Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICAID PAYMENTS OF PREMIUMS


FOR EMPLOYER GROUP HEALTH


INSURANCE


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2W JUNE GIBBS BROWN


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OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program and management problems and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIG’S Office of Audit Services (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing-audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIG’S Office of Evaluation and Inspections (OEI) conducts short-term management and


program evaluations (called inspections) that focus on issues of concern to the Department,


the Congress, and the public. The findings and recommendations contained in these inspection


reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability,


and effectiveness of departmental programs.


OEI’S Atlanta Regional Office prepared this report under the direction of Jesse J. Flowers,


Regional Inspector General, and Christopher Koehler, Deputy Regional Inspector General.


Principal OEI staff included:


ATWINTA REGION HEADQUARTERS


Betty Apt, Project Leader Cathaleen Ahern


Joe Townsel Wm. Mark Krushat, SC.D.


Peggy Daniel 

Jacqueline Andrews 

For additional copies 

5022. 

of this report, please contact the Atlanta Regional Office at 404-331 -
EXECUTIVE SUMMARY 

PURPOSE 

To determine the extent State Medicaid agencies pay employer group health plan 

insurance premiums for Medicaid-eligible individuals. 

BACKGROUND 

Expenditures for Medicaid benefits have grown dramatically in recent years. From 

Calendar Year 1989 through 1991, Federal and State spending rose 49 percent, 

increasing from $59 billion to $88 billion. 

The rate of growth in Medicaid expenditures is a major concern to both Federal and 

State governments. Both areseeking ways to curb spending. Onemethodis to pay 

private health insurance premiums for Medicaid-eligible individuals. Under this 

method, private insurance becomes the primary payer for medical services and 

Medicaid becomes the secondary payer. 

J%rcha.n”ngEmployer Group Health Plan Insurance for Medicaid Rectpienfi 

Effective January 1, 1991, Section 1906 of the Social Security Act mandated State 

Medicaid agencies, when cost effective, to pay premiums for employer group health 

plan (EGHP) insurance for Medicaid-eligible individuals. Individuals must enroll in 

the EGHP as a condition of Medicaid eligibility when a State determines it is cost 

effective for them to do so. Section 1906 also requires that States use EGHP fee 

schedules rather than Medicaid fee schedules when paying deductibles and 

coinsurance. 

We surveyed the 50 States and District of Columbia to determine State practices for 

paying EGHP premiums. We completed our data collection April 30, 1993. 

FINDINGS 

Most States have not purchased EGHP insurance for iWedicaid-eligMe individual 

� Eighteen States had paid EGHP premiums for Medicaid-eligible individuals. 

�	 Only 1 of the 18 States that paid EGHP premiums also used the EGHP fee 

schedule to pay deductibles and coinsurance. 

� One State had begun a pilot program, but had not yet purchased insurance. 

�	 Thirty States had not implemented Section 1906 at all, and two States did not 

respond to our survey. 

1 
Substantial savings rex.dt from pu~hasing EGHP insurance for Medicaid-eli@le 

individual 

Seven of the 18 States that purchased EGHP insurance had conducted cost/benefit


analyses. Officials from five of the seven reported a savings of about $2.7 million


resulting from private insurance companies having paid for medical care that


otherwise would have been paid by Medicaid. Of the remaining two States, one


reported saving $24 for every $1 spent, and the other saved about $12 for every $1


spent.


We estimated that $32,000,000 in Federal and State Medicaid funds could be saved


annually if all States purchased EGHP insurance for Medicaid-eligible individuals


when cost effective to do so. We based our estimate on cost/benefit figures provided


by four of the seven States that had conducted cost/benefit analyses. Data from the


other three States were not complete enough to use in our calculations. We


calculated a weighted average savings per person per year for the four States and


determined the four States’ ratio of savings to Medicaid recipients. We then used that


ratio to compute potential savings.


Compliance with current legidation could reduce potential savings resulting from EGHP 

insurance 

Seventeen of the 18 States that purchased EGHP insurance for Medicaid-eligible 

individuals did not use the EGHP fee schedule to pay deductibles and coinsurance. 

Instead, they used their established Medicaid fee schedules. They did so because (1) 

the EGHP fee schedule is higher (more costly to Medicaid) than State Medicaid fee 

schedules, and (2) using the EGHP fee schedule would require unnecessarily high 

administrative expense. 

RECOMMENDATIONS 

We have two recommendations that could increase cost savings from EGHP, 

1.	 The Health Care Financing Administration (HCFA) should continue to strongly 

support States implementing Section 1906 of the Social Security Act. HCFA 

can do so by transferring technology horn States that have developed systems 

and procedures for 1906 programs to States without such systems and 

procedures. 

2.	 HCFA should propose legislation that allows States to pay EGHP deductl%les 

and coinsurance using Medicaid fee schedules rather than EGHP fee schedules. 

ii 
AGENCY COMMENTS 

The Assistant Secretary for Management and Budget (ASMB) and the HCFA 

Administrator commented on our draft report. 

ASMB remarked that HCFA’S Office of the Actuary estimated $230 million in 

Medicaid savings in 1994 if States purchased EGHP insurance for eligible individuals 

when cost effective. The methodologies used for HCFA’S estimated savings and our 

estimate differ, and both have limitations. Our estimate is based on actual experiences 

of four States. It is possible that those States are different in some important ways 

from the rest of the nation. HCFA’S estimate is based on census data and certain 

assumptions about the extent to which Medicaid recipients have access to EGHP 

insurance that is cost effective for States to purchase. Therefore, HCFA’S estimate 

represents theoretical savings. 

HCFA agreed with our recommendation that they should continue to strongly support 

States’ implementation of Section 1906. However, they deferred comment on our 

recommendation that HCFA should propose a legislative change, noting that the 

requirements of Section 1906 of the Social Security Act may change under the 

proposed health reform plans Congress is presently considering. We believe HCFA 

should closely watch legislative activity, and at the appropriate opportunity, propose 

the necessary legislative change if it is not superseded by the broader legislative 

reform. Revising legislation would likely be an incentive for States to implement an 

EGHP program. 

... 

111 
TABLE OF CONTENTS


EXECUTIVE SUMMARY 

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

FINDINGS 

Few States Purchased EGHP Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . ...4 

Substantial Savings Resulted from Purchasing EGHP Insurance . . . . . . . . . . . . 6 

Current Legislation Could Reduce Potential Savings . . . . . . . . . . . . . . . . . . . . 8 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 

AGENCY COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...11 

TABLE 

1. States Paying Private Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . ..4 

APPENDICES 

Profile of States Paying Premiums for EGHP . . . . . . . . . . . . . . . . . . . . . . . . A-1 

Projected Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. B-1 

Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. C-1 
INTRODUCTION


PURPOSE 

To determine the extent State Medicaid agencies pay employer group healths plan 

insurance premiums for Medicaid-eligible individuals. 

BACKGROUND 

Medicaid &ogram 

The Medicaid program, authorized by Title XIX of the Social Security Act, provides


health care coverage for specified individuals who have low incomes and few assets.


States administer the Medicaid program under Federal laws and guidelines.


Generally, States pay health care providers who treat and provide care to Medicaid-


eligible individuals. States set their own fee schedule, or payment rate, for medical


services provided to Medicaid-eligible individuals. Health care providers who accept


Medicaid-eligible patients agree to treat them for the rate established by a State.


The Federal government pays a percentage of Medicaid benefits, based on a State’s


per capita income. Generally, poorer States receive a larger Federal contribution than


affluent States. In Fiscal Year 1993, the Federal share ranged from 50 percent to 79


percent. Within the Department of Health and Human Services, the Health Care


Financing Administration (HCFA) has Federal responsibility for Medicaid.


Concern Over Medicaid Cosb 

Expenditures for Medicaid benefits have grown dramatically in recent years. From 

Calendar Year 1988 through 1991, Federal and State spending rose 49 percent, 

increasing from $59 billion to $88 billion.l 

The rate of growth in Medicaid expenditures is a major concern to both Federal and 

State governments. Both are seeking ways to curb spending. One method is to pay 

private health insurance premiums for Medicaid-eligible individuals. Under this 

method, private insurance becomes the primary payer for medical services and 

Medicaid becomes the secondary payer. 

‘Health Care Financing Administration, HCE4 1992 Statistics, September 1992 

1 
Purchast”ng Wvate Iksurance for Medicaid Reapients 

Two sections of the Social Security Act allow States to use Medicaid funds to pay 

private insurance premiums for Medicaid-eligiile individuals. 

For several years, Section 1905(a) of the Social Security Act has allowed States to use 

Medicaid funds to pay a Medicaid recipient’s private insurance premiums. States may 

choose this option when a Medicaid-eligible individual is expected to have high 

medical costs. When States choose this option, private insurance pays for the majority 

of medical care, and Medicaid pays the amount that exceeds the third party’s liability 

up to the Medicaid rate. States use their established Medicaid fee schedule to 

determine the amount they will pay toward the difference. 

The Omnibus Budget Reconciliation Act of 1990 established Section 1906 of the 

Social Security Act. Effective January 1, 1991, Section 1906 required State Medicaid 

agencies, when cost effective, to pay premiums, deductibles and coinsurance for 

employer group health plan (EGHP) insurance for Medicaid-eligible individuals. 

Individuals must enroll in an EGHP as a condition of Medicaid eligibility when a State 

determines it is cost effective for them to do so. When a non-Medicaid-eligible family 

member must be enrolled in an EGHP in order for the Medicaid-eligible member to 

receive coverage, the State must pay the premiums (not deductibles and coinsurance) 

for the non-eligible member. Section 1906 also required that States use an EGHP fee 

schedule rather than their established Medicaid fee schedule when paying deductibles 

and coinsurance. 

States still have the option of following the payment guidelines of Section 1905(a) and 

pay premiums for insurance other than EGHP--for example, Medicare supplements 

and cancer policies. States may pay EGHP premiums and use the Section 1905(a) 

payment guidelines if they have determined it is not cost effective to use Section 1906 

guidelines. 

tirchasihg l?n”vate Ikwrance For Non-Medicaid Recipients 

A third part of the Social Security Act, Section 1902, allowed States to use Medicaid 

funds to pay EGHP premiums for non-Medicaid-eli@de individuals. 

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 required 

employers to provide individuals an opportunity to continue their group health 

insurance when they leave employment or reduce hours of employment. Under 

Section 1902, States can pay EGHP insurance remiums--but not deductibles and 

coinsurance--for certain low income individuals 1?when they consider it cost effective. 

States may use this option to purchase EGHP insurance for individuals who (1) have 

21ndividuals who are not eligible for Medicaid, but have incomes below the poverty level and assets 

less than twice the maximum allowed for Supplemental Security Income (SS1) eligibility. 

2 
health problems that are expensive to treat, and (2) are likely to become Medicaideligible in the future. 

SCOPE 

This report focuses on the extent that State Medicaid agencies (1) purchase EGHP 

insurance for Medicaid-eligible individuals when cost effective to do so, and (2) pay 

deductibles and coinsurance at the EGHP rate. We surveyed all 50 States and the 

District of Columbia to identify any private insurance States purchased with Medicaid 

funds in State Fiscal Year (FY) 1992. This report reflects what States told us they 

were doing as of April 30, 1993. We did not conduct a compliance review. 

METHODOLOGY 

We mailed a standardized questionnaire to all 51 jurisdictions on July 15, 1992. A 

total of 49 States returned completed questionnaires by December 1992. As needed, 

we conducted telephone interviews with State Medicaid staffs to obtain clarification 

and elaboration on responses to the mailed questionnaire. Florida and Ohio did not 

respond to the survey. 

To review State program operations, we visited two State agencies that reported they 

had implemented Section 1906. One State, Iowa, implemented the program in July 

1991. The other State, New York, implemented a program making it mandatory to 

pay insurance premiums in 1982--nine years prior to the enactment of Section 1906. 

We interviewed staffs from HCFA and the American Public Welfare Association 

(APWA) to get their opinion on State implementation of Section 1906. APWA is an 

advocacy group representing State welfare and Medicaid agencies. 

We conducted this inspection in accordance with the Quali~ Standards for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

3For convenience in summarizing survey results, we counted the District of Columbia as a 51st 

State. 

3

FINDINGS


MOST STATES HAVE NOT PURCHASED EGHP INSURANCE FOR 

MEDICAID-ELIGIBLE INDIVIDUALS 

Section 19060fthe Social Security Act required State Medicaid agencies, when cost 

effective, to pay (1) EGHP premiums, and (2) deductibles and coinsurance using 

EGHP fee schedules. 

�	 Eighteen States paid EGHP insurance premiums for Medicaid-eligible 

individuals. One other State had implemented a pilot EGHP program, but had 

not paid any premiums (see Table lj. Appendix ‘A shows a piofiie of each of 

the 19 States. 

�	 Only 1 of the 18 States that paid EGHP insurance premiums also used the 

EGHP fee schedule to pay deductibles and coinsurance. The other 17 States 

used their Medicaid fee schedules when paying coinsurance and deductibles. 

Officials from 2 of the 17 States told us that they will pay deductibles and 

coinsurance at the EGHP rate if a provider requests it. However, at the time 

of our study no providers had done so. 

�	 Thirty States had not implemented Section 1906 

respond to our survey. 

TABLE 1


at all, and two States did not 

PREMIUMS 

Sz’rrE MEDICAID 

RwIpml 

0regon3 1257 

S. Carolina3 43 

S. Dakota 1 

Tennessee 5 

Vermon# 20 

Washington 199 

STATES 

SZAZZ? MEDIG41D 

mwpm~ 

Alabama 2 

Colorado 50 

Connecticut 29 

Idaho2 115 

Iowa3 1417 

Minnesota 3000 

PAYING EGHP 

SZAZE 

Montana3


Nebraska


Nevada


N. Hampshire-y


New Jers#


New Yorl$


INSURANCE 

MEDICALD 

RECIPIEJ@ 

202


40


5


33


77


20,000


lApprom”matenumber of Medicaid individuals covered under Section 1906. Virginiahas an EGHP pi[otprogram 

underway. We excluded Virginiaji-om the table becausethe State had not yet begunpayingpremiums at the time 

thk report wm writ~en. 

II2Statethat routinelypays deductiblesand coinsuranceusingEGHP fee schedules. 

3Statesthat also pay insurancepremiums under Section 1905(a). Datafi-om New Jersey,New York and South 

Carolina did not distinguishnumber of individuals coveredby Sections 1905(a) and 1906. 

4

7he Extent of EGHPInsurance Coverage Varied Among States 

As shown by Table 1, the number of individuals for whom States paid EGHP varied 

widely among States. 

Many factors can contribute to the variation in purchasing EGHP insurance among 

States. For example, State financial condition and commitment to the EGHP program 

could partly account for the differences among States. While we did not compare one 

State to another in terms of providing EGHP coverage, we observed three factors that 

partly accounted for extent of EGHP coverage provided in a given State. 

�	 Date of Implementation - At the time of our survey, most States had operated 

their 1906 programs less than two years. To start programs, States usually pay 

premiums for only a few individuals. As problems are identified and solved, 

States begin purchasing insurance for more individuals. Thus, States with older 

programs usually had more individuals included. 

�	 Dem-ee of Automation - States that have computer technology to perform 

functions such as determining cost effectiveness have larger EGHP caseloads 

than States that perform such functions manually. 

�	 Dem-ee of Tar~etinR Cases - Some States target EGHP premium payments only 

for individuals they know will have high medical expenses, such as pregnant 

women. Other States determine cost effectiveness of purchasing EGHP for all 

individuals who are entitled to EGHP coverage. 

Reasons for Not Purchm”ng EGHP Insurance 

Officials in 18 of the 30 States4 (60 percent) that had not purchased EGHP insurance 

and paid deductibles and coinsurance as required by Section 1906 said they did not do 

so because of the high administrative costs and lack of resources. 

To illustrate, to purchase EGHP insurance and pay deductibles and coinsurance, a 

State must first determine that it is cost effective to do so for each potentially eligible 

person. Several State officials expressed particular concern over this requirement. 

They said they did not have resources to obtain automated systems for determining 

cost effectiveness. Further, doing so manually is very labor intensive. At the time of 

our inspection, only six of the 30 States said they had needed automation technology 

to determine cost effectiveness of purchasing EGHP. 

To determine cost effectiveness of purchasing EGHP, a State must compare the cost 

and potential benefits of purchasing EGHP to the average Medicaid cost for a person 

who had characteristics (e.g., age, gender, class of assistance) similar to an individual 

4Excludes two States that did not respond to our survey. 

5 
who would be entitled to EGHP. These calculations sometimes include examining the 

medical needs of specific individuals which may require reviewing their medical 

records and previous insurance claims. This analysis indicates the potential of a State 

Medicaid program to save money by purchasing EGHP insurance for a specific 

individual. 

State officials also cited several other cost and resource needs that have partly 

prevented their implementation of an EGHP program. They noted that additional 

staff and system resources would be needed to 

� pay premiums to insurance companies, 

� pay premiums to individuals when premiums are withheld from wages, 

�	 pay premiums for non-Medicaid-eligible individuals in order to enroll Medicaideligible family members, 

� update Medicaid recipient files, and 

�	 redetermine cost effectiveness of EGHP when premium and fee schedules 

change. 

HCFA is aware that States are experiencing such problems implementing EGHP 

programs. To assist States in implementation, HCFA, in conjunction with APWA, 

conducted a workshop on Section 1906 at the 1991 National Medicaid Management 

Information System (MMIS) / Third Party Liability (TPL) Conference. The 1993 

National Conference included three workshops in which five States that have 

implemented EGHP programs shared their experiences. In 1992, HCFA regional 

offices conducted conferences for the States in their respective regions. Section 1906 

was an agenda topic at each regional conference. In addition, HCFA’S “TPL Trends” 

newsletter highlighted Iowa’s and Idaho’s EGHP programs in the September 1992 

issue. HCFA continues to provide technical assistance to States on an ongoing basis 

and is monitoring State performance through System Performance Reviews and 

Management Reviews. 

SUBSTANTIAL SAVINGS RESULT FROM PURCHASING EGHP INSURANCE 

FOR MEDICAID-ELIGIBLE INDIVIDUALS 

Officials from the 18 States that had purchased EGHP insurance for Medicaid-eligible 

individuals said they had realized substantial savings. The savings resulted because 

private insurance companies now pay for medical care that otherwise would have been 

paid by Medicaid. Generally, the difference between what Medicaid would have paid 

for medical care and what it did pay in EGHP insurance premiums is considered a 

savings to the Medicaid program. 

6

Repotied Savings by States with EGHP programs 

Seven of the 18 States that purchased EGHP insurance for Medicaid-eligible


individuals had conducted cost/benefit analyses of their programs. Officials from five


of the seven States reported about $2.7 million in savings during Fiscal Year 1992.


The remaining two States had not computed total savings, but they reported


substantial cost benefits from purchasing EGHP insurance for Medicaid-eligible


individuals. One reported saving $24 for every $1 spent, and the other about $12 for


every $1 spent.


Other States had not completed cost/benefit analyses, but they provided anecdotal


examples indicating substantial savings. One State Medicaid official, for example, was


in process of completing a cost/benefit analyses. This official had already identified


one individual for whom the State paid EGHP insurance and saved $97,000. This


savings alone almost equaled the State’s total investment in EGHP insurance.


Potential Savings Resulting jiom a Nationwide EGHP I?rogram 

We estimated that $32 million in Federal and State Medicaid funds could be saved


annually if all States purchased EGHP insurance for Medicaid-eligible individuals


when cost effective to do so. (The 90 percent confidence interval for our nationwide


estimate of savings is $15,736,000 to $48,816,000.) We based our estimate on the


cost/benefit figures provided by four of the seven States that had completed cost/


benefit analyses. We did not include the cost/benefit studies of the other three States


in our analyses because they did not have adequate information. Specifically, they did


not have the number of months that they had purchased EGHP per individual. Thus,


we could not use their EGHP experience in our savings calculation.


our estimate of $32 million is a much lower estimate than the estimate prepared by


the HCFA Office of the Actuary. HCFA estimated that $230 million savings would


result in 1994 from purchasing EGHP insurance. The methodologies used for HCFA’S


estimated savings and our estimate differ, and both have limitations. Our estimate is


based on actual experiences in four States. It is possible that those States are


different in some important ways from the rest of the nation. HCFA’S estimate is


based on census data and certain assumptions about the extent to which Medicaid


recipients have access to EGHP insurance that is cost effective for States to purchase.


Appendix B contains (1) our methodology and assumptions for estimating the savings


that would result from a nationwide EGHP program, and (2) a short description of


the methods HCFA used to determine savings.


7

COMPLIANCE WITH CURRENT LEGISLATION COULD REDUCE 

POTENTIAL SAVINGS RESULTING FROM EGHP INSURANCE 

Currently, Section 1906 of the Social Security Act requires that when cost effective, 

States purchase EGHP insurance for Medicaid-eligible individuals and use an EGHP 

fee schedule to pay deductibles and coinsurance. However, 17 of the 18 States that 

purchased EGHP insurance for Medicaid-eligible individuals in their States did not use 

the EGHP fee schedule as required to pay deductibles and coinsurance. Instead, they 

used their established Medicaid fee schedules. Thev did so because (1) the EGHP fee .�

schedule is higher (more costly to Medicaid) than State Medicaid fee’ s~hedules, and 

(2) using the EGHP fee schedule would require unnecessarily high administrative 

expense. 

The following hypothetical example shows the difference in Medicaid cost sharing 

obligations using an EGHP fee schedule and a Medicaid fee schedule. Further, it 

shows that using the required EGHP fee schedule could reduce potential savings 

resulting from purchasing EGHP insurance for Medicaid-eligible individuals. 

A medical service costs $100. The EGHP allows $100 for the service and 

pays 80 percent ($80). The State’s Medicaid fee schedule allows $90 for 

the service. 

Using the EGHP’s fee schedule, ~edicaidk payment for the coinsurance 

would be $20. 

$100 Allowed by EGHP fee schedule 

-~ Paid by Insurance 

$20 Medicaid’s Payment for coinsurance 

Using the Medicaid fee schedule, Medicaidk payment for the coinsurance 

would be $10. 

$90 Allowed by A4edicaid’s fee schedule 

-& Paid by Insurance 

$10 Medicaid’s Payment for Coinsurance 

Although this hypothetical example illustrates a Medicaid savings of $10, State officials 

reported much greater differences usually exist between the Medicaid and EGHP fee 

schedules. Frequently when using the Medicaid fee schedule, Medicaid does not have 

any cost sharing obligation. This situation results because the amount paid by the 

EGHP insurance is sometimes more than the amount allowed by a State Medicaid fee 

schedule. 

8

State officials told us the administrative costs of using an EGHP fee schedule to pay 

claims for deductibles and coinsurance is prohibitive because those claims must be 

paid manually. States said they cannot simply add EGHP fee schedules to their 

automated systems. State systems are designed for the State Medicaid fee schedule. 

Those systems will not accommodate EGHP fee schedules which vary by plan. There 

is no single EGHP fee schedule at which to program State systems. It is possible for 

each EGHP policy to have a different fee schedule. Therefore, a State like Minnesota 

may need a different automated program for each policy held by the 3000 recipients 

enrolled in EGHPs. If the State did not have an automated system to process EGHP 

claims for deductibles and coinsurance, staff would have to process EGHP claims 

manually. 

9

RECOMMENDATIONS


States are struggling to develop ways to curb the escalating costs of Medicaid benefits. 

Section 1906 programs have produced savings for those States that have implemented 

them; however, 170f those 18 States are paying deductibles and coinsurance using 

Medicaid fee schedules. If States hadtobear theadministrative costs ofusing EGHP 

feeschedules, thesavings would be reduced. Thecosts ofstaying abreast of changes 

in EGHP fee schedules and paying deductibles and coinsurance manually are 

prohibitive. 

Further, using EGHP fee schedules could create inequitable treatment among 

Medicaid recipients. Higher payments would be made for those recipients for whom 

States pay premiums than for other Medicaid recipients. Physicians are likely to 

prefer treating Medicaid recipients for whom States are paying EGHP premiums to 

get the higher payment. This could limit the choice of providers available to other 

Medicaid recipients. 

As more States implement and expand 1906 programs, greater Medicaid savings will 

be realized. We have two recommendations which will help accomplish this objective. 

1.	 HCFA should continue to strongly support States implementing Section 1906 of 

the Social Security Act. They can do so by transferring technology from States 

that have developed systems and procedures for 1906 programs to States 

without such systems and procedures. 

2.	 HCFA should propose legislation that allows States to pay EGHP deductibles 

and coinsurance using Medicaid fee schedules rather than EGHP fee schedules. 

10

AGENCY COMMENTS


The Assistant Secretary for Management and Budget (ASMB) and the HCFA 

Administrator commented on our draft report. Appendix C shows the full text of their 

comments. 

ASMB remarked that HCFA’S Office of Actuary estimated much larger Medicaid 

savings than we did if States purchased EGHP insurance for eligible individuals when 

cost effective. We compared HCFA’S methodology for estimating savings to the 

methodology we used. Both methods had limitations. We revised our draft report to 

show both HCFA’S and our estimates and include a comparison of the two 

methodologies. (See page 7 and appendix B.) 

HCFA agreed with our recommendation that they should continue to strongly support 

States’ implementation of Section 1906. However, they deferred comment on our 

recommendation that HCFA should propose a legislative change, citing that the 

requirements of Section 1906 of the Social Security Act may change under the 

proposed health reform plans Congress is presently considering. We believe HCFA 

should closely watch legislative activity, and at the appropriate opportunity, propose 

the necessary legislative change if it is not superseded by the broader legislative 

reform. Revising legislation would likely be an incentive for States to implement an 

EGHP program. 

In response to HCFA’S technical comments, we made appropriate revisions to the 

report. 

11

APPENDIX A


PROFILE OF STATES PAYING PREMIUMS FOR EGHP 

As of April 30, 1993 

STATE LENGTH OF DETERMINING COST EFFECI’IVEITES!% 

(Approx. No. In TIME WITH BENEFTT 

1906 Program) PROGRAM HOW? BY WHOM? FOR? STUDY 

Afabama (2) 2 Years Manually State Office Recipients Yes 

Colorado (50) 2 Years Computer & State Office Recipients Yes 

Manually 

Connecticut (29) 3 Years Manually State Office Applicants & No 

Recipients 

Idaho (115) 2 Years Computer & State Office Applicants & No 

Manually Recipients 

Iowa (1417) 3 Years Computer & State Office Recipients Planned 

Manually 

Minnesota (3000) 3 Years Manually Local & Applicants & Yes 

State Offices Recipients 

Montana (202) 2 Years Manually State Office Applicants & Yes 

Recipients 

Nebraska (40) 2 Years Computer & State Office Applicants & No 

Manually Recipients 

Nevada (5) 2 Years Manually State Office Recipients No 

New Hampshire 1 Year Manually Local & Recipients Yes 

(33) State Offices 

New Jersey (77) 2 Years Manually State Office Applicants & Yes 

Recipients 

New York (20,000) 3 Years* Computer & Local Applicants & No 

Manually Offices Recipients 

Oregon (1257) 2 Years Manually Local & Recipients No 

State Offices 

South Carolina (43) 2 Years Manually State Office Applicants & Yes 

Recipients 

South Dakota (1) 2 Years Manually State Office Recipients No 

Tennessee (5) 2 Years Manually State Office Recipients No 

Vermont (20) Over 2 Yrs. Manually State Office Recipients No 

Virginia Piloting Program in Two Counties - All Procedures Not Yet Developed 

Washington (199) Over 3 Yrs. Computer & State Office Applicants & No 

Manually Recipients 

*New York has had a State program making it mandatory to pay EGHP premiums since 1982. 

A-1

--

--

APPENDIX B


PROJECllZD SAVINGS IF ALL STATES PURCHASE AVAILABLE EMPLOYER 

GROUP HEALTH PIAN INSUR4NCE FOR MEDICAID-ELIGIBLE 

INDIVIDUALS 

OIG Methodolo~ 

Introduction 

We estimated that $32,276,000 in Federal and State Medicaid funds could be saved 

annually if all States purchased employer group health plan (EGHP) insurance for 

Medicaid-eligible individuals when cost effective to do so. This figure includes the 

amount States with 1906 programs are currently saving. We based our estimate on a 

weighted average savings of $22,168 per person per year in four States. 

Methods and Resulti 

Using documentation furnished by Alabama, Colorado, New Jersey, and South 

Carolina, we estimated a dollar savings attributable to EGHP enrollment on a per 

person per year basis. Many Medicaid recipients are enrolled for periods of less than 

one year. Thus, we converted the data to a standard rate per person year for 

comparison purposes. The following table presents the data we used. 

STATE MEDICAID MONTHS ES’lTMATED PER PERSON 

REcrPIEN’N COVERAGE SAVINGS PER YEAR 

II Colorado I 50 I 145 I $104,612 I $8,643 II 

New Jersey 66 467 $1,300,000 $33,405 

S. Carolina 43 237 $395,751 $20,038 

Alabama 2 34 $100,000 $35,294 

The unweighed average of the savings per person per year is $24,345 (90 percent 

confidence interval $14,083 to $34,606). Using the number of recipients per State, 

the weighted average savings per person per year is $22,168 (90 percent confidence 

interval $18,222 to $26,114). We feel a weighted average, especially since it is more 

conservative, is more appropriate than a simple average due to the wide distribution 

of the number of recipients in the four States. (The two Alabama recipients represent 

only one percent of the weighted data.) 

Each of the States included in our analysis showed positive savings under their 

respective EGHP programs. However, the data furnished by the States showed 

B-1 
--

significant variation, indicating that only certain segments of their respective Medicaid 

populations had potential for EGHP enrollment. 

The Health Care Financing Administration’s Medicaid Bureau furnished data on the 

number of full year and part year recipients and benefit payments for FY 1992. We 

converted that data to person years of experience nationally and for the four States we 

used as a basis for our analyses. We assumed that the savings the four States reported 

to us represented all of the savings they achieved for one full fiscal year. We further 

assumed that the same level of savings could be achieved nationwide as were achieved 

in the average of the four States if all States had an EGHP program. 

The total benefit payments for FY 1992 were $91.48 billion for 27,754,493 person 

years of Medicaid experience. The four States included in our analyses represented 

$5.82 billion in payments and 1,634,097 person years experience. Using ratio estimates 

of the savings per person years experience, we calculated that $32,276,000 (90 percent 

confidence interval $15,736,000 to $48,816,000) might be saved by the Medicaid 

program should a similar EGHP program be instituted nationwide. 

Conclusk”on 

Because of the variability in the number of Medicaid recipients in the four States, the 

precision estimate of our national savings projection is about 50 percent. Potentially 

the four States represent a biased subset of the Medicaid population. However, we 

believe our analyses provide a reliable estimate of potential savings in Medicaid 

through the EGHP program. 

HCFA Methodolo~ 

HCFA’S estimate of $230 million is based on census data and certain assumptions


about the extent to which Medicaid recipients have access to EGHP insurance that is


cost effective for States to purchase. Therefore, HCFA’S estimate represents


theoretical savings.


At our request, HCFA’S Office of Actuary provided the following description of the


methodology for estimating Medicaid savings.


Data from the Current Population Survey (CPS) and National Medical


Expenditure Survey (NMES) were used to estimate the fraction of


Medicaid recipients having access to employer-sponsored insurance


(ESI) but not currently enrolled in it: about 3 percent for children and


one-half percent for adults (including the disabled). We [HCFA]


B-2

assumed that about 75 percent of these individuals would be subject to 

the group health enrollment requirements. 

Other major assumptions include the following. We [HCFA] assumed 

that ESI premium rates are based on utilization which is 80-90 percent 

of that of Medicaid enrollees for adults and children and 30-40 percent 

for the disabled, and that employers pay about 60-80 percent of these 

premiums on average. Employee cost sharing was estimated at 20 

percent, and the ratio of Medicaid to employer plan recognized charges 

was assumed to be about two-thirds. 

Clearly, there is a large difference between the OIG and HCFA savings estimates.


We acknowledge the difficulties inherent in any estimating process for this program.


In any event, substantial savings can be achieved through stronger implementation by


the States of the EGHP provisions.


B-3

APPENDIX C 

AGENCY COMMENTS 

Assistant Secretary for Management and Budget 

Administrator, Health Care Financing Administration 

c-1 
TO


DEPARTMENT OF HEALTH& HUMAN SERVICES Officeof the%cmtafv 

WasMn@on, D.C. 20201 

Om 41993 , 

. 

. Bryan B. Mitchell 

Principal Deputy InspectQr General 

PROM : Kenneth S. Apfel 

Assistant Secrets agement and Budget 

mBJEcT : DRAFT Report: ‘Medicaid Payments of Premiums for 

Employer Group Health Insurance,” OEI-O4-91-O1O5O 

We reviewed the indicated draft report and find the information


very enlightening. However, we wish to comment on the


methodology used in estimating the potential Medicaid savings.


Using data supplied by four States, the report calculates average 

weighted annual per person savings ($22,168) resulting frOm 

States purchasing Employer Group Health Plan (EGHP) insurance for 

eligible individuals when cost effective. A ratio of the sample 

data to national statistics-is used to estimate nationwide 

savings of $32 million by instituting EGHP programs. 

The HCFA Office of the Actuary (OACT) estimates $230 million


total Medicaid savings in FY 1994 resulting from States providing


EGHP insurance to eligible individuals when cost effective. This


estimate was included in a proposed rule sent through


Departmental clearance at the beginning of the month.


OACT used Current Population Survey data to determine the


fraction of Medicaid recipients having access to employer-


sponsored insurance but not currently enrolled. This population


was multiplied by a standard cost which had been adjusted for 

private insurance rates, utilization, and cost Sharing= 

We believe that the OACT estimate yields a more accurate


representation of the potential savings from providing EGHP


insurance. The OACT estimate talcesinto account the size of the


eligible population and offsetting cost factors which are the


same principles used to develop the statute. In contrast, the


OIG estimate is based solely on existing programs and has a high


probability of sampling error.


Hence, we recommend &at the methodology for estimating potential


Medicaid savings be revised to incorporate


OACT .

Health
 Care 

DEPARTMENT OFHEALTH& HUMAN SERVICES financing Administration 

Memorandum 

Date WI 8199b 

Bruce C. Vlade ~L &b 

From Administrator
 %YSubject Office ofInspector General(OIG)DraftRepo~. “Medicaid Payments of Premiums

for Employer Group Health Insurance” (OEI-O4-91-O1O5O) 

To June Gibbs Brown 

Inspector
 General


We reviewed the subject draft report which examines the extent to which state 

Medicaid agencies pay employer group health plan insurance premiums for Medicaid 

eligible individuals. 

We agreewithOIG’Sfirst recommendation,
 thattheHealthcareFinancing 

Administration (HCFA) continue tostrongly support States implementing
 section

1906oftheSocial Security Act(theAct).Sincethis isthecurrent
 law,we will


continue togivepriority totheStates’ implementation ofsection
 1906oftheAct.


We will alsocontinue toencourage andassist thoseStates
 whichhavenotyet


implemented this provision. However,therequirements undersection
 1906ofthe


Actmay changeundertheproposed HealthSecurity Act.Therefore,we
are


deferring commenton thesecondrecommendation, thatHCFA propose
legislation


thatallows States topayemployer grouphealth plan(EGHP) deductibles
 and


coinsurance usingMedicaid feeschedules rather
thanEGHP fee schedules, pentig 

these changes. Several technical commentsareattached
 foryourconsideration.

Thankyoufortheopportunity toreview andcomment on this draft report.
please


advise usifyouwishtodiscuss
 ourresponse.


Attachment 

... --+ 

... . --’ “ “! 

,, 
[~~ 

Comments of the Health Care Financing Administration (HCFA~ 

on the Office of Inmector General’s (OIG\ Draft Rer)oti 

“Medicaid Pavments of premiums for Erndover GrouD Health bu rance” 

Technical Comments 

.=. - The report indicates that because State systems are only designed for the 

Medicaid fee schedule, a State coui~ theoretically, have a different fee schedule for 

each recipient who has employer group health plan (EGHP) insurance. Therefore, 

the report contends that a State would need a different automated program for each 

recipient. We agree the State will need to design a separate system to accommodate 

the EGHP fee schedule. However, it is not clear from the analysis that the State will 

need a different program for each fee schedule. 

k? - The report suggests
 that “using EGHP fee schedules creates inequitable 

treatment among Medicaid recipients [since] higher payments would be made for 

those recipients for whom States pay premiums than for other Medicaid recipients.” 

We do not believe that OIG has provided data to support the implication that 

Medicaid recipients who use the same Medicaid provider necessarily would receive 

different treatment because one has EGHP insurance and the other does not. If 

there is any disparity, it seems more likely it would be among different providers 

since, admittedly, the EGHP provider receives full payment based on the EGHP fee 

schedule rather than the lower Medicaid fee schedule. 

We wouldsuggest thatifbothoftheseassertions
 remainintherepo~ OIG include 

datainsupport ofthem.Ifthis information isunavailable, w recommendthatthese


commentsbeomitted
fromthereport.