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Testimony on Unfunded Mandates in Medicaid by Bruce C. Vladeck
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Government Reform, and Oversight, Subcommittee on Human Resources and Intergovernmental Relations
January 18,1996


Medicaid provides health coverage for 36.1 million Americans - children, pregnant women, senior citizens, individuals with disabilities and others -- through a partnership between the Federal government and the States that provides States with substantial flexibility in designing their Medicaid programs.

Under the current program structure, States and the Federal government have been working to implement more flexibility in the Medicaid program. HCFA has used current waiver and demonstration authority to enable States to pursue a number of innovative approaches to provide health coverage to special populations and to redesign provider delivery systems.

Furthermore, the President has pro posed important new reforms that will maintain coverage of vulnerable populations, increase control of Medicaid costs, contribute savings to the Federal budget, and provide States with additional programmatic flexibility.

In fact, Medicaid program spending has grown less rapidly than spending in the private sector on a per person basis, except for the period between 1989 and 1992 (Chart 1) 1 . Combined efforts by the Executive Branch, Congress and the States have kept costs under control while maintaining the Medicaid program as an important source -- often the only source -- of coverage for income Americans. This Administration's proposals to further control spending continue the commitment to guaranteeing these individuals access to a meaningful benefits package. The President's proposal does not shift Federal responsibilities to the States, it is not an unfunded mandate, and it provides significant increases in States' flexibility to manage their Medicaid programs. 1 The higher growth rates during this time were caused by several factors, including a national recession, States' use of statutory loopholes to increase Federal payments without increases in medical services, and increased provider payments.

Medicaid is a Critical Safety Net

Medicaid is the primary source of coverage for Americans with diverse health care needs. It covers preventive care for low-and moderate-income pregnant women and children and long-term care for low-income senior citizens and persons with disabilities. It also provides a variety of rehabilitative services and adaptive technologies for persons with disabilities, chronic care for individuals with special needs, and supplemental coverage for low- income Medicare beneficiaries.


Generally, Medicaid acute-care coverage mirrors the employer based coverage available to most Americans, but for senior citizens and individuals with disabilities Medicaid also provide long-term care benefits that are rarely available or affordable through other sources. Because Medicaid covers these services, the program ultimately helps a large number of working American families care for their chronically ill, family members. Indeed, 68 percent of all nursing home residents rely on Medicaid to help pay for some of their care.

Many senior citizens have complex health problems or need long- term care. In 1993, spending on services for elderly and disabled individuals constituted almost 70 percent of all Medicaid spending, excluding payments to disproportionate share hospitals (DSH). Approximately half of these dollars was spent on long-term care in nursing homes. Without Federal Medicaid funding, the costs of caring for many of these individuals -- the elderly, chronically ill, disabled and mentally ill -- would fall entirely on States, local communities and families. The remaining thirty percent of Medicaid spending pays for care -- primarily hospital and physician services of low-income adults and children (Chart 2).

It is important to note that States are free to cover additional populations and services beyond those required under Federal guidelines. A few optional benefits, such as prescription drugs and clinic services, are covered by almost all of the States. States can choose to offer a wide variety of other medical services, and they can and do change their benefit packages. States use flexibility in eligibility and coverage of services to customize their Medicaid programs to meet their specific needs. In 1993, only 38 percent of all Medicaid benefit and disproportionate share hospital payments was spent on mandatory services provided to mandatorily eligible individuals. States spent nearly 50 percent of their Medicaid funds on optional services and populations they have chosen to cover, while another 13 percent was devoted to disproportionate share hospital payments.

Americans who qualify for Medicaid are guaranteed financing for their essential health services. National standards for coverage of vulnerable populations apply in all States. States provide a full range of services to beneficiaries, from childhood immunizations to nursing home care. Within these parameters, Medicaid has had substantial success serving diverse low-income populations.

Financial Partnership

Medicaid is a voluntary program designed by Congress to be administered by States with matching Federal funding at rates that range from 50 to 80 percent depending on State per capita income. Today, all 50 States, the Territories, and the District of Columbia have chosen to participate in the Medicaid program and to enter into a financial partnership with the Federal government.

States have used the broad flexibility inherent in the Federal State relationship to create many optional eligibility, coverage, and financing policies that meet the diverse needs of their people and the State's own financial circumstances.

More importantly, this relationship provides State Medicaid programs with the financial backing of the Federal government. The flow of Federal funds under the current Medicaid entitlement program protects States and beneficiaries during economic downturns and natural disasters, such as earthquakes or hurricanes. When States increase enrollment, the Federal government automatically shares the responsibility of additional costs. The combination of Federal financial participation and an individual entitlement guarantees that the Federal government will consistently share the cost of providing medical care to low-income children, elderly, pregnant women, and individuals with disabilities. Federal financial assistance is provided regardless of changes in program enrollment or in a State's economic situation. The Federal/State partnership inherent in the Medicaid program guarantees the commitment of Federal funds.

Block Grant

The Conference Agreement would curtail Federal financial responsibility by converting Medicaid into a capped block grant formula, throwing the current Federal/State partnership out of balance. The new MediGrant program would end the entitlement to a basic health care safety net for low-and middle-income individuals and families. It would also be seriously underfunded.

The MediGrant proposal would constrain increases in Federal Medicaid spending far below the rate of inflation and the rate of growth in the number of elderly, disabled and low-income people who will need help from the program. Federal Medicaid payments would be an aggregate amount, fixed in law, totally disconnected from State funding needs. This would underfund the Federal portion of the Federal-State partnership and leave States with no protection from enrollment changes. States with growing populations would be at greater financial risk. The arbitrary limits particularly threaten States with rapidly aging populations, since the block grant amounts would not change to reflect the increasing number of high-cost beneficiaries in a State.

Exacerbating the underfunding problem, the Republican block grant formula creates an overwhelming incentive for States to reduce their contributions to Medicaid. The formula would lower amount of State expenditures required to receive Federal .funds. State spending beyond the block grant amount would not matched at all. The Center on Budget and Policy Priorities has estimated total Medicaid spending reductions - Federal and State - could exceed $400 billion over seven years.

While both Federal and State support for low-income individuals and families would be dramatically reduced under the Conference agreement, the medical needs of this population would not go away. The cost of caring for the uninsured and low-income Americans could fall to local-level public health care systems and may shift costs to the privately insured and their employers. Worse, millions of needy people could opt to forgo necessary care altogether or potentially increase the use of costly emergency services.

The Republican plan would also eliminate the individual entitlement to health care under Medicaid. Vestiges of statutory language guaranteeing coverage for some people are undermined by a lack of definitions for eligibility criteria and have no specific set of meaningful health benefits. The set-asides in the Republican plan offer little protection for vulnerable populations.

In addition, the Republican block grant does not provide meaningful assurances that Federal and State tax dollars will appropriately spent. The Conference Agreement eliminates some Federal enforcement provisions to guard against waste or abuse American Federal tax dollars. The taxpayers deserve appropriate Federal standards and oversight in the Medicaid program.

The President's Proposal

The Administration opposes the Republican Medicaid proposal as excessive, harmful and unnecessary. The President has proposed an alternative approach that would protect health care access and high quality of care while providing States with additional flexibility in their programs and controlling costs and yielding savings for deficit reduction.

The President's Medicaid per capita cap proposal would continue the shared Federal-State financial partnership and maintain the entitlement to a meaningful set of health benefits for low-income children, pregnant women, seniors, and individuals with disabilities.

States would receive Federal matching funds up to per person spending limits for any current or new enrollees. This plan would maintain the Federal financial commitment even if States have to expand enrollment. Under a period of economic recession, increased enrollment in a State would automatically result in additional Federal funds for States. Under a per capita approach, Federal dollars would be specifically linked to the number and casemix of enrollees. The Center on Budget and Policy Priorities estimates that a recession, depending on its severity, could increase Medicaid costs due to increased enrollment by between $8 billion and $29 billion. Under the per capita approach, Federal funds would automatically be available to match State spending for each new enrollee.

Cost Shift -- Opponents of the President's plan charge that the per capita cap would result in a cost-shift from the Federal government to the States. That accusation is wrong. The President's proposal provides new State flexibility under the current partnership, not new mandates. The President's proposal maintains the Federal/State financial partnership and the Federal government's financial commitment to the States and to beneficiaries -- which is the heart of the Medicaid program.

Under the per capita cap, States would continue to receive Federal matching funds for individuals States need to enroll in the Medicaid program. Federal matching funds would increase as the States' population expands and enrollment grows. Federal matching funds under the per capita cap proposal would be dynamic and responsive to States needs.

It is the block grant that would shift costs and leave States at risk -- particularly in the event of economic downturns. Under a block grant, Federal matching funds do not change -- regardless of changes in the size of the States' Medicaid populations.

Unfunded Mandate -- Opponents charge that the per capita cap proposal is an "unfunded mandate" on the States. This accusation is also wrong. In fact, under a per capita cap methodology, Federal funding would expand as the States' needs expand and enrollment grows. The per capita cap would reduce Federal spending without putting the States at undue financial risk.

However, the Republicans' block grant proposal would underfund the Federal/State partnership, leaving the States with no protection from enrollment changes. States with growing populations would be at greater financial risk. The block grant methodology does not reflect the number of high-cost beneficiaries in a State. Consequently, the arbitrary limits particularly threaten States with rapidly aging populations.

Flexibility -- Opponents also charge that the per capita cap proposal does not provide enough State flexibility. The President's proposal enhances State flexibility -- but not to the point of jeopardizing beneficiary access to services or their quality of care. The President's proposal is designed to provide States increased flexibility to manage their Medicaid programs. At the same time it retains the beneficiary entitlement to benefits.

The President's proposal incorporates many flexibility changes States have been advocating through the National Governors Association, the State Medicaid Directors Association, the American Public Welfare Association and other groups. These changes would provide States greater flexibility to design and operate their programs, thereby permitting them to improve program management to help meet the Federal per capita payment limits. These flexibility provisions could also produce savings independent of the Federal payment limits in cases where State spending is projected to be under the per person growth limits.

The President's proposal provides:

  • Greater State control over program efficiency and costs:
    • Eligibility simplification and expansion would provide States the option of covering individuals with incomes up to 150 percent of poverty, subject to a budget neutrality adjustment.

    • States would be able to require enrollment in managed care without waivers.

    • States would be able to continue innovations in provider payment methods without Federal requirements regarding hospital and nursing home payments.

    • States would no longer have to reimburse Federally Qualified Health Centers (FQHCs) and Rural Health Centers (RHCs) on a cost basis.

    • States would have greater control over long-term care costs because they would be able to implement home and community- based services programs without Federal waivers.

  • Enhance flexibility for States to establish managed care networks:
    • States would be able to establish provider networks (including primary care case management (PCCM) programs) without needing waivers.

    • States would be able to contract with capitated health plans without regard to Federal enrollment requirements (i.e., the current rule requiring Medicaid capitated plans to have 25 percent commercial enrollment would be repealed).

    • States would be able to restrict Medicaid beneficiaries in a rural area to a single HMO if only one HMO were available. State relief from administrative requirements regarding provider qualifications and long-term care services:

    • States would no longer be subject to annual reporting requirements for obstetric and pediatric care.

    • States would no longer have to conduct duplicative annual resident assessments for mentally ill and mentally retarded nursing home residents.

    • Federal restrictions on training sites for nurse aides would be relaxed.

These flexibility provisions would augment current State authority within Medicaid's Federal-State partnership. This enhanced State flexibility, combined with a per capita cap funding mechanism, would preserve the safety net Medicaid provides while containing costs.


Can savings be achieved in Medicaid? of course, as long as they are at a moderate level that protects the vulnerable populations who depend on Medicaid. The Administration's per capita cap proposal would do just that within the context of continuing the entitlement to meaningful benefits and providing substantial new flexibility to the States.

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