HHS opens door to Medicaid eligibility cuts

Washington -- A push by Arizona to reduce its Medicaid coverage to help plug massive budget deficits recently received a nod from Health and Human Services Secretary Kathleen Sebelius. The acknowledgment soon was followed by new HHS advice to all states on how they might dial back on their Medicaid coverage to help tackle budget crises without violating federal law.

In a Feb. 15 letter to Arizona Gov. Jan Brewer, Sebelius said the state could stop covering 245,000 low-income, childless adults when the state Medicaid demonstration waiver that first allowed the expanded coverage expires on Oct. 1. The adults represent the bulk of the 280,000 people whom the state decided to cut from Medicaid on Jan. 20. Brewer had been seeking a new federal waiver to carry out the cuts and sidestep federal eligibility mandates.

Brewer said Sebelius' letter shows the secretary is listening to state concerns about growing Medicaid spending and other budget problems.

But Sebelius' decision comes as a "complete shock" to the Arizona health care community, which is united in its opposition to the Medicaid eligibility cuts, said David Landrith, vice president of policy and political affairs for the Arizona State Medical Assn. Such a coverage reduction would pose a financial challenge to Arizona health care professionals by greatly increasing the low-income uninsured population, he said.

The advice to Arizona was followed by a Feb. 25 HHS letter to all state Medicaid directors in which the HHS chief clarified situations in which cash-strapped states might reduce eligibility without running afoul of federal laws that typically prevent such cuts. States accepted billions in federal stimulus money in exchange for new maintenance-of-eligibility requirements designed to keep Medicaid a stable source of coverage for low-income and disabled people.

States that have current or projected budget deficits, for instance, can seek an exemption from the eligibility requirements for higher-income adults who are enrolled in Medicaid for reasons other than a pregnancy or disability, the Sebelius letter explains.

States like Arizona that have expanded Medicaid coverage under previously obtained federal waivers must continue covering those populations as long as the waivers are in effect, but nothing in federal law requires those states to renew waivers when they expire.

In addition, states may have some flexibility under the law when it comes to raising Medicaid premiums for certain populations, such as Children's Health Insurance Program beneficiaries whose family incomes are higher than 150% of poverty, Sebelius notes.

The way to more flexibility?

In Arizona's case, the state had adopted the demonstration waiver to cover the 245,000 additional people five years ago, said Brewer spokesman Matthew Benson. The waiver covers childless adults who earn up to the federal poverty level, which is $11,000 a year for individuals.

Arizona is one of several states to cover childless adults in its Medicaid program.

The state probably will proceed by filing a replacement waiver during its legislative session this year, Benson said. Lawmakers could cut coverage, freeze enrollment or take other actions.

"It's safe to say that we're going to pursue a number of efficiencies as we modernize our system," Benson said. The Sebelius letter to Brewer "gives us some flexibility to do that."

Brewer might have a harder time eliminating Medicaid coverage for the other roughly 30,000 adults -- who are parents -- because of restrictions on Medicaid cuts in the national health system reform law. An additional 5,000 mentally ill adults would be transferred from the waiver coverage into regular Medicaid. Covering all 280,000 adults costs the state about $1 billion a year, Benson said.

Brewer has been at the forefront of governors asking for more flexibility to control the expansion of state Medicaid spending. Arizona's Medicaid spending increased from 17% of the state's general fund in 2007 to 30% this year, Benson said.

The latest Sebelius advice on Medicaid flexibility could influence other states' actions.

"A lot of the states are interested in what's happening because many of the states are concerned about similar issues," said Rick Fenton, acting director of health services at the American Public Human Services Assn., a Washington, D.C.-based organization representing state health agency commissioners.

However, it's unclear how many states have waivers they could allow to expire or have conditions that could allow them to obtain eligibility rule exemptions.

At least one Medicaid expert didn't expect other states to follow Arizona's lead. "I'm not at all certain that many states would want to take some of the real deep cuts that Arizona is proposing," said Diane Rowland, ScD, executive director of the Kaiser Commission on Medicaid and the Uninsured.

Sebelius said she is considering a number of other requests by Brewer, including ending transportation services for Medicaid enrollees and charging fees to beneficiaries who miss medical appointments.

She also pledged to work with Brewer on adopting a state tax on physicians or hospitals in an effort to draw additional Medicaid matching funds. The added money then could be used to reimburse health professionals for the tax while paying for more medical care.

But this move would increase the use of a type of federal spending loophole that President Obama is seeking to close in a few years. Obama, in his fiscal 2012 budget request to Congress, called for capping the percentage of additional federal matching funds states could secure through these provider taxes beginning in 2015.