59

ways to slice what is basically the same population of people that
are low income.

And having the groups added on with very incremental dif-
ferences, in terms of how income or assets are treated or composi-
tion of the household, number of children, all of those things can
cause you to move into another coverage group, which requires the
State to report separately on that group on its expenditures.

It’s a tremendously complex—I would say overly complex—way of
administering the program and certainly adds to the administra-
tive costs of maintaining coverage.

I would second everything that John had said—that in Connecti-
cut we as well are looking toward moving toward a more means-
tested, straight-income-tested type of model for assistance, where
we could cast the net over largely the same population without slic-
ing it up so finely that we have to move between so many coverage
groups in order to maintain the entitlement. I think that certainly
is part of it.

The other side to it, as I alluded to in my remarks, is on the
mandates. As far as coverage and service delivery of benefits, it’s
very difficult, in the current Medicaid program, moving to managed
care or even within managed care, if you want to move to a system
where you design benefit packages specifically for certain popu-
lations. We have done it. Minnesota has done it.

Mr. Suays. Well, Connecticut has just started, correct?

Mr. PARRELLA. That’s correct, but we have moved away from
comparability of services under our home and community-services
based waivers for many years now.

Going back to 1987, we have expanded home and community-
based service programs for the elderly, largely intended to keep
those people from having to make a choice of going into a nursing
home. But the current process does require somewhat burdensome
waiver application and submission in order to structure your bene-
fit package specifically to meet the needs of that—1 of those 41 cov-
erage groups.

Mr. SHays. Medicaid basically is health care for the poor and
nursing care for the elderly. I mean, I view it that way. Is that an
improper way to view it?

Mr. PARRELLA. I think of it pretty much on those terms. There
are three main groups. There are families that are covered, poor
families, the disabled and the elderly.

Mr. PETRABORG. Right.

Mr. SHays. Now with the disability group that I should also add,
the charge is that basically block granting to the States means that
potentially we are pitting the old against the young, the healthy
maybe against the unhealthy and so on. Which is an interesting
concept because bottom line is, as a Member of Congress, I have
to make those decisions every day. I have to decide whether more
resources go to the elderly or more go to the younger incomes.

I have come to a basic conclusion that when I look at Medicaid,
as an average, 70 percent of the resources go to 30 percent of the
individuals, the elderly, and 30 percent of the resources go to 70
Percent, which are the—which are the poor, basically, and the dis-
abled.


123

vide care at a hopefully lower cost by controlling the price and use
of services.

Medicaid, however, still lags well behind the private sector in the
use of managed care.

The Medicaid statute, adopted at a time when fee-for-service
medicine was predominate, limits States’ ability to use managed
care. States can enroll their Medicaid beneficiaries, as was dis-
cussed, in managed care only by seeking waivers of program rules;
and to make the most extensive use of managed care, a State must
seek a section 1115 waiver to operate their program as a dem-
onstration or experiment.

Section 1115 waivers provide States the ability to contract with
a broader range of managed care organizations, including those
that enroll few or no private patients. Usually, to serve Medicaid
beneficiaries, 25 percent of a managed care organizations’s enroll-
ment must be private, paying patients, as the plan’s ability to at-
tract private patients has been seen as one assurance of quality.

Similarly, section 1115 waivers also permit States to require
beneficiaries to remain enrolled in managed care for up to a year
rather than 30 days, which is usually required by Medicaid. The
freedom of beneficiaries to disenroll at will has also been seen as
an indirect assurance of quality of care.

While HCFA has agreed to waive some of the traditional quality
assurance provisions, the terms and conditions of section 1115
waivers require States to Operate alternative quality assurance sys-
tems. Beneficiary protections are essential in our view because of
the financial incentives to underserve in managed care plans that
are paid and are themselves paying providers on a per capita rath-
er than a per service basis.

Almost half the States are currently engaged in or planning a
transformation of their programs and we believe an important les-
son has emerged from our observations of these State experiences.
That is, while broader use of managed care holds the promise of
better cost containment and access for Medicaid beneficiaries, it
also presents considerable planning and implementation chal-
lenges.

In my written statement, we provide information on the experi-
ences of three States that we have examined: Arizona, Tennessee
and Oregon. Let me focus briefly on Arizona.

Today, Arizona’s program includes the development and use of
competitive market forces to select health care providers and deter-
mine capitation rates. Its effective use of competitive bidding has
resulted in considerable savings to both the State and Federal Gov-
ernments. In addition, it has developed the data collection and
analysis capabilities needed to monitor plans provision of services
and financial performance.

These accomplishments, however, did not occur overnight. Ari-
zona encountered early implementation difficulties, but has been
expanding and refining its program management efforts since it
began its managed care program in 1982. The maturity of Arizona’s
program today, especially its oversight mechanisms, reflects the
substantial preparation and development efforts that the State in-
vested over many years.


25

Federal Funding Changes

As part of an effort to balance the federal budget over the next seven years, Congress enacted a
budget resolution requiring that growth in federal Medicaid spending be limited beginning in
federal fiscal year (FFY) 1996. The Congress passed, and President Clinton vetoed, the Balanced
Budget Act of 1995. The bill would have reduced the growth in Minnesota's forecasted
Medicaid expenditures by approximately $1.9 billion over seven years. The following table
compares the national limits of the budget resolution to the state-specific limits that would have
been applied to Minnesota under the Balanced Budget Act of 1995. In considering the impact of
these limits, it is important to note that Minnesota's Medicaid Program expenditures have grown
ten percent or more over the years, and while current favorable economic conditions result in the
forecasting of a growth of less than ten percent for the very short-term, itis anticipated that
program growth would return to an average of 10 percent in the long term in the absence of
significant change.

Federal Medicaid Growth Limits:

BUDGET BALANCED
FFY RESOLUTIO! BUDGET ACT
1996 12% 13.76%
1997, 6.8% 3.5%
1998 4.0% 3.0%
1999 4.0%, 2.0%
2000 4.0% 2.0%
2001 4.0% 2.0%
2002, 4.0% 2.0%

Recognizing that balancing the federal budget is a laudable goal, many state governors, including
Governor Carlson, have supported these Congressional efforts on the condition that states be
given sufficient growth in funding and complete flexibility in designing and administering the
Medicaid Program. Based on the impact this congressional action could have on Minnesota, the
need to address publicly funded health care's growing share of the State's budget, and the
importance of subsidizing health care for low-income, uninsured, and special needs Minnesotans
in a way that makes good sense, the Department is developing a proposal that has the capability
to address capped Medicaid funding and still provide affordable access to quality health care:

Minnesota Department of Human Services
4 January 1996


154

rent law, and leaves States at risk for recession, demographic
change and price increases.

This is not a proposal to promote flexibility or efficiency. It is an
abdication of Federal responsibility to protect the Nation’s most
vulnerable population.

The Conference Agreement would eliminate the fundamental ele-
ments of Medicaid as insurance—legally enforceable national cri-
teria for who is covered for what benefits. At the same time, it
would dramatically reduce, by 17 percent over 7 years, the Federal
funds available to provide that protection. In other words, States
would have neither the obligation nor the resources and ability to
sustain current protection.

Under the Conference Agreement, Federal funds for the
Medigrant program would increase at an average of 4.8 percent a
year from 1996 to 2002 in the aggregate. This growth rate is well
below the 6 percent per year needed to keep pace with estimated
beneficiary growth, at roughly 3 percent per year, and general in-
flation, about 3 percent per year.

Looked at another way, if States were to retain coverage pro-
vided under current law, the Urban Institute estimates they would
have to constrain expenditure growth per beneficiary to 1.3 per-
cent, less than half the rate of general price inflation. Even the
modifications that have been proposed to increase funding under
the Conference Agreement have failed to assure a per capita
growth rate that is sufficient to keep up with medical cost inflation.

To achieve this goal, the agreement provides no flexibilities in
service delivery beyond those that are in the administration pro-
posal. Nor is it clear that any such flexibilities exist that could sus-
tain coverage with such limited resources. Rather, what is allowed
under that proposal is a safety valve to States that undermines the
program’s findamental purpose. That safety valve is the ability to
eliminate coverage. That means that poor families, people with dis-
abilities, and senior citizens would lose essential health and long-
term care protection.

The Conference Agreement’s threat to coverage goes beyond its
reduction in Federal dollars. As we have heard earlier, by changing
the matching formula and other current Medicaid provisions, it al-
lows States to substitute the limited pool of Federal funds for the
expenditure of State dollars. The Urban Institute estimates that if
States reduce their spending to the minimum amount needed to
draw down their allowed Federal payments, total spending on med-
ical assistance would fall an additional 8 percent beyond the 17

ercent reduction that I already noted, a total of 25.4 percent or
3400 billion from 1996 to 2002.

No amount of flexibility can sustain coverage in light of such ex-
penditure reductions. Coverage could be sustained only if States
were actually to increase their spending in order to offset Federal
reductions. Furthermore, fixed dollar Federal grants that do not
vary with changing economic or demographic conditions that in-
crease enrollment leave States fully at risk for such changes. Esti-
mates prepared by the Center on Budget and Policy Priorities indi-
cate that a recession could increase the costs associated with Med-
icaid coverage by $7 billion to $26 billion over 7 years. Under a
block grant, all that risk would be born by the States.


149

Feimbursement rates be “reasonable and adequate to meet the costs which must be incurred by
cfficiently and economically operated facilities in order to provide care and services in conformity with
applicable State and Federal laws, regulations, and quality and safety standards...”

Background

‘The intent of the Boren Amendment was to give states a means of controlling costs related to
reimbursement claims from providers of Medicaid services, Rather than basing reimbursements on &
cost-related payment requirement for hospitals and nursing home services, the amendment allows
states to pay for services based on a predetermined reimbursement rate, giving states a basis for
enying reimbursement for costs determined to be in excess of that necessary to provide “efficiently
and economically” delivered services.

Despite good intentions, the law is seen by many states as more of a burden than a benefit.
One problem is the use of vague, undefined terms to describe the federally mandated criteria for
reimbursement rates (¢.g. the terms: reasonable, adequate, efficiently, and economically). Consistent
with the intent of the law, the federal government made a conscious decision not to issue regulations
defining the vague terms in the statutory language.

‘An additional complication is that, while the law requires reimbursement rates to be
“determined in accordance with methods and standards developed by the State,” it also requires the
federal government to be satisfied with the state-determined rates. To implement this requirement, the
federal government decided to require state processes for determining rates and the rates themselves to
be a part of Medicaid State Plans. These plans are subject to approval by the Secretary of Health and
‘Human Services.

‘The vagueness of the statutory language, combined with the lack of regulatory definitions, has
resulted in substantial litigation, with some courts viewing the Boren Amendment as a cost based


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Illinois
DAN BURTON, indiana HENRY A. WAXMAN, California

J. DENNIS HASTERT, Ilinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr, West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, Jr., South Carolina
WILLIAM H. ZELIFF, Jn, New Hampshire LOUISE McINTOSH SLAUGHTER, New
JOHN M. McHUGH, New York York

STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida GARY A. CONDIT, California

PETER BLUTE, Massachusetts COLLIN C. PETERSON, Minnesota
THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida

DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York
JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsi
RANDY TATE, Washington GENE TAYLOR, Mississippi

DICK CHRYSLER, Michigan BARBARA-ROSE COLLINS, Michigan
GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
MARK E. SOUDER, Indiana Columbia

WILLIAM J, MARTINI, New Jersey JAMES P. MORAN, Virginia

JOE SCARBOROUGH, Florida GENE GREEN, Texas

JOHN B. SHADEGG, Arizona CARRIE P. MEEK, Florida

MICHAEL PATRICK FLANAGAN, Illinois. CHAKA FATTAH, Pennsylvania
CHARLES F. BASS, New Hampshire BILL BREWSTER, Oklahoma

STEVEN C. LATOURETTE, Ohio TIM HOLDEN, Pennsylvania
MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, Jr., Maryland (Independent)
James L. CLARKE, Staff Director
Kevin Sako, General Counsel
Junirt McCoy, Chief Clerk
Bup Myers, Minority Staff Director

SUBCOMMITTEE ON HUMAN RESOURCES AND INTERGOVERNMENTAL RELATIONS
CHRISTOPHER SHAYS, Connecticut, Chairman

MARK E. SOUDER, Indiana EDOLPHUS TOWNS, New York
STEVEN SCHIFF, New Mexico TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland BERNARD SANDERS, Vermont (Ind.)
THOMAS M. DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
DICK CHRYSLER, Michigan GENE GREEN, Texas
WILLIAM J. MARTINI, New Jersey CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida HENRY A, WAXMAN, California
MARSHALL “MARK” SANFORD, South

Carolina

EX OFFICIO

WILLIAM F. CLINGER, Jn., Pennsylvania CARDISS COLLINS, Illinois
LAWRENCE J. HALLORAN, Staff Director and Counsel
KATE HiCkEY, Professional Staff Member
Ropert Newman, Professional Staff Member
‘Tuomas M. Costa, Clerk
Dave MCMILLEN, Minority Professional Staff Member

ap


119

HEALTH CARE FOR THE POOR OF THIS NATION

WILL BE REDUCED.

THAT IS WHY THE ADMINISTRATION’S

PROPOSAL FOR A PER CAPITA CAP THAT

RESULTS IN ONLY A $54 BILLION REDUCTION IS A

FAR MORE REASONABLE AND COMPASSIONATE

APPROACH. STATES WOULD BE GIVEN

INCREASED FLEXIBILITY IN DETERMINING WHAT

BENEFITS TO COVER AS WELL AS THE ABILITY

TO DEVELOP MANAGED CARE PLANS THAT MEET

THE NEEDS OF INDIVIDUAL STATES. MOST

IMPORTANTLY FOR STATES LIKE NEW YORK,
8


68

Further, as you know, the President has proposed a set of new
reforms to provide States with still further flexibility while main-
taining coverage of vulnerable populations, increasing the control of
Medicaid costs and contributing savings to the Federal budget.

Mr. Chairman, one of the issues that came up with the prior
panel had to do with the rate of growth in Medicaid expenditures
on a per-enrollee basis. And the chart that is on your right—again,
it is table 1, I believe, or chart 1 in your written materials—shows
that except for one particular glitch in the period between 1988 and
1991, Medicaid rates per beneficiary have traditionally over the life
of the program grown at a rate lower than or roughly equivalent
to the rates per individual of private health insurance costs, not-
withstanding the fact that, as was also noted and as we will get
to, a large share of Medicaid expenditures are devoted to folks who
are inherently more expensive to care for than are folks covered by
private health insurance. That is why there is such a disproportion
between the share of the covered individuals in Medicaid who are
elderly or disabled and the proportion of expenses associated with
the elderly and disabled.

A principal driver of Medicaid cost increases over the last num-
ber of years, almost 40 percent, the contributor of almost 40 per-
cent of projected increases in Medicaid costs under CBO projections
for the balance of this decade has to do with the continued growth
in the number of people eligible for the program.

Since 1988, according to estimates of the Urban Institute, the
total enrollment in the Medicaid program has increased somewhere
in excess of 5 million persons. At the same time, I might note par-
enthetically, the number of people in the United States with pri-
vate health insurance in this same period of time has fallen by
somewhat more than 7 million people. So the question is not just
a cross-sectional one of how we will operate the Medicaid program
at the moment, but how States are to have adequate flexibility in
an era of constrained spending in order to meet the needs of a
growing number of low-income and disabled persons for health
care.

We believe Medicaid is the critical safety net for a variety of pop-
ulations. Not only does it cover preventive care for low and mod-
erate income pregnant women and children and long-term care for
low income seniors and persons with disabilities, as you know, but
it is, as was noted in the previous panel, the principal provider of
long-term care not only for the elderly but for the seriously dis-
abled of all kinds, including the mentally retarded and devel-
opmentally disabled. It is the primary source of financing for serv-
ices for people with HIV in the United States, accounting for some-
where between 40 and 50 percent of all health care expenditures
for the HIV infected. It is now the primary source of financing for
public mental health services in the United States, exceeding any
other source of Federal or State revenue, and is the safety net for
all middle income families whose parents or adult children are in
need of chronic expensive services of one sort or another.

Again, as we have discussed, while the elderly and disabled ac-
count for roughly half of Medicaid recipients, they account for more
than 70 percent of Medicaid spending.


152

Mr. SHays. Ms.—Professor Feder, would love to hear your testi-
mony. It’s nice to know that—the voice behind the nodding of the
head.

Ms. FEDER. Thank you, Mr. Chairman.

Mr. Suays. I said one thing about what?

Ms. FEDER. I apologize, and I appreciated very much your cor-
recting the record.

Ms. FEDER. I’m glad to be here today to talk about the Medicaid
program. I have been impressed, in listening to the discussion this
afternoon, at how much agreement there is about the need for en-
hanced flexibility in the program.

I think that there is very little disagreement on the key issues
that have received so much attention: managed care, home care,
and the Boren amendment, as the preceding speaker indicated. I
think, unfortunately, where the disagreement lies is whether to re-
tain what I believe is the purpose of the program and of the Fed-
eral funds and that is the guarantee of insurance coverage for the
eligible population.

To briefly summarize my views, I think it is reasonable to argue
that legislative change can enhance Medicaid’s efficiency, as Dr.
Scanlon described it earlier, and can generate savings in pursuing
the program’s fundamental purpose of insurance protection for vul-
nerable populations and that that is, in fact, the approach that has
been taken in the administration’s proposal for flexibility and a cap
on per beneficiary, the growth in Federal payments per beneficiary,
referred to as the per capita cap.

In contrast, the Conference Agreement and subsequent proposals
from the Republicans that would eliminate the entitlement to cov-
erage and would reduce Federal funds would not—dramatically
provide flexibility in pursuit of that coverage goal. Rather, they
would abandon the assurance guarantee that actually defines the
Medicaid program.

Block grants, with limited funds, put States willing to sustain
coverage at greatest risk. Under these proposals, coverage can be
sustained only if States increase spending to offset Federal reduc-
tions. If, instead, States spend the minimum needed to draw down
their allocation of Federal funds, insurance coverage of the eligible
population would be dramatically undermined.

Let me elaborate briefly. First, as we heard from Dr. Vladeck,
the HCFA administrator, Medicaid is a voluntary Federal/State
partnership. Under the program, the Federal Government makes
matching funds available to States to operate the medical assist-
ance programs consistent with Federal guidelines. State participa-
tion is voluntary, and the guidelines aim to assure the intended
use of Federal funds.

The most important of these guidelines define Medicaid as an in-
surance program. That is, they define the population that must or
may be insured and specify the health and long-term care benefits
that must or may be covered.

People who satisfy Medicaid eligibility criteria have a legally en-
forceable right to coverage for a defined set of benefits. That means
that Medicaid beneficiaries, like people with private insurance,
know what will be paid for when they get sick.


719

their contributions to Medicaid. The formula would lower the
amount of State expenditures required to receive Federal matching
funds. State spending beyond the block grant amount would not be
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.


15

Recently we surveyed Minnesotans to find out how they
feel about their health care and published the results in
newspapers around the state.

a To my knowledge, this marks one of the first
times any state has taken the collective pulse of
consumer satisfaction for public and private

health care consumers.

m___ By the way, Minnesota’s publicly-funded
programs, especially a state-subsidized
program for low-income working people, fared

very well.

Because of Minnesota’s tremendous health care
infrastructure, we believe that within the new system,
we need to address education and research, which are
now indirectly funded through Medicare and Medicaid.


128

States' efforts to obtain the flexibility to implement managed
care reflects the growth of managed care in the private sector.
Managed care plans have the potential to provide care at lower cost
by controlling the price and use of services. In 1993, about 60
percent of individuals with health benefits sponsored by large
employers were enrolled in some type of managed care plan--up
dramatically from a decade ago. As of June 1994 (the most current
date for which data were readily available), 23 percent of Medicaid
beneficiaries--primarily women and children--were enrolled in some
form of managed care.

Managed care is not new to states' Medicaid programs. Under a
section 1915 (b) waiver, available since 1981, states have been
able to restrict beneficiaries’ freedom to choose any health care
provider, a key provision of the traditional Medicaid program.

More than 40 states currently enroll some portion of their Medicaid
population in managed care. A number of provisions in the Medicaid
statute, however, cannot be waived under section 1915(b) and
inhibit the implementation of broader managed care programs,
particularly those involving plans that are paid with a fixed, or
capitated, fee. Consequently, a number of states are turning to
demonstration projects permitted by section 1115 waivers.

Section 1115 waivers address states' needs in two ways: they
allow states greater flexibility to test cost-containment
strategies, such as the more extensive use of capitated managed
care, and they allow states to expand program eligibility beyond
traditional Medicaid populations. Since 1993, HCFA has approved
for implementation 12 statewide demonstration waivers: Oregon,
Hawaii, Kentucky, Tennessee, Rhode Island, Florida, Ohio,
Massachusetts, Minnesota, Delaware, Vermont, and Oklahoma.‘ Of the
12 approved, 5 states have statewide demonstrations currently
operating: Tennessee, Hawaii, Oregon, Rhode Island, and Minnesota.
Another 10 states have applications pending with HCFA. In all but
a few of the approved and pending waiver applications, states have
proposed expanding coverage to previously ineligible groups, such
as single adults and childless couples.

“In 1982, Arizona was granted an 1115 waiver to initiate a
statewide managed care program. Previously, the state had not
participated in Medicaid.


134

APPENDIX I APPENDIX I
Population atfected Expansion Mandate/option
Chiron ‘Alows coverage for Option
children below age 9 in

the poverty tine (phased in
by age).
MCCA (Medicare Catastrophic Coverage Act of 1888) (P.L 100-360)
Pregnant women and infants Makes mandatory the Mandate
BRA 1985 opto of
o the poverty
fino (phased in by % of
poverty line).
Family Support Act of 1088 (P.L. 100-485)
‘APOC families Tncrensesrequed poiod  Mandatet
Medicaid coverage if
Arb cash asostarc ls
lost as a result of increased
eamings.
‘AFDC tamities with Requires coverage # Mandate
‘unemployed parent otherwise qualified.
(AFDC-UP)

‘OBRA 1980 (Omnibus Budget Reconciilation Act of 1989) (P.L 101-230)
Pregnant women and infants Requires coverage i family Mandate
Income Is below 133% of
poverty line.
Children, Requires coverage upto Mandate
‘age 6 if family income is
below 133% of poverty fine.

Children Requires provision of all Mandate

Children Reavis interperiodic! Was an option, now
EPSDT mandated

when medical problem fe

suspected.
‘OBRA 1990 (Omnibus Budget Reconciliation Act of 1990) (P.L 101-608)
Ghitdren Requires coverage up io Mandate

‘age 18 if family income is

below’ fine

(phased in by age).

Pregnant women ‘age coancalony te Mandate
‘OBRA 1986 option of
continuous eligibility
through postpartum period,

(continued)
9


178

Ms. FEDER. Arizona is an exception in which there is some expe-
rience, but we could talk more about that. In general, I think that
what the States have wanted to do is apply managed care to the
women and children portion of their programs, which as we saw is
only 30 percent of the spending. So if we save 15 percent on 30 per-
cent, we are talking about-——

Mr. SHays. When you talk percent on percent, my mind tends to
wander.

Ms. FEDER. We are talking about managed care generating sav-
ings of, at maximum, 15 percent of expenditures. We are going to
apply where now we have experience and can generate savings and
can actually make a managed care system, design a system to do
it, we are talking about taking 15 percent of only 30 percent of the
program’s spending.

Mr. SHays. You make an assumption that I do not agree with.
That is it is a one-shot savings.

Ms. FEDER. I am reporting to you what the literature and the
evidence tell us.

Mr. SHays. Well, would you agree that some literature says one
thing and some says another? If we cannot agree on that, we have

roblem.

s. FEDER. The literature has said that historically and in the
last couple of years, that we have seen a more aggressive negotiat-
ing with providers and discounting that might be sustainable to
some greater extent over time.

Mr. Suays. Thank you.

Ms. FEDER. What I am pointing out is that we do not have expe-
rience with managed care for the population with disabilities, nor
with the elderly population, or on long-term care, virtually none—
not none, you are quite right, but very little.

Mr. SHays. This committee that I have been on for a good num-
ber of years oversees HCFA for waste, fraud and abuse. I was elect-
ed thinking that the Federal Government would do it better than
the States, and I have evolved to realizing that it does not do it
better than States. It does it worse. I have a gigantic question
mark when I look at Medicaid and Medicare; I see extraordinary
waste in the program, extraordinary waste.

So I have a level of confidence that a system that the private sec-
tor gets more involved in, has a financial incentive to be involved
in and realize a benefit by trying to get at the waste, fraud and
abuse, that there is a lot in the system to squeeze out that is sim-
ply not cost savings but is efficiencies.

If that is not true, God help our country, because we cannot con-
tinue to have growth rates of 10 or 12 percent a year. We just sim-
ply cannot. It is not sustainable. And my conversations with Leon
Panetta and others, when he was in Congress was saying we have
to find a way to slow the growth of entitlements.

Do either of you gentlemen have a comment?

Mr. Beacu. If I could say something about the drift of the con-
versation, it seems to assume on both parts that there is a popu-
lation that will just continue to grow that is eligible. Let us assume
you do not add new wrinkles or new beneficiaries to that popu-
lation; what makes that sort of a difficult assumption for me to
swallow is that if there are certain policy changes at the Federai


74

the Executive Branch, Congress and the States have kept program

costs under control while maintaining the Medicaid program as an

important source -- often the only source -- of coverage for low-
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.

afet:

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 suppleméntal coverage for

low-income Medicare beneficiarie:

Benefits

Generally, Medicaid acute-care coverage mirrors the employer-

based coverage available to most Americans, but for senior


32

© Eligibility access points. As described in the provisions applicable to the elderly and
disabled, there would be locations or entities, in addition to the local county social
services agency, through which an individual could enroll for health care coverage.
Application sites could possibly include a local WIC clinic or hospital. It would also be
possible to seek eligibility through a toll free telephone line. This component is intended
to improve the range of options for an individual seeking assistance with the purchase of
health care coverage, while at the same time recognizing that the county agency may be
the best place for many individuals to seek assistance with the application and enrollment
process.

Insurance barriers. Provisions would be made to prevent employers and individuals
from dropping current insurance coverage to access publicly subsidized coverage. People
with private individual coverage or with access to employer-subsidized insurance (where
an employer pays more than 50% of the premium) would not be eligible for publicly
subsidized coverage. People who had and lost employer-subsidized coverage would have
to wait 12 months to be eligible (with some exceptions). People who dropped individual
coverage would not be eligible for four months.

© Flexibility to respond. Provisions would be made for the ability to limit enrollment, if
necessary, of to adjust eligibility criteria such as the income limit or the premium
schedule, to ensure that spending would not exceed available funding.

Coverage.

It is not necessary to purchase the comprehensive benefit set of the current Medicaid Program to
meet the health care needs of the vast majority of program recipients. Most people who are not
elderly or disabled require coverage that addresses basic health care needs. In addition, it makes
sense to purchase coverage that is portable, that could follow an individual from poverty to work.
Therefore, coverage would be purchased that is similar to health coverage offered to state
employees. The package would include the following services: physician services, including
preventive services; inpatient services; outpatient hospital and surgical center; emergency room:
pharmacy; lab and diagnostics; therapies, including physical therapy, occupational therapy,
speech and respiratory therapy; home health care; emergency transportation; chiropractic care;
mental health; chemical dependency; durable medical equipment; vision care; hearing aids and
batteries; preventive dental services for adults limited to oral exams, cleaning, fluoride and x-
rays; and comprehensive dental services for children, except that orthodontia is not covered.

Purchasing.
Managed coverage would be purchased from entities that agree to provide it on a capitation basis.

Purchasing would be done on a competitive basis and with the ability to create incentives to
enhance competition.

Minnesota Department of Human Services
ul January 1996


103

point out, even my State, when it spends 50 cents, it gets $1. Some
States, when they spend 20 cents, they get $1. And there is a dan-
ger that States have in not fully grasping that some of this money
that is getting wasted, because it is not their dollar, isn’t worth fo-
cusing in on.

So one of the interests that we have is to have the State feel the
impact when it does make a savings. In other words, when it
makes a savings, it doesn’t save 50 cents on the dollar. When it
makes a savings, it saves 100 percent. When it finds waste, fraud
and abuse, it makes it 100 percent.

So that is another part of this logic of saying, you know, three
different people are responsible. Let us have one party responsible
for the savings and the management and let that party realize the
full benefit from it.

It is the problem of, since it is a Federal dollar, who cares. Now
we want to make it a State dollar, and we want them to care a lot
more, and we think they will. What is wrong with that logic?

Mr. VLADECK. Well, there is the notion of two people instead of
one. It seems to me the entire constitutional theory of the United
States is one of checks and balances. That is what we have in the
existing Medicaid system, and that is what you largely remove in
a block grant, whether it is a block grant for Medicaid or a block
grant for community development or a block grant for anything
else.

It is true that a system of checks and balances, just as that be-
tween the executive and the legislative branch, produces a degree
of cumbersomeness and time-consuming and paperwork that our
colleagues in parliamentary systems or colleagues in unitary coun-
tries do not have to deal with. But, sure, if there are 100 percent
Federal dollars, if they become 100 percent State dollars, it is true
that the States may be more careful with them.

It’s also true that they may choose, as States tried in the early
1990’s, to spend Federal Medicaid dollars on highways and State
university construction rather than health services for poor people.

And I think, from the point of view of a Federal official, it’s very
important to me that every one of those dollars—and, of course, I
don’t personally oversee every dollar, sir, but I do believe that the
size of the system is not our major administrative problem. The
fact is, if the States get $97 billion, Federal taxpayer dollars, to
provide health services for low-income people, I think we as Fed-
eral officials, whether in the executive or legislative branch, have
the responsibility to see that those dollars are spent on health serv-
ices and low-income people.

Mr. SHays. Before we go to Mr. Souder, let me just ask you this:
putting aside the block grant issue, with our Medicare, Medicaid
health care anti-fraud bill, we are making health care fraud a Fed-
eral offense. You don’t have to get someone basically for wire or
mail fraud. You can get them for medical fraud. Does the adminis-
tration agree with that thrust in our legislation?

Mr. VLADECK. I believe we have, sir. Yes.

Mr. Suays. Thank you.

Mr. Souder.

Mr. SoupeER. I am not a big is beautiful fan.

Mr. SHays. You are not a what?


39

Our benefit package is a generous one. In addition to the
mandatory covered services such as physician, hospital and
nursing facility services, we also cover 27 of the 33 optional
services in our State Plan. In addition, we operate three home
and community based waiver programs for the frail elderly,
persons with developmental disabilities and children with special
health care needs, The rates that we pay for services are among

the highest in the country.

The pressure to continue to pay these rates is certainly related
to the high cost of goods and services in the northeast. But
even greater pressure is applied by the force of federal
regulations. The Boren Amendment and other requirements in the

Social Security Act which mandate cost based reimbursement for

uticnal providers have contributed to higher and higher

rent population.

contunued to attempt to expand
coverage for poor famii:es, these same families are left with a

smaller poe? of total Med:ca:d spending.

2994, the elderly

and the

abled - the nr, nsumers of institutional services -
accounted for 82+ of totai spending in the Connecticut Medicaid

program while representing cnly 27+ of the total eligible


164

to raise an additional $47 billion in order to pay for their portion
or obligations.

Now, very briefly, how did we develop these estimates? Because
I think I would like to put a pedigree on these numbers. The Herit-
age Foundation, as you may or may not know, is from time to time
a critic of large government and has said from time to time that
we tax too much. So in doing these estimates——

Mr. Suays. From time to time, give me a break. All the time.
That’s what you say.

Mr. BEACH. Well, most cf the time.

So to make sure that these estimates had as little content in
them as possible, we turned to one of the Nation’s foremost econo-
metric houses, consulting companies, the Wharton Econometric
Forecasting Associates in Philadelphia, more particularly Balla
Kenwood, working with them, we created three sets of models.

The first was a set of 51 models of the total Medicaid program
at the State level; and these equations, if you will, include, among
other things, variables for the relevant demographic groups that
are covered by Medicaid and variables for gauging the health of the
States’ economies.

The second set of models was a set of projections of total State
revenues and the third was a projection of total State expenditures.

We took the baseline solutions from those models and adjusted
them in order to reflect the size of the program that the Congres-
sional Budget Office in December—I believe December 12, 1995—
indicated that the Medicaid program would be at the Federal level.

The Heritage Foundation has made a point of always adopting
the CBO forecast. And, finally, the additional State revenues re-
quired to pay for Medicaid, which you see on table No. 1 of my tes-
timony, over the next 7 years were calculated by subtracting State
Medicaid spending in 1995 which is in the bank from what they
may have to pay over the period 1996 through 2002. So our addi-
tional dollars are additional to 1995 total payment.

A couple of observations about what I put before you. First, I
think it would be fair to characterize our projections as almost
worst case. They are almost worst case for a couple of reasons, not
quite worst case. First of all, we assumed that the States would not
make any additional efforts beyond what they are doing now to ad-
dress Medicaid costs. Clearly, they will be making additional ef-
forts, but there is a set of parameters in which they, or channel in
which they can make additional efforts. That has been defined by
previous testimony.

Second, because CBO Medicaid forecasts of December 1995 are
based on economic projections that do not contain a recession, our
estimate of $146 billion in additional State payments would cer-
tainly go up or grow if the economy experienced significant declines
over the next 7 years.

Finally, the probability of slower growth and recession is cer-
tainly higher today than it was a month ago in light of the contin-
ued failure of the Congress and the administration to reach a 7-
year balanced budget plan.

I thank you very much, and any questions you have I would be
happy to answer.

[The prepared statement of Mr. Beach follows:]


64

predominantly and is there enough money in that that there are
really alternatives?

Mr. PETRABORG. I guess the ultimate answer to that is that the
current system is not preventing that. OK? So let’s start with that
assumption.

Mr. SoupeER. Right.

Mr. PETRABORG. And then let’s look at whether or not some use
of the purchasing power of the State can be useful in defining a
higher quality or a higher standard in terms of what kind of care
we want to purchase for those individuals.

In Minnesota, we have more nursing homes than we need, and
we would be able to start shaping, or pointing, our purchasing then
toward those nursing homes that met our standards. I think that
that would be basically our strategy.

Mr. Souper. I know it’s a difficult question. The reason I’m ask-
ing it is because on both sides of the aisle we are—you know, those
are difficult questions.

Mr. PETRABORG. Right.

Mr. Souper. Mr. Parrella, how—in the home health care area,
as we looked at some of Medicare, one of the problems is that it’s
easier to audit when people are together and that while all of us
see the advantages of home-based delivery systems and the saving
to the system, does it not in fact engender more fraud and and/or
auditing costs in that and how are you dealing with that? Have you
seen any of that?

Mr. PARRELLA. I guess by your question what you are saying is
that it is easier to audit a large residential facility where you have
people concentrated as opposed to a more disbursed delivery model
where people are in the home. I think that’s sort of the sense of
what you are getting at.

Mr. SoupER. Right.

Mr. PARRELLA. Our audit efforts, as far as both home health and
nursing homes, are pretty aggressive. We have conducted some sig-
nificant audits of home health delivery systems within the State.

It is true that onsite audit of the delivery of services is more
complicated when you are dealing with a disbursed delivery model.
But there certainly are central repositories of records where you
can go to for verification of service delivery. I wouldn’t say that it’s
less—it is probably more challenging, but it can be done.

Mr. Souper. I would like to ask one other question yet, if I may?

Mr. Suays. Sure.

Mr. SouDER. This is a hard question that nobody really likes to
ask, and by asking this I don’t mean that I don’t prefer home-based
delivery systems.

In looking at children’s programs, for example, in the programs
that try to—the family preservation programs, if somebody is about
to be assigned to foster care and the State goes and says, let’s try
to work with that family and try to avoid it, it can save the State
tons of money by avoiding the foster care placement. But if you
don’t have that criteria that they were definitely going into foster
care, you wind up helping a lot of families who otherwise wouldn’t
have gone into foster care and, in fact, you don’t save that amount
of money.


148

ADVISORY COMMISSION
ON INTERGOVERNMENTAL RELATIONS

Testimony by
PHILIP M. DEARBORN
Director of Government Finance Research
USS. Advisory Commission on Intergoveramental Relations

Hearing of the U.S. House of Representatives
Committee on Government Reform and Oversight

THE BOREN AMENDMENT TO THE MEDICAID PROGRAM

‘Thursday, January 18, 1996
Washington, DC

Mr. Chairman and members of the Committee, my name is Philip M. Dearbom. I am Director
of Government Finance Research for the Advisory Commission on Intergovernmental Relations
(ACIR). My testimony today is based on the Preliminary ACIR Report on Federal Mandates required
under the Unfunded Mandates Reform Act of 1995 (P.L. 104-4). In this report, ACIR reviewed 14
federal mandates to provide a basis for recommended changes in federal policies to improve
intergovernmental relations. Final recommendations will be submitted to the President and Congress in
March 1996, The Medicaid Boren Amendment is one of the 14 mandates reviewed in the preliminary
report.

The Mandate

The Boren Amendment,’ requires states to establish reimbursement rates to pay hospitals,
nursing facilities, and intermediate care facilities for services provided to persons eligible for assistance
‘through the Medicaid program. The mandated federal criteria provide that state-determined

1 Section 962 of the Omnibus Budget Reconciliation Act of 1980 (P.L. 96-499) as amended by Section
2173(a)(1) of the Omnibus Budget Reconciliation Act of 1961 (P.L. 97-35).

£800 K Street, NW, Suite 450, South Building. Washington. DC 20875
Telephone. (202) 653-5540 Fax. (202) 653-5429


35

The resolution of our Boren experience was related indirectly to
my second subject, the implementation of managed care for our
AFDC population. By 1993, Connecticut had recognized that the
cost of providing services was slowly eroding our ability to main-
tain our benefit structure for a population of children and families
that had grown rapidly with the impact of the recession and legis-
lative initiatives to expand coverage. We were one of the last of the
high-cost, high-benefit States to move aggressively to managed
care.

We submitted our waiver application in January 1995. We were
ably assisted by our HCFA regional office staff during the 3 months
that went by before we received our first official response, 12 pages
of detailed questions.

When first elected, President Clinton had committed HCFA to a
single round of questions as part of the waiver review process.
However, having responded to our regional office in May, we re-
ceived another set of requests for clarification from the central of-
fice the following month.

Having finally convinced the central office of the merits of the
plan, we still had to negotiate with the Office of Management and
Budget, despite the fact that similar 1915(b) freedom of choice
waivers had previously been approved in over 40 States. All these
questions and negotiations diverted energy from the real-world con-
siderations of delivering health care. The process has been a bo-
nanza for consultants but with little tangible benefit for the recipi-
ents whose entitlement the laws are designed to protect.

I mentioned at the outset that our managed care initiative was
related indirectly to the resolution of Boren. Over the past 5 years,
enrollment in HMOs in Connecticut has grown rapidly. Hospitals
with excess capacity find themselves in an increasingly competitive
environment, forced to grant discounts which are nearly as deep as
the Medicaid rates which were in dispute. With the national debate
turning to consideration of block grants to replace Medicaid, pro-
viders began to feel a certain nostalgia for the good old days of
cost-based Medicaid reimbursement.

As we concluded negotiations on the Boren settlement, a key pro-
vision was that the State would promise to retain, not repeal, the
current rate methodology for a minimum of 18 months until such
time as a major restructuring of Federal aid would require the
State to revise it.

The irony of the outcome should be lost on no one. From the
snowbound vantage point of a small New England State, it appears
that the chief stumbling block to concluding an agreement that
would redefine Medicaid is the concept of entitlement.

I believe it’s not the guarantee of coverage that frightens the
States. Rather, it is the mandated benefits for recipients and pro-
viders alike, the limit on State discretion to manage those benefits
and the Federal cause of action that stand in the way of an agree-
ment. If the States and the Federal Government are to move to be-
come prudent purchasers of health care, they must stop tying each
other’s hands in mandating the structure of the system to provide
that care. Flexibility on amount, scope, duration and comparability
of benefits will go a long way toward relieving State concerns about
covered populations.


67

are paid for similar services in the private sector. But as the pri-
vate sector has aggressively pursued discounts on rates for medical
services as part of the purchase of consortiums of care, they are
getting down to a range where they are paying rates which are not
all that dissimilar in some instances from what we had been pay-
ing in a fee-for-service environment, which is one of the things that
leads us to think that we could do better as a purchaser than
where we have been historically.

Mr. PETRABORG. I would only add to that example, I think most
of us are familiar with, having to do with hospital utilization over
the last few years, kind of the way purchasing has moved toward
shorter stays and services outside of that hospital. We can apply
that same kind of perspective to the way we are purchasing serv-
ices for nursing care, nursing home care and services to the dis-
abled. I believe we have a lot of room for maintaining service and
controlling costs.

Mr. SuHays. John Petraborg and David Parrella, thank you both
for coming. It is a nice way to introduce this issue to the commit-
tee. Thank you very much for coming. I appreciate your testimony.

I now would invite Dr. Bruce Vladeck, Administrator of the
Health Care Financing Administration.

Mr. SuHays. I want to thank you, Mr. Vladeck, for adjusting your
schedule. As I said earlier, Henry Waxman has asked us to post-
pone this hearing slightly. He was in New York and is being some-
what detained by the fog. Frankly, this hearing would be more in-
teresting if he were here, because he is very knowledgeable. I
would appreciate hearing his questions as well.

For the record, I recognize that we really are represented by one
side of the aisle up here and want to be thoughtful of that in our
questions, but we do want to have a meaningful dialog. That would
be helpful. I know you to be a very devoted public servant, and I
appreciate your being here and welcome your testimony.

STATEMENT OF BRUCE VLADECK, ADMINISTRATOR, HEALTH
CARE FINANCING ADMINISTRATION

Mr. VLADECK. Thank you, Mr. Chairman. I do appreciate the op-
portunity to be here today and all of the flexibilities about sched-
ules that were associated with it.

In light of where we are in this debate and the nature of the sub-
ject—I know your concerns about dialog—I am going to try and
keep my prepared statement very brief and to organize it essen-
tially around three charts, copies of which we are trying to get up
here, but which I believe are also in the back of your full written
statements.

Medicaid is in the process of becoming, in one sense, the largest
health insurance program in the United States of America, now
covering 36 million vulnerable Americans through partnership be-
tween the Federal Government and the States. Within the current
program structure, States have substantial flexibility to design
their programs to meet their unique needs, and the State and Fed-
eral Government have been working to implement more flexibility.
We have used our current waiver authority to enable States to pur-
sue innovative approaches to the provision of health care coverage
to special populations and to the redesign of delivery systems.


104

Mr. Souper. I am not a big is beautiful fan. I believe the country
is moving toward decentralization. I understand that you need
some standards and checks and balances, but I had a very particu-
lar question.

In the 27 percent of the recipients who are in the aged, blind and
disabled category that get 69 percent of the money, I also thought
I heard you say that the money for the elderly hasn’t changed
much.

Mr. VLADECK. As a share, sir, as a proportion.

Mr. SoupEr. So that, presumably, the—that growth has been in
the disabled area?

Mr. VLADECK. Yes, sir.

Mr. SoupER. And you said that was partly because they were
getting the money from other sources?

Mr. VLADECK. Yes.

Mr. SOUDER. What would some of the other sources be?

Mr. VLADECK. Well, just for example and you made reference—
and I think this is an issue where the States have a real beef about
mandates and where in the context of other legislation the admin-
istration has tried to work with the Congress—there was a very
substantial expansion de facto in the definition of disability in the
1980’s in the areas of mental illness and substance abuse as the
primary or corollary causes of disability.

What that has meant, in many States, is that many chronically
mentally ill people or chronic substance abusers or both, because
there are many who are both, who are traditionally treated entirely
in State-run and State-financed services and institutions, although
there used to be more Federal funding until it was block granted
and cut for those services, are now covered by Medicaid. They are
eligible for Medicaid, and those mental health and substance abuse
services are now being paid for under Medicaid programs.

And that’s probably—the single biggest piece of that—I mean,
Medicaid is so big and so complex there’s a lot of pieces, but of that
growth in the outlays for the disabled, for the nonelderly disabled,
that’s probably the biggest single piece in the 1980's.

Mr. SOUDER. You are saying some of the squeeze on low income
children and seniors is because of drug abusers?

Mr. VLADECK. I’m saying it’s because of the—well, I would say
it differently. I would say it’s because the Federalization of the ex-
pense for treatment of the chronically mentally ill and drug abus-
ers in what had previously been fully State or State and county
funded service programs.

The other piece of that, just to finish up, in some States, my own,
New York, it’s been a big issue. In other States, it’s been a much
smaller issue, has been that’s where most—the plurality—not the
majority but the plurality—of all services in the United States for
people with AIDS and HIV infection is in that box. And, of course,
that’s an 1980’s phenomenon in terms of the growth of those num-

ers.

Mr. Souper. I think there are a number of issues like that, and
probably many of these would range in the optional areas you ear-
lier raised—dental services. My wife is an occupational therapist.
I think there are a lot of things that may indeed be meritorious,
but that’s where the flexibility at the States and a lot of that bur-


167

‘Annual Federal Medicaid Costs
‘(Millions of Dollars)

Fiscal Year ‘Annual Federal Medieaid Costs
1995 $89,216
1996 97.292
1997 107,021
1998 118,060
1999 129,631
2000 140,116
2001 156,600
2002 172,800
‘7-Year Total 1,010,736

Source: Congressional Budget Office (December, 1995)

Although the financial impact on the federal government of generally unrestrained
Medicaid growth is alarming enough, the future impact on states could be even more
severe: a remorseless growth in the share of their own projected revenues going to
Medicaid that either forces them to raise taxes in order to maintain spending for other
programs or to reduce state expenditures for non-Medicaid programs. States can make
some cost-saving reforms in the program, but only subject to federal rules requiring that
certain levels of coverage (entitlements) be provided to certain populations.

To examine the probable future budget impact on states, The Heritage Foundation
analyzed the likely trend of total Medicaid spending using certain assumptions to forecast
the state share of Medicaid payments for the period 1995 through 2002.' This analysis
resulted in two sets of findings: first, the additional costs to the states if no changes are
made in the Medicaid program and, second, the additional costs stemming from President
Clinton’s proposed “per capita cap” reforms to Medicaid. Hence, the following charts
and tables project the future state-level Medicaid burden if Congress either does nothing
‘or adopts the President’s proposal. These projections of state spending incorporate
expected changes in state economic activity, in the size of the eligible population, and in
the trend of federal Medicaid transfers to the states.

‘These forecasts of future state Medicaid spending were prepared jointly by
Heritage and Wharton Econometric Forecasting Associates (“WEFA"), a nationally
recognized economic consulting firm that maintains detailed models for each state. For
47 states, WEFA found a significant relationship between changes in historical Medicaid
spending and fluctuations in the state's economic activity and Medicaid-eligible

' The original estimates of additional state Medicaid costs under current law and the technical assumptions
behind these estimates are contained in William W. Beach, “The Cost to States of Not Reforming
Medicaid,” Heritage Foundation F. ¥. J. No. 63, September 26, 1995. The cost estimates in this earlier
paper were revised downward on December 18, 1995 after the Congressional Budget Office recalculated
its seven-year projections of federal Medicaid outlays. The CBO made its revisions in order to reflect the
influence of lower forecasted inflation on federal Medicaid outlays. See Beach, “Updated Estimates of the
Costs to the Sates of Not Reforming Medicaid and the Additional Costs of Adopting Per Capita Caps,”
Heritage Foundation F. ¥. No. 81, December 18, 1995.

2



126

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to testify on how states have
addressed rising Medicaid costs brought on by federal mandates and
other factors. Since 1984, the Congress has mandated eligibility
expansion to certain low-income groups and allowed coverage of
others at state option.’ From the time these mandates began to
take effect, Medicaid costs have more than tripled and the number
of beneficiaries increased by over 50 percent, to 39 million.
Medicaid's current costs exceed $141 billion, and its growth
outpaces that of most major items in the federal budget, including
Medicare. Without modification, spending is likely to double in
the next 5 to 7 years.

In response to these escalating costs, many states are in the
process of restructuring their Medicaid programs by seeking section
1115 waivers from the Health Care Financing Administration (HCFA),
which oversees the Medicaid program. Named for section 1115(a) of
the Social Security Act, these waivers free states from certain
Medicaid restrictions on the use of managed care delivery systems.
They also allow states to expand Medicaid-financed coverage to
individuals not normally eligible for Medicaid.

My statement today will focus on (1) federal mandates and
other factors that have led to Medicaid cost growth, (2) states‘
use of section 1115 waivers for managed care programs to address
rising Medicaid costs, and (3) lessons for adequate program
planning and oversight from states’ experiences implementing
managed care programs. My comments are based on recent GAO work on
these issues. (See app. II for a list of related GAO products.)

In brief, several factors, including federal mandates that
expand eligibility, medical price inflation, and creative financing
schemes, have contributed to rising Medicaid costs. To contain
these costs, 22 states have recently sought waivers from federal
regulations that inhibit their ability to operate extensive managed
care programs. Some of these states have mandated the enrollment
of their acute care populations--primarily for low-income women and
children--into managed care programs and have expanded coverage to
previously ineligible individuals. Arizona, which runs a Medicaid
managed care program under a federal waiver obtained over a decade
ago, has lowered Medicaid spending by millions of dollars. It also
-eads the states in its development of information systems for
<ollecting medical encounter data essential for assessing quality
of care.

‘See app. I for details of these major federal expansions of
Medicaid eligibility and services.


45

Having finally convinced the HCFA central office of the merits of
our plan, we still had to negotiate with the Office of Management
and Budget. The involvement of OMB was unprecedented in the
review of the fiscal projections for a 1915(b) as opposed to an
1115 waiver application and continued right up to the eleventh

hour for the August 1 implementation date.

All these questions and negotiations diverted energies from the
real world considerations of delivering health care and
contributed to the problems we experienced during implementation.
The process has created a thriving industry for consultants with
little tangible benefit for the recipients whose entitlement the

laws are designed to protect.

l mentioned at the outset that our managed care initiative was
related indirect!y to the resolution of the Boren Amendment case.

Over the past five years enrol!rent in HMOs in Connect

qrown rapidly. Hospitais find

mselves in an increasin

competitive environment, forced to grant discounts to managed

care organizations which are nearly as deep as the Medicaid rates

which were in dispute. W:th the national debate turning to

consideration of block grants to replace the current Medicaid


87

Mr. SHays. Thank you. I found your testimony very interesting
and helpful. Let me just outline kind of where I am, what I am
wrestling with, and I am happy to hear your comments.

I served on the Committee on the Budget for a number of years.
I was elected in 1987. I vowed that this country needed to get its
financial house in order and have been part of that group within
Congress, among which there are some Democrats as well, obvi-
ously, as Republicans, who want to get our financial house in order
and balance the budget.

When I look at Government spending, I have realized for the last
8 years, I vote on one-third of the budget. I vote on discretionary
spending, defense, nondefense, what comes out of the Committee
on Appropriations. Two-thirds of the budget is basically on auto-
matic pilot. You fit the entitlement, you get the money.

Then you have the interest rates, which are about 15 percent of
the total budget. There is no way conceivable that we can balance
our budget unless we slow the growth of entitlements, not cut
them, slow the growth, which is—I think the President has ac-
knowledged that as well, because in his program he chooses to save
$52 billion over 7 years as opposed to our savings of $133, which
we dropped it down to $85, which disappointed me; I would like to
stay at $133 or close to it.

Now, we cannot keep the Government on automatic pilot and
balance the Federal budget. I would be more than willing, a num-
ber of my colleagues would, some would not, to get rid of all the
tax cuts and balance the budget in 6 years. What my interest is
is to get that 50 percent of the budget that is on automatic pilot
and to not have it grow so much.

Now, the other part of the equation for me is that because of the
additional add-ons that the Federal Government has done, which
some are mandatory and some are optional on the States, we have
seen Medicaid grow during certain times, during certain years, re-
cent years, of 20 percent a year. Medicaid/Medicare now constitute
17.6 percent of the entire Federal budget. Medicare and Medicaid
are equal to all domestic discretionary spending. Equal to it.

Now, we have continually squeezed discretionary spending. I
have sympathy with the President’s view that we are squeezing
discretionary spending domestic. Where my challenge is, we have
to slow the growth of Medicare and Medicaid.

Now looking at your chart, there are parts that are mandatory.
In other words, if you choose to be part of Medicare and all Medic-
aid, and I think it is disingenuous to assume that a State would
not, if you choose now, these are the rules. I will just put another
bias that I have on the table. In the State level, I saw States doing
innovative things. I do not see it on the Federal level. I see the
State adding—the Federal Government adding up everybody in
this room—gets the number of people, adds up all the shoe sizes
and says, there we are, size 8¥2 fits all. And I would dispute your
basic sense that there is flexibility in this. Obviously we would
have a debate on that.

What would you call—you have mandatory people and optional
people. This is a very helpful chart to have a discussion. I thank
you for having it. You have mandatory people; you have optional


Introduction

Mr. Chairman and members of the committee, thank
you for the opportunity to share Minnesota’s vision for

reforming Medicaid.

As negotiations continue, I want to assure you that
Governor Arne Carlson and his administration are
working hard to find ways to meet the needs of
Minnesotans while supporting a balanced federal
budget.

Minnesota already has a number of market-based
reforms under way that show how innovations in health

care can work.

m= Contrary to what some people would have you
think, we have shown that managed care is

high quality care.


UNFUNDED MANDATES IN MEDICAID

THURSDAY, JANUARY 18, 1996

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON HUMAN RESOURCES AND
INTERGOVERNMENTAL RELATIONS,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 12 noon, in room
2247, Rayburn House Office Building, Hon. Christopher Shays
(chairman of the subcommittee) presiding.

Present: Representatives Shays and Souder.

Staff present: Lawrence J. Halloran, staff director and counsel;
Kate Hickey, and Robert Newman, professional staff members;
Thomas M. Costa, clerk; Dave McMillen, minority professional
staff; and Jean Gosa, minority staff assistant.

Mr. Suays. I would like to call this hearing to order and to wel-
come our witnesses, our guests and our C-SPAN audience as well.

This is a hearing that won’t die. Despite near mortal assaults
from snowstorms, scheduling conflicts and time changes, this hear-
ing to examine the issue of unfunded mandates in Medicaid is at
last convened. We deeply appreciate the patience and cooperation
of all of our witnesses.

Last year, this subcommittee held four hearings on fraud and
abuse in the Medicare and Medicaid programs. Two of those were
on the legislative proposals to strengthen antifraud activities and
to protect the integrity of health care spending. We also heard tes-
timony from the Health and Human Services Inspector General,
the Health Care Financing Administration and the Department of
Justice, State officials, scholars, commentators and many others on
the staggering costs of scams, abuses and mismanagement.

Some estimate that fully 15 percent of all Medicare and Medicaid
spending is wasted. Many of us think it is much higher.

Today, we address another factor driving Medicaid spending to
unsustainable levels: unfunded mandates.

Over the years, when Congress added to the Medicaid entitle-
ment through expanded eligibility or additional covered services,
little or no thought was given to the fiscal impact on the States or,
in fact, even to the Federal Government. The Boren amendment,
one effort intended to help States limit Medicaid reimbursements
to reasonable costs, has been transformed into an unfunded man-
date, enforceable in Federal court, to reimburse providers for the
full attributable cost of every Medicaid service.

In a draft report prepared pursuant to the Unfunded Mandates
Reform Act, Public Law 104-4, the Advisory Commission on Inter-

ied)


150

payment standard in which all cost incurred by the providers must be reimbursed. In these instances,
states may be liable for significant sums to cover the retroactive rate increases ordered by the court for
the group of providers involved in the suit. In some cases, the additional payments made as a result of a
‘court-ordered retroactive rate increase are not eligible for cost-sharing from the federal government.

Much of the Boren Amendment litigation, however, does not relste directly to the vagueness
of the statutory language. Rather, the issue is a state's procedure for determining reimbursement rates.
In such cases, if the procedure is ruled by a court to be flawed due to lack of adequate public notice or
other factors, a state may be lisble for substantial retroactive reimbursements based on a revised rate
determination procedure. Again, depending on the situation, the additional payments made as 2 result
of the court order may not be eligible for cost-sharing from the federal government, even though the
rate determination methodology was approved as a part of the stste’s plan for the Medicaid program.

I should add on behalf of the Department of Health and Human Services, that in response to
litigation, the Department has tightened its process for reviewing state rate determination procedures to
strengthen potential acceptance by the courts.

State Concerns

Responses received by ACIR to a survey of states indicte thet many states feel the Boren
‘Amendment handoufis their ability to constrain the growth in Medicaid spending during times of fiscal
qrisis, Requiring that Medicaid reimbursement rates be established within the limits of federally
mandated criteria restricts the scope of a state's negotiations with providers of medical and nursing
hhome services. Further, the threat of potential tigation often causes a state to increase rates merely to
avoid legal actions. States are concerned about the extensive and expensive work necessary to
substantiate compliance with the law and to protect against suits by nursing home or hospital providers.


42

were one of the last of the high cost, high benefit states to
move aggressively to managed care. Managed care also offered the
promise of positioning the state for wider reform of the delivery

system,

As we began our planning for the initiative, we had to make
strategic decisions, Although the disabled and the so-called
dual eligible population that receives benefits from both
Medicaid and Medicare consume a majority of our costs, we
recognized that there were few models for the successful delivery
of managed care to populations with special needs. There is no
current waiver mechanism that can restrict freedom of choice for
dual eligibles and require that they receive care from Managed
Care Organizations, even though many of their most expensive
benefits like nursing facility care and pharmacy are paid for

dicard program.

aged care effort with th

which represents close te a quarter cf a million

Connecticut strongly supports the Lual Eligible Medigrant

Demonstration uded in the Balanced Fusqet

Act of 1995 (BSA) passed by the Congress and vetoed by the

President which would have alicwed the states to manage an

integrated Medicaid/Med:care benefit.


161

Under the Conference Agreement, federal funds for the Medigrant program would
inctease an average 4.8 percent per year from 1996-2002, This growth rate is well below the 6
percent per year needed to keep pace with estimated beneficiary growth (about 3 percent per
year) and general inflation (about 3 percent per year). Looked at another way, if states were to
retain coverage provided under current law, the Urban Institute estimates they would have to
constrain expenditure growth per beneficiary to 1.3 percent-Less than half tho rate of geneal
price inflation. Even modifications Republican bave proposed to increase funding in the
Conference Agreement have failed to assure per capita growth rates sufficient to keep up with

medical cost inflation.

To achieve this goal, the Agreement provides no Dexibilities in service delivery beyond
those in the Administration proposal; nor is it clear that any such flexibilities could sustain
coverage with such Limited resources. Rather, it allows states the safety valve that undermines
the program's fundamental purpose-the ability to eliminate coverage . That means that poor
facies, people with discbilities and seaior citizens would lose essential heath and long-term

care protection.

The Conference Agreement’s threat to coverage goes beyond its reduction in federal
dollars. By changing the matching formula and other current Medicaid provisions, it allows
states to substitute the limited pool of federal funds for expenditure of state dollars. The Urban
Institute estimates that if states reduce their spending to the minimum needed to draw down their
allowed federal payments, total spending on medical assistance would fall an additional 8 percent

5


ui

Introduction

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 proposed 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)’. Combined efforts by

“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.

1


82

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.

10


UNFUNDED MANDATES IN MEDICAID

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES
AND INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

JANUARY 18, 1996

Printed for the use of the Committee on Government Reform and Oversight

ee

U.S. GOVERNMENT PRINTING OFFICE
40-631 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-055192-7
a



108

Remarks of Honorable Henry A. Waxman
Subcommittee on Human Resources and Intergovernmental Relations
Hearing on “Unfunded Mandates’ in Medicaid
January 18, 1996

The title of today's hearing — “Unfunded Mandates in Medicaid” — reminds of
Alice's encounter with Humpty Dumpty in Through the Looking Glass. Alice is trying to
figure out what Humpty is talking about, and Humpty informs her that, “When Luse a
word, it means just what | choose it to mean.”

The simple truth is that there are no “unfunded mandates’ in Medicaid, Anyone
who asserts that there are either misunderstands the program or has taken up Humpty
Dumpty’s world view.

According to, ter's New World Dictionary, a “mandate’ is “an authoritative
order or command.” “Unfunded” means “not funded.”

There is not a single “authoritative order or command” that is “not funded” in
Title XIX of the Social Security Act, which establishes the Medicaid program

First, Medicaid is a voluntary program. No State is required to participate. No
hospital, physician, nursing home, or other provider is required to participate. No
citizen is required to participate.

Title XIX does not - does not -- “order or command’ the States to provide basic
health and long-term care coverage to their low-income citizens. Every single State
has the constitutional and statutory right to drop out of the Medicaid program today.

So much for the so-called “mandate.” Now let's turn to the “unfunded.”

The Congressional Budget Office projects that the Federal government will send
$97.2 billion in Federal Medicaid matching funds to the States. That's about 57
percent of the total amount that is projected to be spent on basic health and long-term
care services under Medicaid by all the States and the Federal government combined.

In other words, the Federal government is paying more than half the costs of the
program. The dictionary might characterize this as “predominantly funded.” However
itis a clear misuse of the English language to call this arrangement “unfunded.”

‘So Medicaid 1s neither a “mandate” nor is it “unfunded "
Which brings us to the world according to Humpty Dumpty, where words mean

what we choose them to mean, We now have, as part of the Republican Contract on
‘America, - a law which solves this inconvenient English language problem by arbitrarily


182

Letters from Governors

Tommy G. Thompson, Wisconsin
Michael O. Leavitt, Utah

Terry E. Branstad, lowa

William F, Weld, Massachusetts
Kirk Fordice, Mississippi

Fife Symington, Arizona

Marc Racicot, Montana

are available in subcommittee files.

John Engler, Michigan

George V. Voinovich, Ohio
George E. Pataki, New York
David M. Beasely, South Carolina
Bill Graves, Kansas

Edward T. Schafer, North Dakota
Gary E. Johnson, New Mexico


131

CONCLUDING OBSERVATIONS

About 39 million low-income women, children, elderly, blind,
and disabled Americans depend on health care made possible by the
Medicaid program. However, the program's rapid spending growth
imperils efforts to bring the federal deficit under control.
Consistent with the interest of the Congress in containing federal
spending, states believe they need the flexibility to manage their
respective programs. Such flexibility is available today only by
seeking federal permission through a section 1115 waiver. If
states are granted more direct control to aggressively pursue
managed care strategies, the importance of continuous oversight of
managed care systems to protect both Medicaid beneficiaries from
inappropriate denial of care and federal dollars from payment
abuses should not be overlooked. Finally, the experiences of
states with Medicaid managed care programs underscores the
importance of adequate planning and appropriate quality assurance
systems for a Medicaid program's effective transition to managed
care.

Mr. Chairman, this concludes my prepared statement. I will be
happy to answer any questions you or other Subcommittee members may
have.

For more information on this testimony, please call Kathy Allen,
Assistant Director, on (202) 512-7059. Other major contributors
included Richard Jensen and Hannah Fein.



159

On provider payment, the proposel would eliminate the so-called Boren amendment
requirements that have constrained states in setting payment rates to hospitals and nursing

homes. This change will mske it easier for states to limit payments to providers.

Both managed care and provider payment changes will facilitate state efforts to provide
insurance protection at lower cost. The Administration further promotes these resulls with the
additional action of establishing a limit on the rate of growth in federal payments per beneficiary

enrolled in the program, The per capita cap, as it is called, has three fundamental characteristics:

+ First, by focusing on expenditures per beneficiary, rather than total expenditures, it
ceucourages states to focus on efficiency in coverage—not eliminating coverage~in

slowing cost growth.

+ Second, by allowing federal funds to inerease as the number of beneficiaries increases, it
sustains the health insurance safety net and protects states ageinst increased demands for
coverage thet comes with economic recession or demographic changes, developments
that are unpredictable and from which no state is immune.

* Third, by establishing a growth rate for federal funds that recognizes rising medical costs,
it protects states and beneficiaries against the erosion of purchasing power as prices rise,

thereby sustaining the value of insurance protection.




109

defining certain changes in Medicaid as “Federal intergovernmental mandates.”

Obviously, there is a political agenda at work here -- an agenda to repeal
Medicaid and its guarantee of basic health coverage for 36 million Americans, and to
replace it with what is, for all intents and purposes, Federal revenue-sharing to the
States.

Medicaid is the program under which, for the past 30 years, the Federal
government has shared with the States in the cost of hospital, physician, nursing home,
and other basic health and long-term care services for vulnerable Americans

States are not - repeat not - “mandated” to provide any of these services by
either the Constitution or Title XIX of the Social Security Act.

However, if the States want the Federal government to share with ih"
cost of these basic health and long-term care services, they must meet certain terms
and conditions,

For example, if States want Federal Medicaid matching funds, they must spend
some of their own money providing coverage for medically necessary hospital,
physician, nursing home, and other specified services to certain populations, such as
pregnant women with incomes below 133 percent of the poverty line.

If States offer the required coverage to the specified populations, States may
also receive Federal matching funds for spending on other services, such as
prescription drugs, and other populations, such as elderly individuals with high,
recurring medical expenses.

Despite all the rhetoric about “unfunded mandates,” the fact is that majority of
Federal Medicaid dollars are spent on services and populations that States are cic
required to cover in order to participate in the program

More precisely, in 1993, only 38 percent of all Medicaid funds were spent on
required services for required populations that States must cover in order to receive
any Federal Medicaid matching funds at all. Most of the rest -- 50 percent -- were
spent on populations or services for which the States may receive Federal matching
funds if they choose to but are not required to cover as a condition of receipt of Federal
Medicaid funding. The remaining 13 percent were spent on payments to
disproportionate share hospitals, some of which were redirected by some States to help
finance other State activities.

Again, this means that well over half of the $97 billion that the Federal
government will send to the States in Medicaid matching payments this year are for
populations or services that the States are.not required to cover as a condition of
receiving Federal Medicaid funds


Purchasing.

Services would not be purchased one at a time on a fee-for-service basis. Rather, both Medicaid
and Medicare would together purchase comprehensive managed coverage from care delivery
networks on a risk-bearing basis. Coverage would be purchased in the market place from a
variety of sources, not necessarily solely from health maintenance organizations (HMOs). Until
design and implementation of a mature strategy is completed, purchasing for this population
would be administered in three manners:

@ — PMAP. Medicaid coverage of non-institutional services (excluding home- and
community-based services) is currently purchased on a prepaid, capitated basis through
the Prepaid Medical Assistance Program (PMAP) for most Medicaid populations,
including the elderly, within designated geographic regions. This program will continue
to expand geographically to include all elderly Medicaid recipients within the state,
except for those participating in LTCOP.

© LTCOP. The Long-Term Care Options Project (LTCOP) combines Medicare and
Medicaid purchasing of acute and long-term care! services on a capitated basis for
Medicaid enrollees who are dually eligible for Medicare. Beginning in July 1996, up to
4,000 elderly dual eligibles, residing in designated geographic regions, may enroll to
receive their combined Medicare-Medicaid coverage in this manner. This project was
federally approved under §1115(a) of the Social Security Act.

© Projects for purchasing managed coverage for persons with disabilities. Pilot
projects intended to demonstrate the effectiveness of purchasing coverage for persons
with disabilities on a comprehensive, managed basis would be implemented in designated
‘geographic regions beginning in January 1997.

These purchasing approaches would pave the way to begin implementation of a more mature
purchasing strategy in 1998 and 1999, This strategy is still in the early design stages and would
likely have different aspects between the two larger populations, elderly and disabled, and among
the various geographic regions of the state.

Consumer Protections & Performance Measurements.

Experience has shown us that a prescriptive, process-oriented regulatory approach to protecting
consumers from poor performing providers does not guarantee that consumers are protected or
that services of good quality are provided. Experience has also shown us that the current
regulatory approach has a high cost associated with it, We have been hearing from both
providers and consumers alike that more flexibility in this area may reduce costs and even
improve the quality of services. A combination of purchasing on a comprehensive, managed

‘Including up to 6 months of nursing facility services.

Minnesota Department of Human Services
9 January 1996


89

there describes the optional people and the optional services? Is it
the 45.5 percent?

Mr. VLADECK. The optional people and optional services is that
24 percent of the total, people who the Federal Government does
not require the States cover for services, that the State does not
require——

Mr. SHays. What would define here in your chart the total
amount of spending that is optional?

Mr. VLADECK. I guess the total amount of spending that is op-
tional is the total amount that is not in the upper left-hand box.
So it would be 56 percent of State Medicaid spending, and the Fed-
eral match of it is not mandated by the Federal Medicaid program.

Mr. SHays. Not to turn something around but to turn something
around, what you described to me is something quite significant.
States on their own are choosing to spend 56 percent of all the
costs. So why do you have such a concern that States will be irre-
sponsible if we give them discretion?

Mr. VLADECK. States have made that choice, Mr. Chairman,
under a deal in which the Federal Government matches them any-
where between $1 for $1 and $3 per $1. If there is no additional
Federal dollars associated with a change in State expenditure pat-
terns, you would expect a rational State to behave very differently.

Mr. SHays. I am listening to that, and for you that is a satisfac-
tory answer. For me it is not, because I know my State of Connecti-
cut, yes, has to match 50 percent. My point to you is that the bot-
tom line is States have chosen—you cannot have it both ways and
say it is optional, and then say they option it and now it is not sig-
nificant.

It is optional; they option it and they choose to. They do not have
to. My State could save a hell of a lot of dollars by choosing not
to have that service, but they choose not to.

Mr. VLADECK. Mr. Chairman, I have heard the argument in your
State and every other State made by providers every time the State
proposes to cut any part of the Medicaid program. They Say you are

oing to save $20 million in the State budget and cost the State
$20 million in Federal dollars. I have heard the argument, and
every time States have proposed to reduce their outlays on Medic-
aid, the argument is made that for every $1 the State saves, the
beneficiaries of the service and the providers in the system lose be-
tween $2 and $4, depending on the Btate you are in.

The converse of that is it has given the States a greater incentive
to expand coverage because of the availability of the open-ended
Federal match, absolutely.

Mr. SHays. What is interesting is, you take some States that
have a 50 percent match and they choose to spend more than some
States that get 80 percent Federal dollars, which is kind of an in-
teresting—to me it is at least interesting that even with a greater
incentive—let me ask you this now: When I look at nursing care
and where States are required to have ombudsmen, is that Federal
or State requirement?

Mr. VLADECK. That is Federal.

Mr. Suays. Why is it logical and why is it cost-effective and why
is it right to have an ombudsman that can say to a nursing home,
you had two patients in room A and you had two patients in room


84

© 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.

12


12

Minnesota’s approach

Since it became clear there would be significant reforms
at the federal level, Governor Carlson’s administration
has gone to great lengths to gather the ideas of
stakeholders and the public at large. We traveled the
state throughout the summer and fall, and people are
open to change.

= For the record, I have included a document that
outlines Minnesota’s plan, which grew out of
this broad-based input.

Our plan to create a new health care system is built on a
number of guiding principles. We intend to design a
system that: .

= provides access to high quality care,

= = promotes personal independence and wellness,

= ensures efficiency and value, and

= reinforces accountability and responsibility.

5


54

such as the criteria for adequate rates at Section 1902(a) (30) of
the Social Security Act. It maintains the federal cause of
action for entitlements and all the current restrictions on co-
payments and provider taxes. With the attendant reductions in
the federal share, it is clearly an unfunded mandate to the

states.

I wish the budget negotiators success in their efforts. Our
state and the future of the Medicaid program can ill afford

either the continuation of the current impasse or the status quo.


171

annual percentage of total national Medicaid spending for each of the seven forecast years
following 1995. Estimates of additional taxes that would be raised to meet each state’s
additional funding requirement were calculated by dividing the additional funding
requirement by the estimated number of taxable individual federal income tax returns in
1995,


96

acted as part of OBRA 1993. And none of us yet, frankly, have real-
ly looked at the extent to which the OBRA 1993 requirements
would permit us to simplify the 1991 requirements, but we would
simply be willing to do that.

Mr. Souper. It becomes very critical because these hospitals are
serving the portion of the population that is getting squeezed in
this chart here, basically low-income families and children who
partly are being squeezed in Indiana because of what amounted to
an unfunded Federal mandate on disability; because the Federal
disability law broadened it from what the Indiana disability law
was, transferred Indiana funds. They tried to address that to try
to be able to cover low-income kids. We have a number of major
hospitals in our State that are constantly on the margin as to
whether they are going to close. And this funding becomes very
critical, because while you are sorting through and saying this is
very difficult, we are getting squeezed at both ends of the unfunded
mandates changes, the State forced allocation. Then they tried to
address that question, and that isn’t being waivered, when they
thought it was going to be waiverable. That is why we are pushing
hard on that.

Mr. VLADECK. I understand that, sir. With all respect, and I am
really not as familiar as I probably ought to be about Indiana, but
there are a number of States which are financing disproportion-
ate—and I do not believe this is the case in Indiana—but which are
financing disproportionate share hospital programs without any
State revenues whatsoever, essentially with Federal dollars match-
ing hospital dollars. And to the extent that implementation of the
1991 or 1993 laws creates difficulty for those hospitals, we find our-
selves in a very hard place because——

Mr. SOuDER. If they had a hospital fee that went to the general
revenue fund and then that money came out of general revenue,
would that not be eligible?

Mr. VLapDECK. That is correct. But as you are well aware, State
governments in the last decade, for a variety of reasons, in order
to support these institutions, including many that were tradition-
ally supported by county revenues, tax revenues, for example,
found a way to use Federal funds to do it without State or county
tax levees going to them. It has created some real problems and we
are going to try to work them through as best we can to protect
the institutions.

Mr. SoupeR. I understand that. I view a hospital tax as a State
and local tax of a different form. I want to revisit, because it is a
fundamental—let me ask you an angle off the State question first.
You raised a question of what if there was a recession or a down-
time and there was not a Federal program to protect. How do you
feel about—this has come up in other forms of our block granting
program—Senator Lugar from Indiana has expressed it in relation-
ship to school lunches and some of the food stamp programs, be-
cause Indiana from time to time has been known to be automobile
recession prone—how would you feel about some sort of a fallback
kind of rainy day protection, that if you have a trigger that the
State then would partially reimburse when it went up in a boom
time?


170

First proposed by a group of Democratic House members earlier this year,” this
pian would further challenge the fiscal resources of the states by maintaining all the
‘existing program mandates which the federat government imposes on the states* while
simultaneously reducing the federal government's contribution through the mechanism of
“per capita cap” on the federal share of the program. Under the “Blue Dog” plan, the
per capita cap limits the amount of federal medical assistance that states would receive
for each Medicaid recipient. Any expenses that exceed this limit would be the sole
responsibility of state and local taxpayers. Because the full array of federal Medicaid
mandates would remain in effect, states would not be able to offer innovative, and less
expensive, health care options to Medicaid recipients. Overall, the per capita cap would
shift an estimated $47.4 billion of mandated Medicaid spending from the federal to state
governments over the next seven years.

States would probably respond to this shift in one of three ways: 1) enact dramatic
tax increases; 2) reduce state spending on education, infrastructure, law enforcement, and
other important state functions; or, 3) some combination of the above. Indeed, the
proliferation of Medicaid mandates during the late 1980s and early 1990s has already
forced the states to reallocate their resources to Medicaid. According to the National
Association of State Budget Officers, Medicaid spending has doubled from
approximately 10 percent to 20 percent as a share of overall state spending since 1987.

Technical Assumptions

‘The Heritage Foundation and Wharton Econometric Forecasting Associates used
stale models of economic activity to develop state-by-state estimates of Medicaid
spending and the additional funds states would need to meet their future Medicaid
obligations.

Our baseline estimates assume no change in current Medicaid eligibility rules and
allowed federal Medicaid transfers to the states to grow at the rates implied by the history
of this program. Total Medicaid program spending in each state is a function of the
state’s historical Medicaid expenditures and expected demographic and economic change.
We used this as the basic structure for future Medicaid spending.

‘These baseline forecasts of state Medicaid spending were adjusted upwards by
Heritage to reflect the higher federal expenditures on Medicaid projected by the
Congressional Budget Office. The difference between our initial baseline for total
(federal and state) spending and the CBO adjusted estimates is $58 billion over the period
1996 to 2002. We distributed the state portion of this additional amount by each state's

” On October 26, 1995, Representative Bill Orton (D-UT) and a group of House Democrats offered a
‘substitute to the Balanced budget Act of 1995 (HR 2491). This proposal, which would reduce baseline
federal Medicaid expenditures by $85.1 billion over seven years, was defeated by a vote of 72-356, Sixty-
cight Democrats and four Republicans supported the plan.
“ Federal Medicaid law defines precisely who is eligible to receive benefits under the program, which
medical services beneficiaries can receive, and the amount, scope, and duration ofthese benefits
* Information obiained from House Commerce handout, September 20, 1995,

3


15

citizens and individuals with disabilities Medicaid also provides
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.


36

Despite our initial concerns about the funding formula, we now
believe that there was enough money in the Balanced Budget Act
of 1995, passed by Congress and vetoed by the President, to do the
job, given added flexibility. In contrast, the President’s own pro-
posal would have cost our State $450 million over the 7-year period
from 1996 to 2002 with little or none of the flexibility we need to
manage more efficiently. It is clearly an unfunded mandate for the
States.

I wish the budget negotiators here in Washington success in
their efforts. Our State and the future of the Medicaid program can
ill afford either the continuation of the current impasse or the sta-
tus quo.

Thank you.

{The prepared statement of Mr. Parrella follows:]


181

So I think, in part, some of our Governors are interested in doing
this because they want to show that they can do it. It is an issue
that the public has before them and they want to demonstrate
their ability to do this. But also we just found a lot of ways within
the State government in which we could cut costs if we were not
required to do things a certain way or report a certain way. And
it was continual frustration, a maddening frustration as we ran up
against budget constraints, that we were not enabled, we were not
capable of doing those things. So there is a whole inventory of
items that Governors, particularly their long-serving and -suffering
staffs, know that they can do if they could only do it.

Mr. SHays. Mr. Cuomo is reported saying in the New York Times
a few months ago, he said: When we had the chance to fix the sys-
tem, we did not take advantage of it.

Now it is, I think he might have used the word “destroy.”

I would not agree with all of that, but it is interesting to me that
we are finally wrestling with this issue which I think has just been
kind of there for a long time, calling out for addressing.

It is kind of sad in one sense that it has taken us so long to get
to this point where we are at. I am struck by one point. In my own
mind, I hope we go all the way. If we go 70 percent of the way or
even 50 percent of the way, it will be a significant progress. To me
as I look at it, why not go the full distance?

This has been a very interesting discussion. You have added a
lot to my knowledge. You have made my day by at least acknowl-
edging that a cut in the growth is still an increase. The record will
be open for 3, for a period of time, 3 days, for any submission of
anything you would like to add, anything that our colleagues on
the other side of the aisle would like to add. I am going to submit
for the record a number of letters from Governors who are eager
to get into this program and hope that we get rid of the red tape.

[The information referred to follows:]


48

inappropriate use of emergency room services, is strictly

forbidden for all of our recipients.

What we were left with was the application of co-payments to non-
emergency services for our most vulnerable non-institutional
populations, the disabled and the elderly who live in the
community. Many of these individuals have developmental
disabilities, chronic mental illness, or other long term ailments
that make them high volume consumers of Medicaid services,
pharmacy in particular. Caught between a state mandate to act
and federal regulations that caused us to exempt the majority of
our recipients, we made plans to implement co-payments on
populations whose special needs would yield the maximum political

fallout.

But it gets worse. Net only were we limited in

implement co-payments, federal law renders th

rtually

meaningless. The Social Secur:ty Act specifically states that no

because of their inability to

recipient can be denied a ser

Pay a co-payment. A prov:

elects to provide the se
must do so while acknowledgin3j that they may never recover from

the recipient.


117

GROWTH RATE. THIS PLAN, THUS, PLACES A

STATE LIKE NEW YORK AT THE SAME GROWTH

RATE AS ALASKA, WYOMING AND THE DISTRICT

OF COLUMBIA.

WHILE SOME WOULD ARGUE THAT MEDICAID

IS BEING RESTRUCTURED, IN THE BUDGET

RECONCILIATION PROPOSAL, THE FACT IS THAT

$133 BILLION IS ELIMINATED FROM THE

MEDICAID PROGRAM. RESTRUCTURING

ADVOCATES ARGUE THAT THE ELIMINATION OF

"UNFUNDED MANDATES" WILL GIVE STATES THE

DESIRED FLEXIBILITY TO ABSORB THIS $133
6


53

sign a bill that does not contain explicit guarantees of coverage

for broad segments of the poor.

I believe it is not the guarantee of coverage that frightens the
states. Rather it is the mandated benefits that go with
coverage, the limits on state discretion to manage those

benefits, and the federal cause of action.

If the states and the federal government are to become prudent
purchasers of health care services, they must stop tying each

other's hands in mandating the delivery system for that care.

Flexibility on amount, scope, duration and comparability of
benefits w:ll go a long way towards relieving state concerns
abcut covered populations. Despite our concerns about the

tinal tirmula, we now believe that there is enough money for

the B3A to do the Jeb given the added flex:b:lity.

, the President's proposal would cost our state $450

over the seven year pericd from 1996-2002 with i:ttie or

flexibility we need tc manage more efficientiy. Even
though the President's plan would relieve the states of the
managed care waiver burdens and repeal the Boren Amendment, it

leaves in place other requirements for provider reimbursement

17


138

APPENDIX I APPENDIX I
Table 1.3; Federal Medicaid Expansion to Other Populations and

Population atfected Expansion Mandate/option
‘COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986) (P.L. 99-272)
Terminally individuals Allows provision of Hospice Option

services
(GBRA 1986 (Omnibus Budget Reconciliation Act of 1986) (P.L 99-508)
ions Requires provision of Mandate

‘emergency services it
‘otherwise eligible
{financially and
categorically).
IRCA (Immigration Reform and Control Act of 1988) (P.L. 99-603)
Newly legalized aliens, Requires provision of Mandate
emergency and
pregnancy-related services
‘fotherwise eligible. Also
requires ful coverage for
eligible individuals under 18.
‘Anti-Drug Abuse Act of 1986 (P.L. 99-570)
Homeless Requires state to provide Mandate
‘proof of eligiblity for
individuals otherwise
eligible but having no
permanent address,
OBRA 1993 (Omnibus Budget Reconciliation Act of 1983) (P.L 103-66)
Medicaid beneficiaries ‘Wakes coverage of ‘Option
personal care services
‘outside the home an
‘optional rather than @
mandatory service.

Aliens Claniies that Mandate
Madi

id-covered

Jency services for
liens do not include care
and services related to
organ transplant
procedures.

13


49

It did not take long for the Connecticut Pharmaceutical
Association to bring this contradiction to the attention of the
press and the legislature. Pending further review, the Governor
has suspended indefinitely the collection of co-payments for

Medicaid services.

Finally, I would like to comment on our difficulties in
sustaining an uncompensated care pool for the uninsured. I know
that state disproportionate share payment adjustments to
hospitals are not popular in Washington these days. But I will
tell you that DSH payments to acute care hospitals have provided
over $600 million to cover the costs of uncompensated care since
1991 while the percentage of the population in our state who have

no health insurance has doubled over the same period.

Initially, the Uncompensated Care Pooi was funded by a direct
assessment on hospital revenues that came in to the state and
went right back out to the providers as DSH payments based on the
volume of uncompensated care at their facilities. This
relatively simple system was truly redistributive and broad based
with the exception of psychiatric hospitals who neither paid the
assessment nor experienced the same volume of uncompensated care

as acute care hospitals.


8

Block Grant

The Conference Agreement would curtail Federal financial
responsibility by converting Medicaid into a capped block grant
formula, throwing the current Federal/Staté 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


88

Reople. You have mandatory services; you have optional services.
And you have thoughtfully broken that down.

Describe to me the optional people that you call optional. In
other words, you can be part of Medicaid but you do not have to
have optional people. What would be an optional——

Mr. VLaDECK. I think the largest numbers of so-called optional
people are in two categories. One are the so-called medically needy.
States may, but are not required, to cover folks who would qualify
for cash assistance if you ignored that part of their income that
they have to spend on medical care. So in other words, if you are
a person with even a median income in some States but you have
to spend $5,000 or $6,000 a month on medical care because you
have a chronic illness of some sort or another, and that $5,000 or
$6,000 a month when subtracted from your total income would oth-
erwise make you eligible for AFDC or SSI——

Mr. SuaAys. Give me some other optional people.

Mr. VLADECK. That is the largest group.

The second group of medically needy, States are required to cover
AFDC recipients and children up to the age of 13 under 100 per-
cent of the poverty level and pregnant women up to 100 percent of
the poverty level.

Mr. Suays. That is the AFDC?

Mr. VLADECK. Well, some of them, no, they can, children must
be covered up to 100 percent of the poverty level whether their par-
ents receive AFDC or not.

Mr. Suays. So working poor?

Mr. VLADECK. States may extend that coverage up to 185 percent
of the poverty level. And so there are two very disparate groups in
that other People category.

Mr. SHays. So your point would be States do not have to do that.
Most States do; correct?

Mr. VLADECK. I believe about two-thirds of the States cover some
or all of the medically—have some degree of medically needy pro-
gram. But only about a third of the States cover more than the
minimally required low-income mothers and children.

Mr. SuHays. You described the bulk of the optional people. How
about describing the bulk of the optional services?

Mr. VLADECK. A lot of the optional services have to do with par-
ticular kinds of providers of services or additional services that are
not in the basic Medicaid package. Podiatrists are the ones that we
always used to fight about in New York all the time. Dental serv-
ices for large parts of the Medicaid population are in optional serv-
ices.

Actually, the most expensive optional service by far is pharma-
ceutical drug coverage, which is not required to be covered, but
most States, I think all the States do. A variety of home and com-
munity-based services, long-term care services that are thought
to—for institutional care are optional for the States but many
States take advantage of them.

Nonmedical transportation is a so-called facilitative service.
Physical therapy, occupational therapy on an outpatient basis.
There is a list of about 30 such services.

Mr. Suays. So basically is it your contention that, am I reading
this correctly that if I take mandatory services—what number


43

Having identified our target population, the next step was to
select a vehicle. As you know, there are two waiver options for
states interested in requiring that all or a portion of their
Medicaid populations enter managed care - a section 1915(b)
"freedom of choice" waiver and a section 1115 research and
demonstration waiver. Initially, we were attracted by the 1115
option because of the potential it held for greater flexibility
on recipient eligibility, enrollment lock-in, enrollment
composition and upper payment limits. However, we were wary of
the lead time and effort necessary to obtain federal approval of
such waivers. Because our state fiscal projections called for
enrollment to begin in 1995, we elected the 1915(b) option and

reserved the 1115 application for a future date.

We assumed a relatively quick turnaround on our waiver
application with one minimal question and answer period from the
Health Care Financing Administration. After all, these same
waivers had been approved in over 40 states. We had worked
closely with regional office staff throughout a lengthy

development period with our state legislature.


129

Section 1115 waivers allow states to contract with managed
care organizations® that enroll few or no private patients. In
other words, the "75-25 rule* has been waived. This rule
stipulates that, to serve Medicaid beneficiaries, 25 percent of a
health plan's total enrollment must consist of private-paying
patients. The principle behind this restriction is that a health
plan's ability to attract private enrollees can serve as one
assurance of quality.

The waivers also permit states to require beneficiaries to
remain enrolled in their health plans for longer periods of time
than Medicaid typically requires. Allowing beneficiaries to choose
to disenroll at will, as normally permitted by Medicaid, makes
managed care organizations’ planning for financial stability
difficult and therefore the enrollment of Medicaid beneficiaries
less attractive.

While HCFA has agreed to waive some of the traditional
requirements aimed at ensuring managed care quality, the terms and
conditions of section 1115 waivers require states to operate
quality assurance systems and to collect medical encounter data.
Beneficiary protections are essential because of the financial
incentive to underserve in managed care plans that are paid, and
are themselves paying providers, on a per capita rather than per
service basis.

EQR PLANNING AND OVERSIGHT

The experiences of at least three states--Arizona, Tennessee,
and Oregon--in implementing their section 1115 demonstration
programs show the challenges that states are likely to encounter in
changing from the traditional Medicaid fee-for-service program.
Under Medicaid's traditional delivery system, program
administrators primarily determine beneficiary eligibility and act
as third-party payers. Under a managed care system, however,
considerable advance planning is important as administrators learn
to develop market forces and carefully monitor the care provided.

Arizona's experience in implementing a managed care program is
instructive. Today, Arizona's program includes the development and
use of competitive market forces to select health care providers
and determine capitation rates. Its effective use of competitive
bidding has resulted in millions of dollars of savings to the state

‘Managed care here refers to prepaid plans, some of which operate
as health maintenance organizations with "gatekeepers" (providers
designated to coordinate the care for individual enrollees) and
some as preferred provider organizations, which do not use
gatekeepers.


113

TODAY’S HEARING RAISES IMPORTANT

ISSUES ABOUT WHETHER THE PROPOSED

REFORMS IN THE MEDICAID PROGRAM WILL

ENABLE AMERICA’S NEEDIEST CITIZEN, THE

LOW-INCOME ELDERLY AND POOR CHILDREN TO

RECEIVE THE SAME QUALITY OF CARE THAT

THEY CURRENTLY RECEIVE.

THE MEDICAID PROGRAM IS A MEDICAL

ASSISTANCE PROGRAM JOINTLY FINANCED BY

STATES AND THE FEDERAL GOVERNMENT FOR

ELIGIBLE LOW-INCOME INDIVIDUALS. MEDICAID

COVERS HEALTH CARE EXPENSES FOR
2


122

Mr. Suays. Our third panel is comprised of one individual, Wil-
liam Scanlon, who is the Associate Director of Health Finance Is-
sues, General Accounting Office, the GAO office.

Let me—if you would stay standing and swear you in.

Mr. ScaNLON. We have here Richard Jensen as well, who is a
Medicaid specialist.

Mr. Suays. Richard, wonderful to have you here.

If both of you would stay standing and raise your right hand.

{Witnesses sworn.]

STATMENT OF WILLIAM J. SCANLON, ASSOCIATE DIRECTOR
OF HEALTH FINANCING ISSUES, GENERAL ACCOUNTING OF-
FICE, ACCOMPANIED BY RICHARD JENSEN, MEDICAID SPE-
CIALIST

Mr. Scanion. Mr. Chairman—

Mr. SHays. Thank you. Thank you for your testimony.

Mr. SCANLON. Mr. Chairman, we are very pleased to be here
today as the subcommittee considers the issue of mandates in the
Medicaid program, and we are happy to report on work that we
have done on Medicaid programs in various States over recent
months.

Between 1984 and 1993, the Congress enacted a series of provi-
sions that mandated coverage, primarily for low income pregnant
women, children and Medicare beneficiaries, and allowed States to
cover other groups at their discretion. These provisions have been
detailed in an appendix to my written statement.

During the decade, Medicaid enrollment increased more than 50
percent as 11 million persons were added to the rolls, At the same
time, the Federal coverage mandates and State optional coverage
decisions led to considerably greater uniformity across States in the
proportion of low income individuals covered by Medicaid. These
mandates, however, also contributed to sharp increases in Medicaid
spending. In the last decade, Medicaid spending more than tripled
and grew faster than most major items in the Federal budget, in-
cluding Medicare.

Enrollment mandates, however, were not the sole contributor to
the rise in Medicaid spending. Depending upon the time period you
examined, other factors such as medical price inflation, utilization
growth and increases in eligibles due to a national recession con-
tributed significantly as well.

From 1988 through 1991, higher enrollment, inflation and in-
creased use of services each accounted for about a third of the ex-
penditure growth. In 1991 and 1992, however, it was States’ use
of Disproportionate Share Hospital [DSH] payments—those supple-
mental payments to hospitals that serve a large number of Medic-
aid and other low income patients—that were the important cost
driver. In 2 years, DSH payments grew from just under $1 billion
to over $17 billion and represented about $1 out of every $7 Medic-
aid spent on medical services.

Today, in response to these rising costs, many States have or are
seeking flexibility to control Medicaid spending through greater use
of managed care. Their program restructuring efforts mirror pri-
vate health payers’ growing reliance on managed care plans to pro-


127

MEDI Ts

Financed jointly by the federal government and the states,
Medicaid provides access to health care for two statutorily defined
groups of low-income residents--families, primarily women and
children; and the aged, blind, and disabled. In reality, Medicaid
is not 1, but rather 56 separate programs that differ dramatically
across states.’ Federal statute mandates who is eligible for
coverage and the broad categories of services that must be
provided. Each state designs and administers its own program by
(1) setting certain income and asset eligibility requirements,’ (2)
selecting which optional groups and services to cover, and (3)
determining the scope of mandatory and optional services.

Several factors, including federal mandates, have contributed
to Medicaid's recent cost explosion. Between 1984 and 1993, the
Congress mandated coverage primarily for low-income pregnant women,
children, and Medicare beneficiaries and allowed coverage of others
at state option. Since these expansions began to be implemented,
enrollment has grown by more than 50 percent, to 39 million
beneficiaries. At the same time, the mandates and state decisions
to cover optional groups led to greater uniformity across states in
the proportion of low-income individuals covered by Medicaid.

Enrollment growth resulting from mandates does not, however,
fully explain the rise in Medicaid spending. Such factors as
medical price inflation, higher provider reimbursements,
utilization growth, and an increase in the number of eligibles due
to a national recession also played a role. From 1988 through
1991, enrollment, inflation, and increased use of services each
accounted for about one-third of the expenditure growth. The most
important cost driver in 1991 and 1992, however, was “creative"
financing techniques that states adopted to increase supplemental
payments to hospitals serving a large number of Medicaid and other
low-income patients, thereby partially offsetting costs not covered
by Medicaid, state charity care programs, or private insurance. In
2 years, these disproportionate share hospital (DSH) payments grew
from just under $1 billion to over $17 billion and represented
about $1 out of every $7 Medicaid spent on medical services.

*all 50 states plus the District of Columbia, American Samoa, Guam,
the Northern Mariana Islands, Puerto Rico, and the Virgin Islands
have Medicaid programs.

‘Federal guidelines tie most eligibility categories to the Aid to
Families With Dependent Children (AFDC) and the Supplemental
Security Income (SSI) programs.


151

This situation is especially true since the 1990 Supreme Court ruling in Wilder v. Virginia
Hospital Association, (496 US 498). The Supreme Court declared that medical care providers
(stead of Medicaid recipients) are the intended beneficiaries of Boren Amendment. This ruling allows
medical facilities and mursing homes to obtain judicial review of state reimbursement rates under the
Chil Rights Act, Section 1983, In effec, the Court ruling allows hospitals and nursing homes to claim
that a state is Violating the hospital’ civil rights by falling to pay “cost incurred to provide services.”

Preliminary Recommendation

Because states are traditionally responsible for the quality and safety of medical services, and
Modicaid is a state administered program, ACIR has conchuded in its preliminary report that states
should be allowed to conduct reimbursement rate negotiations with Medicaid service providers without
preconditions set by federal law. The ACIR preliminary recommendation is to repeal the language of
the Boren Amendment and insert language making states solely responsible for determining Medicaid
reimbursement rates.

In concluding, I want to emphasize that my testimony, including the conclusions and
recommendations regarding the Boren Amendment, are based on the ACIR preliminary report and are
subject to change based on final decisions of the Commission after receipt and review of public
comments. The Commission will hold a conference for discussion of its preliminary report on March 6
nd 7 and will receive public comments over the next two months before issuing its final report.


155

Rather than enhancing States’ ability to manage their programs,
the major thrust of the Conference Agreement is to leave States
holding the fiscal bag for protecting vulnerable Americans. Expect-

States to bear such risks in order to preserve coverage is not
on ly unrealistic, it would indeed represent the unfunded mandate
that its proponents profess to avoid.

Thank you, Mr. Chairman.

Mr. Suays. I am going to enjoy our conversation.

(The prepared statement of Ms. Feder follows:]


CONTENTS

Hearing held on January 18, 1996 ..
Statement of:

Beach, William, visiting fellow, the Heritage Foundation; Philip Dear-
born, director of government finance research, Advisory Commission
on Intergovernmental Relations; and Judith Feder, Institute of Health
Care Research, Georgetown University

Petraborg, John, deputy commissioner, Minnesota Department of Human
Services; and’ David’ Parrella, Medicaid director, Connecticut Depart-
ment of Social Services .

Scanlon, William J., Associate Director, Health Financing Issues, General
‘Accounting Office, accompanied by Richard Jensen, Medicaid Special-
ist

Viade

Letters, statements, etc., submitted for the record by:

Beach, William, visiting fellow, the Heritage Foundation, prepared state-
ment of ..

Dearborn, Philip, director of government finance research, Advisory Com-
mission on Intergovernmental Relations, prepared statement of

Feder, Judith, Institute of Health Care Research, Georgetown University,
prepared statement of

Parrella, David, Medicaid director, Connecticut Department of Social
Services, ‘prepared statement of.

Petraborg, John, deputy commissi
Services, prepared statement of

Scanton, William J., Associate Director, Health Financing issues, General
‘Accounting Office, prepared statement of

Shays, Hon. Christopher, a Representative in Congress from the State
of Connecticut, list of Governors eager to get into program ..

Towns, Hon. Edolphus, a Representative in Congress from the State
‘of New York, prepared statement of ..

Viadeck, Bruce, administrator, Health ‘e Financing Administration:

Information concerning mandatory services and people
Prepared statement of

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared ‘Statement of .

ID

Page

122
67

165
148
156

37

125,
182
112

92
72

108


145,

search at the Advisory Commission on Intergovernmental Rela-
tions.

My testimony today is based on “The Role of Federal Mandates
in Intergovernmental Relations,” a report required under the Un-
funded Mandates Reform Act of 1995. In this report, ACIR re-
viewed 14 Federal mandates to provide a basis for recommended
changes in Federal policies to improve intergovernmental relations.
Final recommendations will be submitted to the President and
Congress in March of this year. The Medicaid Boren amendment
is 1 of the 14 mandates identified by our survey of State and local
governments that is reviewed in the preliminary report.

The mandate itself, Boren amendment, requires States to estab-
lish reimbursement rates to pay hospitals, nursing facilities and in-
termediate care facilities for services provided to persons eligible
for assistance through the Medicaid program. The mandated Fed-
eral criteria provide that State-determined reimbursement rates
must be reasonable and adequate to meet the costs which must be
incurred by efficiently and economically operated facilities in order
to provide care and services in conformity with applicable State
and Federal laws, regulations and quality and safety standards.

Now, as the chairman pointed out, the intent of the Boren
amendment was to give States a means of controlling cost related
to reimbursement claims from providers of Medicaid services. Rath-
er than merely being reimbursement on a cost-related payment re-
quirement for hospitals and nursing home services, the amendment
allowed States to pay for services based on predetermined reim-
bursement rates, giving States a basis for denying reimbursement
for costs determined to be in excess of that necessary to provide ef-
ficiently and economically delivered services.

However, despite the good intention, the law is seen by many
States as more of a burden than a benefit. One problem is the
vague, undefined terms used to describe the federally mandated
criteria for reimbursement rates, and these include terms such as
“reasonable,” “adequate,” “efficiently” and “economically.” And be-
cause the intent was to provide flexibility, the Federal Government
made a conscious decision not to issue regulations defining the
vague terms in the statutory language.

An additional complication is that, while the law requires reim-
bursement rates to be determined in accordance with methods and
standards developed by the State, it also requires the Federal Gov-
ernment to be satisfied with the State-determined rates. To imple-
ment this requirement, the Federal Government decided to require
State processes for determining rates and the rates themselves be
a part of the State Medicaid plans. These plans are then subject
to approval by the Secretary of Health and Human Services.

Well, what has happened is the vagueness of the statutory lan-
guage, combined with the lack of regulatory definitions, has re-
sulted in substantial litigation, with some courts viewing the Boren
amendment as a cost-based payment standard in which all costs in-
curred by the providers must be reimbursed. In these instances,
States may be liable for significant sums to cover the retroactive
rate increases ordered by the Court for the group of providers in-
volved in the suit. In some cases, these additional payments made


106

But what I’m thinking of is in terms of the whole concept of in-
troducing managed care, and the ability of a community to provide
managed care in one area that they may not be able to provide in
it some other parts of the State.

Mr. VLADECK. We do not require that States that do managed
care in one community do it all everywhere.

Mr. Suays. No, no. But there you give waivers.

Mr. VLADECK. We have proposed in our legislation that it does
not require waivers.

Mr. Suays. And one of the obscene things, as far as I am con-
cerned, is that a State even has to go to the Federal Government
on bended knee to ask to do—to be able to do managed care. I
mean, managed care is a pretty basic kind of program.

Mr. VLADECK. It doesn’t have to come to the Federal Government
to ask to do managed care if it limits enrollment to voluntary en-
rollment on past beneficiaries. If it wants to require beneficiaries
to enroll in managed care, then under current law it requires a
waiver from the Federal Government, and we have proposed elimi-
nating that and permitting mandatory managed care without such
a waiver.

Mr. SHays. OK. You know what? In some ways, I think you have
the same challenge on Medicaid that we have now with our budget.
We don’t have a budget and so we are having to decide what gov-
ernment programs we keep running, and we are having to work
night and day to say, we want this one to run but maybe not this
one.

And that’s kind of an archaic system, but it’s the best we’ve got
on the table right now. And you all are having to decide what are
all these things in this book that we can drop soon enough before
some of us, you know, point out another problem with it. It would
be a lot simpler, I think, to scrap the thing and to just be logical
about, yes, managed care, for instance, do it, and not have to ask
permission.

I understand the distinction you make, requiring or not requir-
ing. I happen to believe that the Federal—if the American people
are paying the bill, they should have some requirement. No welfare
recipient is forced to join a health care system that is provided to-
tally and completely by the taxpayer.

I think the taxpayers have a right to say: You know what? If you
want free health care, you are going to do it in a program that we
think is good, cost-effective and saves money at the time. And there
we would have another disagreement.

Mr. VLADECK. No, I would agree with you, sir.

Mr. Suays. OK. So you would agree that the State should be al-
lowed to?

Mr. VLADECK. Yes, sir. That’s part of the President’s proposal.

Mr. Suays. OK. But I thought you said the Federal law was we
have to—

Mr. VLADECK. The existing law.

Mr. Suays. I thank you very much for being here.

Mr. VLADECK. Thank you, sir.

4 Mr. Says. I welcome our next witnesses. You have been a won-
lerful—


66

One of the strategies that we have pursued in Connecticut, and
John had mentioned it, is the long-term care insurance model
where we will grant asset protection when a person applies for
Medicaid equal to the dollar value of benefits that they received
from a privately purchased long-term care insurance policy, the
idea there being that people would have an incentive to invest
themselves to acquire protection against catastrophic costs in a
nursing facility without necessarily just going to the option of say-
ing, well, the State will pick it up. I think that there are innova-
tions like that that can be looked at in ways that would encourage
other sectors, including the private sector, to play more of a role
as a payer in nursing facility care.

If Pinay, one of the things that’s peculiar about Medicaid’s role
with nursing facility care is that it’s probably the only place, at
least in our State, where we are the majority payer. We are paying
maybe 10 to 15 percent of the inpatient hospital cost, probably a
smaller fraction of physician bills paid in the State, but on the
nursing facility State we are probably 62, 65 percent of the market.
I mean, we are the big deal as far as the nursing facility is con-
cerned.

So it is certainly in our interest, through other mechanisms that
we can create, if we can have other incentives for other payers to
become involved in that market.

Mr. SHAYS. We just have a few minutes left. Counsel knows that
he can ask questions and chooses not to at this round here. But let
me be more precise, given the shaking of the head in the back.

In terms of my one-third/two-third analysis, according to the Kai-
ser Commission on the future of Medicaid, of the total bene-
ficiaries, 50 percent are children, and they consume 15 percent of
the expenditure. And adults mostly associated with AFDC and
pregnancy and so on are 23 percent of the beneficiaries. They
consume 12 percent. If I take the children and the adults, I am at
73 percent consuming about 27 percent. The blind and disabled—
and this is where I was off—are 15 percent of the population con-
suming 31 percent of the expenditure, and the elderly are 12 per-
cent consuming 28 percent. So it would be—then for those who are
adding the percentages, the DSH, or disproportional share, is the
14 percent not associated with anyone. So I feel better having—
being more precise.

Is there anything that we can learn from the growth in future
Medicaid funding by looking at the recent cross-growth in the pri-
vate sector? The private sector appears to be growing at a lesser
rate than the public sector. Is that a significant factor in terms of
your calculations?

Mr. PARRELLA. Well, I would say that in our State, private sector
purchasers of insurance are abandoning, to a large extent, fee-for-
service reimbursement models for the major corporations that are
based in our State. They are overwhelmingly going to managed
care delivery models as a way of trying to contain costs. And I
think that the leverage that they are seeking is the same leverage
that John alluded to in his remarks about purchasing power for the
State, and they are able to do that.

I think one of the things that was surprising to us was that his-
torically our rates have been extremely low compared to rates that


52

The tests applied for broad-basedness and uniformity are too
complex to describe here. We have submitted two applications of
the P1/P2 test of broad-basedness over the past two years without
@ response. The B1/B2 test of uniformity is better left to the

imagination.

I believe that it is possible to contain the cost of Medicaid by
reducing the regulatory burden while maintaining or even
expanding the ability of the program or its successor to provide

health care to the poor.

From the snowbound vantage point of a small New England state,

it appears that the chief stumbling block to concluding an
agreement that would redefine the Medicaid program is the concept
of entitlement. Based on their long experience with unfunded
service mandates such as the EPSDT provisions in OBRA 89 or
eligibility quidelines that have created a maze of coverage
groups and an administrative nightmare, states are loathe to
consider any proposal that mandates coverage for anyone beyond
the minimum guarantees for the d:sabled, the elderly and pregnant
women and children as described in the Medigrant legislation. At

the same time it is reported that the Administration will not


173

Mr. Suays. I am trying to think of where we will begin here. Pro-
fessor Feder, let me ask you this question: When the President
wants to make savings, do you call that a cut or a savings; and
when Republicans want to make it a savings, do you call it a cut
or a savings?

Ms. FEDER. I think that what we are talking about, as you indi-
cated with respect to both kinds of proposals, is cuts in rates of
growth. The point that I think needs to be made when we call it
a cut, it is always Federal savings.

Mr. Suays. It is always what?

Ms. FEDER. It is always going to be Federal savings. The ques-
tion is whether it is cutting the purchasing power that is associated
with the program.

Mr. SHays. There are two issues, if we could kind of establish
our ground rules. There is one question of whether we are actually
spending more absolute dollars; and there is the other question, are
we spending enough to keep up with the current program.

Ms. FEDER. I would say there is a third, which is whether we are
spending an amount that is adequate to finance the coverage that
the program aims to provide.

Mr. SuHays. The current level of service. In other words, are we
maintaining that current level of service? And it gets into this
whole issue that the Federal Government started to do in the early
1970’s. That is why I am sensitive to it. Our national debt has
grown since after World War II from about $430 billion—excuse
me, after the Vietnam war, in 1974 it was about $430 billion, a lot
of money, and it is now $4.9 trillion. So since 1974 to now 1996,
we have seen a tenfold increase in our national debt. And my con-
stituents, when I was first elected in 1987, would say: What do you
mean; you keep telling me you are cutting spending when your
budget keeps going up.

I thought that a fair question, because I kept talking about we
are cutting this program, cutting spending, yet the program kept
going up. I realized, as I obviously had to, that we were using
quote unquote a baseline budget where we say each year we add
inflation and new population, and whatever is taken from that we
in the Federal Government will call a cut. So constituents out there
and the press dutifully report we cut spending. No, we did not cut
spending. We spent more dollars. We may have in fact cut the pro-
gram. A fair question.

So one of the debates that we are going to have a dialog here is—
I would concede, if you concede this point, one, we are spending
more dollars—I would concede that under a baseline budget, if you
spend less dollars than inflation plus the new population, that you
are under existing program, you know, rules, you would be cutting
that program. Is that fair?

Ms. FEDER. I think that is fair.

Mr. Suays. So one of the debates that I think we are going to
have in this panel is going to be we obviously want to change the
program. So the debate that we have with the White House on
Medicaid, our number was a savings to the growth of about 133.
My leadership dropped that number down to $85 savings, the
White House is at an so, yes, we are, my gosh, we are only $34
billion apart in one sense.


101

Let me give you one particular example, however, in the case of
Medicaid, and I am sorry Mr. Waxman is not here for this discus-
sion because this was largely the result of his doing.

Mr. Says. Right.

Mr. VLADECK. The fact of the matter is——

Mr. Suays. For the record, I know he is probably in agony right
now. Nothing is worse than you think, my God he is down there
and I am not there.

I say this sincerely; it would add to—having his presence would
be very helpful. So it is unfortunate he is not here.

Mr. VLADECK. The fact of the matter is since he wrote legislation
in 1982, I believe to take the first steps in the expansion of home
and community-based services for the elderly in Medicaid, about 80
percent in the growth of the number of people receiving long-term
care in the Medicaid program has been in home and community-
based services.

We talk all the time about how the system is still too dependent
on nursing homes and not using enough home and community-
based services. We would agree with that. But, in fact, since 1982,
the overwhelming proportion of the growth, spurred to a consider-
able extent by Federal policy and Federal policy changes in that re-
gard, the issue there is even more dramatic for the seriously re-
tarded and developmentally disabled where since 1982 we have
gone from a situation in which most of them were institutionalized
into a situation in which most of them are in community residences
or in the community.

The States, of course, have done that. Many, I might add, under
State court order. But in fact it was changes in the Medicaid pro-
gram that permitted them to do that, that provided them with the
financial incentives to do that, that in some way shaped and di-
rected that the institutionalization of that——

Mr. Suays. I would give that as an example that I believe in
home care, but I believe that that is the area where we are having
the biggest abuse—I mean, gigantic abuses; and I can relay a—
story after story in my own district of senior citizen homes where
you have home health care providers who are coming into the
homes basically as companions. I have nursing homes where they
will describe that a nursing care physician will come into the nurs-
ing home and provide care, see people for 10 minutes and see, you
know, 10 people in a very short period of time, collecting sizable

ollars.

The big weakness, in my judgment, with our plan is that we
didn’t take on the home health care industry because they have be-
come a powerful political block. So, I mean, where you would call
it invasion, I would say a gigantic danger zone out there, and the
States do not have an ability to get a handle on it.

Mr. VLADECK. If I can just say a few words about Medicare. I
frankly—and try to keep this as collegial a hearing as possible.
There are issues of—periods in which Medicare was substantially
more innovative than other periods in its history. But the fact is
on the back office functions for running a health insurance com-
pany Medicare is so far ahead in terms of automation and the use
of automated technologies of any other health insurer, public or
private, in the world that the only ones who are even close are our


26

BUILDING BLOCKS

Guiding Principles

Appropriate access to quality care. Within taxpayer affordability, the largest number of
uninsured, low income Minnesotans possible should have access to publicly funded care.
If priorities must be set, then the people most vulnerable and least able to provide for
themselves must be served first.

Personal independence and wellness. To the greatest extent possible, health care
benefits should promote personal independence and wellness. Prevention should be a
focus in the area of acute or episodic care, and independent living, to the extent possible
and practical, should be the focus in the area of long-term or continuing care.

Efficiency and value. With limited resources, the State, as a health care purchaser on
behalf of its enrollees, must promote efficiency within its own processes and require
efficiency from those it contracts with for services. Getting value for the money spent
and the most service for the best price must be a priority. Marketplace forces will play a
key role in efficient service delivery and value

Accountability and responsibility. A system with no accountability or responsibility
serves no one. The State and those from whom it purchases health care must be
accountable to enrollees and taxpayers, Responsibility must underscore any system. The
State has a responsibility to provide access to health care while balancing ability to pay
Service providers have responsibility for appropriate, quality care that is delivered as
affordably as possible. Individuals must be responsible for full participation in their own
health both through healthy lifestyle habits and by bearing some financial responsibility
for care when possible.

Key Assumptions

This proposal is based on the following key assumptions:

Minnesota will be granted sufficient flexibility in the design and administration of its
Medicaid Program, either through Congressional action or to some extent through the
granting of Phase 2 of the MinnesotaCare Health Care Reform Waiver under §1115(a) of
the Social Security Act.

Federal Medicaid funding will be sufficient to allow Minnesota to transition to this new
approach.

Sufficient time will be granted to design and implement a new system and to minimize
disruption to people who need services.

Minnesota Department of Human Services
5 January 1996


22

PREFACE

‘Congress has been working for several months to balance the federal budget, reshape federal
programs and send those programs to the states in the form of block grants or capped state
entitlements. The Department of Human Services has monitored federal actions and is
developing policy approaches to address these potentially massive changes. This document
outlines proposals that respond to federal changes that could be anticipated in the area of
Medicaid, as well as publicly funded health care policy changes that should be done to improve
the program regardless of federal Medicaid reform.

This is the fifth in a series of documents that the Department has used to inform the public and
gather comment on how publicly funded health care should be subsidized, purchased, and
delivered and how the Department should respond to proposed federal changes. Earlier editions
outlined the potential federal changes and presented policy frameworks that we would use in
developing our proposals. This document goes a few steps further. It describes the major
components of a proposed publicly funded health care system for Minnesota that could be
implemented in response to anticipated federal reforms or potentially in the context of a federal
waiver under existing federal Medicaid law. This proposal is based on our analysis of
congressional legislative proposals and the public input we have received to date. The proposed
response describes an approach that is conducive to changes in available funding. While our
approach is not etched in stone, responding to the new federal fiscal realities is central to any
proposed strategy for publicly funded health care. Fiscal reality does limit our choices.

It is our hope that discussion of this document will be useful to policy makers in shaping
Minnesota's response to changes in the funding and delivery of health care in a way that
improves access to quality health care for all Minnesotans.

SYNOPSIS OF PROPOSAL

Minnesota's publicly funded health care programs are growing at a rate that clearly exceeds the
available state funding. This growth, coupled with the potential reduction in future federal
Medicaid funding, makes it imperative that these programs be redesigned to meet the needs of
Minnesota's most vulnerable citizens within a limited appropriation. The Department of Human
Services’ role in providing health care coverage to low-income, uninsured, and special needs
populations must change to address this new paradigm. Our focus must be on three essential
functions:

+ Subsidizing health care;
+ Purchasing health care; and

* Consumer protection.

Minnesota Department of Human Services
January 1996


105

den should fall and that there may be other ways—as we move
through a lot of these things in the future, we can work out some
relationships where I think the Federal Government has moved
way too far and even if everything isn’t block granted there may
be some kind of rainy day fund to protect the highest risk in the
health areas. But there’s a lot of ranges. I think it’s a matter of
some decision at the States and how they want to deal with alcohol
and drug abuse, too. I don’t think that should necessarily be a na-
tional mandate.

Mr. VLADECK. Well, again, I think we—if you start from the pre-
sumption of the basic, you know, that upper left hand corner, sir,
is one way of describing it. There are a lot of ways to give the
States greater flexibility, both in administration of that part of the
program and in the way they run the rest of the program.

Mr. SHays. Mr. Vladeck, I just have two general questions. I
know you need to get on your way, and we are going to get you
on your way a little earlier than your bottom line final requirement
was.

Mr. VLADECK. I appreciate that.

Mr. Suays. Thank you.

You had mentioned to me, talking about Connecticut as an exam-
ple of a repeals requirement, that all communities in a State re-
ceive comparable benefits, that whole issue.

Let me just introduce the other side of the story. The Federal
Government on high’s decision that the State has to offer the same
level of service everywhere prevents a State, particularly a State
like Illinois, a larger State—it basically says that it can’t offer an
innovative program, let’s say in the Chicago area, because it’s not
provided in southern Illinois, because it’s not a comparable service.
And, to me, this is kind of the illustration of why I would like the
Federal Government out of it. Because if people live in Chicago and
you can provide a better service because it’s available, why should
we do it? Why should we basically downgrade the benefit to Chi-
cago because it’s not available, say, in southern Illinois?

Mr. VLADECK. The State is not required to make it available, sir.
If there’s one super-duper children’s specialist in the State of Illi-
nois and he practices at Children’s Hospital in Chicago, the State
is—and he’s the only one that does that operation——

Mr. Suays. I’m not talking about the super-duper.

Mr. VLADECK. Well, let’s—but I think if you look at the practical
issues, if we are talking about tailoring home and community-
based services to the particular needs of communities and some
communities—in rural communities, you can run a decent, long-
term care program without providing people with transportation.
In the city of Chicago, you may be able to rely on public transpor-
tation. That flexibility is permitted.

But what’s not permitted under current law is to say that in
down-State Illinois we are going to provide Medicaid beneficiaries
with dental care and we are not going to provide it to the Medicaid
beneficiaries in the State of Chicago—in the city of Chicago—and
we think there’s a good historical basis for that requirement.

Mr, Suays. I know there has been a historical basis, but the—
thank God, we don’t do everything on a historical basis.


162

beyond the 17 percent reduction in federal funds--a total of 25.4 percent--$400 billion--from
. 1996-2002.

‘No amount of flexibility can sustain coverage in light of such expenditure reductions.
Coverage could be sustained only if states were actually to increase their spending, in order to
offset federal reductions. Furthermore, fixed dollar federal grants that do not vary with changing
economic or demographic conditions that increase enrollment leave states fully at risk for such
changes, Estimates prepared by the Center on Budget and Policy Priorities indicate that a
recession could increase the costs associated with Medicaid coverage by $7 billion to $26 billion

over seven years. Under a block grant, all of that risk would be bome by the states,

Rather than enhancing states’ ability to manage their programs, the major thrust of the
Conference Agreement is to leave states holding the fiscal bag for protecting vulnerable
Americans. Expecting states to bear such risks in order to preserve coverage is not only

unrealistic; it would indeed represent the unfunded mandate that its proponents profess to avoid,


165

Congressional Testimony

The Costs to the States of
Not Fundamentally Reforming Medicaid

Testimony
of
William W. Beach
Visiting Fellow in Tax Analysis
‘The Heritage Foundation
Washington, D. C.

Before
‘The Subcommittee on Human Resources
and Intergovernmental Relations
United States House of Representatives
on January 18, 1996

‘The views expressed inthe ezached testimony donot necessarily reflec thse of the Hesiage Foundation
nor are they tobe construed as an temp by the Hertage Foundation io infience the pasage of any legislation before Congres


169

This rapid growth in the states’ Medicaid share is reflected in the annual
percentage change in state-level Medicaid spending as compared with total state
spending, which includes support of such things as education, crime control, and
transportation infrastructure (see Chart 2). The Heritage analysis anticipates 1995 state
Medicaid spending to grow at a rate of 7.5 percent, while total state spending should
grow at an 6.4 percent rate. This higher rate of change for Medicaid means that states
either must raise taxes or must take funds away from other state programs. The forecast
suggests that state spending on Medicaid will continue to keep pace with total spending.
(Over the forecast period (1995-2002), Medicaid spending is projected to grow at an 8.4
percent rate, while total state expenditures are expected to grow by an average of 5.8
percent.

Chart 2

Relationship Between Total Expenditures and Medicaid
‘Spending
Percentage Change, 1990 - 2002
(Source: WEFA Trend Forecast, July 1995)
35%
30% | OA
25%

20% 7 =
15%

od a
re

om ]
a a a ee

[=o Total State Spending “a= Siate Medicaid Spending]

Fiscal Effects of the “Blue Dog” Democrat Plan

The Democratic “Blue Dog” plan to reform the federal Medicaid program, the
principal elements of which have been advanced by the Clinton Administration in their
seven-year budget proposal, would increase the federal fiscal burden on the states by an
estimated $47.4 billion over the next seven years. This new fiscal burden has been,
described as “one of the biggest and most expensive unfunded [federal] mandates ever”
and, over the seven-year period 1996-2002, would amount to $4.4 billion in California,
$3.7 billion in Florida, $3.4 billion in New York, $3.2 billion in Pennsylvania, and over
$2.9 billion in Texas. Overall, this unfunded federal mandate would exceed $1 billion in
16 states.

* News release, “Clinton Medicaid Plan Places New Unfunded Mandate on States,” House Committee on
Government Reform and Oversight, December 15, 1995.
4


34

Mr. SHays. David Parrella.

Mr. PAaRRELLA. Thank you.

Mr. Chairman, members of the subcommittee, my name is David
Parrella. I am the director for medical policy for the Connecticut
Department of Social Services. I would like to thank you for the op-
portunity to appear before you today to speak about the regulatory
issues we have struggled with in Connecticut as we attempt to re-
form our Medicaid program. They are not unique to Connecticut,
but they are illustrative of the issues the States are facing as we
attempt to achieve the goals of improved access and long-term cost
containment within the current Medicaid regulatory environment.

I would like to focus today on managed care and provider reim-
bursement. In the interest of time, I would refer you to my written
testimony for a discussion of our ongoing problems with recipient
cost sharing and the financing of health care for the uninsured.

Suffice it to say that my description of our travails with regula-
tions and mandates are part of a plea for greater flexibility for the
States to address issues related to the financing of health care for
the poor. Simply stated, if you are to restrain the rate of growth
and Federal spending on the program, you must give us the flexi-
bility to operate programs that incorporate the innovations which
are commonplace in the private sector.

In Connecticut, we currently serve over 300,000 recipients, 1 out
of every 10 citizens in the State. Our benefit package is a generous
one, including 27 of the 33 operational services in our State plan.
The rates we pay for services are among the highest in the country.

The pressure to maintain these rates of payment is certainly re-
lated to the high cost of goods and services in the Northeast. But
even greater pressure is applied by the force of Federal regulations.

The Boren amendment and other requirements in the Social Se-
curity Act, which mandate cost-based reimbursement, have contrib-
uted to higher costs for a small percentage of our total recipient
population. As we have continued to expand coverage for poor fami-
lies, these same families are left with a smaller pool of total Medic-
aid spending. In contrast, in fiscal year—Federal fiscal year 1994,
the elderly and the disabled, the main consumers of institutional
services, accounted for 82 percent of spending in the Connecticut
Medicaid program, while representing only 27 percent of the total
eligible population.

This burden represents a serious impediment to further reforms
in the Medicaid program where the State share of expenditures
will account for 15 percent of the State general fund in the 1996
State fiscal year.

Into this context came a Boren amendment lawsuit filed by the
Connecticut Hospital Association. The suit challenged the State’s
application of the methodology set forth in the Tax Equity and Fis-
cal Responsibility Act of 1982, known as TEFRA, for the calculation
of inpatient rates. After months of negotiations involving the State,
the hospitals and the Federal Government over claims for an addi-
tional $350 million, an agreement was reached to settle the case
at a cost of $34.6 million, subject to ratification by the State legis-
lature. It is the taxpayer who will pay the programmatic and ad-
ministrative costs to settle this dispute.


175

to me that they be done in a way that sustains the capacity for cov-
erage and the commitment to coverage, and I think that that is the
proposal; we are not talking about the status quo.

Mr. Suays. I am kind of like—

Ms. FeperR. We do have an agreement that some change, some
restrictions are possible and appropriate. I think that is fine.

Mr. Suays. If the White House and our leaders cannot work out
their disagreements, I want to know if we can.

Ms. FEDER. I do not know. We will see.

The point I wanted to make about the growth rates over the
years, the very high—and they were in the—actually I think in
some years even in the high 20 percents, in the early part of the
90’s in Medicaid were only partly a function of expanded popu-
lation. That was, I think, about a third of the growth. It was a com-
mitment to cover low-income pregnant women and children. A siz-
able portion of that quite dramatic growth had to do with the—
what was discussed earlier—the provider taxes and donations and
disproportionate share payments. And there were then, and actu-
ally I would call it perhaps some buck passing between the Federal
Government and the State governments.

Mr. Suays. If we could be candid here, and we are being candid,
the other factor was that Congress devised this Gramm-Rudman
that was going to control the growth of costs, and Gramm-Rudman
only focused on savings in one-third of the budget. It focused on
discretionary spending. It did not look at entitlements.

President Bush, right or wrong, with his budget agreement and
some tax increases, was out to do one thing: He was out to say if
you expand an entitlement, you have to come up with the money
to pay for it, either with spending cuts somewhere else or a tax in-
crease. That was part of the 1990 agreement. I voted for it. I know
that was part of the agreement.

That was the concept of basically pay as you go. It was to get
around Congress, which when it could not live within the discre-
tionary spending because we were capping spending under Gramm-
Rudman, went and just kept loading entitlements. So we candidly
had to get at that. So I mean, there are fascinating questions here.

Mr. Dearborn, you basically spent most of your time on the
Boren amendment. It appears from Mr. Vladeck’s emphasis that
the White House wants to get at the Boren amendment. But they
still want to leave a right of action in Federal court. My question
mark is—I guess maybe we do not have enough details to know—
by getting rid of the Boren amendment in name, do we still have
its ghost linger in the courts? Because, candidly, when Mr. Vladeck
was talking about nursing care and no quote unquote requirement
of the Federal Government, you both in a sense directed your at-
tention to the fact of regulation; you in particular, the regulation,
the law not being defined by regulation. Therefore, where is it
being defined by it? By the Federal court.

And the Federal court, it is almost a little disingenuous to say
that we do not have a Federal requirement of so many nurses per
patient when you have the Federal Government saying since it is
ambiguous, we are going to step in and we are going to start to de-
scribe on the Federal level what we need.


115

FOR ONLY 30 PERCENT OF THE SPENDING. THE
AGED, BLIND, AND DISABLED, ABOUT 30 PERCENT
OF MEDICAID RECIPIENTS, ACCOUNT FOR 68
PERCENT OF SPENDING. ABOUT HALF OF THAT
68 PERCENT IS FOR LONG TERM CARE.

PROPOSED REFORMS OFFER VERY LIMITED
GUARANTEES THAT THESE CURRENT RECIPIENTS
WILL CONTINUE TO RECEIVE HEALTH
COVERAGE UNDER THE MEDICAID PROGRAM.
FOR EXAMPLE, THE PROPOSED REFORMS PASSED
BY THE CONGRESS WOULD REPEAL ANY

NATIONAL STANDARDS OF CARE AND REQUIRE
4


136

APPENDIX I APPENDIX I

Table 1.2; Federal Medicaid Expansion to the Population Receiving
ssi

Population affected Expansion Mandate/option
DEFRA (Deticit Reduction Act of 1964) (P.L. 98-369)
Ssirecipients increases qualifying asset Mandate
limits for applicants for
limited time period
(1984-89).
COBRA (Consolidated Omnibus Budget Reconciliation Act of 1885) (P.L. 99-272)
Chidren with special needs Requires coverage Mandate
regardless of
i 08
adoptive/toster parents.
OBRA 1986 (Omnibus Budget Reconciliation Act of 1986) P.L. 89-600)
‘Aged and disabied Creates new optional ‘Option
‘categorically needy group
for those with incomes
below the poverty li

under certain resource
‘constraints. Option can be
exercised for this group
only if exercised also for
pregnant women and
fants.
‘Aged and disabled ‘Allows Medicare buy-in* up Option
to the poverty line for
qualified Medicare
beneficiaries under certain

resource constraints.
Severely impaired individuals Establishes new mandatory Mandate
ically needy

coverage group for

Qualified individuals under

ages.
Ventiator-dependant ‘Allows coverage of at-home Option
individuals tespiratory care services.
Sstrecipients ‘Makes permanent the Mandate

provision requiring

coverage of some former

disabled SSI recipients who

have returned to work,
Employment Opportunities for Disabled Americans Act of 1986 (P.L. 69-643)
Disabied individuals ‘Makes permanent a Mandate

‘demonstration

rogram for indivdtvals able

{o engage in substantial

‘gainful activity despite

severe medical impaitments.

(continued)
at


177

like it, they have, every month they can get on and get back onto
their old fee-for-service system. There we make significant changes.
And that is why we are able to keep the growth at 7.2 percent as
opposed to a 10 percent or 11 percent growth.

Have you had. a chance, Ms. Feder, to look at Medicare, or are
you more focused on Medicaid?

Ms. FEDER. I am familiar with Medicare as well.

Mr. SHays. Are you as troubled with Medicare, or is there more
trouble with Medicaid?

Ms. FEDER. I would rather—rather than make a comparison, I
would tell you, if you wish, what my concerns are about the Medi-
care proposal.

Mr. Suays. I would welcome that.

Ms. FEDER. I will do it briefly and relate them to what we are
talking about, specifically what can be expected from structural
change.

On the Medicare proposal, the savings according to not only ex-
perts but also the Congressional Budget Office, the savings with
the slowdown in the rate of growth come not overwhelmingly from
changes in the structure in terms of beneficiary choice, but rather
they come from caps that are established in terms of Federal pay-
ments.

So it is, I think, not quite right to see it as coming from market
efficiencies. It comes from restrictions and really turning the pro-
gram from a defined benefit program to a defined contribution pro-
gram, where the risk is shifted from the Federal Government to
the beneficiaries or to health plans. So——

Mr. SHAYS. With all due respect, you are really stretching it. The
Federal Government is going to keep the fee-for-service system. For
anyone who wants the fee-for-service system, they get it. We do not
scrap that.

Ms. FEDER. You are quite right, but the growth in it is capped,
and there are a number of concerns about what happens to that ar-
bitrary cap relative to the cost and the fee-for-service system over
time. Then you are quite right. That system remains available. The
question is whether the rates paid to providers in that system are
sufficient to assure access to care to beneficiaries, which is not dis-
similar to the concerns that have been raised in the Medicaid pro-
gram.

Mr. SHays. And your comparison to Medicaid is what?

Ms. FEDER. What I wanted to say, again going back to what we
can expect from changes in structure, and again, I am impressed
by the level of agreement, there is agreement on the Boren amend-
ment. There is agreement on managed care. There is agreement on
home community-based care. There is agreement on delivery flexi-
bilities. The evidence from managed care, is that it _Provides one-
time savings of about 10 to 15 percent—or I think it is 5 to 15 per-
cent actually—of expenditures. And, in terms of our States’ experi-
ence with managed care and experience in the private sector, that
saving is applicable to the portion of the program that is mothers
and children. We do not have experience with long-term care and
managed care.

Mr. SuHays. We are starting to get experience in Arizona with
long-term care.


58

Mr. Suays. I thank both gentlemen. I would like to ask a few
questions and then Mr. Souder and would welcome counsel as well
to ask a few questions.

I need to have a sense, to start with, about what the Federal
Government does specifically, and maybe specifically HCFA, that
causes you the most difficulty? And I would take either of you to
answer it.

Let me preface my statement by saying that this is the Medicaid
source book that describes what States have to do. It obviously con-
tains data as well. The print is small. But this is kind of your
Bible. You have got to follow it. And we want to candidly kind of
throw this in the trash can and have a document that would be
much smaller that would give you the flexibility.

Now, the danger, when you do that, is you may do some things
we don’t like. And so what the Federal Government is having to
deal with is what is that—can there be a balance? How shall we
move? Our interests, as the majority, is to get rid of this book.

Now, what would be helpful is for you to describe, if you can,
some ways that you find it difficult to comply that needlessly ratch-
et up costs.

Mr. PETRABORG. Mr. Chairman, I believe that really one has to
look at the whole. The whole is 30 years of additions to a basic con-
cept that has become more and more prescriptive and regulated.
There is a mandated eligibility coverage and multiple groups of
coverage, is a serious problem.

Mr. Suays. When you say that, I want you to speak a little more
specifically. You mean——

Mr. PETRABORG. We estimate in Minnesota—actually, our Medic-
aid program in Minnesota has 60 different doorways.

Mr. Says. Sixty different what?

Mr. PETRABORG. Sixty different doorways, we say. Sixty different
ways you can qualify or must qualify in order to become eligible for
the Medicaid program. We would like to look at income as the prin-
cipal determinant of whether or not someone should be eligible,
rather than whether or not there is this combination of family
members with these circumstances. That’s a very direct example of
the kind of complexity.

Mr. Suays. I mean, one obvious doorway is, if you are poor and
have a child and you are on AFDC, you get health care costs.

Mr. PETRABORG. Right.

Mr. Suays. Now, that’s nothing you would dispute.

Mr. PETRABORG. That’s correct.

Mr. Suays. OK. If you are 65 and older and your income is basi-
cally nonexistent, you get nursing care. Now, that’s said in more
general terms. Does the Federal Government begin to outline what
kind of nursing care or is that mostly State regulation?

Mr. PETRABORG. Mr. Chairman, then we get into the area of ac-
tually the kind of services that are required.

Mr. Suays. Yes. So the first issue is who qualifies.

Mr. PETRABORG. Who qualifies.

Mr. SHays. Now, would Connecticut, Mr. Parrella, see this same
doorway of 60 doors or is it more or less?

Mr. PaRRELLA. Well, in Connecticut we don’t have 60 doors. We
have 41 doors. But it is still a lot of different—a lot of different


112

WASHINGION OFFICE

1202) 279-5938

Congress of the United States
ovement Osegenons House of Representatives
‘menawy EAC 380 Biashington, BE 20515-3210

cowence consumes BROOKLYN OFFICES

‘ria asso8018

"UNFUNDED MANDATES AND THE MEDICAID PROGRAM"

Opening Statement by the Honorable Ed Towns

HEARING BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

AND INTERGOVERNMENTAL RELATIONS

January 18, 1996


16

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.
anc. ‘tne
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


Elderly & Disabled

The approach for subsidizing the purchase of health care for persons age 65 and older and for
persons with disabilities, requires continued discussion and policy exploration to address many
‘outstanding issues and undefined aspects of the proposal. However, a basic framework needs to
be established to pave the way for this discussion and exploration.

Eligibility.

.

Simplified eligibility. Eligibility categories would be streamlined to eliminate artificial
barriers and reduce administrative costs. Income and asset tests would be simplified. It is
also likely that the information verification process at the time of application would be
simplified by using post-eligibility computerized income verification matches and
random sample case reviews.

Premiums. Rather than requiring a person to incur medical expenses to spend down
their income to get coverage, a more premium-based system would be established.
Unlike spenddowns, premiums put money in the health care system in advance and
encourage responsible, advanced purchase of health care coverage and use of preventive
care.

Disability definition. To achieve administrative efficiencies and to encourage
individuals to apply for the federally funded Supplemental Security Income (SSI)
Program and Social Security Disability Insurance (SSDD), the definition of disability
would be tied to SSVSSDI. Revisions to this definition are currently under discussion in
Congress and may impact this component.

Eligibility access points. ‘There would be locations or entities, in addition to the local
county social services agency, through which an individual could enroll for health care
coverage. Application sites could include local senior citizen centers or clinics. It would
also be possible to seek application assistance through a toll free telephone line. This
component is intended to improve the range of options for an individual seeking
assistance with the purchase of health care coverage, while at the same time recognizing
that the county agency may be the best place for many individuals to seek assistance with
the application and enrollment process.

Family responsibility. It may be necessary to reevaluate the extent to which spouses and
parents should be financially responsible for the purchase of each other's health care,
keeping in mind that there is much informal care giving and some purchasing of health
care services and coverage that occurs outside of the Medicaid Program.

Minnesota Department of Human Services
7 January 1996


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9

uw We have shown that when people don’t have to
worry about health insurance, they're more
likely to get off welfare and get jobs.

mu And we have shown that saving money doesn’t
have to come at the expense of our children.

In spite of our successes, we know we have just begun.
That is why Minnesota is wholeheartedly behind efforts
here in Washington to create a better health care system.

As you work to create that new system, we in Minnesota
want to make sure states have the right balance of
flexibility and funding to achieve our ultimate
goal—access to affordable, quality health care for people
in need.

When we talk about adequate funding and flexibility, it
is also critical that any mandates coming out of
Washington receive proper funding. I'll talk more about
that issue in a few minutes.


T

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.


83

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.


5

A marvel in its day, Medicaid is now a system that is collapsing
under its own weight. The rate of growth in the Medicaid program
exceeds the rate of growth of personal income in our State. In Min-
nesota and many other parts of the country, the State’s share of
the current Medicaid program will soon consume a majority of the
State’s general fund budget.

This is a path that is simply not acceptable, and another round
of incremental change is not enough to turn the situation around.
If we try that course, we believe that the people we are trying to
serve and protect will be hurt. There simply will not be enough
money available to support Medicaid as we know it, and we will
have to make cuts in the program at the expense of some of our
most vulnerable citizens.

So in Minnesota, we believe, we need to start fresh; and, to do
that, we need a system that allows us to be true to our values and
allows us to create efficient, simple and people-centered ap-
proaches.

In Minnesota, as we have participated in the national debate,
Governor Carlson’s administration has gone to great lengths to try
to secure public input into the nature and the direction of our pub-
licly funded health care programs. We have traveled around the
State this summer and fall and found people very open to change.

For the record, I have included a document that outlines Min-
nesota’s plan and which grew out of this broad-based input. The
plan would create a_new health care system built on a number of
guiding principles: first, providing access to quality—high quality
care, promoting personal independence and wellness, ensuring effi-
ciency and value, and reinforcing accountability and responsibility.

For Minnesotans who are elderly or disabled, we are trying dif-
ferent ways of coordinating care to stress independence and quality
of life, ways that would focus our purchasing toward buying com-
prehensive packages of services, providing an incentive to find ap-
propriate care in the appropriate place. The current Medicaid pro-
gram has a strong residential bias, if you will. This is not only
physically prudent but it is what our people want and need.

But, when we talk about flexibility, this does not mean putting
consumers at risk. In fact, in Minnesota, consumer protection and
education must be at the core of any redesigned program.

We believe that the new system has the potential for greater
consumer protection than does the current system, which is based
on complex, highly prescriptive regulations and regulatory enforce-
ment mechanisms. Using market-based strategies to maximize the
State’s tremendous purchasing power, we believe we will have the
option of demanding higher standards. As for marginal providers
that are protected by the current system, they will either improve
or we will take our business elsewhere.

We must also develop mechanisms for health care consumers to
have a voice—mechanisms that focus on outcomes, not rules and
regulations, and mechanisms that are available to all health care
consumers, not just special procedures for public clients only.

Options include consumer satisfaction surveys, which we are al-
ready trying in our State.

We have recently completed a quite—a comprehensive survey of
Minnesotans about their health care and published the results in


1

As a result, total Federal and State spending on health and long-term care
services for vulnerable Americans could fall by over $400 billion over the next 7 years
under the vetoed Republican plan. That translates to a cut of 25 percent over the next
7 years, and 35 percent in the year 2002 alone.

Now that is how to “unfund’ a program.

Obviously, what this “unfunding,” Republican-style, will mean in most States is
cutbacks in eligibility, benefits, and payments to providers - cutbacks that will increase
in severity year after year after year.

In contrast, the President's per capita cap proposal responds to the pleas of
those who want more cost discipline in Medicaid without terminating the guarantee of
basic health and long-term care to 36 million Americans. Under the President's
approach, States would have both the incentives and the tools to manage Medicaid
more efficiently, and the Federal government would maintain its commitment to sharing
in the costs of providing basic health and long-term care coverage to vulnerable
Americans. This continuing Federal commitment is particularly critical when States
face cost increases for reasons beyond their control, including recessions, regional
economic downturns, natural disasters, and outbreaks of contagious disease

The policy differences between the President's approach and the Republican
Medicaid repeal could not be more fundamental. They are the difference between
guaranteed basic coverage and rationing of basic care to 36 million Americans.

Mr. Chairman, | look forward to the testimony of our witnesses this morning.
This hearing should be extremely useful in helping both the press and the public
understand that the Medicaid program is neither a “mandate” nor “unfunded, * and that
the differences between the Republican and Democratic approaches to Medicaid are
profound


81

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.


107

Mr. VLADECK. I will try to get you that additional information as
soon as I can.

Mr. Souper. Thank you.

Mr. Suays. Again, Mr. Vladeck, thank you for trying to arrange
the schedules of others.

We are all set. I just want to make sure—I have had the oppor-
tunity to have read Mr. Waxman’s statement. It was very interest-
ing—and Mr. Town’s. And, without objection, all records will be—
their statements will be in the record; and obviously any—the full
statements of our witnesses, without objection, will be as well.

[The prepared statements of Hon. Henry A. Waxman and Hon.
Edolphus Towns follow:]


92

Hearing on Medicaid as an Unfunded Mandate
Before the Subcommittee on Human Resources and Intergovernmental Relations
of the House Committee on Government Reform and Oversight
January 18, 1996

Materials Provided for the Record by
Bruce Vladeck, Administrator, Health Care Financing Administration

Mr, Souder: On the chart showing the mandatory services and mandatory people, has that 43.5
percent (expenditures for mandatory services for mandatory recipients) stayed
relatively constant? Has that been increasing?

‘The attached chart shows Medicaid spending distributions for 1993, 1994, and spending
distribution estimates for 1995 mid-session review. The percentage of Medicaid spending
incurred by mandatory eligibles for mandatory services has remained relatively stable over
this period.



180

handle on the Medicaid mandates; otherwise some of us are going
to go broke. Accelerated costs of Medicaid, Medicare and other
health programs argue for a new look at health care financing op-
tions.

Then you have Governor Weld, just basically: Release us from
Federal nonsense. So he says: In Washington Democrats character-
ize our enthusiasm for block grants as naivete or worse, a perverse
desire to begin some race to the basement. They miss the point en-
tirely. If the Federal Government would just release us from its bu-
reaucracy and nonsense, we would make these programs better for
those they serve and would do it for less money.

Then he basically says: It is time for President Clinton to allow
the States to give it our best shot. We could not do worse than
Washington. I know we would do much better, much better.

What is your worst or best take on why the States want to do
it?

Ms. FEDER. Well, as you said we should be candid, and I think
that in all candor——

Mr. SHays. Haven't you been candid?

Ms. FEDER. Totally, and I will continue to be.

Mr. Suays. You may not be right, but you are never in doubt?
That was said to me one time, so I just had to say it to someone
else.

Ms. FEDER. I took it in good spirit, I think.

Mr. Suays. I figured, since you had such a good sense of humor,
I could get away with it.

Ms. FEDER. I think that we have a lot of statements by a lot of
political actors in the current debate that reflect a number of var-
ied objectives.

Mr. Suays. Fair enough.

Ms. FEDER. I think that if we are looking at the problems that
States are likely to face, and now face, States are looking for flexi-
bility. I really think it is important to keep reiterating that on the
flexibility in delivery and payment side there is agreement, and in
terms of the desire to slow the growth, the rate of growth in the
Medicaid as well as the Medicare program, there is agreement. The
question is whether that is going to be done in a way that protects
the coverage of the population.

Mr. Suays. Gentlemen?

By the way, I will ask a few more questions and then we will
end this hearing.

Mr. DEARBORN. Mr. Chairman, I think there is no doubt States
are concerned about the growth that has occurred in Medicaid and,
as you said, the only question is how best to go about curbing that
growth.

Mr. Beacu. If I could share one personal experience, I used to
work for John Ashcroft when he was Governor of the State of Mis-
souri, was on his budget and planning staff. Well before it became
a Federal issue of note, Governor Ashcroft was closing nursing
homes right and left across the State, largely because they were
abusing elderly people. He took this as a personal thing and, as
you know, he is a very devout fellow. It was politically very impor-
tant to him as well within the State.


183

Mr. Suays. I would allow each of you to make a closing comment
if you would like.

Mr. BEACH. I just would, in 10 seconds, like to say that the
growth of this program and its related Medicare program is a con-
straint on economic growth, and anything we can do to make this
a better program that is less costly will aid the economy, which of
course aids the targeted groups.

Mr. DEARBORN. Mr. Chairman, at the very least, I hope that the
repeal of the Boren amendment would come out of this.

Mr. Suays. I think you have got a commitment on that. We just
have to make sure its ghost does not still stay there.

Ms. FEDER. And, Mr. Shays, I would just like to be sure that the
entitlement to insurance coverage for vulnerable populations comes
out of this process.

Mr. Suays. I get the last word. I will tell you that with all my
heart and soul, I believe the States are going to be as responsible,
if not more responsible and responsive to the population that you
and I both care deeply about, all of us do.

I thank you for coming.

I would like to thank Kate Hickey on my staff and others on my
staff; also the recorders that have been here diligently and have
done their job, as they always do, extraordinarily well. I thank you
all very much.

The hearing is now adjourned.

[Whereupon, at 3:44 p.m., the hearing was adjourned.]}

[Note.—The following attachments can be found in subcommittee
files: Attachment 1, Medicaid budget charts; Attachment 2, Advi-
sory Commission on Intergovernmental Relations (ACIR) draft re-
port on Federal mandates; Attachment 3, National Governors Asso-
ciation (NGA) July 17, 1995 briefing paper; Attachment 4, Gov-
ernor William Weld’s December 11, 1995 Wall Street Journal arti-
cle; Attachment 5, Congressional Quarterly (CQ) April 15, 1995 ar-
ticle on the Unfunded Mandates Act of 1995 (P.L. 104—4); and At-
tachment 6, Time Magazine December 18, 1995 article on Medicaid
reform, “A Tale of Two States.”]

e)


60

Now, the question mark—and it may be—but, bottom line, on the
poor versus the elderly, we have to make choices, and you all have
to make choices. The big concern that some have, like in the State
of Connecticut, is that the lobby group for the elderly in nursing
homes will gobble up the resources that are going for the poor. Bot-
tom line, how would a State deal with that issue?

Mr. PARRELLA. Well, I think there’s a couple of answers to that.
I think that’s exactly a main concern. That exists in Connecticut
today, even with the current Medicaid structure, there’s still com-
petition for dollars in terms of where the State is looking for expan-
sions.

I think that the Medigrant legislation that was passed did con-
tain provisions for set-asides, mandated set-asides. A certain per-
centage of the money, based on prior history, would have to con-
tinue to be spent on families, on disabled, on the elderly, which
would provide some insulation for, I think, the situation that you
are alluding to where suddenly there would be a tremendous lobby-
ing pressure to move large chunks of those resources away from
one of the other population groups and into the other two.

Mr. SHays. Since there are only two witnesses, Mr. Souder, I am
going to take a little bit more time, and then we will get to you.

Ultimately, the objective is to enable you to save money. Now, in
my mind, saving money doesn’t mean denying services. It means,
in my mind, providing better service. And, in my mind, we are not
able to provide quality service because we have what I think is an
archaic system that doesn’t provide flexibility. Could either of you
illustrate how you can provide better service at less cost?

Mr. PETRABORG. Mr. Chairman, in fact, I think one of the dan-
gers of incremental change in this area, is that—the ability to craft
innovative new solutions to make those dollars go further would be
hampered.

Minnesota’s goal really is one of trying to protect access in terms
of the number of people covered but to do that in two ways: one,
in the sense of designing benefit packages that are more like em-
ployee-based benefit packages that are now available to State of
Minnesota employees or 3M employees in the State. The other is
to look for more efficient ways to purchase services for the elderly
and disabled, to purchase those services in comprehensive packages
of service rather than in discrete little pieces.

For example, in Minnesota, nursing home care is funded directly
by the State. Hospital services for that population are funded
through the Medicare program and in-home services or at-home
services are essentially a State-funded service, although we have
some waivered services there as well.

We would like to look at purchasing health care services for that
population, all of those services, in a single package with a single
price, so that the incentive is to find the most appropriate level of
care for that person, not encourage that person to go into the Medi-
care—Medicaid system in order to get covered services at the nurs-
ing home.

Mr. PaRRELLA. I would second that.

I think one of the things that John was alluding to is—one of the
things that contributes to higher costs, both for the States and for
the Federal Government, is this kind-of Alphonse and Gaston act


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18

Unfunded mandates: An underlying concern

One issue that is related to both funding and flexibility is
the issue of unfunded mandates.

With shrinking state dollars and a growing
need for services, it is becoming more
important that rules, regulations, and programs
imposed by the federal government come with
the funding to pay state costs.

You’ve heard states talk about our concern over
unfunded mandates for many years. But the time has
come when we can no longer absorb these costs. If
reform efforts at the state level are to succeed, we must
have assurance that the federal government will back

up their ideas with a financial commitment.

a Likewise, it is important that if new
responsibilities are placed on states, adequate

funding be provided to permit us succeed.
n


aT

outcome of the federal rules which make recipient cost sharing so

difficult to implement.

Our co-payment plan was shaped in tandem with the welfare reform
and managed care initiatives to bring some recognition to our
recipient population of the costs and consequences of decisions
they make about health care. Annual savings from the application
of co-payments to all non-exempt services were estimated at
approximately $14 million with $1.8 million in savings resulting

from the co-payment on pharmacy services alone.

In 1995 the state legislature passed a Public Act requiring the
Department to implement co-payments. However, under federal

rules all recipients in hospitals or nursing facilities are

Pregnant women and children are exempt. All emergency

g services are exempt. And finally, al!

ed in a Managed Care Organization are exempt

t requirements. At the same time that we were

¢ populatics into managed care, we alse

ives unable to apply any cost sharing to two thirds of
cur recipient population. A nominal charge which would be

commonplace in the private sector, such as a charge for


51

The situation becomes far more complex in attempting to meet the
criteria for redistribution, broad-basedness, and uniformity.
under federal regulations, a provider tax can only be determined
to be redistributive if 75% of the participating hospitals
receive less than 75% of their tax payments back in DSH or other
state payments. This so-called rule of the 75's has severe
consequences. Failure to meet it could result in the loss of all
federal financial participation (FFP) in the Uncompensated Care
Pool. In Connecticut, this could cost the state over $120
million a year. The test is complicated by the inclusion of
other state payments to hospitals in the calculation, such as
special grants and appropriations to assist economically
distressed hospitals including grants made by other state

agencies.

We have new

r teen asked to provide the data fcr the test of 75's

and it is unclear for wnat period we might be asked to sc.

But clearly we fear it. In the cperation of a program which has

been subject to so many changes, such as the hospita! spec:fic

limits on OSH imposed by CBHA 4:, it is difficult to anticipate

the consequences of a change

the distribution of funds fro

the pool that could be disastrous for the state.


80

In addition, the Republican block grant does not provide
meaningful assurances that Federal and State tax dollars will be
appropriately spent. The Conference Agreement eliminates some
Federal enforcement provisions to guard against waste or abuse of
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,


142

Mr. SCANLON. Given that Medicaid is still predominately a fee-
for-service system, I think that there are considerable efficiency
gains to be made. We are seeing in the private sector as well as
in the States that are moving to managed care with their Medicaid
programs, that there is an ability to negotiate additional discounts
with providers and that there is an ability to affect the utilization
of services.

We don’t know how far we can go, and we have to worry about
how far it goes in terms of whether we affect the quality of care
that’s being provided. But it would seem that, given the incentives
the fee-for-service system was to overprovide, as we change those
incentives, we have the opportunity to gain some efficiencies
through more appropriate provision of services.

Mr. SHays. And I am going to capture this thought as if it’s my
own after a few days. Your concept of efficiency gains versus——

Mr. SCANLON. Simple cost savings.

Mr. SHays. OK. Cost savings you would define as not necessarily
providing the same level of service, thereby saving money. That
really helps define the debate. If the administration thinks there
are going to be cost savings and that’s what ultimately results,
then they may be right. If we find that by having the States do it
we see significant efficiency gains by doing it, then we would tend
to be right. And, obviously, that’s where the debate is, a nice way
to focus the debate for me. So I thank you.

Mr. Souder.

Mr. Souper. I just have a couple of brief questions, and I am
sorry if I go over a point that you covered while I was out.

In the computer question, which we have talked about in the
Medicare before, too, as well as today, and the Medicaid, is the in-
ability to contract that out due more because of input data plan
wide? Is this not something that would overlap with some of what
private sector people may do already?

Mr. SCANLON. It’s a challenge on both sides, both for the State
as well as the managed care organizations. Historically, health
maintenance organizations have not had to submit claims for serv-
ices because they were being paid a capitated fee, and were not
being paid on an individual service basis. So there were often no
claims records generated for each individual service.

The kind of encounter data or service data that is needed to mon-
itor managed care organizations is the equivalent of getting data
on individual services or individual claims. The managed care orga-
nizations themselves have to have the capacity to be able to submit
such claims, and I think some may currently lack such capacity.

Another issue for the managed care organizations is that they
have to submit all that information in a common format so that
States can work with it. Having worked with claims data myself
in the past, I know that when you are getting data from multiple
sources, even though they are purportedly in similar formats, it’s
often a challenge to get them to be truly compatible and to inte-
grate them for analysis.

With regard to the States, they are in a different position now
in terms of what they need to do with those data once they receive
them. In the past, they simply had to pay claims, calculate some
aggregate statistics so they were able to report to HCFA and be


135

APPENDIX I APPENDIX I
Population affected Expansion Mandate/option
Pregnant women Extends period of Mandate
presumptive aligibility
‘befora wntten appiication

must be submitted.

Pregnant women and children Requires stales to receive Mandate
‘Process applications at
‘convenient outreach sites.
infants Requires continuous Mandate
eligibility i (1) born to
Medicaid-aligible mother
‘who would remain eligible it
pregnant and (2) remaining
in mother's household.
‘BRA 1099 (Omnibus Budget Reconciliation Act of 1983) (P-L 103-66)

Mothers and newborns Expands scope of required Mandate

‘maternity cycle that
midwives are authorized to
erform under state law.
Children Requires state Medicaid Mandate
programs to establish a
program to distribute
Pediatric vaccines
furnished by the federal
government.

Aintants are children up to age 1
°AFDC-UP atows coverage in two-parent famies if principal wage-easmer is unemployed.
“Mandate is for 9 months. State may opt to provide addtional 6-month pened of coverage.

‘Geto emerses associated wit work ae sagas tam income im exleuatng AFDC
eligi.

‘Mandate is for 12 months. Stato may opt to provide addtional 6-month pariod of coverage.

‘States establish a screening schedule: “Interperodic” vss are added to the standard schodule
‘a problem is suspected.

10


18

For those Minnesotans who are elderly or disabled, we
are trying different ways of coordinating care to stress
independence and quality of life.

a Under the current system, the incentive is to
place people in nursing homes because that is
where the funding stream is.

=u But if we are given the flexibility to contract for
a comprehensive package of services, the
incentive will be to find appropriate care at the
appropriate place.

a That’s not only fiscally prudent, it is what our

people want and need.

When I talk about giving states flexibility, that doesn’t
mean consumers should be at risk. Consumer protection
and education must be at the core of any redesigned
program.


187

APPENDIX I

APPENDIX I
Population attected Expansion Mandate/option
‘OBRA 1987 (Omnibus Budget Reconciliation Act of 1967) (P.L. 100-203)
Elderly ‘Allows provision of home Option
‘and community-based
‘services to those who
otherwise would need,
nursing home care?
Nursing home applicants Requires states to establish Mandate

readmission screeni
programs for mentally
and retarded individuals.

Nursing home residents

Requires preadmission
screening and annual
resident review for mentally
ill or retarded individuals.

Mandate

MCCA (Medicare Catastrophic Coverage Act of 1988) (P.L. 100-360)

Eideriy and disabled
individuals

Mandate

beneficiaries the OBRA
1986 option of Medicare
buy-in for individuals with
incomes up to the poverty
line (phased in by % of
poverty line).

‘COBRA 1990 (Omnibus Budget Reconciliation Act of 1990) (P.L 101-508)

Elderly and disabled
dividuals

ine

Extends the MCCA qualified Mandate
Medicare beneficiary

provision to individuals with

Incomes up to 120% of

poverty line (phased in by

% of poverty line).

Elderly and disabied
individuals

‘Allows limited program
permitting states to provide
home and

‘Option

arrangements to mertally
retarded/ developmentally
Gisabled individuals.

‘OBRA 1999 (Omnibus Budget Reconelilation Act of 1969) (P.L. 103-66)

‘SSI recipients

Option

“Medicaid covers Medicare cost-sharing charges: premiums, deductibles, and coinsurance.

This isnot automatic. HCFA must grant a waiver to any state wishng to provide these services.

12


55

Medicaid Services Covered in Connecticut

%ot
Service Mandatory? Covered In CT? $for Serv.
Nursing Facies > age 64 YES Yes 39.09%
Hospital inpatient Yes YES 13.34%
Hospital Outpationt Yes YES 6.06%
Physicians YES Yes 4.19%
Home Health Yes Yes 394%
Laboratory 8 X-Ray Yes YES 0.33%
HoalthTrack#/EPSOT-1 Yes Yes 031%
Family Planning Yes YES 0.10%
Rural Health Clinic Yes YES 0.00%
Nurse-Midwives Yes Yes 0.00%
Nurse Practitioners Yes YES 0.00%
Intermediate Care Fasilty/Mentally Retarded NO Yes 3.41%
Targotod Case Management NO Yes 8.08%
Prescription Drugs NO YES 7.08%
Ciinies NO YES 2.06%
Transportation NO Yes 1.56%
Rehabiltetive Services NO YES 1.33%
Dental Services NO Yes 1.35%
Insttution for Mental Disease , < age 21 NO Yes 0.63%
Instdution for Mental Disoase > age 64 NO Yes 0.44%
Optometrists NO Yes 028%
Psychologists NO Yes 12%
Podiatrists xO YES 0.09%
Dentures NO YES 0.08%
Prosthetic Devices NO YES 0.05%
Eyeglasses NO Yes 0.15%
‘Speech, Hearing 8 Language NO Yes 0.03%
Chiropractors NO Yes 0.03%,
Physical Therapists NO Yes 0.03%
Nursing Faciltes, under age 21 NO Yes 001%
‘Christian Scance Santoria NO Yes 0.00%,
Diagnostic Services NO nel in Other Cat 0.00%,
Screening Services NO nel, in Other Cat 0.00%
Preventive Services NO Incl in Other Cat 0.00%
Hospices NO Indirectly 06%,
Emergency Hosptial Services NO Indirectly 0.00%
Occupational Therapy NO Indivectty 0.00%
(Christian Seience Nurses NO NO 0.00%,
Private Duty Nursing NO NO 0.00%,
Medical Social Workers NO NO 0.00%
Nurse Anesthesthotists NO NO 0.00%
Respiratory Care NO NO 0.00%
Personal Care Services, i} No 0.00%

1 - Includes payment for comprehensive sereens and immunizations for patients under age 21

# - HaathTrack which is the name in Connecticut for Early Periodic, Screening, Diagnosis and
Treatment (EPSOM) requites coverage of all services for treatment of @ condition
diagnosed as the resuk of a screen, for recipients under age 21



2

governmental Relations identified the Boren amendment as a man-
date which many States feel handcuffs their ability to constrain the
growth of Medicaid spending during times of fiscal crisis.

As a result, Medicaid spending, driven by rigid Federal rules, re-
lentlessly commands a greater and greater share of State budgets.
At projected growth rates, State Medicare expenditures between
now and the year 2002 will grow from $69 billion to $104 billion,
a 50 percent increase. Federal Medicaid spending is projected to
double during the same period. No one claims spending at this un-
controllable pace can be sustained for very long without crippling
fiscal and human consequences.

In an effort to regain control of Medicaid spending, both Con-
gress and the administration have proposed to limit the growth of
Federal expenditures on the program. Now let’s be very clear on
that point from the outset. Both parties, both political parties, have
proposed to limit the growth of Federal Medicaid spending, albeit
through very different mechanisms and at different rates as well.

Before anyone indulges in any politically charged and telegenic
theatrics about cuts, I want to be very clear on this issue, that both
sides have acknowledged the need to restrain the rate of growth in
Medicaid spending. We are not talking cuts. We are talking about
restraining the rate of growth.

The question then is how. Or, more specifically, how can Federal
Medicaid spending be restrained without shifting unbearable costs
to the States through unfunded mandates?

The Congress proposed to transform Medicaid into a block grant,
providing a defined Federal grant to the States along with the re-
sponsibility and flexibility to design and purchase health care for
those in need.

The administration proposed a per capita cap on Federal Medic-
aid spending, limiting the growth of per-beneficiary expenditures
but maintaining mandated eligibility and services.

We both have different approaches. We will discuss both propos-
als today, asking our witnesses which approach offers States the
most effective, physically sustainable opportunity to provide for the
health needs of vulnerable citizens.

The States are already leading the way to Medicaid reform. Min-
nesota, Connecticut, Tennessee, Arizona and many other States are
pursuing managed care options to control costs and meet expand-
ing needs. But they must do so through a cumbersome waiver proc-
ess. In the Federal-State Medicare partnership it seems only one
partner gets to make the rules.

To anchor its domineering position, HCFA points out that Medic-
aid is a voluntary program. But it is a fiction to suppose that a
State would withdraw from the program, just as it is fallacious to
assume that States would race to the basement in structuring their
own health care programs.

The Medicaid partnership, like a marriage, must be sustained by
a mutual respect and trust. The mere possibility of divorce is no
justification for Federal extortion in the form of unfunded man-

lates.

The President recently observed that the perfect should not be
the enemy of the good in Medicare and Medicaid reform. I agree
with the President but would go further. State flexibility should not


174

But we would contend that it is not just the number; it is are
we going to change the program. So that is where the debate will
be. Case closed. If we do not make changes in the program, we
have got to spend exactly what that baseline budget tells us. Even
the President’s number of $51 billion will cut that program if we
do not change the system.

Ms. FEDER. That is why I began my testimony with the comment
that I think that there is agreement on the need to change the sys-
tem. The questions that have to be asked: what can be expected in
terms of reduced rates of growth from those changes and whether
the level of continued funding is sufficient to provide the health
care coverage, albeit in a more efficient system? But whether it is
sufficient to provide the coverage, I think that it is there that the
conference agreement and even the subsequent proposals fall down.

Mr. SHays. Now, what I have asked Ms. Feder, either of you gen-
tlemen are more than—she has provided a focal point of some dis-
agreement. I may ask questions but I am more than happy to have
either of you gentlemen jump in. Would you, either, care to make
a comment so far? Are you basically content with this parameter
of we are spending more dollars?

The question is: Are we spending enough? If we do not change
the program, we are not spending enough to keep up with the same
level off service. If we change the program, then the question is are
we able to meet all of those program needs, in other words. And
it gets me back to this issue of the previous witness who basically
talked about cost savings versus efficiencies.

Mr. BEacu. I do not know too many people who would disagree
that there needs to be, in some fashion or form, a program like
this. How we construct it and how we put it together is the big
issue.

I would think we would also want to bring into this another pa-
rameter no one has discussed today—perhaps it is not relevant—
and that is that we need to promote, in some way through public
policy, savings so that people can provide for these kinds of emer-
gency care that bring them to this point.

How do you promote savings among very, very poor people? You
promote economic growth. And the ‘evel of economic growth we
have now is so very low that it endangers the future of this pro-
gram as much as it endangers the future of generations yet to come
into the work force. These are all related questions.

Mr. Suays. Which triggers a point again that I would throw out
to the panel and address to you, Ms. Feder. You make a point that
the population growth requires 3 percent more to meet the need of
that population, plus an additional 3 percent for inflated health
care costs.

Ms. FEDER. That was general inflation.

Mr. SHays. OK. Medicaid is in some cases, in some years has
grown at 20 percent a year as we added more voluntary programs,
some mandatory programs. Some years it has grown at less than
that. We have been looking at a range of about 10-plus a year. Do
you think it is conceivable that we could maintain Medicare and
Medicaid at a growth of 10 to 15 percent a year ad infinitum?

Ms. FEDER. I think that as we both indicated earlier, that there
is some room to constrain the Federal payments, but it is critical


163

Mr. Suays. Mr. Beach.

Mr. BEACH. Thank you very much, Mr. Chairman. I want to
thank you, as all the witnesses have thanked this committee, for
the opportunity to come before you and share the research we have

lone.

I must say that—two points. This has been an extraordinary
seminar on this whole subject. I have learned a lot this afternoon,
as I am sure everyone who has spent the whole afternoon with you
has learned.

Mr. SuHays. It’s nice of you to say that. It’s been an interesting
hearing, and you have helped make it that way as well. Thank you,
sir.

Mr. BEACH. And I appreciate also being on the last panel, though
that’s not normally the position one wants to be if one has other
things it wants to do, because I think the testimony that I have
heard from my fellow witnesses and the testimony I am about to
give you puts an exclamation point on what went before our panel.

Let me summarize my main point, in a paper which has been
distributed prior to this committee and which I am not going to
read and I am just going to ask you to look at at your convenience.

The main point of the work that the Heritage Foundation has
done on this particular subject is that if we assume that Medicaid
remains a program of guaranteed health care for federally defined
covered groups—that’s our first assumption—and, second, that
States are largely prohibited from making significant changes to
the program that would reduce its costs beyond their current ef-
forts—and I make that assumption, perhaps underlining that, be-
yond their current efforts—then it is highly likely that States will
need to raise substantial new tax revenues or make major cuts in
other programs, such as education, economic development and
highway construction, in order to meet their Medicaid obligations.

low, we came at this problem, Mr. Chairman, statistically. What
we wanted to do was to develop 51 estimates, if you will, of what
the States are facing over a 7-year period in terms of their obliga-
tion for meeting current law as well as the proposed blue dog or
per capita cap program.

So we constructed 51 State statistical or economic models—that
is, all the States plus the District of Columbia—and we found that
failing to fundamentally change the Medicaid program as it’s now
defined may mean that States will need to raise, over this 7-year
period, out of their own resources, an additional $146 billion in
order to meet their current obligations under the current program.

Second, to restress my earlier point that these additional dollars
from Medicaid may mean that States will need to raise new taxes
or cut spending in other programs, if I could just say I think this
afternoon we haven’t heard enough on that latter point and that
is that, at the State level, the debates aren’t just in do we cover
this group or do we cover that group or do we provide this level
of service. The debate is rather, in the legislatures, do we support
higher growth in higher education or do we meet these obligations
as they are currently defined? They are between the program cat-
egories.

And, third, that moving to a per capita cap program that reduces
Federal Medicaid program dollars may mean that States will need


72

STATEMENT OF

BRUCE C. VLADECK
ADMINISTRATOR

HEALTH CARE FINANCING ADMINISTRATION

ON
UNFUNDED MANDATES IN MEDICAID

BEFORE THE SUBCOMMITTEE ON
HUMAN RESOURCES AND
INTERGOVERNMENTAL RELATIONS

“HOUSE COMMITTEE ON GOVERNMENT REFORM
AND OVERSIGHT

JANUARY 18, 1996



27

These key assumptions are subject to change as various federal Medicaid funding formulas,
eligibility and coverage requirements (in addition to Medicare, welfare and SSI program
changes) are addressed by Congress. As a result, the following framework and key
components are also subject to change.

FRAMEWORK AND KEY COMPONENTS OF THE DHS PROPOSAL

‘The guiding principles and assumptions identified in the preceding section are used as the basis
for the framework of the proposal. There are still many outstanding issues and undefined aspects
of the proposal that will be addressed in the coming months with legislators, consumers, tribes,
counties, providers, and other stakeholders. Key components of the proposal include:

Integration. Minnesota's three publicly funded health care programs, Medical
Assistance (MA), General Assistance Medical Care (GAMC), and MinnesotaCare should
be integrated into one simplified health plan that provides access to quality, affordable
health care.

Direct resources to most needy populations. Within available resources, pregnant
women, children, low-income elderly, persons with disabilities, and families should
continue to be given priorities.

Premiums. A more premium-based system should be established.

Access sites. Multiple sites and access points should be available for people seeking
enrollment in the health care plan.

Contracts. Services should be purchased in the marketplace from a variety of sources,
not necessarily solely from health maintenance organizations. A prime goal is to get out
of purchasing health care services one at a time and instead to purchase services more
comprehensively through contract arrangements.

Performance measurements. Necessary to assure value, quality, and accountability for
expenditures is the modification and expansion of performance measures, allowing us to
move away from a prescriptive, process-oriented regulatory approach.

Public health infrastructure. Minnesota's three publicly funded health care programs
help to support an infrastructure of public health, medical education, American Indian
reservation health care services, and providers who serve a disproportionate share of low
income, uninsured people. With the movement toward comprehensive purchasing of
managed coverage, the possibility of funding certain aspects of the health care
infrastructure through some other payment methodology should be explored.

Minnesota Department of Human Services
January 1996


70

The fundamental nature of the partnership between the Federal
Government and the States that has existed in the Medicaid pro-
gram for the last 30 years, in which in effect the Federal Govern-
ment says if the State chooses to meet a set of minimum require-
ments about coverage and benefits, we will provide a Federal
match of between 50 and 83 percent of the dollars associated with
that activity and, in addition, we will match, at the same rate, a
very broad range of additional expenditures the State may, at its
option and its discretion, choose to make.

This has permitted States to develop 57—if you count the terri-
tories, the District of Columbia—very considerably different Medic-
aid programs which vary from one to another on almost any dimen-
sion one could try to name. But it also provides the States with a
considerable degree of automatic protection. To the extent to which
economic circumstances of one sort or another require or cause an
expansion in coverage or an expansion in the need for service, Fed-
eral matching payments are automatically available within the
very broad confines of the existing program.

We believe that the conference agreement would curtail this Fed-
eral financial responsibility by putting an absolute ceiling on the
willingness of the Federal Government to match State payments,
which would throw the partnership out of balance in a fundamen-
tal way, and which makes sense as a matter of arithmetic only if
the basic guarantee of coverage for low-income elderly and disabled
persons that is now the core of the Medicaid program were aban-
doned at the same time.

Most simply, we just do not believe that the Medigrant program,
as contained in the balanced budget bill, provides nearly enough
funding to continue to provide existing levels of coverage to existing
beneficiaries, even with greater program efficiencies, and certainly
not to accommodate the growth that might come about as a result
of economic recession or just continued increase in the number of
low-income people in this society.

To make matters worse, the provisions in the conference agree-
ment which reduce the extent of required State matching for some-
thing on the order of a dozen States will, we believe, provide those
States with a very strong incentive to reduce the level of their con-
tributions to Medicaid. If you add the projections of what the
States would reduce in terms of their spending as permitted under
the formula in the reconciliation bill with the reductions in Federal
outlays, we believe that amount would total close to $400 billion
over 7 years, an amount with which it would just not be possible
to continue coverage of most of the folks who are now being cov-
ered.

We believe at the same time that we can protect access to high-
quality health care while providing States with additional flexibil-
ity, as is outlined in the President’s proposal. We would continue
the basic Federal partnership with the single change of limiting the
growth in per-person spending by the major categories of persons
covered. If States had to expand enrollment as a result of popu-
lation change or economic circumstances, more than otherwise
would have been expected, they would receive additional Federal
funds in order to cover those folks.


146

as a result of court-ordered retroactive rate increases are not eligi-
ble even for Federal matching payments.

Much of the Boren amendment litigation, however, does not re-
late to the vagueness of the statutory language but, rather, it re-
lates to a State’s procedure for determining these reimbursement
rates. In such cases, if the procedure is ruled by a court to be
flawed due to lack of adequate public notice or other factors, a
State may be liable for substantial retroactive reimbursement rates
based on revised determination procedures and, again, the Federal
Government may or may not share in the cost of the retroactive
payments.

Now, we understand that the Department of Health and Human
Services, in response to this problem, has tightened its process for
reviewing the State rate determination procedures so that the po-
tential acceptance by the courts will be, they hope, better than it
has been in many instances in the past.

The State concerns, of course, are that they feel the Boren
amendment handcuffs their ability to constrain the growth in Med-
icaid spending during times of fiscal crisis, requiring that Medicaid
reimbursement rates be established within the limits of federally
mandated criteria, restricts the scope of States’ negotiations with
providers of medical and nursing home services, and this potential
litigation often causes a State to increase rates merely to avoid the
legal action that might be forthcoming. States are concerned about
the extensive and expensive work necessary to substantiate compli-
ance with the law and protect against suits by nursing home or
hospital providers.

This situation is especially true since the 1990 Supreme Court
ruling in Wilder against Virginia Hospital Association. In that suit,
the Supreme Court declared that medical care providers, instead of
the Medicaid recipients, are the intended beneficiaries of the Boren
amendment. This ruling allows medical facilities and nursing
homes to obtain judicial review of State reimbursement rates under
the Civil Rights Act, Section 1983. In effect, the Court ruling al-
lows hospitals and nursing homes to claim that a State is violating
the hospital’s civil rights by failing to pay costs incurred to provide
services.

The preliminary recommendation of the ACIR is that because
States are traditionally responsible for the quality and safety of
medical services and Medicaid is a State-administered program,
States should be allowed to conduct reimbursement rate negotia-
tions with Medicaid service providers without preconditions set by
Federal law. Therefore, the ACIR preliminary recommendation is
to repeal the language of the Boren amendment and insert lan-
guage making States solely responsible for determining Medicaid
reimbursement rates.

In concluding, I want to emphasize that my testimony, including
the conclusions and recommendations regarding the Boren amend-
ment, are based on the ACIR preliminary report and are subject to
change based on final decisions of the Commission after receipt and
review of public comments. The Commission will hold a conference
for discussion of its preliminary report on March 6th and 7th and
will receive public comments over the next 2 months before issuing
its final report.


63

State and Federal Government of $2 million a month, from this—
the availability of this subsidized health insurance program.

Mr. Souper. Another question that was raised by your testi-
mony—is it Petra or Petra?

Mr. PETRABORG. Petraborg.

Mr. SoupDER. I am sorry. That you said that if you didn’t like
some of what the organizations were providing you would like the
flexibility to go to alternatives. And one of the problems that we
see, particularly in seniors in Medicaid—and some of this is from
personal example.

Growing up, our church used to visit some nursing homes, and
you could see where often the Medicaid or the poorest people
were—and often they were getting cited. They had—they had not
very good conditions for many people there.

We also—I just went through this with my late father-in-law
when we were looking at different nursing homes and considering
alternatives. You could see very clearly where there was a lot of
Medicaid and where there wasn't.

We had a problem in a Fort Wayne health center that the gov-
ernment would like to close down, but they don’t know what to do
with the people if they close them down. We heard in the Medicaid-
Medicare fraud hearings about, for example, one company that was
providing services that was disciplined by the government. They
really couldn’t cut them off because they didn’t know what to do
with the people.

Are there really alternatives? If you had some people who you—
some major providers to the frail elderly and low income elderly,
where would you go for alternatives? Do they really, in fact, exist?

Mr. PETRABORG. First of all, in Minnesota, we have—we do not
have a separate standard for Medicaid recipients as for private pay
recipients of nursing homes. So our first defense, line of de-
fense-——

Mr. SOUDER. May I ask a question about that? I don’t think it’s
so much that there’s a different set of standards but that when you
have higher paying people—

Mr. PETRABORG. We have a——

Mr. SOUDER [continuing]. You tend to subsidize the others.

Mr. PETRABORG. We have the same payment rate for both, so pri-
vate pay and Medicaid pay the same amount in Minnesota. So
there’s no difference in payment. And I think that that goes a long
way to assuring no difference in care.

Mr. SouDER. Can I ask you one other question about that? Does
that mean if somebody wanted a better place, they can’t pay more?
Because we have started to see nursing Fomes that offer a lot more
facilities. So are you saying that it’s capped and an individual can’t
pay more?

Mr. PETRABORG. They can find a different nursing home that of-
fers more services. In that nursing home, however, the Medicaid
patients and the private pay patients——

Mr. SouDER. I was not saying it was different within the nursing
home. What I was saying was there was a tiering of nursing homes
that the lowest income were having a different quality, and I’m not
complaining about that. But then what happened is that you get
a group of nursing homes who are used to providing to that group


Conclusion

In conclusion, a few brief thoughts. Much has been
made in the news reports out of Washington about the
lack of final agreement on a budget—particularly
Medicaid. From where I sit, there appears to be

a great deal of agreement. Most of us believe:

that eligibility should be simpler,

m that our focus should be on people, not
programs,

= that market forces should be used to the fullest
extent possible, and

w__ that people shouldn’t have to quit their jobs to
get health care for their children.

I urge you to step back, reexamine these common
principles, and build on them together. Thank you.



37

Testimony Presented to the House Subcommittee

on Human Resources and Intergovernmental Relations

David Parrella, Director of Medical Policy
Connecticut Department of Social Services

January 18, 1996

Mr. Chairman and members of the Subcommittee, my name is David
Parrella. I am the Director of Medical Policy for the
Connecticut Department of Social Services. I would like to thank
you for the opportunity to appear before you today to speak about
the regulatory issues we have struggled with in Connecticut as we
attempt to reform our Medicaid program. They are not unique to
Connecticut, but they are illustrative of the issues the states
are facing as we attempt to achieve the goals of improved access
and long term cost containment within the current Medicaid

regulatory environment.

T would like to focus on four main areas: managed care, recipient
cost-sharing, provider reimbursement, and the financing of
uncompensated care for the uninsured. Suffice it to say that my

description of our travails with regulations and mandates on


157

Mr, Chairman, members of the Committee, it i a pleasure to appear before you to discuss
proposed changes to the Medicaid program--our nation’s critical health and long-term care safety
net for poor families, people with disabilities and the elderly. Based on better than twenty years

of health policy research, my views, in summary, are as follows:

+ Legislative change to reduce requirements on states regarding service delivery and
provider payment can enhance Medicaid’s efficiency and generate savings in pursuing the
program's fimdamental purpose: health insurance protection for vulnerable populations.

‘This is the approach taken in the Administration's Medicaid proposal.

= Incontrast, the Conference Agreement and subsequent Republican proposals that would
eliminate the entitlement and dramatically reduce federal funds would not provide
flexibility in pursuit of'a goal; rather, they would abandon the insurance guarantee that
defines the Medicaid program,

. Block grants with limited funds put states willing to sustain coverage at greatest risk.
Under these proposals, coverage can be sustained only if states increase spending to
offset federal reductions. If, instead, states spend the minimum needed to draw down

their allocation of federal funds, insurance coverage is even more severely undermined,
Medicaid is a voluntary federal/state partnership. The Medicaid program is a federal

state partnership. Under the program, the federal government makes matching funds available to

states to operate medical assistance programs consistent with federal guidelines. State

40-631 97-6


57

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23

To meet these challenges with the potential for reduced funding, fundamental policy changes will
be required. The current Medical Assistance (MA), General Assistance Medical Care (GAMC),
and MinnesotaCare programs must be integrated to better serve enrollees, to reduce
administrative expenditures, and to facilitate streamlined purchasing of health care services.
Eligibility for the programs must be simplified by use of gross income tests, streamlined
eligibility categories, and by offering multiple eligibility access sites. Coverage must be
designed to target the needs of the population, calling for a benefit set for most enrollees that
‘would be similar to a typical employer benefit set and supplemental, long-term or continuing care
coverage to wrap around Medicare for most elderly and disabled enrollees.

To achieve efficiencies in purchasing health care, coverage would be purchased through health
care service networks on a risk basis. For elderly and disabled enrollees, Medicare coverage
‘must be purchased or coordinated with long-term care or continuing care coverage if cost-
shifting between acute and long-term care providers is to be diminished and continuity of care for
the individual is to be assured. Certain social services that have been funded with Medicaid may
need to be purchased separately from the more traditional health care services, but those that
support or are alternatives to more costly health care must be somehow tied to the delivery of
health care to reduce the gaps in the system and avoid cost shifting.

As we look at methods to allow enrollees and providers more flexibility in determining the most
appropriate services, it is important to maintain assurances of value and quality for the funding
expended. Additional performance measurements must be developed that build upon the
measures already in place to assure value, quality, and accountability.

Efficiencies in administration must be achieved to assure that funding that could be used for the
delivery of services is not used for administration as available dollars become more scarce. To
achieve the transition from the current programs to a mature, integrated strategy for subsidizing,
purchasing, and measuring the quality of health care services for low-income, uninsured, and
special needs individuals, the maintenance of substantial administrative resources may be
necessary for an allotted period of time.

There are still significant components of this general strategy that must be more clearly defined
in the coming months. Your input in the development of these strategies is welcomed by the
Department. As additional detail and fine-tuning is achieved, information will be provided so
that enrollee, community, advocate, and provider input can be obtained.

Minnesota Department of Human Services
2 January 1996


144

mandates for the most part added persons to the rolls who were
less expensive to serve because they were adding primarily women
and children and Medicare eligibles who were being covered only
for their Medicare cost sharing.

Mr. SOuDER. So the dollars wouldn’t be—

Mr. SCANLON. The dollars would not be the 50 percent number,
right.

Mr. SOUDER. Thank you.

Mr. SCANLON. Thank you.

Mr. SHays. Mr. Scanlon, thank you very much.

Did you have any point or observation you would like to make?

Mr. JENSEN. No.

Mr. SHays. You think your boss did a good job?

Mr. JENSEN. Great job.

Mr. Says. I think he probably did a better job knowing you
were by his side.

Mr. ScaNnLon. Right. A little calmer, I think.

Mr. Suays. I appreciate your good work. I appreciate your obser-
vations. It was good to have your testimony and thank you very
much.

Mr. SCANLON, Thank you.

Mr. Suays. We are going to close with panel four: William Beach,
visiting fellow, the Heritage Foundation; Philip Dearborn, director
of government finance research, Advisory Commission on Intergov-
ernmental Relations; and Judith Feder, professor, Institute for
Health Care Research, Georgetown University.

I am sorry. I should have caught you before you sat down. If you
would all rise and raise your right hand.

[Witnesses sworn.]

For the record, I would note that all three witnesses have re-
sponded in the affirmative.

You are our last panel, but you are equal to the others, and we
appreciate it. The nice thing is, I think a good number of you have
been here for awhile and you might want to make observations on
points that were made before, which is always helpful as well.

STATMENTS OF WILLIAM BEACH, VISITING FELLOW, THE HER-
ITAGE FOUNDATION; PHILIP DEARBORN, DIRECTOR OF
GOVERNMENT FINANCE RESEARCH, ADVISORY COMMIS-
SION ON INTERGOVERNMENTAL RELATIONS; AND JUDITH
FEDER, INSTITUTE OF HEALTH CARE RESEARCH, GEORGE-
TOWN UNIVERSITY

Mr. Suays. So, Mr. Beach, I am being told by staff I have to start
with you.

Mr. BEacH. I am accustomed because of the spelling of my last
name to being at the top of the list.

Mr. SHays. Well, in that sense, Mr. Dearborn, why don’t we go
with you?

Mr. BEACH. That's fine.

Mr. SHays. I want a little variety for you. I don’t want you to
always have to go first.

Mr. DEARBORN. Mr. Chairman, members of the committee, my
name is Philip Dearborn. I am director of government finance re-


90

B, and one patient in each room no longer is there. Passed away.
Now you have one in each. And the nursing home petitions the ad-
vocate to be able to move it. And the advocate says, no, you cannot
move that patient. Why is that logical?

Mr. VLADECK. Well, if you were to—what you are referring to is
the ability to change a patient’s room without the patient’s consent.
One of the basic principles of the nursing home reforms embodied
in 1987, coming out of the report of the Institutes of Medicine, was
that merely by virtue of the fact that an individual is a resident
of a nursing home, they should not lose their rights as a citizen or
their dignity as a human being. And to take someone and say, be-
cause you are a nursing home resident we are moving you from
this room to that room for the convenience of the facility, without
your consent, struck a number of us as a violation of the basic dig-
nity of the individual.

Mr. SHays. You have just illustrated to me why I want the
States to have this decision. You on high basically decide in a sense
that a nursing home cannot save the taxpayers money and be able
to put those two individuals into one room; the room looks the
same, is the same. It is maybe one room down. But instead, that
nursing home now has two patients, each having their own room.
It is logical that patient may want to stay there and not—and have
the room all to themselves. But it sure is not cost-effective.

Mr. VLADECK. Mr. Chairman, there is nothing in the rules, Fed-
eral or State, that permits, that prevents the facility from bringing
another patient into each of those rooms.

Mr. Suays. Right. But maybe they cannot do it for a week or two
or three.

Mr. VLADECK. And the decision was made, and I would defend
it. And let me generalize from your comment on why we think it
is important to have a Federal role. We believe that the mere fact
that an individual, because of illness or poverty requires Federal
and State support for the receipt of medical care, should not re-
quire them to lose their rights or their dignity as a citizen of this
country in the receipt of medical care. It should not give them less
freedom to get care or to be treated like a citizen than anyone else
who enters the medical care system.

Mr. Suays. I agree with that. But you make a quantum leap, in
my judgment. I acknowledge to you, this is just one, but it is just
one replete with a whole host of others. I believe you believe that.
And you believe basically the Federal Government should be able
to have a system that prevents efficiencies and that basically costs
the taxpayers a hell of a lot of dollars.

Mr. VLADECK. No, sir. I have not defended everything in that
book. I think that is a misstatement of the position of the adminis-
tration. We believe that large parts of that book ought to be re-
pealed.

Mr. Suays. I do not want to put words in your mouth. So if that
is the case, it appears to me that that is what is being said. What
is your point?

Mr. VLADECK. Let me be very explicit. We believe that large
parts of that book, as they relate to requirements on provider pay-
ment methodologies, ought to be eliminated; that large parts of
that book as they limit the ability of States to engage in home com-


172

Table 1

Addition

State Medicaid Obligations Under Current Law
ind Per Capita Cap, 1996-2002

(amount in Thowands of Dols)

‘State ‘Additional Spending Addition to Current Law Total Additional State
Under Curent Law from Per Capita Cap __ Medicaid Obligations

“aiaske $108,258 ST $133,147

Alabama 1,699,383, 1024.889 2.724272

Arkansas 832824 567.691, 1,400,515

‘Ancons 2.979.037 1.020.447 3,799,484

California ¥4027,116 4,461,013 22,488,130

Colorado 1,629,869 419.704 2,049,574

Connecticut 2158812 547555 2,703,367

pc 13731 331,399 1.863.130

Delaware 163.156 115971, 719.128

Florida 12,870,910 3.710823 16,581,734

Georgia 5.270.028 1,300,974 62771,002

Hawaii 1,193,243, 186,034 1379277

Towa 498548 449.939 898.887

Idaho 39,798 93,388 483.186

inoss 2321.24 1,718,303, 4,939,587

Indiana 2.054.049 942,267 2.996316

Kansas 1,023,210 426,814 150,028

Kentucky 1.647.154 855.243 2,502,397

Louisiana 2,352,886 1,319,094 3.671.981

Maseachusens 4347438 1137495 5.484933

Maryland 33419 704,388 3,847,804

Maine 377.690 180,319 $58,010

Michigan 4371374 616.829 5,988,203

Minnesota 2365431 602.981

Missouri 2.079.914 943,278

Mississippi 719.280 632,456

Montana 220.234

‘North Carolina 42245599

Non Dakous n614

Nebraska $86,179

‘New Hampshire 490,432

New Jersey 410,780

‘New Mexico 331,082

Nevada 1.026297

New York 17325.783

Ohio 5.141.895

‘Oklahoma "708,006

Oregon Bo4.s18

Pennsylvania 11,886950

Rhode Island 31,384

South Carolina 1.037.409

‘South Dakota 102.365

Tennessee 5438037 7312643

Texas 7.228.538 10,169,653,

Utah 221,110 136.382 Ns2az

Virnigia 4,604,946 916841 5,521,787

Vermont 175.053, 71,058 246.111

Washington 2243972 607348 2,851,320

Wisconsin 2,054,465 730,899 2.845364

West Virginia 228,364 349.159 $74,524

Wyoming 88,126 11673, “16,453

Tour “Sa6ATT OST STAT FIST aT IOS

Source: The Henge Foundeson snd Whanon Emer Foreaang Atv, Eats
ecade new Congresonl Bags Ofc economic nsumpons aed on ecb 2195,


44

We submitted our waiver application in January 1995. We were
again assisted by our HCFA regional office during the three

months that went by before we received an official response.

Despite earlier assurances that HCFA's review clock would not be
stopped during our response to questions, it was officially
halted once we received our twelve (12) pages of detailed

questions in April.

When first elected, President Clinton made a commitment that his
Administration would limit waiver reviews to a single round of
questions. However, after we responded to our regional office at
the end of May, we received another set of "requests for

clar: fication” from the HCFA central office the following month.

quickly as possible to this round but cur target

cf July 1, 1995 was already compr

tices could not be issued in an atmosphere of

We decided to impiument managed care cn a voluntary

counties in August and withhold mandatory enrollment

1, This decision had a negative impact on the

state tudget and caused great uncertainty among recipients and

Froviders, a}


85

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.

Conclusion

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


176

So does anyone here have any information as to what—I wish I
had thought to ask Mr. Vladeck this when he was here—if you do
not have the answer, I understand. It will be something we will
pursue. Is there any understanding about once we get rid of the
Boren amendment, does its ghost still linger?

Mr. DEARBORN. Mr. Chairman, I do not have that information.
Until we saw Dr. Vladeck’s testimony, I was not aware that the ad-
ministration was going to recommend repeal of the Boren amend-
ment. Our recommendation of course suggests that it not:only be
a repeal but a clear statement that the rate-setting process is solely
that of the States, and presumably any lawsuits would be under
the State law and not under the Federal law if that were done.
There is no way you could preclude——

Mr. SHaAys. What troubles you about that?

Ms. FEDER. I would want to think more about that, but I think
my understanding is that the primary problem is—which is consist-
ent with the testimony that was given—is that the statutory lan-
guage of the Boren amendment is quite vague and that the courts
have no standards by which to apply it. Consequently, I think quite
consistent with what you testified, that has been the major source
of the problem.

So I think throwing something to the courts without any speci-
fications is the biggest problem there, not necessarily the Fe eral
courts.

Mr. SHays. We have our Medicaid. Medicare growth is growing
at 7.2 percent. Our Medicaid growth was not 4.8, it was 5.2 per-
cent. But the confusing thing for you and all of us is what is the
baseline. But it is a 5.2 percent growth.

Having said that, I conceded earlier on as someone who helped
set these numbers on the Committee on the Budget—I have raised
it with my leadership and Mr. Panetta as well and his legislative
liaison people—that we allowed for a greater growth in Medicare
but not basically that same level in Medicaid. My contention is that
the 7.2 percent growth in Medicare is a very significant growth.

Your argument would be that Medicaid should be closer to that
gross level of getting over the 6 percent. Whereas I now would re-
spond to you that we are looking to change the program. We made
significant savings in Medicare, made significant savings in Medi-
care without negatively impacting beneficiaries. We do not increase
the copayment, we do not increase the deduction. We keep the ben-
eficiary rate at 31.5 percent, with the tax break continuing to pay
68.5 percent. We have a test for the wealthy. The wealthy are
going to have to pay more for Medicare Part B. They are paying
31.5 percent. They are going to have to pay potentially up to 100
percent on incomes over $100,000.

What we also do, which is something that we did in the private
sector. I am just trying to illustrate changing the system means a
savings. What we also do with Medicare is we then provide for a
whole host of choices for the beneficiaries, allowing them, though,
if they choose to get into managed care or some other private
care—and their only inducement to do that is if they get something
they do not get now under the traditional Medicare system—eye
care, dental care, a rebate on the premium, no copayment, maybe
the Medigap is paid for by the managed care people. If they don’t


62

thing in southern Minnesota where you have Mayo Clinic and
other fairly widespread systems. What is it like in the northern
parts of the State where it’s much more spread out and the popu-
lation is more spread out? Are there alternatives there that would
exist?

Mr. PETRABORG. There are, and there will need to be developed
more. As we move to expand our managed care strategy across the
whole State, we are having to find different strategies. I mean, this
is—why we need some transition time here to work out those kinds
of concerns in the various parts of the State.

But even in Northwestern Minnesota, for example, managed care
is impacting that marketplace, with services out of some of the pop-
ulation centers that are nearby, Fargo and Grand Forks, for exam-
ple.

So it is an approach, we believe, that can work but has to take
account of the infrastructure in those various parts of the State.

Mr. SouDER. Are the—part of our concern was—is that the
threshold of reimbursement—because when you look at the costs
for nonseniors and nonacute care, it is substantially different than
it is for others, because there may not be enough of them to get
to a threshold, and if our reimbursement rate isn’t high enough you
may not have enough people with which to get the facilities that
you need. Have you seen that and do you have different types of
reimbursement rate problems in those areas?

Mr. PETRABORG. That is an issue that, again, I think is part of
the transition process. We are struggling with that particularly
around dental services in the rural parts of our State. So I cer-
tainly recognize that this a legitimate issue.

Mr. SouDER. We heard a couple of different numbers; but, Mr.
Parrella, I think you said 82 percent were elderly and disabled.
Does that mean only 18 percent is going to the——

Mr. PaRRELLA. That’s correct.

Mr. SouDER [continuing]. Lower income families? Is that similar
to Minnesota or how is that?

Mr. PETRABORG. In terms of the expenditures or the caseload?

Mr. Souper. Yes. I understood that was expenditures.

Mr. PARRELLA. That is expenditures.

Mr. PETRABORG. Yes.

Mr. SOUDER. So it is up to near—over 80 percent now for the el-
derly and disabled?

Mr. PeTRAsORG. I think it is more like 75—75/25.

Mr. Souper. If it is 75/25, one of the comments—I am interested
in this. I assume then you are just relating to the 25 where you
say that the ability to get health care helps people’s willingness to
move into the job sector, but most of the money is not going to that
area at this point.

Mr. PETRABORG. Minnesota does operate a State-subsidized
health care insurance program for those people just above the Med-
icaid program; and we have, since that program began a year and
a half—2¥2 years ago, been able to document a direct connection
between our AFDC caseload and the use of the Minnesota care pro-
gram. And, in fact, we have seen that we have around 4,000 fewer
families a month using AFDC in Minnesota, at a savings to the


86

entitlement to meaningful benefits and providing substantial new

flexibility to the States.


121

OUR NATIONAL STAGE, I CAN ONLY HOPE THAT

IN THE FINAL ANALYSIS, WE WILL HAVE A

MEDICAID PROGRAM WHICH ENSURES SOME

VIABILITY FOR HOSPITALS THAT SERVE THE

POOR AND UNINSURED AS WELL AS

GUARANTEEING A MINIMAL LEVEL OF CARE FOR

OUR NEEDIEST CITIZENS.

10


124

In conclusion, I would note that, consistent with the interests of
the Congress in containing Federal spending, States believe they
need greater flexibility to manage their respective Medicaid pro-
grams, flexibility available today only by seeking Federal permis-
sion with a waiver. If States are granted more direct control to ag-
gressively pursue managed care strategies, the importance of ade-
quate implementation, planning and continuous oversight of man-
aged care systems to protect both Medicaid beneficiaries from inap-
propriate denial of services and Federal dollars from payment
abuses must not be overlooked.

Mr. Chairman, I would be happy to answer any questions that
the subcommittee members may have.

Mr. SHays. Thank you, Mr. Scanlon.

(The prepared statement of Mr. Scanlon follows:]


31

basis through a contract with a series of performance measurements tied to payment and some

less prescriptive regulatory provisions could improve our ability to assure consumers are
protected and services are of good quality.

Although significant advances have been made in recent years, the field of performance
measurement and outcome assessment is in its infancy. General areas for measurement could
include provider, contractor, or network performance; program performance; population level
performance; and statewide health care economy performance, A number of tools are available,
including encounter level claims; HEDIS and other measures of aggregate plan performance;
consumer satisfaction surveys; internal quality assurance processes; Department of Health
regulatory oversight; medical chart audits; complaint and grievance processes; registries for
births, deaths, immunizations, cancer, etc.; and contract enforcement. It will be necessary to
define what should be measured and at what level, to meet our expectations for protecting
consumers and assuring access to good quality care, recognizing that this is a vulnerable
population with diverse health care needs.

Families with Children & Adults without Children

The approach to better addressing the needs of families with children and adults without children
focuses on program integration, simplification, premiums, and purchasing of comprehensive,
managed and portable coverage.

Eligibility.

© Program integration. The intent is to streamline the eligibility categories that currently
exist among the three programs to reduce the administration necessary for completing the
eligibility process and to treat families as units, all to facilitate a more efficient
purchasing strategy for both enrollees and administrators. However, some variation of
income and asset standards and eligibility methodologies may still exist amongst major
groups of eligibles.

© Premiums. Rather than requiring a person to incur medical expenses to spend down their
income to get coverage, a more premium-based system would be established. Unlike
spenddowns, premiums put money in the health care system in advance and encourage
the responsible, advanced purchase of health care coverage and use of preventive care.
People with income under certain levels would be exempt from the premium requirement.

Minnesota Department of Human Services
10 January 1996


156

whet

W

GeorceTown University Menicat Center

Anathtute for Health Care Revearch and Polley

Testimony
Before the
House Committee on Government Reform and Oversight,
Subcommittee on Human Resources
and Intergovernmental Relations

January 18, 1996

Judith Feder

Professor of Public Policy, Georgetown University

2233 Wircontin Avenue, NW Sulte 525 Washington DC 20007
ROESET.GEAO ROLAAT10 fre


179

level and certain international changes that will alter the economy,
that population could very well shrink. And so I think that the con-
versation has to be tied to this other dimension, if today is where
the conversation is going forward.

Mr. SuHays. I would like to deal with that issue because—but it
was the point that you had triggered when I began to talk about
population growth versus the increased cost of a program, I mean
the inflated cost, the inflation cost.

Mr. BEACH. Perhaps one of the reasons we had a number of
groups added—Professor Feder could answer this—in the 1980’s is
we had fairly substantial growth in some parts of our country eco-
nomically.

Mr. SHaAys. One thing we probably agree on is that the elderly
are going to get older and therefore be in nursing homes.

Mr. BEACH. Not necessarily.

Mr. SHays. Let us agree on this point though; I realize there are
exceptions. It seems to me your point is more focused on the poor
population, the nonworking poor, more than the nursing home pop-
ulation which is the elderly. Unless you are saying that the elderly
are going to have more money, so they are not going to go on Med-
icaid as soon.

Mr. BEACH. Perhaps that is one part of it. The other part of it
is—let me just add one other wrinkle.

Mr. Suays. I want to get to this. I want all three of you panelists
to respond. You can make your point.

Mr. BEacu. I will listen to you.

Mr. SuHays. Let us just deal with this issue. Your point is that
if we can get the economy to generate more economic activity, that
we would affect the population. But all I am asking is, would you
basically acknowledge that the population you are most affecting
would be really the 72 percent of the population that grabs about
a third of the cost?

Mr. BEACH. That is very reasonable.

Mr. DEARBORN. One thing I think is somewhat comparable. If
you look at SSI versus AFDC, SSI with the blind, disabled and the
aged, the Federal program, people that become eligible for that pro-
gram, as far as I know, virtually never fall off the program. Only
more come in, none ever leave. The AFDC tends to be up and
down, and we hope go down perhaps.

I think there is a comparable situation with Medicaid. Those el-
derly who are now in nursing homes, elderly poor who are now re-
ceiving Medicaid, are probably always going to be in that situation,
and to a great extent the disabled will fail into that, too. So that
there is one group that will only get larger, that will not decrease.

It is the women and children part of Medicaid that can fluctuate,
and it seems to me that that makes a considerable difference as the
Federal Government and State governments look at this program.

Mr. SHaYS. We have Governors and some legislatures, but a good
number of Governors, who are eager to take on this challenge as
a block grant. What is your best take or worse take on their, for
example, eagerness to do it, Ms. Feder? Then I will ask the others.

Why do I have so many Governors saying we cannot stand this
program? You had Governor Weld basically—you had more than
Governor Weld, you had President Clinton—say we need to get a


Minnesota’s response:

Designing a better health care system
Deputy Commissioner John Petraborg = Testimony

Committee on Government Reform and Oversight,
Subcommittee on Human Resources and Intergovernmental Relations

Minnesota Department of Human Services = January 1996


139

Mr. SuHays. Mr. Scanlon, first, thank you for your good work and
the good work of your agency. And, second, let me just ask you
about the process, the waiver process. What is the basic length of
time that’s required to get a waiver?

Mr. SCANLON. The length of time has varied considerably. As Mr.
Vladeck indicated, the Clinton administration when it came into of-
fice indicated some flexibility in the process of approving waivers.

Mr. Suays. Right.

Mr. SCANLON. And, in fact, the State of Tennessee submitted a
waiver in 1993, and received very rapid approval and began their
program approximately 2 months after they received their ap-
proval.

From our observations of Tennessee, that rapid implementation
ended up being relatively shortsighted and resulted in problems
stemming from confusion over exactly how the managed care sys-
tem was going to operate in the State. This experience seemed to
lead to a more careful and a more deliberate consideration of waiv-
er applications on the part of the administration. Our understand-
ing now is that it’s taking closer to a year before a waiver is ap-
proved.

Mr. SHays. The purpose—the reason why States need a waiver
is that the Federal Government has various requirements that they
no longer want to come under?

Mr. SCANLON. That's correct. There are very important require-
ments. First, a State cannot mandate that persons enroll in man-
aged care organizations without a waiver. Without a waiver, a
State can only make managed care organizations available as a
State option and allow people to voluntarily enroll.

The second major requirement that States feel impedes their use
of managed care is that you cannot—cannot contract with a man-
aged care organization that has fewer than 25 percent private pa-
tients.

Mr. SuHays. Right. And that last one creates what problems?

Mr. SCANLON. It creates a number of problems. For States that
have very limited managed care in the private sector, it means that
they are handicapped in that there may be no organizations to con-
tract with where Medicaid won’t immediately become the dominant
purchaser of services and that Medicaid enrollees will not rep-
resent more than 75 percent of the enrollment.

It also means that you are potentially at a disadvantage in terms
of dealing with organizations that are not serving the areas of
States that are—where Medicaid beneficiaries frequently live, such
as inner cities. You could have managed care organizations in a
large urban area that are really oriented toward the major busi-
nesses of that area and have their services located more in the sub-
urban fringe without enough services in the inner city. If a man-
aged care organization is to organize and attempt to serve the
inner city, it may end up with more than 75 Medicaid patients and
would, under the existing rules, be prohibited from participating in
the program.

Mr. SHays. How long have you been in the position? How long
have you done research on Medicare or Medicaid? How long have
you been involved in that area?


147

Thank you, Mr. Chairman.
Mr. Suays. I thank you.
[The prepared statement of Mr. Dearborn follows:]


153

States can decide whether or not they wish to participate in the
Medicaid program, but if they choose to participate, they are choos-
ing to provide meaningful insurance coverage to a defined popu-
lation. Under current law, as Dr. Vladeck indicated and you dis-
cussed extensively, States already have considerable flexibility in
satisfying this requirement. As discussed previously, only 38 per-
cent of total Medicaid spending is for populations and services that
States are required, as distinct from having the option, to cover.

Now, when you consider legislation to reduce Medicaid spending,
it is critical to preserve Medicaid as an insurance program. The ad-
ministration’s proposal preserves the insurance protections of Med-
icaid while promoting greater efficiency in their pursuit. The pro-
posal would provide States the flexibility in service delivery they
have been seeking, specifically with respect to managed care and
the negotiation of provider payment, and I would add the home
care and long-term care that we were discussing earlier today. As
I said, I think those are the three fundamental flexibilities that
were emphasized.

Both managed care and provider payment changes will facilitate
State efforts to provide insurance protection at lower costs, satisfy-
ing the definition of efficiency that you discussed earlier. The ad-
ministration further promotes these results with the additional ac-
tion of establishing a limit on the rate of growth in Federal pay-
ments per beneficiary enrolled in the program.

The per capita cap has three fundamental characteristics: First,
by focusing on expenditures per beneficiary, rather than total ex-
penditures, it encourages States to focus on efficiency in coverage,
not eliminating coverage, in slowing cost growth.

Second, by allowing funds to increase as the number of bene-
ficiaries increases, it sustains the health insurance safety net and
protects States against increased demands for coverage that come
with economic recession or demographic changes, developments
that are unpredictable and from which no State is immune.

Third, by establishing a growth rate for Federal funds that recog-
nizes rising general costs and medical costs, it protects States and
beneficiaries against the erosion of purchasing power as prices rise,
thereby sustaining the value of insurance protection.

Far from constituting an unfunded mandate, these features es-
tablish appropriate constraints on Federal spending while continu-
ing to assure States the availability of sufficient Federal funds to
meet their population’s need for insurance protection. At the same
time, they demonstrate that fiscal responsibility does not require
the abandonment of social commitments. The combination of flexi-
bility and the per capita cap in the administration proposal would
promote efficiency in pursuing the long-established and widely val-
ued goal of the Medicaid program, insurance protection for vulner-
able populations.

In contrast, block grants that eliminate entitlements are not fo-
cusing on efficient insurance protection. They are eliminating the
guarantee of insurance coverage. The Conference Agreement re-
pealed the Medicaid program and replaced it with a block grant
that eliminates fundamental insurance guarantees, provides States
insufficient funds to cover the population that is eligible under cur-


46

system, hospitals and other providers have begun to feel a
certain nostalgia for the "good old days" of fee for service,
cost based Medicaid reimbursement. As we concluded negotiations
on our Boren settlement, a key provision was that the state would
promise to retain, not repeal, the current rate methodology for a
minimum period of eighteen months or until such time as a major
restructuring of federal aid would require the state revise it.
Even if that occurs, it will take a two thirds majority vote in
both houses of the state legislature to abrogate our promise to

retain TEFRA.

The irony of this resolution should be lost on no one. The same
parties that sought to overturn our reimbursement methodology are
now seeking to keep it in place. They even sought to retain our
capitation rate setting methodology for managed care lest the

state shculd become more aggressive in the aftermath of

Medigran

program received a great deal of publicity over

containment initiative, pharmacy co-payments, The
outcry in the state over the collection of a $2.00 per

rescription co-payment on pharmacy services is largely the



6

newspapers around the State. Minnesota’s publicly funded pro-
grams scored very well in this survey. In fact, the State-subsidized
program for low income working families, Minnesota Care, scored
No. 1 of all public and private health care plans in the State.

Because of Minnesota’s tremendous health care infrastructure we
believe that within the new system we also must address the need
for education and research, which are now indirectly funded
through the Medicaid program.

Given the expected cuts—or changes in Medicare for medical
education and the impact of an increasingly competitive market,
the Governor has become concerned about the erosion of this re-
source in our State.

Let me address the issue of caring for the needy and the issue
of an entitlement briefly. There has been a lot of talk concerning
this issue.

The absence of Medicaid does not have to mean the end of our
commitment to providing a safety net for certain populations. We
believe a safety net must be maintained but that it should and can
exist in the context of a new system. We do not need to preserve
Medicaid to guarantee access to health care for our citizens.

Finally, let me say that we, in Minnesota, set out a very ambi-
tious agenda, one that we are eagerly taking on in Minnesota; and
we believe we can be successful if we have the kind of flexibility
that has been discussed here in Washington and adequate funding
to do that.

This will also take time. It has taken nearly 30 years to build
the existing Medicaid program, and we need to have sufficient
transition time to implement this new system and minimize disrup-
tion to the people who need services.

Finally, I think there are several areas where there is a lot of
agreement in spite of the discussion here. Most of us believe that
eligibility should be simpler, that our focus should be on people, not
on programs, and that market forces should be used to the fullest
extent possible and that people shouldn’t have to quit their jobs to
get health care for the children. So if we step back from the debate
and focus on some of the things that we agree on, I think that we
have the basis for further work.

Thank you very much.

Mr. SHAYS. Thank you.

(The prepared statement of Mr. Petraborg follows:]


40

population. Spending on nursing facilities, acute care
hospitals, ICF/MR's and psychiatric facilities accounted for over
62% of total Medicaid spending during the same period. 1 have
provided exhibits with a breakdown of spending by service and

eligibility category for your review.

This burden represents a major impediment to further reforms in a
Medicaid program where the state share of expenditures, including
disproportionate share payments to hospitals (DSH) will account
for 15% of total spending in the state general fund in SFY 1996.
This percentage is expected to rise to over 17% by SFY 2002. It
will be impossible for the state to continue the momentum to
bring cost effective care to our low income population and meet

its other obligations unless these trends are reversed.

Into this context came a Boren Amendment lawsuit filed by the
Connecticut Hospital Association. The suit challenged the
state's application of the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA) methodology in the calculation of inpatient
rates. As you know, TEFPA allows a national increment in the
adjustment of cost based inpatient rates beginning with our 1982

base year, The suit sought the inclusion of over $350 million in


120

THE PRESIDENT’S PLAN WOULD PROVIDE FOR A

GRADUAL REDUCTION AND RE-TARGETING OF

THE $16.9 BILLION IN DISPROPORTIONATE SHARE

PAYMENTS TO HOSPITALS THAT SERVE THE

POOR AND DISADVANTAGED.

UNFORTUNATELY, AS THIS HEARING

COMMENCES, BUDGET NEGOTIATIONS BETWEEN

THE CONGRESSIONAL LEADERSHIP AND THE

ADMINISTRATION HAVE BROKEN OFF. THE

FUTURE OF HEALTH CARE FOR AMERICA’S POOR

IS NOW LEFT TO THE NEXT ACT IN THE

POLITICAL DRAMA THAT IS NOW UNFOLDING ON
9


19

Keys: Flexibility, funding, transition time

I’ve just described an ambitious agenda. It is one we are
eagerly taking on in Minnesota. We believe we can be
successful if we have:

a flexibility and

= adequate funding.

Even so, we must be realistic. The Medicaid program we
have today was thirty years in the making. We must
have sufficient transition time to design and implement
a new system and to minimize disruption to people who

need services.

m= The longer the debate in Washington takes, it
becomes more and more critical that you adjust
the effective date accordingly.

12


14

In Minnesota, we believe a new system has the potential
for greater consumer protection than does the current
system, which establishes a basic threshold, but no more.

a With market-based strategies that maximize the
state’s tremendous purchasing power, we will
have the option of demanding higher
standards.

a As for marginal providers that are protected by
the current system? They will improve, or we

will take our business elsewhere.

We must also develop mechanisms for all health care
consumers to have a voice-mechanisms that focus on
outcomes, not rules and regulations. This is essential.

Options for consumer input include consumer
satisfaction surveys, which we're already trying in my
state.


3

be the enemy of national standards for health care. Managed care
should not be perceived as the enemy of quality care, and fiscal
sustainability should not be seen as the enemy of compassion.

No one wants pregnant women and children to go without health
care, and they won’t. No Governor or legislature wants to deny
nursing home care to the elderly, and they won't. Yet on our cur-
rent course, if we don’t reform Medicaid, those who we want to
help the most will surely be hurt the most.

Unless we use every tool available to reform Medicaid, including
State ingenuity and accountability, the Medicaid partnership will
lock both partners in a fiscal death grip. More unfunded Medicaid
mandates are not the answer. Having all but used up Federal fiscal
capacity while amassing $5 trillion of accumulated deficits, we can-
not demand the States pick up the tab.

IT look forward to the testimony of all of our witnesses on this im-
portant topic and do want to state that we postponed this hearing
for Mr. Waxman, who is truly the expert on this issue, has been
involved in this for such a long time. He is, as we talk, trying to
get a flight down in a foggy day.

Mindful of the fact that we have two Republicans and no Demo-
crats, I am going to be very cautious of the fact that we don’t, in
that sense, have someone from the other side of the aisle; and any
witness who thinks that we are not being fair on that grounds,
speak up and I will take pause.

Mr. Souder, I welcome any comment you would like to make.

Mr. SoupeER. Thank you.

I don’t have an opening statement. I am just one of those shy
freshmen, who is here to learn. So I am looking forward to hearing
the witnesses today.

Mr. Suays. Thank you.

We have four panels; and I would invite our first panel, the dep-
uty commissioner of the Minnesota Department of Health Services,
John Petraborg; and the director of medical administration policy,
Connecticut Department of Social Services, David Parrella.

If there’s any Democratic staffer here, I would more than wel-
come them to come up—if Henry Waxman’s staff is here—and I
might even invite them to ask questions. We will see how that
goes.

Dave, you are from the full committee?

Mr. MCMILLEN. Yes.

Mr. SHays. You are more than welcome to participate in this
hearing and ask questions, in fact. So you may sit up here, if you
would like. You don’t have to if you don’t want.

Mr. MCMILLEN. Thank you.

Mr. SHays. John, why don’t we start out with you and welcome
your testimony.

Excuse me. We are going to swear our witnesses in. That is our
practice with all of our witnesses, be they the Secretaries of a De-
partment or a guest, whatever. If you would please both stand.

As is the custom, we swear in our witnesses.

(Witnesses sworn.]

Mr. Suays. For the record, both have responded in the affirma-
tive.


132

APPENDIX I APPENDIX I

MAJOR FEDERAL EXPANSIONS OF MEDICAID
ELIGIBILITY AND SERVICES (1984-93)

. 4 dicaid E A R 4
Related Population

Population affected Expansion Mandate/option
DEFRA (Deficit Reduction Act of 1964) (P-L, 98-968)
Tnfants* and children Requires coverage of all Mandate
hasten bom afir 2083
‘who meet state AFDC

Income and resource

standards, regardless of

family stiycture.

Requires coverage trom Mandate

date of medical veiiction,

of pregnancy, providing

ree woud cua te

AFDC once child was

or (2) quay io arOeOr

‘once child wes born,

regardless of whether state

has AFDC-UP program.

infants Requires automatic Mandate
‘coverage for 1 year after
birth if mother already is
receiving Medicaid and
remains eligible and infant
resides with her.

‘FDC families ures limited extension Mandale®
of ‘coverage It
AFDC oligbiity is lost 85 &
t9sult of increased earings.

AFDC famiies Extends earedincome Mandate
disregard trom 4 to 12
months.

COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) (P-L 6-272)

Pregnant women Requires coverage # family Mandate
income and resources are

Pregnant women

Posipartum women Requires 60-day extension Mandate
of coverage postpartum if

Pregnant women ‘Allows provision of ‘Option

infants and children ‘Allows extension of OEFRA Option
coverage upto age 5
immediately, instead of
togatng phaser by bith

7 (contnced}


110

I seriously doubt Mr. Webster would characterize this as either a “mandate” or
“unfunded.”

Yet here we are today, about to hear from witnesses attacking the program --
and Administration efforts to reform it in the context of deficit reduction - as an
“unfunded mandate.”

It is particularly ironic that some of these same witnesses who view the
President's plan as an “unfunded mandate” will be supporting the vetoed Republican
plan to repeal the Medicaid program and to slash Federal matching payments to the
States by 17 percent, or $163 billion, below what CBO estimates will be the cost of
maintaining current coverage over the next 7 years. In the year 2002, the reduction in
Federal payments will be over 28 percent below the cost of maintaining current
coverage.

Apparently, proponents of the Republican Medicaid repeal don't mind taking
huge amounts of Federal money from the States so long as they also remove any
duties that the States might have to undertake in order to receive the Federal funds —
duties such as guaranteeing basic health coverage to low-income children, paying
providers reasonable amounts for the care they deliver, and contributing some of their
own funds toward the cost of the program.

Of course, the States, faced with this massive reduction in Federal funds, will
have no practical choice but to cut back on eligibility, on benefits, and on payments to
providers. That's why the Republican Medicaid repeal gives States the authority to do
what needs to be done to ration care.

To get a sense of what lies ahead under the Republican approach, take a look at
the survey that Virginia's Medicaid agency has already sent out asking its residents to
rank who among them should have priority in coverage.

Here are the choices: all children; persons with disabilities; elderly; homeless;
Medicare recipients; nursing home residents; pregnant women; prisoners; public
assistance recipients; unemployed; working poor, young children; SSI recipients; and
“other.”

Why are Virginia and other States going to have to choose among these
populations under the Republican repeal? A study released just last month by the
Kaiser Commission on the Future of Medicaid gives us some idea.

The study, which was prepared for the Commission by the Urban Institute, finds
that, under the vetoed Republican plan, not only will Federal Medicaid spending drop
by $163 billion over the next 7 years, but State spending could fall by an additional
$240 billion


69

What is interesting, in light of the earlier conversation, is in the
last decade the greatest source of growth in Medicaid expenditures
has not been on behalf of the elderly. It has been on behalf of the
nonelderly disabled, whose numbers have increased and for whom
a variety of services have increasingly been financed through the
Medicaid program rather than other sources of one sort or another.

As you know, under current law there are certain populations
that States are required to cover if they participate in the Medicaid
program, and certain services they are required to offer if they par-
ticipate in the Medicaid program. There are also additional popu-
lations that States may choose to cover at State option and addi-
tional services that States may choose to cover at State option. In
1993, only 38 percent of all Medicaid expenditures were on behalf
of mandatory services for mandatory populations. If you exclude
disproportionate share dollars——

Mr. SHays. Say that over again. It went by me.

Mr. VLADECK. OK.

Mr. SHAYS. Maybe what you could do, because that is a helpful
chart, if you would put the other chart down below, the one that
was just up, just put it down below since we may make reference
to it.

Mr. VLADECK. We talked, the previous witnesses talked, I think
quite appropriately, about some of the complications of Medicaid
eligibility, but there are—the overwhelming proportion of Medicaid
eligibles are eligible by virtue of being recipients of cash assistance,
either AFDC or SSI. States may, at their option, cover a variety of
other folks in the Medicaid program. Similarly, we require States
that participate in Medicaid to cover 11 basic services in the pro-
gram, but we permit them to cover 20 some odd additional services
at State option. As the gentleman from Connecticut noted, Con-
necticut covers most of those.

So that in fact if you exclude, which is sort of the next line, State
payments, disproportionate share payments that States make as
part of their Medicaid program—which nationally are about 12 to
14 percent of all Medicaid expenditures and are also entirely op-
tional on the part of the States—but even if you exclude them, if
you look at the lower of those two tables, slightly under 44 percent
of all State Medicaid expenditures are on behalf of services they
are required to cover, for people they are required to cover, in order
to participate in the Medicaid program.

Another 35 percent of State expenditures are on behalf of indi-
viduals who the States have required, who the States have chosen
to cover over and above that which is minimally required in order
for the States to receive Federal financial participation in the Med-
icaid program.

To flip the chart the other way, 45 percent of Medicaid expendi-
tures are on services that States are permitted but not required to
provide in order to receive Federal matching payments under the
Medicaid program.

The point of this chart, of course, is to suggest in some basic
structural ways the extent of flexibility that is currently available
to States under current law, even though we in the administration
believe there are important ways in which that flexibility ought to
be expanded.


24

BACKGROUND
Profile of Current Programs

* Minnesota, through the Medical Assistance (MA), General Assistance Medical Care (GAMC)
and MinnesotaCare programs, currently provides health care coverage for more than half a
million low-income, uninsured or special needs individuals. Expenditures for 1995 are projected
to have exceeded $3 billion, This spending equates to approximately 20 percent of the State's,
annual budget.

Estimated Average Monthly
Number of Enrollees for 1995

MA 430,000 $2.752 Billion
GAMC 53,000 $196 Million
MinnesotaCare 79.000 $64 Million
Total 562,000 $3.01 Billion

The MA Program is administered under Title XIX of the Social Security Act. The federal
government funds the program at a rate of more than 50 percent. The program covers health care
services that address preventive, acute, long-term care, and continuing care needs for
approximately 430,000 Minnesotans. Eligibility is limited to individuals who fall within one of
the following categories, and who meet the income and asset requirements established by the
Minnesota Legislature within the parameters of Title XIX:

+ Children

. Pregnant women

+ Parents in families that have an absent parent, an incapacitated parent, or an
unemployed parent

+ Elderly, age 65 or older

+ Disabled according to SSI (federal Supplemental Security Income Program)
standards

GAMC is a state-funded program that covers acute and non-long-term care for approximately
53,000 Minnesota residents who are not categorically eligible for MA, but who meet income and
asset requirements comparable to the medically needy standards and methodologies of the MA
Program. GAMC administration is both state and county funded.

MinnesotaCare is a program funded with enrollee premiums, provider taxes, and federal
Medicaid funds. The program covers acute care services for adults and the full MA benefit set
for pregnant women and children who are uninsured,

Minnesota Department of Human Services
3 January 1996


143

able to monitor their program in an aggregate way. Now they need
to know more about the care that’s being delivered. They need to
look at the individual and be able to ask questions about the ade-
quacy of care.

How to do that is a challenge that not only the States are facing,
but the private sector is, as well. There’s promising work going on
in this area, both in the academic community and in the provider
community, in terms of identifying what could be used as markers
of good care. For example, there’s a group of markers called ambu-
latory care, sensitive conditions. For someone that has diabetes, if
their diabetes is being well managed they shouldn’t necessarily be
hospitalized. And so if you see hospitalizations among your diabetic
patients, then you know that they may not be getting adequate am-
bulatory care.

These kind of markers, are in their infancy; and we need to work
to develop them so that we have relatively comprehensive meas-
ures of the adequacy of care. So it’s both an issue of a transition
to this new system and trying to deal with the problems of the
transition, as well as it’s an issue of development of a new science
to be able to monitor care.

Mr. SouDER. One other question. You submitted a list of the
major expansions of Medicaid eligibility over this period 1984 to
1993, and when you read the list there’s—I mean, no person in gov-
ernment or anybody in politics or any really sensitive individual
would ever want to vote against any of these. They all sound real-
ly—I mean, somebody who is pregnant—something pregnancy re-
lated requires coverage if a family income and resources are below
State levels, regardless of family structure, and a lot of things that
sound really important. But when you accumulate them together
that’s how you bankrupt the government.

What my concern was at the beginning here, and maybe you
gave this figure, is you said that you thought that 50 percent of the
recipients were because of the additions in 1984 to 1993? Is that
roughly true?

Mr. SCANLON. There was about a 50 percent increase in the num-
ber of recipients during the decade in which all of those were en-
acted.

Mr. SOUDER. So that could be for several reasons.

Mr. SCANLON. Some of the increase is not due just to those man-
dates or the optional provisions that are at State discretion. There
is also the issue of population growth in that period as well as by
the end of that decade we were in the midst of a national recession,
and we know that recessions increase unemployment and add con-
siderably to the Medicaid rolls. I have not seen an analysis that
tries to separate the effect of the mandates from the recession and
from population growth.

Mr. SOUDER. Because some of the mandates may, however, have
added costs to those who are already on the rolls, too, is that right?

Mr. SCANLON. That’s correct.

Mr. SOUDER. So, in reality, it could be either more or less than
50 depending on the impact of recession versus what they added
to people who were already on the rolls?

Mr. SCANLON. Correct. The mandates, we believe, had their big-
gest impact in terms of the number of recipients. However, the



10

The case for retiring Medicaid

Tinkering with the current Medicaid system will
provide neither the flexibility nor the funding that
Minnesota needs to care for our citizens. Medicaid has

been altered in large and small ways for many years.

us The result is a system that is cumbersome to
administer and difficult for even the experts to

understand.

= Amarvel in its day, Medicaid is now a system
that is collapsing under its own weight.

The rate of growth in Medicaid exceeds the rate of
growth of personal income. In Minnesota and in many
other parts of the country, the state share of the current
Medicaid program will soon consume most of the state’s

budget.

That is unacceptable. 3


141

coming in from multiple providers, and the need to identify an im-
portant type of—or the most prevalent types of abuse involving ex-
cessive numbers of services or duplicative services.

Medicaid programs typically have had one bill payer for their
programs, so all the bills for a Medicaid program are flowing to one
contractor who can then process them and presumably put together
the profiles to identify abusive practices.

With Medicare, we have had divided responsibility in terms of
the payment of bills. We have intermediaries dealing with institu-
tional services, the part A services, and we have carriers dealing
with the part B services.

And so you have claims flow to two different types of entities.
Sometimes actually, in an area, there will be more than one
intermediary involved with different providers. So you have infor-
mation flowing to different parts of the country to be processed,
and the collection of claims information and the profiling to be able
to identify abuses is a challenging task.

The Medicare Transaction System is a planned attempt to deal
with that issue. The fact that we are moving in that direction is
positive. The fact that we are not there is disappointing.

Mr. SHays. What concerns would you have with block grants? If
you were looking at it as an agency, what becomes your concern
if this becomes a block granted program to the States?

Mr. SCANLON. Well, we believe very strongly that for managed
care and more vigorous cost control efforts to succeed, we have to
be successful in assuring that an adequate level of care is being
provided to the population in need.

And from our observation of State experiences, we suggest that
it’s not necessarily a question of will in terms of how difficult a
challenge this is and in terms of how States encountering difficul-
ties in assuring that there is an adequate level of care being pro-
vided. It’s just a difficult challenge. We, as an agency, would hope
is that there be enough assistance and enough attention devoted to
the question of how it—how do we overcome the implementation
problems that States are going to face and how we continue to
monitor to ensure that adequate care is being provided so that we
don’t have the negative feedback that would occur if care turned
out to be inadequate. Then, there could be a backlash against the
kind of efficiency gains that we have been trying to achieve.

Mr. Suays. So you know you have the efficiency gains. The con-
cern would be whether the needs of the individual would be met.
Your comment, though, is well taken. If they weren’t, there would
be a backlash.

Mr. SCANLON. Correct. We would like there to be efficiency gains
as just opposed to pure cost savings. Because cost savings can come
from either efficiency gains, which means you are saving money
producing an acceptable product, or cost savings can come because
we have reduced the amount of services. In effect, you have abused
the per capita payment. We have siphoned off too much of the pay-
ment into profit and payments for excessive provider incomes.

Mr. SHAYS. That causes me to just followup one last question. I
hope I don’t think of another one.

Last question: Is it your sense that there is a lot of efficiency
gains to be made?




Coverage.

With the guiding principles establishing independent living as a focus for long-term or
continuing care, we are challenged to meet both the health and continuing care needs of these
populations in the most cost-effective manner while providing access to appropriate, quality
services.

Medicare or Medicare look-alike coverage. Medicare is the primary payor of acute
care services for the vast majority of the elderly and disabled population served by
Medicaid. For those elderly and disabled who are not enrolled in Medicare, coverage
identical to Medicare would be purchased. Additional coverage for such things as
prescription drugs or certain dental services would likely be included here or with the
continuing care coverage, below.

Continuing care coverage. Supplemental coverage would be designed to wrap around
the Medicare or Medicare look-alike coverage for the elderly and disabled. This coverage
‘would address the long-term or continuing care needs of this population and its design is
critical.

A primary challenge in designing continuing care coverage is to grant consumers and
providers the flexibility to determine what services best meet the needs of an individual
‘without creating a wholesale entitlement for all enrollees. This would be necessary to
assure that costs can be managed and that value for the expenditure can be assured.

It would also be important to provide incentives or design components to reduce the
utilization of institutional services. An additional issue requires that the artificial barriers
to utilization that currently exist in the system, such as the limited number of home-and
‘community- based services waiver allotments, be addressed in a way that would allow for
access to appropriate services without significantly increasing costs. It is important to
note that local county agencies provide services that are currently covered by Medicaid or
that support services covered by Medicaid. Decisions will need to be made about which
services would continue to be part of the continuing care package and which services
‘would no longer be purchased or would be purchased using some mechanism other than
Medicaid. These issues need to be addressed in the coming months.

Housing or living expenses. There are many issues in designing continuing care
coverage, but another key issue is its interaction with payment for housing. Housing is
not a health care service, yet Medicaid currently funds housing when purchasing nursing
facility or ICF/MR s (intermediate care facility services for people with
developmental disabilities). Often these services are sought by enrollees primarily
because housing is provided. It is not yet clear how the purchase of housing will be
designed fit into the integrated health care strategy.

Minnesota Department of Human Services
8 January 1996


166

The Costs to the States of
Not Fundamentally Reforming Medicaid

Testimony

ing Fellow in Tax Analysis
‘The Heritage Foundation
Washington, D. C.

Before
‘The Subcommittee on Human Resources
and Intergovernmental Relations
United States House of Representatives
on January 18, 1996

“We must, however, continue to express our concerns about
mandated Medicaid expansions. States do not have the
luxury of operating a budget deficit. Every mandated
dollar that we spend is a real dollar that has to be taken
from another program.”

Governor Bill Clinton of Arkansas, June 7, 1990

Much of the debate between Congress and the President on reforming Medicaid,
the health care program serving the nation’s poor, has transpired without adequate
attention paid to the effect of the program on state finances. If significant reforms to
Medicaid are not enacted, states will face a heavy increase in spending and a rise in the
proportion of their projected revenues that must be dedicated to the program. And,
because the rate of growth in state Medicaid spending will exceed the rate for total state
spending, the states will be forced either to increase taxes or to divert money from other
programs, such as education and crime control.

Medicaid is a state-administered program that operates under federal guidelines.
Federal and state governments jointly fund the program, Federal reimbursement to the
states is based on a statutory formula designed to give a higher matching rate to states.
with lower per capita incomes. Matching rates for these services range from 50 percent
to 83 percent and are adjusted annually.

‘The cost of Medicaid to the federal government has been growing at double-
rates in recent years. The Congressional Budget Office ("CBO") projects that annual
federal Medicaid costs will almost double by 2002.



98

for another couple of months I guess I still will have spent more
of my career as a State government official than as a Federal offi-
cial. So I am very sympathetic to what you say about folks who
work in State government. I guess the answer I would give you is
twofold.

In a sense, if what we see as a set of minimum protections that
need to be established at the Federal level are things the States
would do anyway, then the Federal requirement is not a burden on
the State if the State were to do it anyway. It is like, you know,
telling my kids that they have to finish the pizza. I mean, they will
complain probably that I am being, I am telling them what to do
again, but they are going to eat it anyway.

If States are going to cover all these folks and provide all these
services and protect the dignity of nursing home residents, then
Federal requirements that they do it should not be an additional
burden on the States.

The second thing is, frankly and unfortunately—and I recognize
that the world changes in a variety of ways—but one of the reasons
we expressed some of the concerns we do about what States would
do under a block grant situation, or in the absence of some of the
requirements of the Federal law, was the historical record. And
there is a considerable historical record in many of these areas of
including during the history of the Medicaid program, and certainly
prior to the history of the Medicaid program—many of them have
to do with issues that are still very relevant today.

Let me just give one example in that regard. One of the things
we have had very extensive discussions with the Governors about
and with Members of Congress of both parties as we have pro-
ceeded with these negotiations over the last couple months, and
Mr. Shays, an issue that has a very interesting resonance in Con-
necticut, has to do with the requirement in the Medicaid law that
if a benefit is provided to any group within the Medicaid program
by a State, the same—the State may limit the availability, may
limit the number of hospital days that are provided, may limit the
number of physicians’ visits, may limit the amount of prescriptions,
but it has to have the same rules statewide.

I think Mr. Parrella raised questions about that so-called
statewideness requirement for its limitations on the flexibility in
the State of Connecticut to operate their program.

The fact of the matter is that among the folks who receive Medic-
aid coverage around the country are somewhere between half a
million and three quarters of a million Native Americans who tend
in most States, for very obvious historical reasons, to be con-
centrated in very limited areas of those States. As recently as this
year, we have had comments from people who run Medicaid pro-
grams that are forced to cut back, if they were not under statewide
obligations, because of the politics of the relationship between the
Federal Government and the States and the tribes. They would
give the responsibility for providing health services to the tribes
back to the Federal Government.

Now, statewideness actually comes in the first instance from the
fact that the Medicaid law was first enacted the year after the civil
rights was enacted. And those concerns have taken on different
forms. The world has changed. In many ways the States are much


140

Mr. SCANLON. I have been involved since 1975 in health services
research, primarily on Medicaid and somewhat on Medicare.

Mr. Suays. What are some of the challenges that we have in the
billing system of Medicaid?

Mr. SCANLON. Well-——

Mr. Suays. [ am just talking in terms of being able to catch the
waste, the fraud, the abuse and so on. Where do the challenges lie?

Mr. SCANLON. Our challenges have changed considerably over
time, in part because of the fact that we have—had a great im-
provement in the data processing capacity that’s available to
States. In dealing with a fee-for-service world where claims for
services come in from all different types of providers, one has to be
concerned about the ability to gather those claims together, match
them for an individual and see whether or not the pattern of serv-
ice use is appropriate. That kind of challenge is now much more
feasible to deal with with modern data processing capacity. We at
GAO have not looked recently at how much the States have been
able to adopt such modern data processing capacity to be able to
do that kind of an activity.

When one talks about managed care you face a different set of
challenges with respect to fraud and abuse because the State is no
longer the direct payer of each individual service. The State is the
payer of a per capita fee to each managed care organization, leav-
ing the managed care organization responsible for delivering the
appropriate package of services.

While you are concerned about whether or not they allow provid-
ers to bill for abusive or unnecessary services, you are also con-
cerned that the managed care organization makes sure that the
package of services being delivered is adequate. We have regarded
it as critical that the States put themselves in a position of being
able to get sufficient information about the services managed care
organizations deliver. This can occur by having the managed care
organization report encounter data to the State and that the State
having the capacity to analyze them. This has been one of the big-
gest challenges that States have faced in moving toward more man-
aged care.

As I indicated, Arizona has been reasonably successful in getting
such information from their managed care organizations, using it
effectively to monitor care, as well as using it in their competitive
bidding process.

The other two States which have more recently moved very sig-
nificantly into managed care, Oregon and Tennessee, have been
less successful to date in trying to work with encounter data. Both
of those States have 2 years of experience and have yet to have
their systems operational and effective to the point of being able
to monitor the kinds of care that are being delivered.

Mr. SHays. Have you done much work in Medicare?

Mr. ScanLon. I have done a moderate amount.

Mr. SHays. OK. What are the differences—what are the chal-
lenges in trying to get at the waste and the fraud and the abuse
in Medicare versus Medicaid? Is there—are there parallels or are
they very different?

Mr. SCANLON. I think there are some parallels. When one is oper-
ating in a fee-for-service environment, there’s the issue of claims


91

munity-based care or in managed care ought to be eliminated; that
the eligibility process ought to be considerably simplified, which is
where most of the regulations by page and by volume in the Medic-
aid system have to do with this eligibility, and we agree strenu-
ously that that should be radically simplified.

At the same time, there are parts of the requirements in that
book that we believe must be maintained in order to protect the
rights and the dignity of the beneficiaries of the program. And one
part of that about which I will confess I feel particularly strongly,
because of my own background, are the Federal requirements
about quality of care and quality of life in nursing homes.

Mr. SHays. Quality of care, is that defined by the number of
nurses versus the number of patients?

Mr. VLADECK. As a matter of fact, there is no Federal standard,
quantitative standard on the relationship of the number of nurses
to the number of patients. There is a standard that gives individual
facilities and States a considerable amount of discretion in adjust-
ing their staffing, nurse staffing to meet patterns of particular
practice or particular needs of residents.

Mr. Suays. It is your testimony that there is no Federal require-
ment to have a certain level of staffing at nursing homes?

Mr. VLADECK. There is a Federal requirement to have an ade-
quate level of staffing. There is not a quantitative requirement at
the Federal level that says for each resident there shall be X num-
per of nurses or of nursing hours, other than the minimum of one

Mr. SHAYS. One R.N. For what?

Mr. VLADECK. Per shift, per facility.

Mr. Suays. OK. It could have 300 patients with one R.N.?

Mr. VLADECK. I believe so; yes, sir.

Mr. Suays. Mr, Souder.

Mr. SOUDER. My initial question is on the chart with the yellow
on it, on the mandatory services and mandatory people. Has that
43.5 percent stayed relatively constant? Is this a new set of data?
Has that been increasing?

Mr. VLADECK. That is a very good question that I do not know
the answer to and will try to get it to fies in the next few days.
My impression is it has probably been decreasing, But I honestly,
that is a guess and I would rather, if you will permit us by early
next week, get you some real, a quantitative answer to that.

[The information referred to follows:]


u

Another round of incremental change is not enough to
turn this situation around. If we try that course, the

people we are trying to protect will be hurt.

ua There is simply not enough money available to
support Medicaid as we know it.

u We would have to slash the program at the
expense of some of our most vulnerable

citizens.
We need to start fresh.

Minnesota and many other states prefer the creation of
a new structure, such as Title 21. We need a system that
allows us to be true to our values—one that allows us to
create efficient, simple, people-centered approaches.


97

Mr. VLADECK. My real answer is that I do not know enough
about that to give you a fully informed answer. My understanding
is, which is not a very sophisticated one, that there is such a mech-
anism in the unemployment insurance system.

Mr. Souper. Right.

Mr. VLADECK. And that I was a resident or involved in govern-
ment in the State of New Jersey at a time where the bankruptcy
of that and the requirement of borrowing from the Federal thing
created enormous problems for the State. The State now has the
opposite political problem of having probably a very large surplus,
which is very difficult for officials to keep their hands off of.

I guess my basic answer is, I think there are a variety of ways
to protect the States. The bottom line from our perspective is to
protect the individuals. It seems to us the best way to protect the
individuals is to combine a guarantee to the individual of coverage
along with mechanisms that adjust for changing needs of the State.

Mr. SouDER. This subject can get tense quickly, and I do not
want to get into that. But there is a philosophical question that
is—

Mr. Suays. This is what makes the hearing interesting.

Mr. SouDER. Not me. I am noncontroversial.

My concern is that in some of the earlier questions, is that while
the intent is to be protective of individuals, it really sounds pejo-
rative to the people in the States that they are not. And that this
is true in a lot of issues—of only the government, Federal Govern-
ment can protect the disabled; they are the only ones who can pro-
tect the frail and elderly; they are the only ones who can protect
minorities.

I am not interested in defending our Governor from Indiana. He
is not one of my favorite people. He may run against my former
boss. But I think it is a little bit of a slight to imply that he does
not have as much concern for senior citizens in Indiana as the Fed-
eral Government does, or that he for some reason is going to not
meet the needs. You even implied at one point in your testimony
that they would cut back if given flexibility to cut back. That is not
only saying that they would not cover, but they would actually re-
duce services if they had the option.

Then you added the additional interesting comment that it was
because they have budget needs and priorities. So do we. We are
the ones in debt. Indiana has a constitutional amendment to keep
them from going in debt so they have to do it that way. We are
here trying to figure out how in 7 years from now we can get to
an annual balanced budget, let alone have this overriding interest.

Why do you think that their budget needs and priorities are
going to take priority over our budget needs and priorities? And
second, what makes you think, for example, the nursing homes—
my friend Bob Alderman, who is a State legislator, has worked real
hard on nursing home protection for seniors in Indiana. Why do
you think that the peo fe of Indiana and other States are less car-
ing than people in Washington? That is the implication, even
though I do not think it is personal that way, certainly not from
Democrat to Democrat in our State.

Mr. VLADECK. I think that is a very good point. I must, again if
I may, sort of add a bit of a personal dimension to it, which is that


102

contractors who have been able to piggyback on our electronic data
transmission systems and our electronic remittance systems and so
forth.

Mr. SHays. Could we pursue that just a little bit? Because I have
a hard time. We are examining what we are doing with our auto-
mated system. Why can’t you tell me what a hospital gets?

Mr. VLADECK. I can tell you what it gets in the Medicare pro-
gram. I absolutely can.

Mr. SHays. How many weeks later?

Mr. VLADECK. I can tell you generally the next day, if you want
last year’s information. If you want current year’s information, I
can only tell you what they have accrued. I can’t tell you what they
will eventually be paid.

Mr. Suays. No, you can’t tell me what they are eventually going
to be paid. But bottom line is, when we have had our hearing, and
we will have a hearing on this, with all due respect, the system is
broken down. We have nine different units, nine different areas.
These areas all use different coding. They do not use the same cod-
ing. So when we bill from one district to another, from one area to
another, they don’t mean the same thing.

We could get into a big story about this one. It is interesting that
the two issues you are bringing up, home care, I am thinking dan-
ger zone. You are bringing up the automated system, and I think
the system is basically breaking down. We are having a postpone-
ment of when the new system gets on line. It is not keeping up to
schedule. I do not think that is anything to be too excited about.

Mr. VLADECK. I don’t know what that last issue is referring to,
sir. I would say that none of the invasions that have ever occurred
in the Medicare or Medicaid program have been perfect. But the
fact of the matter is that invasions everywhere are rarely perfect.
We could cite lots of State level or private sector invasions that in
the aggregate have done good things that there are problems with.
I think at this point it becomes just sort of a silly kind of debate.

Mr. Suays. Well, it is not silly. The one thing that is true is you
can’t be blamed for the system not working. That is the one thing
true. You are in charge; but you are in charge, in my judgment, of
a system almost impossible to operate. We spend so much. We have
such large billings. We have a disjointed system of keeping track.
We do not use the same codes. That is fact. That is not

Mr. VLADECK. I don’t know what you are referring to.

Mr. SuHays. You don’t know the fact that when we bill from area
to area that we use different codes?

Mr. VLADECK. We use the same codes, sir.

Mr. SHays. The computer system——

Mr. VLADECK. The computer system uses nine different sets of
software, that is correct, but the billing codes are the same.

Mr. SHays. Why the different sets of software?

Mr. VLADECK. Because we have not replaced—we have not put
a unified system in place yet.

Mr. SHays. Well, that is kind of where I am headed. This isn’t
the gist of the hearing, but it is just to give you a sense of where
my mind is.

The other area where I have this question mark, one of the chal-
lenges that we think we have with the system is, as you rightfully


118

BILLION CUT THROUGH INCREASED EFFICIENCY

AND MANAGED CARE APPROACHES. EVEN

STATES LIKE ARIZONA AND TENNESSEE, WHERE

THE ENTIRE MEDICAID POPULATION HAS BEEN

PLACED IN MANAGED CARE PROGRAMS, WILL

LOSE 10 TO 16 PERCENT OF THEIR FEDERAL

MEDICAID DOLLARS UNDER THE BUDGET

RECONCILIATION PLAN. THIS DECREASE IN

AVAILABLE FUNDS WILL FREE STATES TO

EITHER REDUCE THE QUALITY OF CARE

PROVIDED OR DECREASE THE NUMBER OF

PEOPLE SERVED BY MEDICAID. EITHER WAY,
7


65

Would not some of this problem also be true of health—home
health care that many—do they have to have already said they are
going to a nursing home or would not, in fact, many people who
would—for example, in our case, with my mom and my mother-in-
law, they have some resources. They desire to stay in their homes;
and as long as we don’t have options, we will work to keep them
in their homes. But you give us a home health care option, we may
tap into government programs that we wouldn’t have otherwise
tapped into. How do you do that type of balance?

Mr. PARRELLA. Well, in our home health—our waiver programs,
the individual has to meet the medical level of care determination
to be placed in a nursing facility.

In addition, we do require them to actually file an application for
admission to a nursing facility in order to be admitted to the home
care waiver program.

I think maybe where your question is going is would that provide
incentive to individuals who might otherwise elect to continue to
care for their family member and never would have explored the
option of going to a nursing facility to, indeed, file that application
because it would entitle them to the waiver services.

I think, under the current system, that’s an open question. I
think that as you move toward more of an integrated delivery
model, where you are looking at a system that doesn’t give the in-
centive one way or another financially, whether the person is at
home or in a nursing facility, some of that problem is alleviated.

I don’t know, John, whether you would agree with that.

Mr. PETRABORG. I think that that is the method that we would
use, and we need to do it in a way that takes advantage of and
doesn’t discourage that kind of personal and family responsibility.

Mr. Souber. If I can take one more?

Mr. Suays. Go ahead.

Mr. SoupER. In my generation, one of the biggest things—and
this is another politically explosive question—and that’s the drain
down of resources. It’s very tempting—as your parents have saved
whatever they can, they want to pass it to their children, to empty
out and say, OK, State take over. Do you see much of that in the
Medicaid area along the margins? Is that going to be a growing
problem?

Mr. PETRABORG. It’s a very hot political issue in Minnesota and
something, I think, that is of grave concern. The Minnesota Medic-
aid program has become the long-term care insurance program for
the vast majority of our State, and so there are serious discussions
in our legislature about different ways of either limiting asset
transfers in different ways or finding ways to make asset transfer
not necessary in terms of encouraging long-term care insurance
models that can be purchased earlier. But, again, these are things
that take time and almost a generational shift in attitudes, but we
need to start.

Mr. PaRRELLA. I think that it’s really difficult to quantify the ex-
tent to which the asset transfer issue is contributing cost to your
State, because you only know the ones that you find out about as
you are doing your investigations during the penalty period, and
there certainly are other asset transfers that occur that the State
is unable to detect.


71

Federal matching funds would increase as the State population
grew, as enrollment grew. There would not be a shift from the Fed-
eral Government to the State necessary to maintain coverage,
which we believe would in that instance clearly constitute an un-
funded mandate. In fact, what a block grant does in effect is trans-
fer all of the financial risk of operation of the Medicaid program
to the States who can be expected, under their obligations to bal-
ance their budget and meet competing priorities, to shift that risk
further downstream onto the poorest and most vulnerable members
of our society if they are not to incur significant additional costs,
as some of the later witnesses will expect.

Nonetheless, we believe that States ought to have considerably
more flexibility in operating their Medicaid programs. We have
been in almost continuous discussion with the National Governors
Association, the State Medicaid Directors Association, and other
representatives of State governments since this administration
began. They have made a number of proposals to us, and we have
incorporated a large number of them in the President’s proposal.

In light of the earlier discussion, I would particularly emphasize
three of those. First, the President’s proposal would eliminate the
so-called Boren amendment, the requirements associated with how
States pay institutional providers—hospitals and nursing homes—
and the legal liability that has evolved for States under that re-
quirement. We would provide States with substantially more flexi-
bility to develop a variety of managed care arrangements and to
mandate the participation of Medicaid enrollees in those networks,
and we would. make it substantially easier in administrative terms
for States to move a larger and larger share of their long-term care
systems, both for the elderly and the disabled, to community-based
services teams out of an institutional focus.

These can all be done while maintaining the safety net for every-
one who is currently eligible for coverage or who is likely to be eli-
gible in the future, and while constraining the rate of cost growth
for both the Federal Government and the States.

We believe it is possible to moderate the growth of costs in the
Medicaid program. We believe it can be done without jeopardizing
the guarantee of coverage as long as the basic financial partnership
between the Federal and State government remains in place and
the incentives on States forced to economize and seeking to econo-
mize are in the direction of greater efficiency or reductions in pay-
ments to providers, rather than reduction in coverage.

We believe that that is what the President’s proposal would
achieve and that it is necessary to continue in that vein in order
to protect this essential and irreplaceable safety net for the most
vulnerable members of our population.

I appreciate, again, the opportunity, Mr. Chairman, to appear. Of
course, I am happy to respond to any questions.

[The prepared statement of Mr. Vladeck follows:]


16

Given the expected cuts in Medicare for medical
education and the impact of an increasingly competitive
market, we have been concerned about the erosion of
this important economic infrastructure for our state.

Without adequate financial support for medical
education, we as a nation will witness a systematic
dismantling of the high quality medical care to which

we have all become accustomed.

a That’s why Governor Carlson is proposing the
creation of a Medical Education and Trust
Fund at the state level that will be financed
broadly across all payers and distributed to
teaching programs.

The support cannot end here. You at the federal level
must continue a similar financial commitment to
ongoing medical education. High quality medical care
and education must remain a priority.


160

Far from constituting an unfunded mandate, these features establish appropriate constraints on
federal spending while continuing to assure states the availability of sufficient federal funds to
meet their population’s need for insurance protection. At the same time, they demonstrate that
fiscal responsibility does not require the abandonment of social commitments. The combination
of flexibility and the per capita cap in the Administration proposal would promote efficiency in
pursuing the long-established and widely valued goal of the Medicaid program—insurance
protection for vulnerable populations.

In contrast, block grants that eliminate entitlements do not promote efficient
insurance protection; they eliminate Insurance coverage, The Conference Agreement
repealed the Medicaid program and replaced it with a block grant that eliminates fundamental
insurance guarantees, provides states insufficient funds to cover the population eligible under
current law, and leaves states at risk for recession, demographic change, and price increases.
This is not a proposal to promote flexibility or efficiency; it is an abdication of federal

responsibility to protect the nation’s most vulnerable populations,

The Conference Agreement would eliminate the fundamental elements of Medicaid as

insurance-legally enforceable national criteria for who is covered for what benefits. At the same
time, it would dramatically reduce (by 17 percent over seven years) the federal funds available to
provide that protection. In other words, states would have neither the obligation nor the ability to

sustain current insurance coverage.


99

more sophisticated, and certainly their professionalism of both
their legislators and their administrative agencies is enormously
greater than it was 30 years ago in a variety of ways. But | think
some of the continuing interest from the point of view of the Fed-
eral Government in these issues remains.

One last issue, if I might, and that tends, I think, to get a little
bit overlooked in this regard. We are talking—and it is one of the
odd things about sitting where I sit relative to these debates—we
are talking, as the chairman noted, about a considerable fraction
of the Federal budget here. We are talking this fiscal year, now
that we have a continuing resolution for these payments for this
part of the year, of just under $100 billion Federal. And what is
remarkable to me is the extent to which the Congress of the United
States is prepared to send out to the States $100 billion a year
with only one book’s worth of requirements and regulations, be-
cause the prudent administration——

Mr. Suays. This is the summary. It is a summary.

Mr. VLADECK [continuing]. The prudent administration of Fed-
eral funds—we are talking about a lot of money here, and a lot of
the limitations on State flexibility are there as limitations of Fed-
eral financial liability.

Anyway, that is a third observation relative to your question.

Mr. SoupeR. If I can make this comment, and then I will yield
back. I understand a lot of the historical examples that led to the
type of attitude that you said, and we still, obviously, in most
States have downstate versus upstate, or out-of-Chicago versus
Chicago, or you have all kinds of variations like that.

While I understand that in a sense of historic sense, I still do not
agree with the basic premise that just because something happened
before that it is necessarily going to happen again. I think that the
mere nature that the Federal Government was involved has
changed the debate in the States on any issue that the Federal
Government got involved, whether it is civil rights, education and
any other. The bottom line is that when all was said and done,
what you said was, is that you felt that the States would have
weaker standards and that they would—Governors and people in
those States would not protect their most vulnerable. Those are the
same people that elected this Congress and this President. When
you make a judgment about their willingness to defend, if that is
a problem in our society, it is a problem that is going to go through
the whole system, because you have in effect said the American
people in their States are not interested in protecting as much as
we are here in Washington. Even though you gave all the reasons
for it, that was your ultimate conclusion, that there is a danger in
doing that.

While I understand there is some risk and we have to watch the
funds—and it is not revenue sharing, it is block granting—so we
have the right, as long as we are raising the revenue, to watch
that, to put conditions in. I think, personally, they will exercise
their responsibility. I know that is a difference.

Mr. Suays. One of the astounding things for me was to come to
grips with this subcommittee overseeing HHS; and when it in-
cludes Social Security, we realized that the combined budget of
HHS and Social Security was larger than the gross domestic prod-


21

Crafting Minnesota’s Response:
Federal Reform Briefing
Medicaid

Fifth Edition
January 1996


50

Two issues intervened to change the original design. The first
was an ERISA challenge which sought to overturn the authority of
the state to collect an assessment against revenues derived from
ERISA plans. We ultimately were granted judicial relief on this
issue following the Supreme Court's decision in Travellers vs
Cuomo. However, in response to this challenge the assessment was
changed to a 6% sales tax and an 11% gross receipts tax
deposited in the general fund, with an annual appropriation to

the Department to make DSH payments back to the hospitals.

The second challenge arose from HCFA's interpretation of the 1992
federal legislation which limited the amount of taxes that states
could collect from providers and established the criteria for

taxes that could be considered truly redistributive and broad-

tien, states may only collect taxes

not exceed 25+ of the state share of Medicaid

ang financial penalties. HCFA has interpreted

include licensing fees for

ders w

do not participate

program, as well as assessments that fund state regulatory



95

Mr. SoupER. I don’t want to belabor an individual point. As you
know, we have been in touch with you and Indiana has been in
touch with you on their concern. I would rather use it as an illus-
trative question, that in this question of flexibility, we had a num-
ber of things that the earlier witnesses had raised, I will ask in
more detail.

I know that Mr. Parrella from Connecticut had said that he was
concerned about the second round of questions that came and de-
layed the program by about 4 or 5 months and their ability for
funding. In Indiana, the particular question relates to a number of
our urban hospitals where a separate hospital fee was assessed and
it is still being debated, as of a December meeting, I guess, for
1993 and 1994 reimbursement. Because the question was—is—if it
had been general broad-based revenue, it would have been reim-
bursable, but because it was a hospital tax, it was not.

For example, we have one hospital in Fort Wayne that mostly
takes care of the lower-income people. It seems to be rather a nar-
row definition. If the State had taken that money under their gen-
eral revenue fund and done it, it would have been eligible. But
since they did it a direct way, it was not.

Why would it be that narrow? Is it a financially driven concern
at the Federal level? It seems like an awful narrow thing to have
not granted a waiver over.

Mr. VLADECK. Mr. Souder, all I can tell you is that the particular
development and refinement of a variety of provider tax arrange-
ments, as well as other ways of raising disproportionate share
funds for hospitals, are really the cause of that spike in the Medic-
aid expenditures in the 1988 through 1991 period. As a result of
which, the previous administration proposed and had enacted legis-
lation to limit the ability of States to raise Medicaid dollars
through those tax arrangements. Frankly, sir——

Mr. Souper. I want to reinforce that because I was on Senator
Coats’ staff at the time, and we were going around with the Bush
administration as well.

Mr. VLADECK. It is a very complicated statute. The previous ad-
ministration, who also issued proposed regulations very late in
1992 to implement that statute—the States felt very strongly that
those regulations were too rigid and did not provide the States with
enough discretion. When this administration came into office, we
undertook to rewrite the regulations in a consultative process with
the National Governors Association, representing the States. It is
still a very complicated set of rules.

As the instance of Indiana illustrates, we are in the first genera-
tion of seeking to apply these very complicated rules to some very
complicated situations. We are trying to be as painstaking and as
careful as we can not to take money away from providers who de-
serve it when we can, appropriately. We do have this complicated
statute that we are obligated to enforce, and we are just trying to
work our way through it.

We would support—it is not, I don’t believe, in any of the—well,
obviously it is not relevant under a block grant. It is not in the
President’s bill. We would support some efforts to simplify that,
and in fact much of the need for the 1991 statute was supplanted
by the further limitations on disproportionate share payments en-


33

DEVELOPMENT AND IMPLEMENTATION TIME LINES

Because legislation has not been enacted that will transform the Medicaid Program at the federal
level, the proposals in this document will be discussed with the 1996 Minnesota Legislature with
the assumption that flexibility in administering Medicaid will be granted by Congress or that
federal approval of a §1115(a) waiver will permit implementation of certain aspects. The
overall time line for implementing the changes for families with children and adults without
children is January 1998. Most aspects of the proposal for the elderly and disabled call for the
Department to prepare a legislative proposal for the 1997 Minnesota Legislature after obtaining
substantive input from consumers, advocates, counties, tribes, providers, and legislators.

Minnesota Department of Human Services
12 January 1996


168

populations. In four cases, however. the relationship was sufficiently weak that WEFA
simply projected the historical trend in spending; these states are North Dakota, South
Carolina, Utah and Wyoming. This table shows the additional state revenues or program
cuts needed if the states are to meet their projected Medicaid expenditures.

Estimated Additional Costs Without Reform

Between 1995 and 2002, if no reforms are enacted that address the costs of
entitlements and the composition of covered groups, states will have to spend $688
billion of their own money on Medicaid. Total state spending over this period is
projected to be $1,700 billion, of which $1,011 billion will be supplied by the federal
government (if CBO’s forecasts of federal spending prove correct). The difference
between federal and state spending on Medicaid means that states will have to devote an
average of 8 percent of their non-federal revenues to the program. Among the hardest hit
states, Pennsylvania will have to devote 17 percent of its revenues to the health care

program.

As Chart | shows, the amount of state Medicaid payments alone steadily increases
between 1995 and 2002. In 1990, the states spent just $32 billion of their non-federal
funds on Medicaid. These unfunded payments are projected by our analysis to grow to
$69 billion by 1995 and $104 billion by 2002. In other words, the Medicaid amount paid
by the states will have increased by 225 percent over the twelve-year period between
1990 and 2002.

Chart 1
“Medicaid Expenses Paid With State Revenues, 1990-2002

Some individual states will be particularly hard hit. For example, California will
need to raise $18 billion in new revenues or in budget cuts to pay its part of Medicaid
growth between 1996 and 2002. Similarly, New York will need to raise $17.3 billion;
Florida, $12.9 billion; Pennsylvania, $11.6 billion; and Texas, $7.2 billion. If these states
choose to raise taxes to meet their Medicaid obligations, then California will have to
increase the average taxpayers bill by $246 per year, New York by $370; Florida by
$374; Pennsylvania by $362; and Texas by $177.

3


APPENDIX I

133

Population atfected

Expansion Mandate/option

‘Adoptive and foster children

Requires coverage even it Mandate
adoptionifoster agreement

was entered into in another

state.

‘OBRA 1986 (Omnibus Budget Reconciliation Act of 1986) (P.L. 99-500)

Pregnant women and infants

Creates naw optional ‘Option
ly needy group

far teeo wih coe

‘below povery line, Women

receive pregnancy-related
services only.

Pregnant women and infants

‘Alows assets test tobe
topped for this newly
defined category of
soot —

Pregnant wornen

sigoiy Upto aS dys
determined by
uated evden”

Pregnant women

Allows guarantee of
Continuous elgiiity
through postpartum period.

Children

‘Allows coverage up 10 age
5 i family income is below
Poverty line (phased in).

Infants and children

‘Option
‘Option
‘Option
Option
Mandate

Requires continuation of
those who

‘OBRA 1987 (Omnibus Budget Reconciliation Act ot 1987) (P-L. 100-203)

Pregnant women and infants

‘Allows coverage itfamily Option
income is below 185% of,
poverty line.

Children

‘Allows immediate extension Option
‘of OBRA 1986 coverage for
children up to age Sin

families with incomes up to

the poverty line.

Clarifies that states may Option
provide in-home services

‘er quattiod dsabiog

children.

Children

‘Allows coverage for
children aged §-7 up to
‘state AFDC level (phased in
by age).

‘Option

(continued)

APPENDIX I


WW

Caring for the most needy

There’s been a lot of talk recently concerning the
“entitlement” aspects of Medicaid. There has been
understandable concern that without Medicaid, there
would no longer be a safety net.

But the absence of Medicaid does not have to mean the
end of our commitment to providing a safety net for
certain populations.
a We believe a safety net must be maintained, but
that it should and can exist within the context of
the new system.

a We do not-let me repeat, we do not-need to
preserve Medicaid to guarantee access to
health care for our vulnerable citizens.

If given the flexibility, we can design a system that
provides a safety net and reflects our principles of
independence, efficiency and responsibility. 10


61

between Medicaid and Medicare, where Medicare has limited expo-
sure on the nursing home side but Medicaid picks up the full
brunt; Medicaid has limited exposure on the hospital side but Med-
icare picks up the brunt. So the two programs are sort of involved
in this dance where patients are sort of discharged from one level
of care to another. It doesn’t necessarily serve the interests of the
patient in any particular way, nor does it lead to terrific coordina-
tion of the benefits really.

Mr. PeTRAborc. Right.

Mr. PARRELLA. Because both programs have somewhat different
incentives right now financially.

Mr. PETRABORG. The same is true between those residentially
based programs, nursing home and hospitals, and in-home services
and, again, the dance between those two programs. So if we can
purchase a service that is defined around a health care outcome
that includes that whole range of services——

Mr. PARRELLA. That’s right.

Mr. PETRABORG [continuing]. We believe that the system will
move toward finding the most appropriate care for the person at
the best price.

Mr. Suays. OK. Mr. Souder, I welcome your questions.

I am going to come back and ask you some more.

And, Mr. Vladeck, we are going to have you on exactly at 1 p.m.
I appreciate you being here.

Mr. SoupeER. First, for both of you: Is the growth rate—you have
kind of alluded to this, but is the inflation rate in Medicare—not
the number of people going into the system but the inflation per
recipient or cost per recipient—going up at a faster rate than it is
at the private sector? I presume that’s what you are saying. Ap-
proximately, do you know what that rate is in Medicare? We have
heard 10 versus 2.

Mr. PARRELLA. Well, in Connecticut, if you average our rate of
increase overall in the program for the years 1991 to 1996, we
averaged in excess of 10 percent. Over the last couple of years, as
the managed care has started to come in and some of the other cost
containment measures, that rate is dropping, dropping rapidly. We
have pretty much cut that in half, but it’s still probably running
between 5 and 6 percent per year.

Mr. Souper. That’s not counting the growth in the population?

Mr. PaRRELLA. No. That’s just the cost per case. There were some
years where we were topping out over 15 percent per year. It is—
depending on the impact of legislation that would be coming down,
you would see a short-term increase.

Mr. PETRABORG. In Minnesota, we would have seen a similar ex-
perience. Our growth rate for acute care, for families and children,
has been pretty moderate, as have health care costs in general in
Minnesota for that population. Where the growth has occurred in
services for the disabled and for the elderly are where the provi-
sions of the Boren amendment have restricted our ability to control
that cost growth.

Mr. SOUDER. As we have battled through some of the arguments
here, we have had some internal tension between the more rural
States and some of the urban States. And as you look at these al-
ternative managed care and HMO type systems and so on, it’s one


130

and the federal government. Arizona's bidding process also reduced
the state's capitated payments to health plans at a time when other
states' per capita costs continued to grow. In addition, the state
has invested in data collection and analysis capabilities to
monitor cost, profitability, and patient encounter data from each
health plan.

But these implementation measures have taken time. Arizona
has been expanding and refining its approach since 1982 and, as
noted in earlier GAO reports, initially experienced a number of
difficulties. In particular, early attempts to contract out the
program's administration and data information systems failed.
Subsequently, the state assumed the responsibility for
administering the program and increased its direct oversight. The
maturity of Arizona's Medicaid program today--especially with its
oversight mechanisms--reflects the substantial preparation and
development efforts that the state invested over many years.

In contrast, Tennessee's Medicaid program has encountered a
number of difficulties. In an ambitious attempt to expand its
Medicaid program to include a large share of its uninsured, the
state shifted its entire program from fee-for-service to managed
care on January 1, 1994. The difficulties resulted in part from
the state's rapid implementation of the shift. Tennessee began
operating its statewide managed care program fewer than 9 months
after announcing the plan, despite virtually no experience with
managed care in its former Medicaid program and a limited private
managed care market compared to the rest of the country. As of the
program's “opening day," plans for contracting with provider
networks were incomplete, and many of the state's physicians had
not yet determined which networks, if any, they might join. Some
beneficiaries were initially required to choose a plan without
knowing which ones would include their physicians. Systems to
process bills were not fully developed, and some providers reported
slow or no payments for services during the first months of the
waiver. The availability of encounter data, which allow officials
to monitor access and quality, is not complete after almost 2 years
since program implementation.

Oregon began planning its current section 1115 waiver program,
also implemented in 1994, several years previously. It has
expanded coverage to over 100,000 new eligibles and is one of the
first states to integrate its disabled and elderly populations into
managed care. Early planning included holding community meetings
and consulting with physicians and hospitals in order to build
support from those providers who were likely to participate in the
managed care program. ‘The state also developed an array of
financial and quality safeguards, including limits on providers’
financial risk and client satisfaction and disenroliment surveys.
The state is in the process of refining an information system that
will effectively collect and analyze medical encounter data
important for assessing quality of care provided.

5


114

RECIPIENTS OF AID TO FAMILIES WITH
DEPENDENT CHILDREN (AFDC) AND MOST STATES
COVER THE NEEDY ELDERLY, BLIND, AND
DISABLED RECEIVING CASH ASSISTANCE UNDER
THE SUPPLEMENTAL SECURITY INCOME
PROGRAM (SSD.

TOTAL OUTLAYS FOR MEDICAID IN FY 95
WERE ABOUT $156 BILLION. FEDERAL OUTLAYS
WERE $89 BILLION; STATE OUTLAYS WERE AT $67
BILLION. CHILDREN AND ADULTS IN FAMILIES
WITH DEPENDENTS MAKE UP OVER 70 PERCENT

OF THE MEDICAID POPULATION BUT ACCOUNT
3


116

THAT THE STATE ENSURE COVERAGE FOR ONLY

THREE POPULATION GROUPS: FAMILIES WITH

INCOME UNDER 185% OF POVERTY THAT

INCLUDE A CHILD UNDER 19 OR A PREGNANT

WOMEN; LOW INCOME ELDERLY PERSONS OVER

65, AND LOW INCOME DISABLED PERSONS.

THE REFORMS INCLUDED IN THE BUDGET

RESOLUTION ALSO REDUCE DIFFERENCES IN

PAYMENTS TO STATES OVER A SEVEN YEAR

PERIOD. STATES WITH HIGHER THAN AVERAGE

MEDICAID EXPENDITURES LIKE MY HOME STATE

OF NEW YORK WILL BE INDEXED AT A LOWER
5


4

STATMENTS OF JOHN PETRABORG, DEPUTY COMMISSIONER,
MINNESOTA DEPARTMENT OF HUMAN SERVICES; AND
DAVID PARRELLA, MEDICAID DIRECTOR, CONNECTICUT DE-
PARTMENT OF SOCIAL SERVICES

Mr. Suays. John, why don’t you begin your testimony?

Mr. PETRABORG. Mr. Chairman and members of the committee,
thank you for this opportunity to share with you Minnesota’s vision
for reforming the Medicaid system.

Mr. SHays. You know what I am going to ask you to do—your
mike is the silver one. C-SPAN is the darker one. I think they pick
up fine. If you could talk into that silver mike.

Mr. PETRABORG. That better?

Mr. SHAyS. Yes. Talk nice and loud, if you will.

Mr. PETRABORG. All right. Thanks for this opportunity to discuss
Minnesota’s vision——

Mr. Suays. I don’t think your mike is on. We are going to wait
a second. Turn it up.

Those in the back of the room who cannot hear, we welcome you
here. If you can’t hear, raise your hand. I will ask our guests to
speak louder.

Mr. PETRABORG. Mr. Chairman, thanks for this opportunity to
share Minnesota’s vision for reforming Medicaid in the context of
this hearing on unfunded mandates.

As the various discussions continue, I want to assure you that
Governor Arne Carlson of Minnesota and his administration are
working hard to find ways to meet the needs of Minnesotans while
supporting the goal of a balanced Federal budget.

In Minnesota, we already have a number of market-based re-
forms under way that show how innovations in health care can
work. In fact, in Minnesota, contrary to what some people would
have you think, we have shown that managed care is high quality
care. We have shown that when people don’t have to worry about
their health insurance, they are more likely to get off welfare and
to get jobs. And we have shown that saving money doesn’t have to
come at the expense of our children.

In spite of our successes, we know we have just begun; and that’s
why Minnesota is wholeheartedly behind efforts here in Washing-
ton to create a better publicly funded health care system. As Con-
gress works to create that new system, we in Minnesota want to
make sure that States have the right balance of flexibility and
funding to achieve our ultimate goal, access to affordable, quality
health care for people in need.

When we talk about this balance between adequate funding and
flexibility, it is also critical that any mandates that come out of
Washington receive proper funding, and I will talk a little more
about that later.

First, the case for retiring Medicaid. Tinkering with the current
Medicaid system will provide, we believe, neither the broad flexibil-
ity needed nor funding that can sustain our goal of meeting the
needs to care for our citizens.

Medicaid has been altered in large and small ways for many
years, and the result is a system that’s difficult to administer. Even
experts find it difficult to understand the nuances of the system.


Medicaid Spending Distributions

(Sn millions}

summary

93

[7993 Summary Date

Eligibility Categories

Services [Mandatory optional [Totals
Mandatory| $47,885 [$12,052 | $59,937
optional | $23,681 | $26,358 | $50,039
rotals $71,566 | $38,410 | $109,976
Eligibility categories
Services [Mandatory Optional [Totals
Mandatory 43.5%] 11.0% 54.53]
lopt ional 21.5%] 24.0% 45.53]
Totals 65.18) 34.9%] 100.08]

994 Summary Data

Eligibility categories
Services [Mandatory Optional [Totals
IMandatory| $52,282 | $14,812 $67,093
optional $27,242 | $25,661 $52,903
Totals $79,523 [$40,473 | $119,996

Eligibility categories
‘Services |Nandatory optional [Totals
Mandatory 43.6% 12.3% 55.9%)
lOoptional 22.7% 21.4% 44.1%
Totals 66.33 33.7% 100.0%)

1995 Mid-Session Review estimates

Eligibility Categories
Services |Mandatory optional [Totals
IMandatory| $57,409 [$15,262 | $72,671
optional | $29,910 | $26,948 | $56,858
frotals $87,318 | $42,210 | $129,528
Eligibility categories
Services [Mandatory optional [Totals
Mandatory 44.3%] 11.88 56.18
lopt ional 23.1%| 20.88) 43.93
Totals 67.43] 32.6%] 100.08
Growth Rates 93.94 94.98
Mondatory/Mandotory 9% 98%
All other Optional 91% 65%

HCPA-PROTO Confidential

93:95 ACRG
9.5%
738%

DRAFT

Page 1


38

provider reimbursement, managed care, recipient cost sharing, and
provider taxes are part of a plea for greater flexibility for the
states to address issues related to the financing of health care
for the poor. Simply stated, 1f you are to give us less money,
you must give us the flexibility to operate programs that
incorporate the same features and innovations as the private
sector. And if we do receive less money, we must be able to
replace a net loss in federal support from whatever resources we

can legitimately tap at the state level.
At the end of my remarks I would like to suggest several key
elements of legislative reform which I feel are central to the

national debate on the future of the program.

a little background on the Connecticut Medicaid

fe currently serve over 300,000 recipients, one cut of

beyond

ens in our state. Connecticut goes we

the mandatery coverage of the AFDC and SSI populaticns. We also

coverage to the medicaliy needy, those individuals whe have

oF assets above the threshold for cash assistance but do

not nave resources to meet the cost of care. We also cover ail

children born after October 1, 1983 up to 185* of the federal

poverty limit.


158

participation is voluntary; guidelines aim to assure the intended use of federal funds,

‘Most important, these guidelines define Medicaid as an insurance program—that is, they
define the population that must or may be insured and specify the health and long-term care
benefits that must or may be covered, People who satisfy Medicaid eligibility eriteria have a
legally enforceable right to coverage for a defined set of benefits, That means that Medicaid
beneficiaries, like people with private insurance, know what services will be paid for when they

get sick.

States can decide whether or not they wish to participate in the Medicaid program. But if
they choose to participate, they are choosing to provide meaningful insurance protection to a.
defined population. Under current law, states already have considerable flexibility in satisfying
this requirement. The Health Care Financing Administration reports thet in 1993 only 38 percent
of total Medicaid spending is for populations and services that states are required (as distinct
from the option) to cover.

Legislation to reduce Medicaid spending must preserve Medicald as an insurance
program. The Administration's Medicaid proposal preserves Medicaid’s insurance protections,
while promoting greater efficiency in their pursuit, The proposal would provide states flexibility
in service delivery, specifically with respect to managed care and negotiation of provider
payment. On managed care, the proposal would eliminate the requirement that states seele
federal waivers in onder to contract for managed care for their beneficiaries. This change would

make it easier for states to expand the use of managed care, just as private employers are doing.


125

United States General Accounting Office.

GAO

Testimony

Before the Human Resources and Intergovernmental Relations
Subcommittee, Committee on Government Reform and
Oversight, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
‘Thursday, January 18, 1996

MEDICAID

Spending Pressures Spur
States Toward Program
Restructuring

Statement of William J. Scanlon, Director
Health Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-96-75,


100

uct of Canada. And here we are trying to regulate it. I think it is
humanly impossible for HCFA to take on this task.

I am going to concede a few points. One of the points I am going
to concede is that—and I am directly responsible because I am the
task force chairman of Medicare and Medicaid on the Committee
on the Budget. We earmarked savings numbers and then told the
authorizing committees: We would like you to allow the growth to
go to this point, not to this point.

The number we got from Medicare, in my judgment, works tre-
mendously well. I happen to believe that no increase in copayment,
deduction and so on, amount of money allowing choice and so on,
we would disagree with this. But where I concede to you is that
if any money were to be added, Medicare and Medicaid, it should
be in the Medicaid one. We allow a 7.2 percent growth in Medicare;
we do not allow for the same growth in Medicaid.

One of the points that I am going to parenthetically say to you
is that in the course of the President staking out his territory of
quote unquote protecting Medicare and Medicaid, what I hope
these negotiators put more money into the Medicaid than the Medi-
care, because I do not think we need to put more money into Medi-
care. Now we may disagree, but I just want to put that on the
record.

What I concede to you is that the number that I helped set, we
should have put more money into Medicaid, particularly in the out-
year.

Having said that, what I am wrestling with are a whole host of
problems here. I don’t think HCFA can do the job. That is why I
decided the first time you appeared in front of us, I could bring out
a litany of crazy things. We do not know how much hospitals are
paid. We don’t know why they are paid it. We make idiotic billing
mistakes of $16 ends up being $16,000. I mean, and on and on; we
bill men for giving birth. I mean, and on and on and on.

Now, I don’t blame you; I made that decision early on, that what
a setup. I think you know HCFA is the brunt of a lot of criticism.
My basic contention is that you can’t do the job, that it is humanly
impossible to regulate from the Federal level such, as you pointed
out, such a gigantic amount.

Now, where I can make a concession to you is that I do think
there has to be basic requirements. Now, the next issue, though,
is: Can we block grant it into basic requirements? I think we can.
Or do we still have a quote unquote, a capped entitlement or an
entitlement? I do not think we have to go the entitlement route
and I think we shouldn’t. So there is kind of where we—we had
disagreements on numbers and then we have ultimately a dis-
agreement on the program.

Can you describe to me some of the incentives that I have seen
come out of the Federal Government in Medicare and Medicaid, in-
centives, savings of programs money? Where do I see that incen-
tive?

Mr. VLADECK. Well, on Medicaid let me just say, Mr. Chairman,
that we try to operate the program in a way that the States do the
invading because the States run the program; we oversee it. And
we oversee the allocation of money.


41

costs in excess of the TEFRA increment over a seven year period.

In defending the TEFRA methodology established in federal law,
the state incurred costs for legal and consulting fees and many
hours of staff time while we were actively engaged in downsizing
our administration. There were injunctions granted and then
lifted to order the state to pay 100% of Medicare allowable
costs. In the end, after months of negotiations involving the
state, the hospitals, and the federal government, an agreement
was reached to settle the case at a cost of $34.6 million,
subject to ratification by the state legislature. It is a
scenario which is playing itself out in many states around the
country involving both inpatient and nursing facility rates. It
is the taxpayer who will pay the programmatic and administrative

costs to settle these disputes.

= of our Boren experience was related indirect!y to
my secend tepic: managed care. Like many states, by 1993

recognized that the rate of growth in the cost of

srvices was slowly consuming any chance of maintaining
our current benefit structure for a population of children and
families on assistance that had grown rapidly with the impact of

the recession and legislative initiatives to expand coverage. We