Medicaid's $10 billion quandary: How and where to make the cuts

Washington -- After tough negotiations, Congress in April passed a budget resolution provision calling for $10 billion in federal Medicaid savings over five years. Turns out that might have been the easy part.

Now lawmakers, governors and others are positioning themselves for the fight over how and where to make those cuts. Members of Congress are drafting plans, the National Governors Assn. recently weighed in with an interim policy and a Dept. of Health and Human Services commission is expected to provide further recommendations later this year.

Both the NGA proposal and the HHS panel are meant to move the discussion away from simply financial considerations and toward broader reforms that help contain costs over the long run while improving the quality of care delivered to Medicaid recipients. Driven by rising health care costs and burgeoning case loads, total spending on the program has grown to more than $300 billion a year.

Physicians are encouraged by the discussion but are worried about some of the possible outcomes, said John Lewy, MD, chair of the American Academy of Pediatrics' committee on federal government affairs.

"We're for Medicaid reform, as long as it is done in ways that don't hurt children, and people in general," he said.

That concern highlights the need to raise the debate above artificial financial goals, said Michael Chernew, PhD, an economics professor in the department of health management and policy at the University of Michigan.

"It's very important to have a serious discussion to make sure the Medicaid eligible continue to get access to services they need," he said.

Reform proposals on the table, such as the NGA recommendations and Bush administration plans forwarded earlier this year, can both improve Medicaid and provide cost savings by giving the states the flexibility to make changes, said Rep. Nathan Deal (R, Ga.), chair of the House Energy and Commerce health subcommittee.

"[States] tell us that if we give them the ability to do that, to focus the resources, that they can in effect broaden coverage, that they can include more people with the same amount of money, and in some instances maybe even less money," he said.

But congressional lawmakers also need to hold Medicaid beneficiaries accountable, Deal said.

"There is one lesson I think we all should have learned being in or associated with government, and that is that any program that eliminates or does not have a rather significant emphasis on personal responsibility is ultimately doomed to failure," he said.

States will be held accountable financially as well, Deal said.

"States don't like to talk about capping anything, but by the same token, you can't just say, 'go do it and have no concept about what it costs to the federal government.' ... You've got to have some kind of cost-containment mechanism," he said.

While lawmakers are already crafting their own Medicaid reform proposals with the goal of finding the $10 billion in savings, they will also be looking to the governors for guidance, Deal said.

State squeeze

Even without pressure from the federal government, states have good reason to keep Medicaid costs as low as possible. The program makes up 20% of the average state budget, competing with or exceeding education as the biggest chunk of the pie. Struggling financially for years, many states have moved to control Medicaid spending by trimming benefits, cutting enrollment and reducing physician pay.

In terms of further cost savings, the governors' interim policy statement on Medicaid reform looks largely to states' abilities to wring further savings from big-ticket items such as prescription drugs and long-term care. The proposal was adopted by the NGA's executive committee earlier this month and must be approved by all the governors during their meeting later this summer before going into full effect.

The plan recommends states be allowed to move away from a "one-size-fits-all" benefits package in favor of targeting disease-management and other services to different groups of recipients.

But those proposals may not get all the way to $10 billion in savings, said Matt Salo, the NGA's director of health policy.

"We're not doing this to save X amount of dollars. We don't care. We're going to put forward reforms that are good reforms, that help us administer this program and keep this program sustainable," he said.

However, states aren't buying into congressional proposals that would require them to sacrifice federal dollars for the ability to make those reforms, he said.

"If you see it as a tradeoff, more flexibility in exchange for less money, that to me implies you are accepting a block grant or some kind of limited cap on federal dollars, and that is not on the table," he said.

But without those tools, states will be forced to make more cuts, Salo said.

"Unless we are given the ability to tinker with or make the current system more efficient, then you are left with no other choice but kicking people off, and nobody wants that," he said.

The governors' policy statement also highlights the fact that Medicaid's problems are bigger than just the program. High health care costs are hitting Medicare and private payers as well, and a large portion of Medicaid expenditures go to long-term care.

"Let's not kid ourselves that anything we can do right now in the short term is going to be the end of what's needed. The long-term problems of Medicaid are so big and so far beyond the scope of Medicaid that Medicaid reform isn't going to do it," said Salo.

New commission asked for a plan

In coming up with the Medicaid savings, Congress will also be able to look to recommendations from the HHS Medicaid reform commission, which was also mandated as part of the budget resolution. The 15 voting members of the panel are tasked with providing Congress with recommendations by Sept. 1 on how to achieve the $10 billion in savings.

The commission is also responsible for producing a second report by the end of next year to propose ways that Medicaid can expand coverage to more people while improving the quality of care, choice and beneficiary satisfaction.

"For generations, Medicaid has served the health care needs of the truly needy in America, but today the program is no longer meeting its potential," said HHS Secretary Mike Leavitt.

"The time to reform Medicaid is now, and this commission will help."