February 25, 2003 


by Leighton Ku

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

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

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

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

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

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

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

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