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Medicaid Commission Finds $1 Billion More Than Asked to Cut

Charged by HHS with finding $10 billion in savings over five years they exceed goal

Sept. 1, 2005 – The Medicaid Commission, which was to tell Health and Human Services how to save $10 billion dollars over five years, presented their report today and it includes suggested reforms that they project will save the government $11 billion – a billion dollars more than their goal.

The commission has the additional task or finding ways Medicaid can better serve beneficiaries but they have until the end of the year to develop that plan.

The big savings - $4.3 billion over five years - the commission projects can come from changing the way states must buy drugs for Medicaid and assuring pharmaceutical companies report data accurately. They recommend prices based on the Average Manufacturer Price (AMP) rather than the published Average Wholesale Price (AWP), which is now in use

The reform that most had consumer advocates worried involved allowing states to impose high co-payments on Medicaid beneficiaries. They see a savings of $2.0 billion by allowing the states the flexibility to develop tier co-payment plans. Basically charging high co-pays for those they assume more capable of paying more. And, having higher co-pays on expensive drugs when alternatives are available.

This is a summary of their recommendations.

  >> $4.3 Billion - Prescription Drug Reimbursement Formula Reform

  >> $2.0 Billion - Extension of the Medicaid Drug Rebate Program to Medicaid Managed Care

  >> $1.4 Billion - Change the Start Date of Penalty Period for Persons Transferring Assets for Medicaid Eligibility.

  >> Less Than $100 Million - Increase the "Look-Back" Period from Three to Five Years

  >> $2.0 Billion - Tiered Co-Payments for Prescription Drugs

  >> $1.2 Billion - Reform of the Medicaid Managed Care Organization (MCO) Provider Tax Requirement

(For the complete report in pdf - click here)

Prescription Drug Reimbursement Formula Reform

The biggest savings, 4.3 billion, should come from allowing states to establish pharmaceutical prices based on the Average Manufacturer Price (AMP) rather than the published Average Wholesale Price (AWP), which is used now. This has been pushed by states and consumer advocates.

Additionally, they say, reforms should be implemented to ensure that manufacturers are appropriately reporting data.

Extension of the Medicaid Drug Rebate Program to Medicaid Managed Care

The Commission recommends providing Medicaid managed care health plans access to the existing pharmaceutical manufacturer rebate program currently available to other Medicaid health plans. States should have the option of collecting these rebates directly or allowing plans to access them in exchange for lower capitation payments.

This will produce a savings of $2 billion from the current system. Today, for Federal Medicaid matching funds to be available to States for covered outpatient drugs of a manufacturer, the manufacturer must enter into and have in effect a rebate agreement with the Federal government. Without an agreement in place, States cannot receive Federal funding for outpatient drugs. Rebate amounts received by states are considered a reduction in the amount expended by States for medical assistance for purposes of Federal matching funds under the Medicaid program.

The basic rebate for brand name drugs is the greater of 15.1 percent of the AMP or AMP minus Best Price (BP). Best Price is the lowest price at which the manufacturer sells the covered outpatient drug to any purchaser. The rebate for generic drugs is 11 percent of AMP.

Under current law Medicaid states cannot collect rebates from managed care organizations in the Medicaid Drug Rebate Program.

Change the Start Date of Penalty Period for Persons Transferring Assets for Medicaid Eligibility.

States determine financial eligibility for Medicaid coverage of nursing home care using a combination of state and federal statue and regulation. Personal income and assets must be below specified levels before eligibility can be established. Personal resources are sorted into two categories: those considered countable (those that must be spent down before eligibility criteria is met) and those considered non-countable (those that applicants can keep and still meet the eligibility criteria such as real estate that is the beneficiary's primary residence). Some assets held in trust, annuities and promissory notes are also not counted.

Federal law requires states to review the assets of Medicaid applicants for a period of thirty-six months prior to application or sixty months if a trust is involved. This period is known as the “look back period.”

Applicants are prohibited from transferring resources during the look back period for less than fair market value. Some transfers of resources are allowed, such as transfers between spouses. If a state eligibility screener finds a non-allowed transfer, current law (OBRA1993) requires the state to impose a “penalty period” during which Medicaid will not pay for long-term care.

The length of the penalty period is calculated by dividing the amount transferred by the monthly private pay rate of nursing homes in the state. The penalty period starts from the date of the transfer.

Using the date of the transfer as the start date provides an opportunity for applicants to preserve assets because some or all of the penalty period may occur while the applicant was not paying privately for long term care.

The Commission recommends saving $1.4 billion by moving the start date of penalty period from the date of the transfer of property to the date of application for Medicaid or the nursing home admission date, whichever is later.

Increase the "Look-Back" Period from Three to Five Years

This is the period federal law requires states to review the assets of Medicaid applicants for a period of thirty-six months prior to application or sixty months if a trust is involved.

Financial eligibility screeners look for transfers from personal assets of Medicaid applicants made during a period of time prior to application (the "look-back" period) that appear to have been made for the purpose of obtaining Medicaid eligibility. Applicants are prohibited from transferring resources during the look back period for less than fair market value. Currently, the “look back” period is 36 months (3 years).

Although the savings are small – less than $100 million over fives years - the Commission recommends increasing the "look-back" period from 36 months to 5 years.

Tiered Co-Payments for Prescription Drugs

The imposition of higher co-payments by states for drugs and services has been the most closely watched proposal by consumer advocates. Federal statute limits the amount of co-payments that can be charged by states. In most cases, co-payments of up to $3 can be imposed for prescription drugs, physician visits, and outpatient hospital visits. However, certain categories of beneficiaries, such as children under 18, pregnant women, and the institutionalized cannot be charged co-payments. Co-pays are also prohibited for some services, including hospice care, emergency care, and family planning and services.

The Commission recommends allowing States the flexibility to be able to increase co-payments on non-preferred drugs beyond nominal amounts when a preferred drug is available, to encourage beneficiaries to fill the least costly effective prescription for treatment.

For beneficiaries at or below the federal poverty line, co-payments for preferred drugs should remain nominal. States should be given the ability to develop effective tiered co-pay structures to encourage cost-effective drug utilization where appropriate for all beneficiaries, regardless of income.

All co-payments for the preferred drug list should become enforceable. States should be given broad authority to waive co-payments in cases of true hardship or where failure to take a non-preferred drug might create serious adverse health effects.

Reform of the Medicaid Managed Care Organization (MCO) Provider Tax Requirement

Until 1991, when Federal law restricted the use of health care provider related taxes, states were able to tax health care providers as a way to raise their share of the Medicaid matching payment. These funds, used to drawn down Federal Medicaid dollars were then returned to the provider, in effect, holding them harmless for the tax they originally paid. This loophole in Federal law permitted states to shift the cost of their Medicaid programs directly to the Federal government.

After 1991, state taxes on health care providers were required to:

  >> Be imposed on a permissible class of health care services;
  >> Be broad based or apply to all providers within a class;
  >> Be uniform, such that all providers within a class must be taxed at the same rate; and
  >> Avoid hold harmless arrangements in which collected taxes are returned to the taxpayers directly or indirectly.
  >> The Secretary shall approve broad based (and uniformity) waiver applications if the net impact of the tax is generally redistributive and that the amount of the tax is not directly correlated to Medicaid payments. The hold harmless requirements cannot be waived.

The loophole in current law, which defines as a separate class of health care services the services of a Medicaid managed care organization, permits states to impose taxes solely on Medicaid.

Managed care organizations are increasingly taking advantage of this loophole by reorganizing in order to protect the commercial lines of business from tax liability that is then targeted only on the Medicaid subsidiary of the managed care organization.

If the reorganization of the managed care organizations with Medicaid contracts continues, all states could impose a tax only on the Medicaid revenues of the managed care organizations, effectively shifting the entire burden of the tax to the Medicaid program.

The Commission recommends changing the law so that managed care organizations (MCOs) are treated the same as other classes of health care providers with respect to provider tax uniformity requirements. Specifically, States would be required to tax all managed care organizations, not just those with Medicaid contracts, in order to meet the uniformity requirements. States should be prevented from guaranteeing that tax revenues paid to states by MCOs be returned. This will save the government $1.2 billion over five years.

About Medicaid Today

Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources. The program became law in 1965 and is jointly funded by the Federal and state governments (including the District of Columbia and the Territories) to assist states in providing medical acute and long-term care assistance to people who meet certain eligibility criteria. Medicaid is the largest source of funding for medical and health-related services for people with limited income.

The portion of the Medicaid program that is paid by the Federal government, known as the Federal Medical Assistance Percentage (FMAP), is determined annually for each state by a formula that compares the state's average per capita income level with the national average. By law, the FMAP cannot be lower than 50 percent or greater than 83 percent. The wealthier states, as measured by per capita income, have a smaller share of their costs reimbursed. The Federal government also shares in the state's expenditures for administration of the Medicaid program at generally 50 percent. Due to the entitlement nature of Medicaid, the amount of total federal outlays for Medicaid has no statutory limit.

Program Enrollment

The Medicaid program, as the safety net for much of the nation’s low-income uninsured population, has taken on an increasing responsibility for providing health coverage for this segment of the nation’s population. For the five-year period from 1998 to 2003, total enrollment in the program increased by 30 percent.

Enrollment growth in the Medicaid program will play a large part in determining future spending. According to figures presented by the Centers for Medicare and Medicaid Services Office of the Actuary (CMS OACT) in the President’s FY 2006 Budget, Medicaid enrollment is expected to increase from 54 million enrollees in 2003 to 65 million in 2015, a 21 percent increase. The growth in enrollment will vary by eligibility category, affecting the share of total enrollees in each of the four general categories of children, adults with dependent children, aged and disabled.

Program Expenditures

Consistent with the rapid rise in enrollment, Medicaid expenditures increased at a faster rate than other insurance coverage types between 1998 and 2003. Overall Medicaid expenditures increased by 62 percent from $153 billion to $248 billion, with spending on adults increasing by 77 percent, the greatest increase among all enrollment categories. These increases compare to increases of 51 percent for private insurance expenditures and 36 percent for Medicare over the same time period.

Beginning in 2004 it is projected that the rate of increase in Medicaid spending will exceed the rate of increase in overall health care spending. Projections by OACT indicate that total health care spending will continue to increase at over seven percent per year for the next ten years while Medicaid spending is expected to increase at a rate of nearly eight percent per year.

Additional estimates from OACT indicate that total Medicaid spending will increase from $275 billion in 2003 to $685 billion in 2015, an overall increase of almost 145 percent over the 12-year period (7.9 percent per year). Federal spending will have increased from $161 billion to $390 billion and state spending from $114 billion to $295 billion, increases of approximately 7.6 percent per year and 8.2 percent per year respectively.

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