Bush FY 2004 Medicaid and SCHIP Budget

Almost 40 million individuals were enrolled in Medicaid in 2002. Medicaid covers one-fourth of the nation’s children and is the largest single purchaser of maternity care and nursing home/long-term care services. The elderly and disabled are one-third of Medicaid beneficiaries, but account for two-thirds of its spending.

The State Children’s Health Insurance Program (SCHIP) was established in 1997 to make available approximately $40 billion over 10 years for states to provide health care coverage to low-income, uninsured children. SCHIP gives states broad flexibility in program design while protecting beneficiaries through federal standards. Approximately 5.3 million children were enrolled in SCHIP programs in 2002.

Both Medicaid and SCHIP rely on state and federal sharing of program expenditures, with the federal contribution based on state per capita income. Total Medicaid spending will be an estimated $311 billion ($177 billion federal share) in 2004. At the beginning of 2003, about $3.2 billion was newly available to state SCHIP programs, in addition to almost $9.7 billion from previous years’ allotments. According to HHS, administrative actions and greater state flexibility through waivers have led to more than one million additional people gaining Medicaid or SCHIP coverage since January 1, 2001.

Medicaid and SCHIP Modernization. While states have considerable discretion in designing their Medicaid programs, many states and other stakeholders have complained that the web of Medicaid laws and administrative guidelines is confusing and burdensome, limiting states’ flexibility. States frequently request additional flexibility, through waivers, to tailor their public programs to their specific insurance markets, or to expand eligibility to the uninsured beyond the populations they are required by law to cover. The creation of the SCHIP program added further complexity to the already intricate rules for expanding coverage to low-income Americans.

Some see Medicaid as having two distinct purposes and serving two distinct populations: health insurance for children and families, and health insurance and long-term care for certain elderly and disabled people. In addition, states are looking for ways to restructure their Medicaid programs to address the recent growth in program spending at a time when states' revenue sources are low.

Principles for Medicaid and SCHIP Modernization

Provide states the flexibility to design innovative programs without waivers, including increased use of consumer-directed services and home- and community-based care.
Enhance state capabilities for coordinating with and utilizing the private sector to deliver services.
Curb the growth of state and federal program costs.
Simplify the payment policies and rules for these programs.
Ensure Medicaid and SCHIP funding is clear and accountable to minimize incentives for arbitrary cost-shifting.
Increase accountability in the state and federal partnership by ensuring that funds are being used to reduce the number of low-income Americans who are uninsured.
Promote more effective coordination of care for beneficiaries dually eligible for Medicare and Medicaid.

Medicaid has relied on a state and federal matching system for funding: state spending on Medicaid services is matched by the federal government at a state-specific rate. Numerous safeguards have been implemented to ensure fiscal integrity and to avoid abuse of the matching system, but there is often a tension between the states and the federal government over matching payments. For these reasons, the President's Budget proposes State Health Care Partnership Allotments.

In August 2001, the Administration introduced the Health Insurance Flexibility and Accountability (HIFA) demonstration initiative. HIFA gives states the flexibility they need to design innovative ways to increase access to health insurance coverage for the uninsured, with an emphasis on private health insurance coverage. To date, the Administration has approved seven HIFA demonstrations. Four of these demonstrations use Medicaid and/or SCHIP funds to support enrollment in private employer-sponsored health insurance coverage. (See Update on the President’s Management Agenda section of this chapter for the latest scorecard on HIFA.)

Building on the HIFA initiative, the budget proposes to create optional Medicaid and SCHIP allotments for states. Under this proposal, all Medicaid and SCHIP funding would be combined and provided to states selecting this option in two individual allotments: one for acute care and the other for long-term care (LTC). (See the accompanying chart.) States would be allowed to transfer some amount (for example, up to 10 percent) between the Acute and LTC allotments. Under the allotment option, states would be required to provide a specified benefit package for those current Medicaid beneficiaries whose coverage is mandated by current law.

State allotments would be based on 2002 spending, inflated annually by a specified trend rate. States would be required to meet a Maintenance of Effort for spending on Medicaid and SCHIP services, which would increase each year, but at a lower rate than federal growth. States that choose an allotment option would have dramatically broader flexibility in designing health insurance options for low-income, uninsured Americans. As with the HIFA initiative, integration with private insurance options such as premium assistance programs and coordination with any federal enacted health tax credit would be encouraged. This proposal is designed to be budget neutral over 10 years.

The accompanying table lays out the costs and savings associated with the State Health Care Partnership Allotments option, as well as the budgetary impact of other Medicaid and SCHIP proposals. It is important to note that scoring for both the State Health Care Partnership Allotments and other Medicaid/SCHIP proposals depends on the number of states that take up the option. Generally, the costs and savings associated with the other proposals decrease as more states take up the allotment option.

Again, the use of allotments would be at the state's option. The allotment option assumes that states will be given flexibility in designing their benefit packages, including making it easier to integrate people with disabilities into the community. Therefore, the proposals below that would create new Medicaid demonstrations or fund new or extended coverage apply only to states that do not choose the allotment.

Extending the Availability of 2000 SCHIP Allotments. The Balanced Budget Act of 1997 authorized a capped level of SCHIP funding through 2007. States were given three years to spend their individual allotments. At the end of three years, any unused funds were to be redistributed among states that had spent all of their allotted funds. These redistributed funds were to be available for one additional year, after which any unused funds would revert to the Treasury. An estimated $1.2 billion in SCHIP funds reverted to the Treasury on October 1, 2002, and an estimated $1 billion will revert to the Treasury on October 1, 2003.

The Administration proposes to extend the availability of the allotments set to expire in 2003 for one additional year, until the end of 2004. According to current estimates, extending the SCHIP allotment would allow states to continue coverage for children who are currently enrolled and to continue expanding coverage through HIFA waivers.

As assessed in the Program Assessment Rating Tool (PART), the SCHIP program has been successful in enrolling more than one million new children per year into Medicaid and SCHIP and in decreasing the number of uninsured children in the United States. The goals and management of the SCHIP program will be improved with the implementation of national core performance measures with states and increased financial oversight.

Improving Options for People with Disabilities and Long-term Care Needs. The budget proposes several policies that promote work incentives and home and community-based care options for people with disabilities. These policies build on the New Freedom Initiative announced by the President on February 1, 2001. The New Freedom Initiative is part of a nationwide effort to integrate people with disabilities more fully into society.

New Freedom Initiative. The budget reproposes four demonstrations to promote home and community based care for individuals with disabilities. Two of the demonstrations provide respite care services for caregivers of disabled children and adults. Unrelieved caregiver burden is a major contributing factor to institutionalization of individuals with disabilities; respite care is the service often requested by families to keep a family member with a disability at home. The third demonstration will test the therapeutic effectiveness and cost-effectiveness of providing a home- and community-based alternative to psychiatric residential treatment for children enrolled in Medicaid. The fourth demonstration will test methods to alleviate workforce shortages of direct care workers in the community.

“Money Follows the Individual” Rebalancing Demonstration. The budget proposes to create a five-year demonstration that finances Medicaid services for individuals who transition from institutions to the community. Federal grant funds would pay the full cost of home and community-based waiver services for one year, after which the participating states would agree to continue care at the regular Medicaid matching rate. This demonstration would also test whether increased use of home and community-based services reduces spending on institutional care, as some advocates believe.

Ticket-to-Work Spousal Exemption. This proposal would give states the option to continue Medicaid eligibility for the spouses of individuals with disabilities who return to work. Under current law, individuals with disabilities might be discouraged from returning to work because the income they earn could jeopardize their spouse’s Medicaid eligibility. This proposal would extend to spouses the same Medicaid coverage protection offered to workers with disabilities.

Presumptive Eligibility for Home and Community-based Care Services. The budget proposes to establish a state option enabling Medicaid presumptive eligibility for institutionally qualified individuals who are discharged from hospitals into the community.

Long-term care options. The Administration also plans to explore other options to expand Americans’ access to and ability to afford long-term care. The Administration proposals include $40 million in Real Choice Systems Change Grants to provide financial assistance for states to develop systems that support community-based care alternatives for persons with disabilities who require institutional care.

Continuity of Coverage for Special Populations. The budget includes policies to improve or continue health coverage already available through certain programs.

Transitional Medicaid Assistance (TMA). TMA provides health coverage for former welfare recipients after they enter the workforce. TMA extends up to one year of health coverage to families who lose Medicaid eligibility because of employment earnings.

The budget proposes to extend TMA for five years with statutory modifications, including a state option to eliminate TMA reporting requirements and provide 12 months of continuous eligibility regardless of changes in families’ financial status. In addition, the budget proposes a waiver of the TMA requirement for states that currently provide health benefits for families at 185 percent of the federal poverty level, which is the statutorily mandated income eligibility level. Finally, there will be an option to allow TMA recipients to purchase private health insurance. These changes will allow for consistent enrollment of TMA beneficiaries while easing the administrative burden on states.

Special Enrollment Period in the Group Market for Medicaid/SCHIP Eligibles. This legislative proposal would make it easier for Medicaid and SCHIP beneficiaries to enroll in private health insurance, by making eligibility for Medicaid and SCHIP a trigger for private health insurance enrollment outside the plan’s open season. This proposal will help states implement premium assistance programs in Medicaid and SCHIP.

Premium Assistance for Low-income Medicare Beneficiaries. Medicare Part B premiums are just over $700 per beneficiary ($58.70/month) in 2003, a substantial amount for low-income individuals. The Administration proposes that Medicaid continue to pay Part B premiums for five years for individuals whose income is between 120 and 135 percent of poverty. States would continue to receive a 100 percent federal match for these benefits.

Vaccines for Children (VFC). The VFC program provides free vaccine to certain categorically-eligible children: Medicaid recipients, the uninsured, American Indians and Native Alaskans, and the underinsured. VFC covers all routinely recommended childhood vaccines, including measles/mumps/rubella, chicken pox, and polio.

The Administration is proposing legislation to change two provisions of VFC to improve access. First, the Administration proposes to lift the price cap on the tetanus-diphtheria booster, which will facilitate its availability at no cost to VFC-eligible children. Second, the Administration is proposing to allow underinsured children to receive VFC-funded vaccine at state and local health departments, rather than only at Federally Qualified Health Centers and Rural Health Centers, as is currently required.

Because VFC is administered separately from Medicaid and SCHIP, these proposals would apply to states that choose the allotment option and also to those that do not.

Medicaid Drug Coverage and Payment. Pharmaceutical manufacturers must pay a rebate, shared between the states and federal government, on prescription drugs dispensed to Medicaid beneficiaries. Under current law, this rebate equals the larger of 15.1 percent of the Average Manufacturer Price (AMP) or the difference between AMP and the manufacturer’s best price.

Over the past year, it has become evident that the best price component of the rebate can be confusing, as it is not always clear which prices a manufacturer must include when calculating and reporting to CMS its best price. In addition, best price may serve to limit the discounts that private-sector purchasers are able to negotiate with pharmaceutical manufacturers. The Administration is interested in exploring with the Congressional Committees of jurisdiction policy options in this area that would improve the Medicaid drug pricing and reimbursement system and generate program savings.

Pharmacy Plus Waivers. The 2003 Budget included the Pharmacy Plus initiative, through which states are encouraged to expand Medicaid drug-only coverage to low-income senior citizens and people with disabilities. Since the 2003 Budget was transmitted to the Congress, HHS has approved five Pharmacy Plus waivers and more waivers are pending. Pharmacy Plus is part of the Administration’s overall strategy to assist Medicare beneficiaries with drug spending before a drug benefit is available to all beneficiaries as part of a modernized Medicare program. Pharmacy Plus waivers are available to states for the elderly and those with disabilities with incomes below 200 percent of the poverty level and must be budget neutral over the life of the waiver.

Medicaid/SCHIP Program Integrity. One of the Administration’s continuing priorities for the Medicaid and SCHIP programs is ensuring their fiscal integrity. The Administration has already made considerable progress in Medicaid/SCHIP program integrity. The 2004 Budget proposes to build upon this success.

Enhancing Medicaid and SCHIP Program Integrity. In 2004, HHS will devote more resources to Medicaid and SCHIP program integrity. This effort will include increasing the number of audits and evaluations of state Medicaid programs, reestablishing and elevating the importance of financial management oversight at CMS and outsourcing appropriate activities to private firms. In addition, HHS will develop a methodology to measure Medicaid and SCHIP improper payments, including producing error rates. The budget proposes to allocate $20 million in Health Care Fraud and Abuse Control funding in 2004 to help finance this initiative.

Upper Payment Limits. Regulations issued over the past two years have curtailed the use of the Upper Payment Limit, through which some states were able to draw down federal matching funds without putting up state dollars and to redirect Medicaid funding to non-Medicaid programs and purposes. The Administration will continue to monitor this issue and propose regulations as necessary.

This document is not necessarily endorsed by the Almanac of Policy Issues. It is being preserved in the Policy Archive for historic reasons.