July 15, 1998
The House Budget Resolution Threatens
Health Care Programs for Low-Income Families
and Elderly and Disabled People
by Cindy Mann and Jocelyn Guyer
On June 5, 1998, by a vote of 216 to 204, the House adopted a budget resolution calling for $101 billion in federal spending cuts over the next five years and the same amount in tax cuts. The spending reductions consist of $45 billion in discretionary program reductions and $56 billion in mandatory program reductions. The resolution assumes that almost 25 percent of the reductions in mandatory spending $13.5 billion will be generated from cuts in health care programs.
It is likely that most if not all of these cuts would come from Medicaid and potentially the new Children's Health Insurance Program (CHIP) programs that serve almost exclusively low-income families, children, the elderly, and the disabled. Coming on top of the reductions in federal Medicaid spending and the program changes that were enacted last year as part of the Balanced Budget Act, further cuts in Medicaid of this magnitude could not be achieved through program efficiencies. As a result, these cuts would almost certainly result in less access to health care for the families and individuals served by Medicaid and a deterioration in the quality of the services provided. Moreover, the specific proposals advanced by the House Budget Committee for how to reduce Medicaid spending call for major structural changes that would shift costs to states and likely lead to deeper federal Medicaid cuts over time.
The Republican leadership is now attempting to work out the stark differences between the House and Senate budget resolutions. In contrast to the House, the Senate Budget Resolution does not include any cuts in CHIP, and it proposes to cut Medicaid by a much smaller amount than the level assumed by the House. Specifically, the Senate Budget Resolution calls for cutting Medicaid spending by $1.9 billion between 1999 and 2003 through reductions in federal payments for Medicaid administrative costs. Moreover, this Medicaid proposal was reflected in the Senate Budget Resolution solely to help offset the cost of the Transportation Equity Act for the 21st Century (TEA-21), the new transportation law. Since passage of the Senate Budget Resolution, however, a version of TEA-21 has been signed into law that did not rely on cuts in Medicaid to finance any of the cost of the legislation. Thus, the Medicaid administrative cut included in the Senate Budget Resolution is no longer needed to fulfill the function that it was slated to serve.(1)
Problems with Cutting Medicaid and CHIP
The House Budget Resolution calls for a $13.5 billion cut in mandatory spending under "Function 550," the budget category that encompasses Medicaid, the new Children's Health Insurance Program (CHIP), the Federal Employees Health Benefit Program (FEHBP), and other small health care programs.(2) Medicaid is by far the largest program in Function 550, accounting for more than 90 percent of mandatory spending in this category. As such, it is likely to bear the burden of most or all of the $13.5 billion in cuts assumed in the House resolution.
As discussed in more detail below, House Budget Committee documents released in mid-May confirm that Medicaid is likely to be the main target of the Function 550 spending reductions. CHIP, which accounts for four percent of mandatory spending under Function 550, also could be subject to reductions. Although the House Budget documents released in May originally proposed $1.5 billion in FEHBP spending reductions, Chairman Kasich has pledged since then that FEHBP will not be cut. Thus, it is likely that virtually all of the $13.5 billion in Function 550 mandatory program cuts would come from Medicaid and possibly CHIP.
Moreover, the $13.5 billion in Medicaid and CHIP cuts could be a conservative estimate of the level of cuts in health care programs for low-income people that would emerge from a budget agreement based on the House Budget Resolution. In addition to establishing spending targets for various budget functions, such as Function 550, the House Budget Resolution includes "reconciliation instructions" that direct the various House committees to meet specified spending targets. The reconciliation instructions in the House Budget Resolution direct the House Commerce Committee, which has jurisdiction over Medicaid and CHIP, to cut mandatory spending under its jurisdiction by a total of $18.6 billion between fiscal year 1999 and 2003. House Budget Committee documents released in May indicate that $6.6 billion of the $18.6 billion is expected to come from selling three power marketing associations, but some have suggested it is likely to be politically infeasible to sell these PMAs. If the House Commerce Committee is required to produce $18.6 billion in mandatory savings but cannot achieve savings by selling the power marketing associations, it could go to Medicaid and CHIP for most or all of the $18.6 billion in savings.(3) (In addition, if the $1.5 billion in savings that was assumed to come from the Federal Employee Health Benefits Program and which the House Budget resolution reconciles to the House Government Reform and Oversight Committee, the committee with jurisdiction over FEHBP is shifted to the House Commerce Committee, the total reductions from Medicaid and CHIP could approach $20 billion.(4))
There are several reasons Medicaid and CHIP should not be cut:
- Cuts in Medicaid and CHIP are not needed for deficit reduction. The House Budget Resolution's health care cuts have been proposed to finance new tax cuts; they are not necessary for deficit reduction. The Congressional Budget Office has recently estimated that the federal government will enjoy a budget surplus for the next 10 years.
- Federal Medicaid spending growth has slowed dramatically. Declining rates of growth in Medicaid spending have made a significant contribution to deficit reduction. Over the past few years, growth in Medicaid spending has slowed dramatically. For each of the last three years, federal Medicaid spending grew at a slower rate than in any year since 1984.
As a result of the marked slowdown in the growth of federal Medicaid spending, CBO has repeatedly revised downward its estimates of federal Medicaid costs. In its January 1998 baseline, CBO estimates that federal Medicaid spending between fiscal year 1999 and fiscal year 2003 will total $618 billion. This is $51 billion below CBO's 1997 projection for Medicaid costs over this five-year period, $148 billion below the level CBO projected in 1996, and $205 billion below the level CBO projected in 1995. While there were some changes in Medicaid policy between 1995 and 1998 that explain a small portion of the decline in CBO's projections, most of the decline has come about because program costs are growing more slowly than anticipated. Thus, mandated Medicaid cuts are not needed to control Medicaid spending. Indeed, if Congress were to cut Medicaid now, it would send the signal that Medicaid will be the target of cuts regardless of what states do to control costs.
- Medicaid already was cut by the BBA; further cuts are likely to have a significant impact on benefits and eligibility. The Medicaid cuts in the House Budget Resolution would be particularly damaging because they would come on top of Medicaid spending reductions and program changes imposed by the Balanced Budget Act of 1997. The BBA resulted in gross Medicaid spending reductions of $22.8 billion between 1999 and 2003. These spending reductions were coupled with changes projected to result in $10.1 billion in increased Medicaid expenditures, leaving $12.7 billion in net Medicaid cuts over this five-year period.(5)
The BBA cut Disproportionate Share Payments (DSH) to hospitals and other institutions, allowed states to increase the cost-sharing imposed on certain low-income elderly and disabled Medicaid beneficiaries, accorded states greater flexibility to set reimbursement rates for nursing homes and hospitals (through repeal of the "Boren amendment"), and allowed states to phase out cost-based reimbursement for federally qualified health centers and rural health centers. At the same time, the Balanced Budget Act expanded significantly state discretion to mandate enrollment in Medicaid managed care. These changes mean there is little room for further reductions in Medicaid spending that do not directly affect benefits, eligibility, or access to care. To the extent that further cuts in federal Medicaid spending lead states to reduce payments to providers, the quality of care provided to beneficiaries may suffer. Some managed care providers are reportedly already leaving the Medicaid market owing to low reimbursement rates; further tightening of Medicaid payment rates in response to federal budget cuts will likely exacerbate this problem.
- Medicaid and CHIP cuts would undermine last year's initiative to provide health care coverage to millions of uninsured children in low-income working households. Last year, as part of the BBA, Congress offered states new options for reaching uninsured children who are eligible for Medicaid but not enrolled. It also created a new block grant that allows states to expand Medicaid or establish separate child health programs to cover a large share of the nation's uninsured children who are not already eligible for Medicaid. Reductions in Medicaid and CHIP could undermine the bipartisan goal of reducing the number of uninsured children, most of whom are from low-income working families.
To date, more than 40 states have seized the opportunity created by CHIP to expand coverage for uninsured children in low-income working families, through either Medicaid or separate state insurance programs. Many states are just beginning to implement these expansions, as well as new Medicaid and CHIP outreach and marketing strategies. Cutting Medicaid or CHIP at this crucial stage of implementation could reduce the resources available to states to lower the number of uninsured children. It also could undermine state officials' confidence in the federal government's commitment to covering uninsured children, chilling or halting some state expansion and outreach efforts.
The Health Care Cuts Assumed in the House Budget Resolution
The House Budget Resolution provides no specific information on how the Function 550 mandatory health program cuts would be accomplished. However, materials released in May by Representative Kasich, the Chairman of the House Budget Committee, indicate that Medicaid has been identified as the primary target of the proposed $13.5 billion in cuts.
The House Budget Committee documents included three specific proposals to reduce mandatory health care spending under Function 550:
- Cutting federal reimbursement for Medicaid administrative expenditures. The House Budget Committee documents released in mid-May proposed generating $4.3 billion in savings by turning federal reimbursement for state administrative costs under Medicaid and Food Stamps into a block grant. In the weeks after these documents were released, Congress approved (and the President then signed) legislation reducing federal funding for state food stamp administrative costs by $1.8 billion over five years and using these savings to finance a partial restoration of food stamps for legal immigrants and agriculture research and crop insurance programs. These savings are no longer available to pay for tax cuts. Accordingly, the budget resolution that the House subsequently passed appears to assume no further food stamp savings in this area(6), and to assume that all $4.3 billion in savings will come from Medicaid. These reductions could be imposed through a block grant for Medicaid administrative costs (without food stamps included in the block grant) or through other mechanisms such as a reduction in the federal matching rate for state Medicaid administrative expenditures.
A block grant for Medicaid administrative costs would replace the current system under which the federal government reimburses states at a 50 percent matching rate for Medicaid administrative spending.(7) Significant reductions in federal payments for Medicaid administrative costs, whether or not they are achieved through a block grant structure, would leave states shouldering a larger share of administrative costs. That, in turn, could lead states to cut corners on important administrative tasks, including managed care planning and oversight, outreach efforts, and fraud and abuse investigations.
- Converting Medicaid acute care spending into a block grant. The House Budget Committee documents propose to generate $7.4 billion in federal savings by converting Medicaid acute care to a block grant. While the documents do not provide a detailed description of the proposal, an acute care block grant would likely result in fundamental changes for the Medicaid program.(8)
Under the current Medicaid financing system, states receive federal matching funds for all acute care spending. A block grant would replace these open-ended federal payments with a grant to states that would cap the federal government's contributions for acute care costs. The federal payments to states would likely grow each year based on a pre-set rate, but the payments would no longer be based on actual state costs. States would be expected to bear the full burden of any costs in excess of the block grant payments, including costs due to higher-than-anticipated health care inflation or enrollment. If the proposal is similar to the 1995 - 1996 Medicaid block grant proposals, it would be coupled with sweeping programmatic changes allowing states to reduce the scope of benefits and restrict eligibility to help states keep their costs within the limits of the capped federal funding.
In addition to these two reductions affecting federal contributions to state Medicaid programs, the House Budget Committee documents proposed generating $1.5 billion in mandatory savings under Function 550 by capping the size of the federal government's contribution toward the premiums of participants in the Federal Employees Health Benefits Plan. As noted, however, Rep. Kasich subsequently stated that the FEHBP will not be cut. This deepens the need for reductions in other Function 550 mandatory spending programs, suggesting that Medicaid, and possibly the new child health block grant, would be hit with the full $13.5 billion in cuts in Function 550 required by the House Budget Resolution.
The two principal reductions the House Budget documents assume, the reduction in federal support for state Medicaid administrative costs and the conversion of Medicaid acute care to a block grant, are discussed in more detail below.
What About Cuts in Disproportionate Share Hospital Payments?
Another potential target of the cuts called for under the House Budget Resolution are Disproportionate Share Hospital payments (DSH), an important source of funding for children's hospitals, public hospitals, and other providers of last resort in many states. DSH spending has been the target of cuts in the past and may again be identified as an "easy" way to achieve Medicaid savings.
Further savings in DSH, however, would be problematic. The Balanced Budget Act already reduced federal Medicaid spending on DSH by $15 billion between fiscal year 1999 and fiscal year 2003. These reductions accounted for more than 65 percent of the Medicaid savings included in the BBA for this five-year period. As a result, CBO now projects that federal DSH spending will decrease at an average annual rate of 2.6 percent between fiscal year 1999 and fiscal year 2003. Any further cuts in DSH are likely to fall most heavily on a number of states that have already been hit hard by the DSH cuts in the Balanced Budget Act, including Alabama, California, Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, and Texas.
Reductions in Medicaid Payments for Administrative Costs
The House Budget Committee documents released in May propose cutting federal reimbursement of Medicaid administrative expenditures. Currently, administrative costs consume less than five percent of all federal Medicaid spending. Reductions in federal administrative payments to states could lead to damaging consequences both for the integrity of the program and for the beneficiaries who rely on it for their health care. This is particularly true in light of changes enacted as part of the Balanced Budget Act of 1997 that create new challenges and opportunities for state Medicaid programs. If states are to implement these changes properly, they are likely to need to increase, not reduce, Medicaid administrative expenditures.
- Implementing Medicaid managed care. The BBA gave states broad flexibility to accelerate the conversion of their Medicaid programs to managed care delivery systems. For most states, this requires new staff expertise, rate-setting capabilities, more sophisticated information systems, and improved quality assurance technologies. Reducing federal spending on administrative costs in the midst of this major payment and delivery system transformation will increase the risk that states will shortchange these tasks, creating problems with the quality of care that Medicaid provides and making it less likely that states will be able to track and account adequately for the managed care services they purchase with federal and state Medicaid dollars.
- Conducting outreach campaigns to uninsured children. A major part of the initiative to reduce the number of uninsured children depends on states' efforts to identify and sign up children who are eligible for Medicaid but not enrolled, most of whom are in families with earnings. The federal Agency for Health Care Policy and Research estimates that 4.7 million uninsured children are eligible for Medicaid but not enrolled most of whom are in families with earnings. Many states are embarking on ambitious outreach campaigns and implementing changes in their Medicaid application systems to make it easier for low-income working parents to enroll their children. States depend on Medicaid administrative funds, however, to finance these outreach campaigns and program simplification activities. If administrative funds are cut, states will likely curtail their efforts to reach and enroll eligible children, undermining initiatives to improve Medicaid participation rates among working poor families.
- Assuring quality of care in nursing facilities. The BBA repealed a long standing requirement that states pay nursing facilities "reasonable and adequate" rates for caring for Medicaid residents. Over time, the repeal of the Boren amendment is likely to result in lower payment rates to nursing homes. Currently, the federal government matches state administrative costs associated with surveying and certifying nursing homes at an enhanced 75 percent rate to assure that homes comply with minimum quality standards. If federal support for these nursing home inspections is reduced at the same time that provider payments are shaved, the quality of nursing home care is likely to suffer.
- Curbing fraud and abuse. A cut in Medicaid administrative matching funds also could compromise and weaken state efforts to curb Medicaid fraud and abuse. Currently, the federal government matches states' costs in operating State Medicaid Fraud Control Units to investigate and prosecute provider fraud and patient abuse in Medicaid at an enhanced 75 percent rate. A squeeze on federal administrative matching payments, however, could cause states to shift state spending from fraud and abuse investigative activities to other more immediately pressing administrative functions. Over the long run, the savings generated by reducing administrative spending could be out weighed by the costs resulting from inadequate systems for controlling fraud and abuse.
- Implementing "delinking" of TANF and Medicaid. Welfare changes have also created new Medicaid administrative responsibilities. The "delinking" of Medicaid and welfare eligibility requires states to revamp their systems to assure that Medicaid eligibility is determined properly for those families that do not apply for cash assistance, whose application for cash assistance is denied, or whose cash benefits are terminated. There already is evidence that welfare program changes have adversely affected the proportion of eligible families and children enrolled in Medicaid. For example, North Carolina is currently investigating whether 24,000 children whose cash assistance was terminated were inappropriately dropped from the Medicaid program as well. Although the welfare law provided states with capped federal Medicaid matching funds that can be drawn down at an enhanced matching rate to develop systems to address these issues, the enhanced federal match rate may not be sufficient to induce states to invest in new systems and assure Medicaid coverage of eligible families if their state administrative dollars must fill in for lost federal funds elsewhere in the program.
- Assuring children are enrolled in the right program. The new child health law requires states that use their federal child health funds to establish separate child health insurance programs to assure that these new funds are not inappropriately spent enrolling Medicaid-eligible children in the new separate state programs. Effective processes to screen children applying for the separate state programs and determine if they are eligible for Medicaid, and if so, to enroll them in Medicaid, will require states to make initial investments in systems to coordinate eligibility determinations between Medicaid and separate state insurance programs. States also will incur ongoing administrative costs in assuring that children who apply are enrolled in the appropriate program. If federal Medicaid administrative funds are reduced, these new systems may not be put into place. States could end up either misusing the new child health funds by enrolling Medicaid-eligible children in separate state insurance programs or turning these uninsured children away from the separate state programs without enrolling them in Medicaid.
The House Budget Committee proposal to convert federal Medicaid administrative spending into a block grant is a particularly risky mechanism for cutting Medicaid administrative expenditures. Under a block grant structure, states would no longer be entitled to federal matching payments for all administrative costs. Instead, they would receive a fixed block grant allocation and would have to pay 100 percent of all costs above that level.
- A block grant structure requires states to finance 100 percent of the cost of any initiatives that increase administrative spending above the states' block grant allocations. Thus, states are particularly likely to be discouraged from undertaking new initiatives that carry administrative costs, including efforts to improve the quality of managed care and develop new outreach and enrollment strategies aimed at reaching children who are eligible for Medicaid but not enrolled.
- A block grant is not likely to adjust for changes in costs due to increases in enrollment. If, over the next few years, caseloads begin to rise as states seek to increase enrollment of working poor children, as state populations grow, or when the economy goes into a downturn, block grant payments to states would not be adjusted to reflect the additional administrative costs associated with caseload growth. Some states could be more adversely affected than others if they experience particularly rapid caseload growth.
In many respects, federal changes enacted over the past few years have set the Medicaid program in new directions. The welfare law changes, the new child health block grant, and the flexibility accorded states under the BBA to set provider rates and implement managed care without seeking federal waivers require states to pay more, rather than less, attention to administrative tasks. Reductions in administrative payments, whether they result from a cap on federal payments or other mechanisms such as a reduction in the federal matching rate, could make it much more difficult to assure that eligible beneficiaries are enrolled in the program and to prevent a deterioration in the quality of health care the program provides.
The Acute Care Block Grant
The Medicaid program serves several groups of low-income beneficiaries: the elderly, people with disabilities, pregnant women, children and their parents, and, in some states, individuals with high medical expenses relative to their income. For each of these groups, coverage is provided for a range of services, including acute care services 81 percent of acute care services consist of physician and hospital care and pharmacy services and long-term care services, which cover both nursing home care and home health services. The Budget Committee documents suggest transforming the acute care portion of Medicaid into a block grant. In 1995, acute care spending accounted for 52 percent of total Medicaid spending and nearly 60 percent of non-DSH spending.
Although the amount of federal savings that would be achieved through the acute care block grant proposal is not as large as the reductions under the 1995-1996 block grant proposals, the changes in the financing structure could lead to greater reductions over time and to significant losses in services and coverage for vulnerable populations.
- Shifts costs onto states. A block grant would erode the longstanding commitment of the federal government to share with states in the cost of providing coverage for health care services to low-income families and elderly and disabled people. Under a block grant, states would bear the full cost of unanticipated increases in Medicaid acute care expenditures that were caused by factors beyond states' control, such as increases in unemployment, outbreaks of a disease (such as a flu epidemic), population growth, and the cost of new medical treatments.
- Undermines child health initiatives. The block grant could bring to a halt state efforts to reach and enroll uninsured children from working poor and near-poor families. Many states are now beginning to pursue outreach and enrollment strategies aggressively in an attempt to reach these children. A cap on federal Medicaid payments for acute care services would likely end these initiatives. In 1995, acute care services accounted for 93.3 percent of all Medicaid spending for children. An acute care block grant could leave states responsible for most or all of the cost of covering newly enrolled children.
- Threatens health care for the elderly and disabled. Elderly and disabled individuals and other persons with significant medical problems also would be significantly affected by an acute care block grant. Together, elderly and disabled individuals account for half of all acute care Medicaid spending. Because the block grant would leave states at risk for all acute care costs above the block grant allocation, the new funding structure would likely prompt many states to impose strict limits on the use of hospital care, new therapies and drugs. High users of acute care services would be most affected by such restrictions.
- Increases risk of deeper cuts in the future. A block grant structure would provide a ready mechanism for future reductions in federal Medicaid spending that could be accomplished simply by ratcheting down the federal block grant payments to states. Recent reductions in the Social Services Block Grant and proposals to reduce the welfare-to-work grants to states and the TANF block grant illustrate how block grants can be targets for federal cuts. Converting the acute care part of Medicaid to a block grant could consequently lead to deeper reductions in federal Medicaid expenditures in subsequent years.
- Generates potential for cuts in state Medicaid spending. The federal reductions are only part of the story. A block grant structure would likely lead to a reduction in state financial contributions for Medicaid as well. Currently, every dollar a state spends in the Medicaid program is matched by a federal payment. Under a block grant, even one in which state matching payments continue to be required, not all state spending will be matched by federal payments; federal matching payments are capped by the block grant allocation. If states are willing to spend only state funds that will be matched with federal payments, a block grant also will lead to a reduction in state spending.
For example, if federal spending is reduced by $7.4 billion over five years by capping federal payments for acute care services and states spend the maximum amount of state funds that could be matched under the block grant, state spending would be reduced by $5.6 billion compared to how much states would contribute to Medicaid under current law.(9) Total Medicaid reductions thus would amount to $13 billion over the five-year period not $7.4 billion. Similarly, if the acute care block grant federal cuts rise to $10 billion, total state and federal cuts could amount to $17.5 billion.
The House Budget Resolution proposes unnecessary and potentially quite harmful cuts in health care programs that serve low-income children and elderly and disabled individuals. These cuts would shift new fiscal responsibilities to the states and could reduce both the quantity and the quality of the health care coverage provided under the Medicaid and CHIP programs.
1. In its fiscal year 1999 budget, the Clinton Administration proposed reducing the matching rate for Medicaid administrative costs from 50 percent to 47 percent, a change that CBO has estimated would generate $1.9 billion in federal savings. However, this proposal was offered in the context of a budget package that also included several Medicaid initiatives to reduce the number of uninsured children. CBO has estimated that the net impact of the Clinton Administration's budget proposal would be to reduce federal Medicaid spending by $0.9 billion between fiscal year 1999 and fiscal year 2003.
2. Function 550 also encompasses discretionary spending on biomedical research, health education activities, and other health care programs, but the House Budget Resolution calls for cuts only in the mandatory spending programs included under Function 550.
3. In theory, the Commerce Committee could achieve some of these savings by reducing spending on Medicare Part B, over which the Committee also has jurisdiction. In practice, there is virtually no possibility the committee would cut Medicare. The budget resolution the House Budget Committee reported included $10 billion in Medicare cuts, but those cuts aroused significant opposition in the House Republican caucus, and Rep. Kasich and the Rules Committee reversed these cuts before the budget resolution came to the House floor to help secure sufficient votes for approval of the resolution.
4. Since the reconciliation instructions are directed to committees, it is not certain that the $1.5 billion in FEHBP cuts would be shifted to programs within the Commerce Committee's jurisdiction. However, because the $1.5 billion in FEHBP cuts are mandatory health spending cuts under Function 550, if the House Budget Resolution spending targets are maintained, it is likely that the cuts would stay within Function 550 and add to the cuts that the Commerce Committee would need to make.
5. CBO, Budgetary Implications of the Balanced Budget Act of 1997, August 12, 1997. While the estimated $10.1 billion in increased Medicaid expenditures are sometimes characterized as offsetting the Medicaid spending reductions, the increases enacted as part of the BBA generally do not benefit those institutions and beneficiaries most adversely affected by the cuts included in that legislation.
6. The House budget resolution does assume $2 billion in other food stamp reductions and reconciles those reductions to the House Agriculture Committee.
7. An enhanced federal matching rate is available for a selected number of administrative activities.
8. This proposal was first described in a May 12, 1998 document from the House Budget Committee majority where it was listed as generating $4.8 billion in federal savings. On May 19, 1998, a revised list of proposed cuts was leaked that indicated the Medicaid acute care block grant was now assumed to generate $7.4 billion in savings. The $7.4 billion figure is consistent with the aggregate cut of $13.5 billion in Function 550 required by the House Budget Resolution and hence is used here.
9. These calculations assume states would spend as much in acute care spending as would be matched by the federal government and are based on an overall federal Medicaid matching rate of 57 percent.