years after leaving the public assistance rolls, and one study showed that about half of the women who are covered by employer insurance in the third year were married and covered by their spouse's plan.(21) Data on the extent to which uninsured women who need medical care leave their jobs to return to the welfare system because they need Medicaid coverage are limited. It is likely, however, that the lack of health insurance makes it more difficult for low-income parents, particularly those who have significant health care needs, to remain in their jobs.

The potential for expanding Medicaid coverage to low-income working parents is another reason for states to consider the Medicaid option for covering children. In general, the new child health block grant funds cannot be used to cover parents either through the separate state program option or the Medicaid option.(22) However, since states already cover some low-income parents under TMA and can receive open-ended federal Medicaid payments at the state's regular Medicaid matching rate to expand coverage to a broader group of low-income parents under the new Section 1931 option or through a federal waiver, the Medicaid route for covering children can make it possible for states to cover all members of a low-income family through the same program and the same provider network. It would not make sense to create a separate state program to cover low-income children if the state is also considering extending coverage to more low-income working parents under the Medicaid program.


G. The Medicaid Option Minimizes the Risk That a Two-Tier System of Publicly Funded Coverage Will Develop

A proliferation of separate state programs covering children whose incomes are somewhat above current state Medicaid eligibility standards would raise the specter of a two-tier system for providing publicly funded coverage for children — a system in which there is one program for poor children and another for children in families with somewhat higher incomes. Even apart from the fiscal and administrative consequences of a dual-program system, the prospect of a publicly funded child health insurance system that segregates children by income is of concern. Dual-program systems, with programs that serve distinct populations — or at least that appear to serve distinct populations in the public's mind — can end up serving neither population well.

In the short term, the administrative procedures developed for a newly created, separate state program are likely to be simpler, more streamlined and more family-friendly than those in place in the Medicaid programs of many states. This is the case in some of the states that already have established separate state programs. For example, in Florida, the state Healthy Kids program has a simple one-page application with no interview or separate income verification requirements. (The program relies on school lunch program eligibility.) By contrast, the Florida Medicaid program requires at least one in-person eligibility interview at the welfare office, a 34-page application, and extensive verification.

It is possible for a state that sets up a separate state program to carry over to its Medicaid program the same improvements in administration developed for the new program; Florida is currently considering changes in its Medicaid application. It is likely, however, that at least in the short term, the new program will distract attention and pull resources away from Medicaid and leave Medicaid behind in terms of systems improvements. Differences in how the two programs operate and serve the public could further stigmatize Medicaid.

The longer-term consequences of a dual-program system could be still more troubling. During periods when state revenues may not be as robust as they are now, the separate state program and Medicaid may compete for state funds. When such competition arises, it is probable that the program serving poorer children will not fare as well as the program with the more middle-class constituency. A single-program system in which children from a relatively broad range of incomes participate on a common basis is more likely to attract stronger, broader political support and, as a consequence, to assure better coverage and better care for all children.


II. Concerns About A Medicaid Expansion

For these reasons, the logic of combining the $6 billion in state and federal child health funds with the $27 billion in Medicaid funds already being spent to cover children is compelling. What then is the basis of the hesitation in some states to pursue the Medicaid option with these new child health funds? The arguments against a Medicaid expansion generally fall into one or more of five areas of concern.


A. The Medicaid Program Creates an Entitlement for Children

The flip side of the federal funding advantage that the Medicaid option offers states is that in exchange for open-ended federal funding, states may not deny Medicaid coverage to an eligible child. Under the Medicaid option, states cannot create waiting lists or otherwise not enroll children who qualify under program rules. From the perspective of insuring the greatest number of children, the entitlement feature of the Medicaid program is a positive feature of the Medicaid option. The concern, however, is that the Medicaid entitlement will force states into spending funds they are not prepared to commit.

The fiscal constraints presented by the Medicaid entitlement are tempered significantly, however, by the fact that states set and have full control over the eligibility rules defining the breadth of their Medicaid expansion and, therefore, the scope of the Medicaid entitlement. A state can largely control its spending by setting the limits of its Medicaid expansion consistent with state budget targets and revising these limits if necessary to remain within the targets.

The cost per child under a Medicaid expansion can be predicted fairly accurately by each state based on its current experience. This is particularly true in states that have implemented managed care and that pay a set, capitated rate, for each child enrolled in the program. While states may not be certain what the participation rate will be once an expansion is put into place, there is a good deal of experience to draw upon from states that already have expanded Medicaid coverage to children in higher income ranges.

In the event that a Medicaid expansion results in higher-than-projected enrollment rates or costs per child, the state is free at any time to roll back the expansion temporarily or permanently; federal approval is not required.(23) For example, a state that currently covers all children up to 100 percent of the poverty line and uses its new child health funds to expand coverage to children with incomes below 185 percent of the poverty line could roll back the expansion modestly—for example, to 175 percent of the poverty line—or even all the way back to 100 percent of the poverty line. States have a means to address potential cost-overruns. Under the Medicaid option, states are precluded only from denying coverage to children who are eligible for coverage under state-established eligibility rules.

A decision to roll back eligibility levels for children's coverage to reduce state spending would likely have political consequences. However, the difficulties associated with rolling back eligibility standards under a Medicaid option are not likely to be any greater than the difficulties facing a state that has to stop enrolling eligible children and create a waiting list for coverage — steps a state operating a separate state program would likely take if it appeared that costs were going to exceed funds appropriated for that program.(24) Moreover, a rollback in Medicaid eligibility standards is likely to produce much fairer results than a first-come, first-serve system for deciding which children are covered. If eligibility standards for an expansion are lowered somewhat as a result of spending concerns, the state continues to assure that the most needy children will be covered. By contrast, a freeze on enrollment and a queuing procedure will necessarily produce arbitrary results; children will be covered on the basis of when they apply, not on the basis of their income or their need for coverage.

Combination Approach: Advantages and Disadvantages

States have the option to use part of their block grant funds to expand coverage under the Medicaid program and part to fund a separate state program. Under a combination approach, a state would cover some additional low-income children under its Medicaid program while covering somewhat higher income children under a separate program.

This approach still results in a dual-program system. As a result, it will entail some unnecessary administrative costs, fail to take full advantage of Medicaid’s open-ended funding and purchasing power, and raise the coordination challenges associated with creating a separate state program. However, if a state is committed to establishing a separate state program or already has a separate child health program, the combination approach has strong advantages compared to an approach where coverage is extended through a separate state program alone.

A combination approach assures that the lowest-income children among the expansion group will be offered the Medicaid benefit package and cost-sharing protections. It also gives states the benefit of open-ended federal funding for a larger portion of their low-income children than the pure separate-program approach allows, while still permitting states the option to cap enrollment if necessary under the separate state program. In addition, this approach can limit coordination problems, particularly if it assures that all children in the same family are covered under the same program by setting a uniform Medicaid income eligibility limit through age 18.

Federal minimum income eligibility requirements in Medicaid are based on a child’s age. Under current law, children up to age six must be covered if their family income is below 133 percent of the poverty line. Children aged six through 13 must be covered if their income is below 100 percent of the poverty line. Older children are covered if their income is below their state’s AFDC standards as of July 16, 1996. (Coverage of older poor children is being phased in so that by 2002, children aged six through 18 must be covered if their income is below the poverty line.) A number of states that have expanded coverage under Medicaid beyond these federal requirements have eliminated the federal age-based distinctions and cover all children in a family whose income is below the state’s established level. But 36 states (and the District of Columbia), including 14 states that have expanded eligibility beyond the federal minimum standards, still have age-based income eligibility distinctions in their Medicaid programs.

These age-based income standards are difficult to administer and produce anomalous results. Some children in the same family are left uninsured, or, in the case of states with separate state programs, one child in a family may be enrolled in Medicaid while another child in the family is enrolled in the separate state program. This may mean that parents must travel to different offices to apply for coverage under the two different programs. It also can mean that children in the same family will be cared for by different health plans and health providers.

These problems affect large numbers of families. For example, according to Census data for 1995, nearly two of every five families that have more than one child and have income below 133 percent of the poverty line have one child under age six and another child age six or older.

Raising the Medicaid income eligibility standards to cover a broader group of children and eliminate age-based eligibility distinctions will limit, although not eliminate, the coordination problems associated with a dual-program approach. To the extent that Medicaid covers children from a broader income range without age-based distinctions, the number of instances in which a child’s birthday or a change in family income will result in a child losing eligibility for one program and gaining eligibility for the other program will be reduced. The Governor of Massachusetts, a state with an existing separate state program and with Medicaid eligibility standards that currently vary by age has announced his intention to maintain the state’s dual-program approach, but to use some or all of the new child health funds to expand coverage under Medicaid so that all children in a family qualify for either Medicaid or the state’s Children’s Medical Security Plan.

It makes sense both for states that establish separate state programs and for states that already have separate state programs to consider using at least part of their new funds to expand coverage under Medicaid. By so doing, these states can take greater advantage of Medicaid’s open-ended financing structure, ease the significant coordination problems that arise in a dual-program system, and establish uniform Medicaid income eligibility limits that apply to children regardless of age.


B. The Welfare Stigma

"Welfare stigma" is commonly cited as a reason to bypass Medicaid and use the child health funds to establish a new, separate child health program. There are two sources for the welfare stigma that is sometimes associated with Medicaid. First, Medicaid historically was available only to children receiving welfare (AFDC or SSI), and thus the program was often viewed as an appendage to the welfare system. But Medicaid eligibility rules have changed considerably in recent years, and welfare receipt no longer controls Medicaid eligibility. Federal rules now require states to cover all poor children regardless of their eligibility for welfare. (This coverage is being phased in by age; currently, all poor children up through age 13 must be covered and older children are subject to lower state-based minimum standards.) In addition, more than half of the states have expanded coverage for children beyond these minimum standards.

As a result of these state and federal expansions, Medicaid now serves children from a wide range of incomes. According to Urban Institute estimates, in 1995 almost half of all children covered under Medicaid — 49 percent — did not receive cash assistance, and more than one of every four children with incomes between 100 percent and 200 percent of the poverty line were covered under the program. While more recent national data is not available, it is likely that the combined effect of further Medicaid expansions and sharp declines in the welfare rolls since 1995 is that the majority of the children enrolled in the Medicaid program today do not receive cash assistance.

In short, the close association between welfare and Medicaid is largely an artifact of an earlier time. The continued association between the two programs reflects the fact that, in some states, the expansion of Medicaid coverage to large numbers of children in families that do not receive welfare is not well known or understood by the public or even by policymakers. Those states that have aggressively marketed their Medicaid program as an insurance program available to a broad range of children have made significant progress changing the public image of the program.

The second source of the "welfare stigma" sometimes associated with Medicaid stems from the manner in which the program operates in some states. In some communities, Medicaid has a burdensome application process, frequently including onerous verification requirements and requirements for in-person eligibility and recertification interviews that must take place at a welfare office at hours that can present difficulties for working parents. These features can create barriers to coverage and care and contribute to the image of Medicaid as a "welfare" program.

These kinds of problems, to the extent they exist in any given state, can be addressed; none of the "problems" with the Medicaid program are inherent in Medicaid. Action taken by a number of states shows that improvements in Medicaid operations are achievable, and that such improvements can change the public's perception of the program.

Many states have simplified their Medicaid application systems, allowed mail-in applications and/or the taking of applications in settings other than the welfare office, and adopted other measures that limit substantially, if not eliminate, the stigma. In addition, numerous communities throughout the country are engaged in Medicaid outreach and marketing campaigns. These efforts have been undertaken in many states at the same time the state has expanded its Medicaid program to cover a broader group of low-income children. Outreach campaigns have also been prompted by a desire to reach the large number of uninsured children who are currently eligible for Medicaid but not enrolled, as well as by concerns that welfare program changes could cause a decline in Medicaid participation and undermine state efforts to provide support to low-income families in which the parent is employed.(25) With fewer children receiving welfare and enrolling in Medicaid through the welfare system, states have been encouraged to design new systems to inform low-income families of their children's eligibility for Medicaid and to enroll these children into the program.(26)

The transformation of the Medicaid program — from an appendage of the welfare system to a health insurance program that serves a broad range of low income children — has been happening over a period of time, but the pace of change has accelerated as a result of welfare program changes and recent Medicaid expansions. The marketing, outreach, and enrollment strategies that states are taking or will need to take to accommodate the changes already occurring in their welfare and Medicaid programs, particularly if these efforts are coupled with an expansion in coverage financed by these new child health block grant funds, are likely to eliminate, or at least limit substantially, any stigma that may now be associated with Medicaid.


C. The Medicaid Program Is Too Expensive

Medicaid is a costly program, and its costs are another factor cited in favor of the separate state program option. The program is costly, however, largely because it covers elderly and disabled individuals who, on average, have high medical expenses. While much is said about Medicaid's "Cadillac" benefit package for children, the cost of covering children in the Medicaid program actually is quite modest.

According to data reported to the Health Care Financing Agency (HCFA) by the states, the average cost of covering children under Medicaid was $1,076 in fiscal year 1996, much less than the $9,596 average annual cost of covering elderly Medicaid recipients or the $8,179 average annual cost of covering disabled Medicaid beneficiaries.(27) Nondisabled children represent about half (49 percent) of all Medicaid beneficiaries, but they account for only 14 percent of all Medicaid spending. While the cost of covering children under Medicaid varies across states — from a high of $2,058 in Oregon to a low of $676 in Idaho — in all but four states, the Medicaid cost per child in 1996 was less than one-fifth the average cost of covering elderly and disabled beneficiaries in that state.

Furthermore, state reported average per-child Medicaid costs likely overstate the cost of expanding Medicaid coverage to more children. A recent actuarial analysis compared the cost of providing coverage to children under the California Medicaid program with the cost of covering children under the separate child health program proposed by Governor Pete Wilson. The analysis showed that expanding coverage under California's Medicaid program ("Medi-Cal") would be substantially less expensive than a new private insurance program proposed by the governor. (28)

In part, the actuaries reached this conclusion by projecting that the average Medicaid cost per child that California could expect to pay under a Medicaid expansion would be lower than the average cost of the children it currently covers under the Medicaid program for two reasons:

Another reason that the California Medicaid expansion was projected to cost less per child than an expansion under a separate state program was that the state benefits from the program's very substantial purchasing power by paying relatively low rates to Medicaid providers.(30) The actuarial analysis assumed that a separate state program would have to pay rates much more akin to those paid in the commercial market. Medicaid thus could provide a somewhat more comprehensive benefits package at a significantly lower cost.

If the cost of covering a child under a state's Medicaid program remains higher than the cost of providing coverage under a separate state program after the advantages presented by Medicaid's substantial bargaining power and the differences in administrative costs are taken into account — and after an appropriate adjustment in the Medicaid estimate is made to account for currently-enrolled high-cost Medicaid beneficiaries — the difference in cost is likely to be due to the more limited benefit package the separate program under consideration would provide. It is, however, appropriate to offer children with limited incomes a comprehensive benefit package, as Medicaid does. The upper income limit in most states for coverage that can be financed with the new child health block grant funds is 200 percent of the poverty level, or $26,660 for a family of three. Most children covered under the new initiative will have incomes significantly below this level. Families with incomes this low generally have little disposable income with which to purchase health care services; when low-income children are provided limited coverage, they often must forego care not covered by the plan. This not only can lead to poor health status, but ultimately can lead to higher costs. When care is delayed, the cost of addressing more serious health problems can be more expensive.(31)

In short, Medicaid can present cost-efficiencies that cannot be achieved under a separate state program and allow states to provide a comprehensive benefit package at a reasonable cost.

Growth in State Medicaid Spending Is Frequently Overstated or Misunderstood

It is sometimes said that state spending on Medicaid — particularly during the early 1990s — has been out of control, consuming an ever-larger share of state budgets and squeezing out other priorities. The data on the rate of growth in Medicaid spending that is often cited in support of this point, however, are misleading by not taking account of the ways in which some states were able to increase their federal Medicaid payments without increasing state expenditures.

States have generally used one of two mechanisms to maximize federal Medicaid payments. During the early 1990s, many states took advantage of the disproportionate share hospital (DSH) payment system to draw down federal Medicaid funds without spending their own money.* Even though these financing schemes essentially served as a source of fiscal relief for those states that used them by allowing states to receive large amounts of federal Medicaid funds without actually spending any state funds, DSH financing made it appear as if state spending on Medicaid was growing at a much higher rate than was actually the case. Between 1990 and 1993, states reported that their Medicaid spending grew at an average annual rate of 21 percent. However, HCFA data adjusted to account for DSH financing schemes that did not actually involve new net state spending for Medicaid indicate that the real growth rate in state Medicaid spending over this period was a far more modest 8.5 percent. The discrepancy between the adjusted and unadjusted data is particularly dramatic for 1992. Although states reported increasing their Medicaid spending between 1991 and 1992 by 28 percent, the actual rate of growth calculated by HCFA was 6.7 percent.

A second practice that many states engaged in was to move existing state expenditures under the Medicaid program in order to secure federal Medicaid matching funds for services that formerly were financed exclusively with state funds. For example, some states reclassified a portion of their child welfare costs as Medicaid expenditures so that the state could receive federal matching funds for these expenditures. While such "revenue maximization" techniques appear to cause state Medicaid spending to increase (because some categories of spending are switched to the Medicaid program), these strategies generally lead to lower overall state spending and new federal payments.

There is little doubt that state Medicaid spending increased significantly in most states, particularly in the early 1990s, due to higher health care costs and rising enrollment. However, the extent to which Medicaid state spending actually grew is often overstated, and the extent to which states realized fiscal relief through new federal Medicaid payments is frequently overlooked.
For a description of DSH financing, see the General Accounting Office, Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government, August 1994, and Leighton Ku and Teresa Coughlin, Medicaid Disproportionate Share and Other Special Financing Programs: A Fiscal Dilemma for States and the Federal Government. Legislation enacted since the period covered in these reports has limited the extent to which states can engage in these financing schemes.


D. The Medicaid Program Has Too Many Federal Rules

The Medicaid program is based on federal and state rules, with federal minimum standards that apply to most aspects of the program. In almost all areas of the program, however, states are provided a significant range of options, and many states have been granted authority to vary their program rules from the federal standards through the waiver process. Moreover, state flexibility has been expanded significantly over the past few years.

Most notably, under the Balanced Budget Act of 1997, states are now free to implement Medicaid managed care delivery systems without seeking a federal waiver and can enroll beneficiaries in Medicaid-only managed care organizations. States also have been relieved of virtually all federal rules regarding provider payment rates. In addition, states have new options to enroll children for 12-month continuous periods and to allow community-based health care providers and other agencies to enroll children presumptively into the Medicaid program.

Federal Medicaid law continues to set minimum standards with respect to eligibility and benefit standards and cost-sharing requirements. Perhaps the most significant federal limitation for states seeking to expand Medicaid coverage to children in families with more moderate incomes is presented by the cost-sharing rules, which generally prohibit states from imposing premiums and cost-sharing requirements on children. These rules assure that families of modest means will not face unaffordable out-of-pocket costs for covering their children.(32)

The federal Medicaid cost-sharing rules do not, however, present a strong reason for a state to create a separate state child health program. The new federal child health block grant law also imposes significant limitations on states' authority to charge children costs for the coverage provided under a separate state program, particularly for children with incomes below 150 percent of the poverty line. In addition, the new law specifies that payments collected from families cannot be counted towards meeting a state's matching requirement.

Under the new child health law, children covered under a separate state program cannot be charged copayments or deductibles for any well-baby or well-child care, including immunizations. The law further provides that cost-sharing for families with incomes below 150 percent of the poverty line must be "nominal," and that premiums may be no higher than those imposed on "medically needy" Medicaid beneficiaries.(33) Under the federal "medically needy" program rules, the maximum premium that can be charged a three or four-person family with income of $1,000 per month or more is $16 per month.(34) For families with incomes above 150 percent of the poverty line, states may impose premiums and cost-sharing on a sliding-scale basis related to income. However, total charges each year cannot exceed five percent of the family's income which implies that states with separate state programs will have to track family out-of-pocket payments through the year to assure the five percent cap is not breached.

While the rules governing the new child health block grant permit states to charge premiums and impose other costs that are not allowed under the Medicaid option, these cost-sharing rules as well as other features of the new law demonstrate that states establishing separate state programs will be subject to federal minimum standards and significant federal oversight. The child health law grants the Secretary of HHS broad authority to issue rules and regulations, to require data reporting, and generally to assure that the standards and requirements established by the new law assure that comprehensive and affordable coverage is provided to uninsured children with these new federal dollars. States will not escape federal rulemakers and oversight by establishing separate state programs.


E. Medicaid is a Public Program, and Families Prefer a Private Program

Another factor sometimes cited in favor of the separate state program option is that it would allow states to rely on the private insurance market. States could purchase coverage from private insurers, and this in turn would mainstream the delivery of care to the children enrolled and make the program more attractive to families.

Medicaid, however, offers states the same opportunity to purchase coverage through private insurers. In fact, with the expansion of managed care in most state Medicaid programs, the purchase of private insurance coverage through managed care organizations is fast becoming the dominant method for providing Medicaid coverage to children.

The Medicaid program in most states relies heavily on the private sector. The program is administered by states or county agencies, but much of the Medicaid program other than its financing and core administrative functions is private. Medicaid operates by purchasing the services of mostly private providers, either directly from hospitals, physicians and other health care providers on a fee-for-service basis, or through the coverage it purchases for its beneficiaries from managed care organizations. The main exceptions are the publicly financed hospitals and clinics that deliver care to Medicaid beneficiaries in many communities as part of their "safety net" missions.

Reliance on managed care purchasing arrangements within the Medicaid program has increased dramatically over recent years. According to Urban Institute estimates, as of June 1996, more than 13 million Medicaid beneficiaries were enrolled in managed care, up sharply from 2.7 million managed care enrollees in 1991. While HHS does not collect data on the extent to which different groups of Medicaid beneficiaries are enrolled in managed care, most of the beneficiaries enrolled in managed care are children. States generally have focused their managed care enrollment activities on children and adults who are not disabled, and CBO estimates these two groups make up 85 percent to 90 percent of the Medicaid managed care enrollees nationwide.(35)

Thus, while the use of managed care varies considerably across the county, in many states, most of the children currently enrolled in Medicaid receive their coverage through state contracts with private managed care organizations. Many state Medicaid programs also rely extensively on private contractors to perform such functions as claims processing, quality assurance, and brokering enrollment in managed care plans.

A separate state child health program would not be substantially more "private" than the Medicaid program. States that set up separate programs will establish eligibility rules and coverage and payment policies through their state child health plan. As in the case of Medicaid, the services the state child health program purchases would largely be provided by private physicians, hospitals, and other providers, or through private managed care organizations. As also is the case with Medicaid, states could rely on private firms to process claims, monitor quality, and broker enrollment. The one administrative function that state Medicaid programs may not privatize but that state child health programs could privatize is individual eligibility determinations. Even Medicaid, however, allows "initial processing" of applications to be performed by nonagency staff.(36) In short, the distinction sometimes drawn between Medicaid as a "public" program and a separate state child health program as "private" program is a false one. Both programs are financed by state and federal dollars, and both will rely heavily on private health care providers, and private managed care organizations.



Over the past 10 years, many states have taken advantage of new options to cover children under the Medicaid program. Currently, 28 states have expanded coverage for children, other than infants, beyond the federal minimum requirements. As a result of federal and state expansions, the Medicaid program has changed dramatically. Medicaid is the single largest source of insurance coverage for children with incomes below 200 percent of the poverty line, both nationwide and in 28 states. It covers one in every eight children in families with at least one full-time worker. In 16 states, including California, Florida, and Texas, Medicaid already covers more than one of every three children in families with a full-time worker and income below 200 percent of the poverty line.(37)

Medicaid has thus become a major insurer of children nationwide. It now serves one of every four children in this county. The new child health funds, while small in comparison to the total funds spent in Medicaid to insure children, could allow states to expand coverage further and invigorate efforts taking place throughout the country to improve Medicaid operations, simplify the Medicaid application process, move more of the eligibility process outside of welfare offices, and provide access to mainstream health plans and providers. A unified system of covering low- and moderate-income children that builds on the current Medicaid program will be most likely to reach and enroll eligible children, take advantage of Medicaid's bargaining power and cost-efficiencies, and maximize available federal funding, thereby assuring the new child health initiative results in the greatest number of children receiving comprehensive and affordable coverage.

End Notes

1. Administrative costs in the Medicaid program consume a small share of total Medicaid spending. Congressional Budget Office data indicate that in fiscal year 1997 spending for administration amounted to less than five percent of total expenditures and slightly more than five percent of Medicaid expenditures for benefits.

2. In general, the amount of funds a state may spend under a separate state program for purposes other than providing coverage cannot exceed 10 percent of its total block grant expenditures. Spending on administration falls within this 10 percent cap. Under the Medicaid option, there is no cap on administrative costs.

3. HHS has not yet issued guidance on whether for states that choose the Medicaid option the new enhanced matching rate under the child health law will apply to the administrative costs associated with covering the newly eligible group of children. If the enhanced matching rate is available for administrative activities, then states that choose to expand coverage under Medicaid will also have to track streams of funds spent on administration in order to claim the appropriate matching rate. The cap on administrative spending, however, would not apply to states that expand under Medicaid.

4. Section 2102 of Title XXI of the Social Security Act.

5. The Congressional Budget Office estimates that 2.7 million children will receive health care coverage with the new child health block grant funds. CBO estimate of P.L. 105-33, August 12, 1997.

6. In addition, state matching requirements are generally the same under the Medicaid option as under the separate state program option. The child health law also applies the same provider tax and donation rules that apply to Medicaid matching requirements to the matching requirements under a separate state program.

7. States may carry over federal funds unspent during the two previous fiscal years. Section 2104(e) of Title XXI.

8. The total amount of federal child health block grant funds available in any given year also could be affected by the extent to which states use their block grant allocations. States with approved child health plans have three years to use their federal allocations; funds not spent after that time will be reallocated to other states. At the end of fiscal year 2000, therefore, any state allocation for 1998 that has not been fully expended will be distributed to states that have exhausted their allotments.

9. Since the law allows states to carry over unused federal child health funds for up to three years, a state could decide to not spend all of its annual block grant allocations in the first three years of the program and to hold those funds in reserve in anticipation of the scheduled drop in the federal allocations.

10. It is possible that some part of the proceeds of a federal settlement with the tobacco companies could be used to fill the hole in the child health block grant allotments. It is very unclear, however, whether there will be any federal legislation settling the tobacco claims and, if so, whether the proceeds of such a settlement will be spent on federal initiatives or passed along to the states.

11. This example does not take into account possible changes over time in Missouri's block grant allocation. Each state's allocation is likely to change modestly over time due to formula changes and changes among states in the distribution of low-income children and of low-income uninsured children. Allocations for some states also could increase as a result of the reallocation of funds that go unspent by other states. Such changes, however, would not alter the basic point of this example—that the drop in overall child health block grant funding will have significantly more adverse consequences for states that have established a separate state program than for states that have expanded coverage through Medicaid.

12. These Medicaid spending estimates are based on projections made by the Congressional Budget Office in its August 1997 baseline.

13. Congress was concerned about problems families might encounter in a dual system and specifically required states that set up separate state programs to "screen and enroll" Medicaid-eligible children and to generally coordinate publicly-funded programs. Section 2102 of Title XXI.

14. For example, unpublished data from a University of Wisconsin researcher show that among families who leave AFDC more than 60 percent experience fluctuations in income that cause their incomes to rise above or fall below the poverty line at least once during the five years after they leave welfare. Of the families that experience such a change, more than half experience changes that bring their incomes above or below the poverty line on two or more occasions.

15. CBO estimate of P.L. 105-33, August 12, 1997.

16. Section 1902(e)(12) of the Social Security Act.

17. The low rate of private coverage for low-income wage earners is due to a number of factors. Low-wage jobs often do not include a health benefit package; low-wage workers are often new employees or part-time employees not eligible for employer-sponsored health insurance; and, even when health insurance is offered through the workplace, the cost of coverage is frequently beyond the reach of low-wage employees. Data from the 1994 National Health Interview Survey show that 70 percent of working, uninsured families reported that their employers did not offer health insurance coverage. Some two-thirds of the 1.3 million working uninsured family heads who were offered health insurance at their place of employment reported that the cost of insurance was among the reasons they were not covered. Statement of Patrick J. Purcell, Congressional Research Service before the Committee of Ways and Means, Subcommittee on Health, April 8, 1997.

18. Parents living with dependent children in a single-parent household must be covered under Medicaid if their income and assets are below a state's AFDC income and asset standards in place as of July 16, 1996. The AFDC income standard for the median state in January 1996 equaled only 36 percent of the federal poverty line. Committee on Ways and Means, U.S. House of Representatives, 1996 Green Book.

19. In addition to TMA waivers, some states also have waivers that allow them to provide Medicaid to a broader group of two-parent families than is otherwise allowed under federal law. Still another group of states has expanded coverage by raising the income eligibility standards that would otherwise apply to parents and by extending coverage to nondisabled adults more broadly.

20. Section 1931 is the provision created by the welfare law which assures that parents and children who qualified for Medicaid because they were eligible for AFDC would continue to be eligible for Medicaid after AFDC was repealed. Under this provision, states must cover parents and children who meet the AFDC family composition rules if their incomes and assets are below state AFDC income and resource standards as of July 16, 1996. These standards, however, are minimum standards, and the law allows states to adopt "less restrictive" methodologies for calculating financial eligibility under this provision to expand eligibility to parents and children with incomes or resources above the July 1996 standards. Since there already is authority under federal law for states to expand coverage under Medicaid for children, the main significance of this expansion option is that it provides states a new opportunity to cover low-income working parents without seeking a federal waiver. While section 1931 generally applies to parents in single-parent families, states that had and retained waivers granted under the AFDC program that allowed them to provide cash assistance to a broader group of two-parent families can rely on these waivers to expand Medicaid coverage under section 1931 to parents in two-parent families as well.

21. Robert Moffitt, Eric Slade, Health Care Coverage for Children Who Are On and Off Welfare, The Future of Children, Welfare to Work, Volume 7, No. 1, Spring 1997.

22. Under the new law, states that establish separate state programs can seek waivers from the Secretary of HHS to use their child health block grant funds to purchase family coverage that meets the benefits and cost-sharing requirements of the child health law if the state demonstrates that the purchase of such coverage is cost-effective and does not substitute for coverage that would have otherwise been provided. Section 2105(c)(3) of Title XXI. HHS has not yet clarified whether this option permits states to use child health block grant funds to pay for the costs attributable to covering the parent (or only the child) under the family policy or provided guidance on the criteria it will use to consider these waiver requests.

23. States cannot make their Medicaid eligibility or methodologies standards more restrictive than those in place as of June 1, 1997 and still receive child health funds, but nothing in the law prevents a state from moderating or even eliminating an expansion it puts into place after June 1997 using the new child health money.

24. It appears that a state that is forced to roll back eligibility standards under a Medicaid expansion due to budget constraints could accomplish the change in standards by closing off enrollment to new applicants with incomes above the reduced standards and by evaluating the continued eligibility of current beneficiaries at the time of their regularly scheduled redetermination interviews. Federal Medicaid regulations do not require states to make pre-termination hearings available to beneficiaries who are losing coverage solely due to an across-the-board change in eligibility rules. 42 CFR section 431.229

25. An estimated 3.4 million of the nation's 10.3 million uninsured children are eligible for Medicaid but not enrolled based on Census data for 1996. This estimate considers uninsured children whose income falls below the minimum federal Medicaid standards; it does not consider uninsured children who may be eligible for Medicaid under expanded state income eligibility rules.

26. States can take advantage of new enhanced Medicaid matching funds made available under last year's welfare law to do outreach and to redesign their Medicaid application systems in light of welfare changes. See, Center on Budget and Policy Priorities, New Federal Funds for Medicaid Outreach and Enrollment Activities, October 18, 1997.

27. Patrick Purcell, Medicaid Spending and Enrollment: A State Chart Book, updated September 22, 1997. These average per child costs do not include spending on administrative functions.

28. Gordon R. Trapnell, F.S.A., Actuarial Research Corporation, Estimated Cost of a Child Health Program in California, September 10, 1997, for the Kaiser Family Foundation. See, also, Assessing the Per Capita Cost of Medicaid Versus a Private Insurance Approach to Cover Uninsured Children: A California Example, draft Policy brief prepared by the Kaiser Family Foundation, October 1997.

29. Committee on Ways and Means, U.S. House of Representatives, 1996 Green Book. The medically needy part of the Medicaid program is a state option that allows states to cover children and other categories of Medicaid beneficiaries whose income is above regular Medicaid eligibility standards but who have particularly high medical expenses.

30. While virtually all states set Medicaid payments for some providers at levels that are below commercial rates, Medicaid provider payment rates are lower in California than in many other states. The Physician Payment Review Commission reports that in 1993, average Medicaid fees were about 47 percent of private sector fees and about 73 percent of Medicare fees; California's Medicaid fees were 63 percent of Medicare fees. (The Medicaid to Medicare ratio developed by the Commission compares fees for a cluster of services; the ratio will not necessarily be the same for all services.) Physician Payment and Review Commission, 1994 Annual Report to Congress. Low rates can allow states to stretch their dollars to provide more benefits to more children; however, the level of provider payment rates also can affect access to care if the rates are so low as to discourage provider participation.

31. For example, a study by the Massachusetts Rate Setting Commission in 1994 found that asthma was the medical condition that resulted in the highest incidence of preventable hospitalizations, with children accounting for over 40 percent of these hospitalizations. The Commission found that the cost of an asthma-related preventable hospitalization averaged about $3,000, far more than the cost of controlling the asthma through medications and regular physician visits. Massachusetts Rate Setting Commission, Preventable Hospitalizations in Massachusetts, January 1994.

Another study compared the cost of providing dental care to children who had early access to care with children who did not regularly visit a dentist when they were very young. It showed that during the two years studied, dental care for children aged four at the time of their first dental visit cost five times less than the care provided children whose first dental visits are at age eight. Doykos, JD, Pediatric Dentistry, Volume 19(1), 1997.

A third study examined the impact and cost of a cap on prescription drugs that had been imposed in the New Hampshire Medicaid program. The study compared the cost of treatment for noninstitutionalized Medicaid beneficiaries with schizophrenia during the period when the cap was in effect with costs during a period of time after the cap was discontinued. It found that the estimated average increase in mental health costs per patient during the time the cap was imposed exceeded the savings in drug costs to Medicaid by a factor of 17. Soumerai, et al., Effects of Limiting Medicaid Drug-Reimbursement Benefits on the Use of Psychotropic Agents and Acute Mental Health Services by Patients with Schizophrenia, The New England Journal of Medicine, Volume 331(10), September 8, 1994.

32. Some states that have expanded Medicaid coverage to children with incomes significantly above Medicaid minimum requirements have imposed premiums or cost-sharing requirements under authority granted through Section 1115 waivers.

33. While Medicaid rules do not allow states to charge premiums or impose cost-sharing for care provided to most children covered under the program, premiums and cost-sharing are allowed to some extent for certain Medicaid beneficiaries, such as those enrolled under a state's "Medically Needy" program.

34. The medically needy premiums and cost-sharing standards are set out in federal Medicaid regulations at 42 CFR sections 447.52 and 447.54. It is not clear whether HHS will adjust the "per family" premium amounts in the Medicaid regulations to arrive at lower "per child" amounts. Further HHS guidance on premium and cost-sharing rules under the new child health law is expected.

35. CBO, An Explanation of CBOs January 1997 Medicaid Baseline, April 1997.

36. "Initial processing" has been defined by HCFA to include taking applications, helping individuals to complete the application, gathering the necessary documentation to verify eligibility, and conducting the eligibility interviews. 45 CFR section 435.904(d)(2).

37. Urban Institute estimates based on TRIM adjusted March 1995 and March 1996 Current Population Survey; prepared for the Kaiser Commission on the Future of Medicaid.