United States General Accounting Office

GAO Report to the Chairman, Committee on

Commerce, House of Representatives

July 1997 MEDICAID

Three States’

Experiences in Buying

Employer-Based

Health Insurance

GAO/HEHS-97-159

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276007 

July 25, 1997

The Honorable Thomas J. Bliley, Jr.

Chairman, Committee on Commerce

House of Representatives

Dear Mr. Chairman:

More and more members of low-income families now qualify for Medicaid1

as a result of federal and state eligibility expansions in recent years. In

fiscal year 1996, Medicaid expenditures totaled about $160 billion for

about 37 million people who received services. Certain Medicaid

beneficiaries also have access to employer-based group health

insurance—for example, as an employee or through a working

parent—which in some cases is more economical than Medicaid.

In 1990, in an effort to achieve Medicaid cost savings, the Congress added

section 1906 to the Social Security Act, requiring states to pay premiums,

deductibles, and coinsurance on behalf of Medicaid beneficiaries eligible

for enrollment in employer-based group health plans when it is

cost-effective to do so. The states must also pay the insurance premiums,

but not deductibles and coinsurance, for non-Medicaid-eligible family

members if it is cost-effective and necessary to obtain private coverage for

eligible individuals.

Currently, little is known about the extent and effectiveness of the states’

efforts to implement this law, which became effective January 1, 1991.

Comprehensive, reliable national data are not readily available because

states have been inconsistent in reporting their section 1906 expenditures

to the Department of Health and Human Services’ (HHS) Health Care

Financing Administration (HCFA), the federal agency responsible for

overseeing the Medicaid program. In 1992, the HHS Office of Inspector

General surveyed the states and found that at that time only 18 states had

purchased employer-based insurance for Medicaid-eligible individuals.2

You asked us to build upon the Inspector General’s study and further

examine states’ implementation of section 1906. In discussions with your

staff, we agreed to focus our work on selected states considered to be

1

Medicaid is a joint federal-state health financing program established under title XIX of the Social

Security Act to provide health care coverage for the poor, disabled, and medically needy.

2

The HHS Office of Inspector General mailed a questionnaire to the 50 states and the District of

Columbia in 1992. Two states did not respond.

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successful in implementing section 1906 to determine (1) the extent to

which these states are purchasing employer-based health insurance for

Medicaid-eligible individuals and achieving budgetary savings, as well as

the potential for greater savings; (2) the cost-effectiveness criteria these

states use and the populations and services covered; (3) the outreach

efforts used and barriers hindering states’ implementation of section 1906;

and (4) legislative proposals suggested by others to improve states’ efforts.

To conduct our work, we collected and analyzed information reported for

Health Insurance Premium Payment (HIPP) programs in Iowa,

Pennsylvania, and Texas, which state Medicaid officials, HCFA officials, and

other experts consider to be aggressive and successful programs in

implementing section 1906 and achieving cost savings. We also contacted

HCFA headquarters officials and three HCFA regional offices to obtain

information regarding states’ implementation of section 1906, and we

reviewed studies and other literature discussing state section 1906 efforts.

For more detailed information on our scope and methodology, see the

appendix.

Results in Brief Although Iowa, Pennsylvania, and Texas are recognized as operating

aggressive HIPP programs, the number of people enrolled in their programs

and their reported cost savings are relatively small. The three programs

are trying to identify and enroll more Medicaid eligibles, and state officials

anticipate enrollment increases in the future. Even with the expected

increases, however, the programs are expected to remain small when

compared with the total Medicaid populations in the three states. Texas,

for example, purchased employer-based health insurance for 5,507

Medicaid eligibles enrolled in its HIPP program as of August 1996 and

reported savings of $4.6 million (0.1 percent of its Medicaid expenditures)

for state fiscal year 1996.3

 Texas officials said they would like their HIPP

program to grow to about 10,000 enrollees, which would represent about

0.4 percent of Texas’ total Medicaid population.

In assessing the cost-effectiveness of purchasing employer-based

insurance for Medicaid eligibles, Iowa, Pennsylvania, and Texas use

criteria designed to enroll anyone whose expected Medicaid costs exceed

the total of the premiums, deductibles, expected coinsurance, and

program administrative costs. The three states do not target their

programs to only those populations with high-cost medical conditions,

3

Each time we refer to a year in conjunction with state-reported data, we are referring to the states’

fiscal years. Iowa’s and Pennsylvania’s fiscal year is July 1 through June 30, and Texas’ fiscal year is

September 1 through August 31.

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such as acquired immunodeficiency syndrome (AIDS) patients, because

program officials believe this would limit potential cost savings. For

example, Iowa officials reported a HIPP program caseload composed

primarily of families with children.

HIPP program outreach and enrollment efforts in the three states rely

primarily on Medicaid eligibility workers to identify those potential

enrollees with access to employer-based insurance. The enrollment

process, including the assessment of cost-effectiveness, also relies on the

cooperation of Medicaid eligibles and their employers to provide needed

information, such as health plan costs and benefits. A variety of barriers,

however, limit the states’ effectiveness in identifying and enrolling

Medicaid eligibles. For example, Medicaid eligibles do not always disclose

their access to insurance coverage, and employers do not always respond

to states’ requests for information on health plans.

State Medicaid officials and health policy analysts have proposed

legislative changes to address some of these barriers and improve HIPP

program implementation throughout the country. For example, proposals

have been made to require greater employer cooperation in enrolling

Medicaid eligibles and parents of Medicaid-eligible dependents. Another

proposal is to require that employers and insurers allow HIPP applicants to

join employers’ health plans at the time Medicaid eligibility is established

rather than having to wait for an open enrollment period limited to a

certain time of the year.

Background Section 1906 of the Social Security Act, enacted in the Omnibus Budget

Reconciliation Act of 1990, requires that states use Medicaid funds to

purchase employer-based group health insurance on behalf of

Medicaid-eligible individuals if such insurance is available and it is

cost-effective to do so. States must also purchase employer-based health

insurance for non-Medicaid-eligible family members if this is necessary for

Medicaid-eligible individuals to receive coverage and the insurance is still

cost-effective.4

As defined by section 1906, an individual’s enrollment in an

employer-based plan is cost-effective if paying the premiums, deductibles,

and coinsurance is likely to be lower than a state’s expected cost of

directly providing Medicaid-covered services. HCFA, which oversees the

4

The states pay the premiums, deductibles, and coinsurance for Medicaid eligibles. For

non-Medicaid-eligible family members, the states pay the insurance premiums but not the deductibles

and coinsurance.

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Medicaid program, has provided the states with guidelines for calculating

cost-effectiveness, including a suggested formula for determining expected

deductible and coinsurance costs. States may use an alternative method

for determining cost-effectiveness after obtaining HCFA’s approval.

If an employer-based health plan is determined likely to be cost-effective,

individuals are required to enroll as a condition of their Medicaid

eligibility. However, a child cannot be denied Medicaid eligibility or

services because a parent does not enroll in an employer’s plan.

Medicaid eligibles enrolled in employer-based health plans are entitled to

receive full Medicaid benefits. The health plans become the primary

payers for the services they cover. The states must provide coverage for

those Medicaid services not included in the private plans. In addition,

according to HCFA, states are required to reimburse providers for enrollee

deductibles and coinsurance according to the employer-based plans’ fee

schedules rather than the state Medicaid fee schedules.

Federal Medicaid matching funds are available, at each state’s regular

matching rate,5

 for premium, deductible, and coinsurance payments made

by the states for Medicaid eligibles. Federal matching funds are also

available for the premium payments made by states for noneligible family

members, but not for their deductibles, coinsurance, or other cost-sharing

obligations.

The administration’s budget proposal for fiscal year 1998 would eliminate

section 1906 of the Social Security Act as part of an effort to “eliminate

unnecessary administrative requirements.” According to the

administration, section 1906 is not necessary because states have an

“inherent incentive” to move Medicaid beneficiaries into private health

insurance when it is cost-effective. Moreover, current, detailed,

“one-size-fits-all” federal rules hinder the states from designing programs

that most effectively suit local circumstances, according to the

administration.6

5

The federal government pays a percentage of each state’s cost of Medicaid benefits. The federal

matching rate for each state is determined by the state’s average per capita income and ranges from 50

to 83 percent.

6

The administration’s fiscal year 1998 budget proposal included per capita spending limits for

Medicaid. The administration cited these spending limits as an increased incentive for states to

purchase cost-effective private health insurance for Medicaid beneficiaries. However, the per capita

spending limits were not included in the subsequent agreement between the Congress and the

administration to balance the federal budget by 2002.

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HIPP Programs’

Enrollment, Savings,

and Growth Potential

Although Iowa, Pennsylvania, and Texas have implemented HIPP programs

to enroll Medicaid eligibles and achieve budgetary savings, to date only

small portions of the Medicaid populations in these states are signed up.

And, as expected, the Medicaid budgetary savings achieved in the three

states have also been relatively small. None of the state officials we talked

with expect their HIPP programs to enroll large numbers of Medicaid

eligibles in the future.

Enrollment Levels and

Savings Achieved

As a percentage of the total state Medicaid population, Iowa’s HIPP

program enrollment was the largest of the three states. In June 1996, Iowa

had 2,504 Medicaid eligibles enrolled in its HIPP program, representing 0.8

percent of the approximately 333,500 Medicaid eligibles in the state. For

1996, Iowa’s HIPP program reported an estimated savings of $2.4 million

(0.2 percent of Medicaid expenditures). Table 1 shows HIPP program

enrollment and estimated Medicaid savings reported to us by each of the

three states included in our evaluation.

Table 1: HIPP Program Enrollment and

Estimated Budgetary Savings in Three

States, 1996

Number of

enrolleesa

Percentage of

state Medicaid

populationa

Estimated

budgetary

savings (in

millions)

Estimated

savings as a

percentage of

Medicaid

expenditures

Iowa 2,504 0.8% $2.4 0.2%

Pennsylvania 4,700 0.3 9.7 0.2

Texas 5,507 0.2 4.6 0.1

Note: The estimated budgetary savings were reported for each state’s fiscal year 1996.

aThe program enrollment data were provided as of a specific month, which differed for each

state: Iowa as of June 1996, Pennsylvania as of January 1997, and Texas as of August 1996.

Some Program Growth

Expected

Because Iowa, Pennsylvania, and Texas are trying to identify and enroll

more people in their HIPP programs, state officials expect enrollment levels

to increase. The anticipated increases and potential budgetary savings,

however, would remain modest.

Iowa officials expect their HIPP program enrollment to rise because the

Iowa Department of Human Services’ request for an increase in its 1998

appropriation for additional staff was approved by the state legislature.

The officials said the appropriation increase, effective July 1, 1997, will

allow the size of the department’s HIPP unit to grow from 7 to 14 staff, and

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2 computer specialists will be added to enhance the unit’s automation

capabilities. The officials predicted HIPP program enrollment will increase

by as much as 30 percent, as the additional staff will likely process more

HIPP applications and help eliminate the backlog that has existed. With a

30 percent increase, program enrollment would constitute 1 percent of

Iowa’s total Medicaid population.

Pennsylvania’s HIPP program, which started in 1995, has grown steadily.

Pennsylvania officials said they are not sure when enrollment will level off

but believed the program has considerable room for growth. Texas

officials said they would like to reach an enrollment level of about 10,000.

This goal would almost double the August 1996 enrollment, representing

less than 0.4 percent of Texas’ total Medicaid population.

Iowa and Texas officials, as well as a HCFA official, noted that some states

may be unlikely to start or expand HIPP programs as they focus their

Medicaid programs on managed care. Such states may believe it is cheaper

and administratively easier to include Medicaid eligibles in contracted

managed care plans rather than operate a separate HIPP program at the

same time. One official noted that when the cost of employer-based

insurance is compared with that of paying a Medicaid managed care plan,

it does not appear as cost-effective as it does when it is compared with

Medicaid fee-for-service program costs. Other officials said some states

have simply ignored employer-based insurance because of their increased

attention and emphasis on Medicaid managed care.

Contrary to what some other state officials may believe about the

practicality of HIPP programs coexisting with managed care, Iowa and

Texas HIPP officials expect their HIPP programs to remain viable and

cost-effective as managed care expands in those states. The officials said

that buying employer-based insurance in their HIPP programs can be less

costly than paying monthly payments to Medicaid managed care plans in

Iowa and Texas. According to the officials, this is primarily because

employer-based insurance plans sometimes can provide coverage for any

size family for the same premium, while state payments to Medicaid

managed care plans are made for each family member covered. They also

noted that because employers typically contribute to the cost of the

insurance premiums for HIPP enrollees, the state does not have to pay the

entire amount.

A Texas official said another reason the Texas HIPP program will remain

viable as Medicaid managed care expands is that the state plans to place

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all new Medicaid eligibles who have access to employer-based insurance

in the Medicaid fee-for-service program, at least initially. Starting in the

spring of 1998, such potential HIPP enrollees will not be allowed to join a

Medicaid managed care plan unless their employer-based health insurance

is determined not to be cost-effective. Texas’ intent is to prevent

enrollment in Medicaid managed care plans, and thus the accompanying

monthly payments to such plans, when the state can achieve greater cost

savings by enrolling Medicaid eligibles in the HIPP program.

Cost-Effectiveness

Criteria, Services

Provided, and

Populations Covered

Iowa, Pennsylvania, and Texas include any Medicaid eligibles in their HIPP

programs who have access to employer-based health insurance and whose

expected Medicaid costs exceed the costs associated with purchasing the

insurance. The programs do not focus on only those with high-cost

medical conditions because program officials believe this would limit

potential cost savings. Each of the three states provide their HIPP enrollees

with coverage for all Medicaid services not included in the employer-based

insurance plans.

States Use Own

Cost-Effectiveness Criteria

The three HIPP programs essentially consider an insurance plan to be

cost-effective if the expected Medicaid costs7

 of a Medicaid eligible exceed

HIPP insurance costs, including premiums, deductibles, any expected

coinsurance, and HIPP program administrative costs. The programs use

their own criteria for assessing cost-effectiveness, rather than following

HCFA’s suggested guidelines. A major difference is that the programs base

estimates of coinsurance costs on their Medicaid fee schedules. This

produces lower estimates of coinsurance payments and results in more

insurance plans determined to be cost-effective and more people enrolled.

The cost-effectiveness criteria that the three states use do not restrict or

target HIPP program enrollment to only those Medicaid eligibles expected

to incur high medical costs. The Iowa program requires a minimum

projected savings of only $5 per month per household. The Pennsylvania

and Texas programs do not require any minimum monthly savings for a

plan to be considered cost-effective. Officials from the three programs said

that Medicaid savings are increased by enrolling more than just high-cost

Medicaid eligibles. A Pennsylvania official noted, however, that the state’s

program gives priority to enrolling those with “special conditions” (for

example, pregnant women, AIDS patients, people needing an organ

7

The three programs estimate each HIPP applicant’s likely Medicaid costs on the basis of the

applicant’s past medical bills and/or the Medicaid costs of beneficiaries with similar demographic

characteristics and medical conditions.

Page 7 GAO/HEHS-97-159 Employer-Based Health Insurance
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transplant), and this has resulted in increased Medicaid cost savings as

reflected in the program’s estimated $9.7 million savings for 1996.

The Iowa program considers an employer-based health plan that provides

comprehensive medical coverage8

 to automatically be determined

cost-effective when the plan provides coverage to a Medicaid-eligible

pregnant woman; the employee’s share of the premium cost is $50 or less

per month for a one-person Medicaid-eligible household; or the employee’s

share of the premium cost is $100 or less per month for households of two

or more Medicaid eligibles. An Iowa HIPP official explained that the $50

and $100 criteria were established for an automatic determination of

cost-effectiveness because the program wanted to reduce the

administrative work load involved in processing its backlog of HIPP

applications. The official said the actual cost-effectiveness of plans with

these premium amounts has been analyzed and such plans are virtually

always cost-effective, primarily because the plans provide comprehensive

medical coverage. On the very few occasions when such plans were found

not to be cost-effective, the Medicaid eligibles were enrolled anyway

because of the program’s established criteria.

The three programs have devised cost-effectiveness assessment formulas

that result in lower estimates of HIPP enrollees’ coinsurance costs than if

HCFA’s suggested guidelines were used. HCFA’s cost-effectiveness guidelines

take into account the requirement that HIPP programs pay coinsurance and

deductible costs for covered services according to the employer-based

plans’ fee schedules. However, the three HIPP programs pay coinsurance

based on their Medicaid fee schedules, which are generally lower and may

allow the programs to avoid paying coinsurance.9

 If the HIPP programs

used HCFA’s guidelines, their cost-effectiveness assessments would

overstate the expected coinsurance payments, and fewer insurance plans

would be determined to be cost-effective. Iowa, for example, does not

factor in any coinsurance costs in its cost-effectiveness analysis because

its actual coinsurance obligation for HIPP enrollees is negligible, according

to an Iowa HIPP program official.

8

The Iowa HIPP program does not have a strict definition of comprehensive medical coverage.

However, program officials said they generally consider such coverage to be for services such as

inpatient hospital care, outpatient hospital care, physician services, laboratory services, and X rays.

9

For example, if a provider billed an employer-based insurance plan $100 for a covered medical

service, and the plan allowed $100 for the service and paid 80 percent of the cost, or $80, the HIPP

program would be responsible for paying $20 in coinsurance if it used the employer-based plan’s fee

schedule. However, if the HIPP program used the Medicaid fee schedule and that schedule allowed $80

for the service, the program would not pay the $20 coinsurance.

Page 8 GAO/HEHS-97-159 Employer-Based Health Insurance
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All Medicaid Services Are

Covered

In assessing the cost-effectiveness of employer-based health insurance

plans, the three HIPP programs consider which services the plans cover.

HIPP program enrollees are entitled to all of the states’ Medicaid benefits,

including those not included in the employer-based insurance plans. The

Texas program, for example, will not enroll a HIPP applicant unless the

insurance plan covers certain Medicaid services, including inpatient

hospital care, physician services, and prescription drugs.

The state Medicaid programs provide “wrap-around” coverage for services

that the insurance plans do not cover by paying claims submitted by

providers. Iowa and Pennsylvania HIPP officials, for example, said every

HIPP enrollee has a Medicaid card he or she must present to providers to

receive medical services. The cards indicate if a Medicaid eligible has

coverage by a private insurance plan and which services are covered. In

reading the cards, the providers can tell whom to bill, either a private plan

or the Medicaid program. In Pennsylvania, the HIPP enrollee must also

present a private insurance plan card.

As the three states receive provider claims for HIPP enrollees, they pay

deductibles and coinsurance costs as appropriate. The Iowa and

Pennsylvania HIPP officials noted that their Medicaid payment systems will

reject any provider claims that should have been submitted to a private

insurance plan.

More Than High-Cost

Populations Enrolled

The HIPP program officials in the three states we reviewed reported having

relatively few enrollees with high-cost medical conditions. The Texas HIPP

program, for example, reported that in 1996 only 11 percent of HIPP

enrollees were blind or disabled, and 10 percent were pregnant women or

newborns. Texas HIPP officials said they consider people in these groups to

be high cost. In contrast, 69 percent of the HIPP enrollees in Texas were

children, a group that typically incurs low medical costs, according to the

Texas officials.

Pennsylvania program officials told us that as of January 1997, about

22 percent of the HIPP enrollees were considered to have “special

conditions.” These included pregnant women, AIDS patients, and the

severely disabled. The officials said they could not provide a more detailed

breakdown, and their program does not maintain data on the enrollees by

other characteristics.

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The Iowa HIPP program also did not have data available on the population

characteristics of its caseload. An Iowa official said the program was

mostly composed of families with children.

Barriers to HIPP

Program Outreach

and Enrollment

HIPP program outreach and enrollment efforts in the three states face a

variety of barriers. The programs are not able to identify all potential

enrollees who have access to employer-based health insurance. When

potential enrollees are identified, the programs often face additional

barriers in attempting to collect needed information from employers and

the potential enrollees themselves.

Processes to Identify

Potential Enrollees Are

Limited

The three HIPP programs rely primarily on Medicaid eligibility workers in

the field to identify potential HIPP enrollees. The eligibility workers

communicate with potential enrollees when they first apply for Medicaid

eligibility, when their eligibility is periodically redetermined, and if they

later report new employment. In two of the states we contacted, HIPP

program officials said Medicaid eligibility workers are sometimes not

sufficiently knowledgeable about the states’ HIPP programs.

Medicaid eligibility workers in Pennsylvania and Texas refer identified

potential HIPP enrollees (for example, those who indicate they are

employed and have access to health insurance through their employer) to

their state’s HIPP program, which then contacts the employers and requests

information about health plan premium costs and benefits. In Iowa, the

eligibility workers send a form directly to employers requesting

information about earnings and health plan benefits and costs, collect the

completed forms, and forward copies to the HIPP program when employers

indicate health insurance is available. The HIPP programs need information

about each insurance plan’s premium costs and benefits package to

determine the cost-effectiveness of purchasing insurance.

Texas officials said there is a high turnover of eligibility workers in their

state. Consequently, many of them do not understand the HIPP program

and cannot adequately explain it to Medicaid eligibles. The officials

consider this a major barrier to program enrollment.

Pennsylvania HIPP officials also told us that eligibility workers need to be

more knowledgeable about the program so the workers can better identify

potential enrollees and explain the program to them. The officials believe

training eligibility workers about the HIPP program will increase Medicaid

Page 10 GAO/HEHS-97-159 Employer-Based Health Insurance
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eligibles’ awareness of it and result in greater enrollment. In April 1997, the

eligibility workers in Pennsylvania started automatically referring

potential enrollees to the HIPP program when they reapply for Medicaid

eligibility and report new employment, in addition to making referrals at

their initial application for Medicaid benefits. Program officials had

discovered that the eligibility workers were missing these opportunities to

identify potential enrollees. Two weeks after the eligibility workers started

referring potential HIPP program enrollees upon their reapplication and

reporting of employment, the number of referrals jumped from 470 in a

week to over 1,300.

In Iowa and Texas, potential HIPP enrollees may also be identified as a

result of computerized data matches of state employment information and

Medicaid eligibility information, which can help identify employed

Medicaid eligibles.10 However, according to HIPP officials, the employment

information is not always current. Frequently, identified Medicaid eligibles

are no longer working, have changed jobs, or no longer have access to

insurance. Iowa officials said this information has not been productive and

has not resulted in many enrollments. In Texas, only about 7 percent of the

active HIPP caseload in August 1996 had been identified through the use of

the computerized state employment data.

Some Potential HIPP

Enrollees Do Not Disclose

Insurance or Provide

Needed Information

Some potential HIPP enrollees do not disclose their access to

employer-based health insurance even when they know about the HIPP

program. In addition, potential enrollees who have been identified often

do not respond to the states’ requests for information. For example, an

individual may fail to provide the program with a requested insurance card

or paycheck stub showing a deduction for health insurance premiums.

Texas HIPP program officials cited “client non-responsiveness” as the

biggest barrier limiting the number of enrollees in their program. Iowa

officials also noted problems with potential enrollees not providing

information.

According to the Texas officials, there are many reasons people do not

comply with requests for information and enroll in the HIPP program, and

convincing people to participate can be very difficult. Sometimes Medicaid

eligibles are afraid to disclose the necessary health plan information

because of an unfounded fear of losing their Medicaid benefits if they have

10The Iowa data matches use computerized information from the Iowa Department of Employment

Services, which receives wage information from employers for all employees. The Texas HIPP

program obtains information from the Texas Work Force Commission database, which contains

information on all workers for whom an employer pays unemployment insurance.

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access to, or are already covered by, private insurance. Iowa officials said

apathy may be the primary reason Medicaid eligibles fail to provide

information regarding their health insurance. A 1996 report on Medicaid

and employer-financed health insurance coverage by the Institute for

Health Policy Solutions noted that Medicaid eligibles may not be eager to

disclose their insurance because to do so results in extra work for

themselves (that is, obtaining information on their employer’s health plan),

reveals their potential Medicaid status to their employer, and generates an

administrative burden for their employer.11

Employers Do Not Always

Cooperate

Another barrier to enrollment is that some employers do not respond to

the states’ requests for information on health plan costs and benefits. This

information is needed to assess the cost-effectiveness of purchasing an

employer’s insurance.

The Institute for Health Policy Solutions report points out that there are

varying degrees of financial disincentives for employers to participate in a

Medicaid HIPP program. For example, an employer with mostly

minimum-wage employees may offer health insurance but have few

participating employees because many of them cannot afford the

insurance. If Medicaid is available to pay the employees’ costs, the

employer will have a larger number of employees for whom it must pay

the employer’s share of costs. Employers with fewer minimum-wage

employees are less affected. Small employers in certain states may also

face the possibility that their insurance premiums will increase if HIPP

enrollees added to the health plans are considered to be high risk (for

example, because of health status, where they live, or demographic

category such as age or gender). For self-insured employers, adding HIPP

enrollees to plans means there is a greater potential for having to pay more

claims. The Institute’s report noted that an additional disincentive to

employer cooperation is the administrative burden of providing the state

with copies of benefit plans and premium costs.

Iowa HIPP program officials told us it is difficult for them to get

information from employers, particularly self-insured employers covered

under the Employee Retirement Income Security Act of 1974 (ERISA). The

majority of employers contacted in Iowa failed to respond when first

asked to submit a copy of their health benefits plan or policy. In contrast,

Pennsylvania and Texas officials said that employers in their states

11Institute for Health Policy Solutions, Improving Health Care Coverage for Low-Income Children and

Pregnant Women: Optimizing Medicaid and Employer-Financed Coverage Relations (Washington, D.C.:

Institute for Health Policy Solutions, Nov. 21, 1996).

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generally respond to HIPP program requests for health plan coverage and

contribution information. The officials in Iowa and Texas also noted,

however, that the states have no legal authority to require that employers

provide the needed health plan information.

Health Plan Enrollment

Periods Are a Barrier to

HIPP Enrollment

HIPP officials in the three states also cited limited health plan enrollment

periods as a barrier to enrolling Medicaid eligibles in HIPP programs. Many

employers allow employees to enroll in their health plans only at the start

of employment; during an annual open enrollment period; or at the time of

certain events, such as a marriage, divorce, or birth of a child. These

enrollment periods often do not coincide with application for Medicaid

eligibility or eligibility redetermination. As a result, many months can

elapse between the time someone applies for Medicaid and the next

opportunity to enroll in an employer’s health plan.

Iowa officials said health plan enrollment periods are sometimes an

impediment to enrolling Medicaid eligibles in the HIPP program. The

officials said that if the establishment of an individual’s Medicaid eligibility

was considered to be one of the events permitting enrollment in employer

health plans, their HIPP program could enroll more people. Pennsylvania

officials said they need to obtain the employer’s cooperation to enroll a

Medicaid eligible in an employer-based plan outside of an open enrollment

period, and employers have allowed such enrollments roughly 50 percent

of the time the situation has come up. While open enrollment periods are

not considered a significant problem for the Pennsylvania HIPP program,

the officials believe there would be more enrollments if establishing

Medicaid eligibility was considered to be an event that permits employees

to enroll in employer health plans. Texas officials believe that such a

change would significantly increase enrollment in their program.

Legislative Remedies

Proposed to Improve

HIPP Program

Implementation

States and others have proposed legislative changes to address some of

the HIPP program implementation barriers. These proposals seek to

increase program enrollment and Medicaid cost savings.

Require Greater

Cooperation From

Potential Enrollees and

Employers

An Iowa Department of Human Services official suggested that the

Congress require greater cooperation from employers, including

employers with self-insured plans under ERISA, to prevent noncooperating

parents from failing to enroll Medicaid-eligible dependents in available

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employer health plans. Another Iowa HIPP official suggested that such

legislation could require employers to (1) provide the state with

information about the health benefits they offer their employees and

(2) enroll Medicaid-eligible employees, or parents of Medicaid-eligible

dependents, in available health insurance plans when requested to do so

by the state, even without the employees’ cooperation.

The Institute for Health Policy Solutions’ report contains another proposal

to require greater employer cooperation. According to the Institute, under

ERISA, it is not clear that self-insured employers have any obligation to

furnish health plan benefit and cost information to employees who are not

enrolled in an employer-based plan, except during open enrollment

periods. The states are not authorized to obtain this information on their

own. Without plan benefit and cost information, state Medicaid agencies

cannot determine if it is cost-effective to purchase employer-based

insurance coverage in a HIPP program. The Institute’s report suggests it be

clarified12 that under ERISA, eligible employees have the right to obtain

information about health plan benefit coverage and premium amounts,

even if they are not participating in the plan. The Institute concluded that

federal action could clear the way for states to obtain this information.

Without federal action, state efforts to require greater employer

cooperation would not significantly affect self-insured plans.

Allow Enrollment in

Employer Health Plans at

Any Time

Another proposal is that employers and insurers be required to treat the

establishment of Medicaid eligibility as an event permitting enrollment in

employers’ health plans. This would eliminate the problem of established

health plan enrollment periods not coinciding with Medicaid eligibility

determinations.

The Institute for Health Policy Solutions proposed amending ERISA to make

the establishment of Medicaid eligibility a “qualifying event” for enrolling

in an employer’s insurance plan outside the open enrollment period, which

normally occurs once a year. In a similar proposal, an Iowa official

suggested that a provision be added to section 1906 allowing states to

enroll Medicaid recipients in an insurance plan at any time. The Texas HIPP

program officials we met with said there are no laws establishing which

events permit enrollment in employer-based health insurance plans.

Instead, these events are agreed upon by employers and their health plans.

12According to the report, this clarification may not require a legislative change but may be able to be

accomplished by revising ERISA regulations.

Page 14 GAO/HEHS-97-159 Employer-Based Health Insurance
B-276007 

Federal or state law could be enacted to permit enrollment in a health plan

whenever an individual becomes qualified for Medicaid (if the individual is

otherwise qualified to enroll in the employer-based plan). In the case of

self-insured plans under ERISA, federal legislation would be needed to

require that employer-based plans comply with this requirement. To obtain

cooperation from those employers who do not self-insure and depend on

health insurance policies regulated by the states, states could—under their

own legislative or regulatory authority—require that insurers consider

Medicaid eligibility a qualifying event for enrollment in an employer’s

health insurance plan outside the open enrollment period.

States May Have Authority

to Use Medicaid Fee

Schedules

In its May 1994 report,13 the Inspector General recommended that HCFA

propose legislation allowing the states to pay employer-based health

insurance plan deductibles and coinsurance using Medicaid fee schedules

instead of the individual plans’ fee schedules as currently required.14 In

making this recommendation, the Inspector General relied on HCFA’s

interpretation of section 1906 requirements that states must use

employer-based health plan fee schedules. Our analysis of section 1906,

however, suggests that another reasonable interpretation is that states

already have the authority to use their Medicaid fee schedules when

paying deductibles and copayments.

In its 1994 report, the Inspector General said that 17 of the 18 states

reporting the purchase of employer-based insurance for Medicaid eligibles

reimbursed providers according to their state Medicaid fee schedules.

They did so because using the individual plans’ fee schedules is more

costly to Medicaid and requires increased administrative expenses.

All three state HIPP programs included in our review use Medicaid fee

schedules for reimbursing providers. HIPP officials we contacted

commented on the difficulty that would be involved in trying to use

employer-based health plans’ fee schedules. According to the officials,

there are many health plans and each has its own fee schedule, resulting in

a wide variety of cost-sharing arrangements. Some officials called the

requirement to use the employer-based plans’ fee schedules “unworkable,”

“administratively impossible,” and “the largest stumbling block for states

13HHS, Office of Inspector General, Medicaid Payments of Premiums for Employer Group Health

Insurance, OEI-04-91-01050 (Washington, D.C.: HHS, May 1994).

14In commenting on the Inspector General’s draft report, HCFA deferred comment on this

recommendation and noted that the requirements of section 1906 could change under proposed major

health reform plans the Congress was then considering. More recently, the administration’s budget

proposal for fiscal year 1998 would eliminate section 1906 altogether.

Page 15 GAO/HEHS-97-159 Employer-Based Health Insurance
B-276007 

trying to implement these [section 1906] provisions.” The Institute for

Health Policy Solutions report also noted that the current cost-sharing

requirement can be cumbersome and costly to administer.

According to HCFA, section 1906 requires states to reimburse providers for

enrollee deductibles and coinsurance according to the employer-based

plans’ fee schedules, rather than state Medicaid fee schedules. However, it

is not clear to us that this is the only reasonable conclusion to be reached

under section 1906, and it is one that may undermine states’ efforts to

achieve Medicaid cost-savings.

In establishing the requirement for states to enroll Medicaid beneficiaries

in employer-based plans and pay deductibles and coinsurance, section

1906 refers to another provision of Medicaid law that establishes

requirements for Medicaid payments when a beneficiary is already

enrolled in an employer-based (or other) health plan. That law allows

states to use their Medicaid fee schedules when paying deductibles and

coinsurance after a private insurance plan has paid for Medicaid-covered

services.15 In addition, language related to section 1906 in the 1990

congressional Conference Report suggests to us that the use of Medicaid

fee schedules is authorized. Specifically, the report states that the House

bill “[r]equires a provider treating beneficiaries enrolled under a plan to

accept the greater of the plan’s reimbursement rate or the Medicaid rate as

payment in full, and prohibits a provider from charging the beneficiary or

Medicaid an amount that would result in aggregate payment greater than

the Medicaid rate.”16 The language in the final version was slightly

different than that in the House bill, but we interpret the quoted

description as being equally applicable to the final language. It appears to

us that existing law may provide adequate statutory authority for the

states to continue to use their Medicaid fee schedules without the need for

congressional action.

Concluding

Observations

Iowa, Pennsylvania, and Texas HIPP programs to enroll Medicaid eligibles

and achieve Medicaid cost savings have encountered barriers that have

limited their size. Although enrollment in these programs is expected to

15Under section 1902(a)(25) of the Social Security Act, private insurance coverage for Medicaid

recipients is treated as a third-party liability. According to this law, when employer-based health

insurance plans are liable to pay for care or services covered by Medicaid, the employer-based plans

provide the primary coverage, and states then pay deductibles and coinsurance using their Medicaid

fee schedules.

16H.R. Conf. Rep. No. 101-964, at 833 (Oct. 27, 1990).

Page 16 GAO/HEHS-97-159 Employer-Based Health Insurance
B-276007 

increase, the likely increases will remain modest when compared with the

total Medicaid populations and expenditures in these states.

Moreover, some state and HCFA officials believe the spread of Medicaid

managed care may dissuade some states from starting new HIPP programs

or expanding existing ones. Such states may decide it is less costly or

administratively easier to include Medicaid eligibles in managed care plans

rather than operate a separate HIPP program. In contrast, Iowa and Texas

officials said they expect their HIPP programs to remain cost-effective and

viable as managed care expands in their states.

The states’ implementation of federal welfare reform legislation may also

have an impact on HIPP programs. Over time, increased numbers of

formerly unemployed welfare recipients may leave the welfare rolls and be

hired into jobs, including people who are currently enrolled in Medicaid

programs or parents of children who are covered by Medicaid. Many of

these newly employed people may gain access to employer-based health

insurance and become eligible for enrollment in a state HIPP program. This

could increase the potential for states to establish or expand HIPP

programs and realize associated Medicaid cost savings. However, the

extent to which states will do so is uncertain given the existing barriers to

such a program and the increasing role of managed care in state Medicaid

programs.

Because of these uncertainties and the administration’s proposal that

section 1906 requirements be eliminated, it is not clear that legislative

changes by the Congress to improve HIPP program implementation are

warranted at this time. States could, however, decide to take action on

their own to remove some of the barriers that HIPP programs face in their

efforts to identify and enroll Medicaid eligibles. Such actions could include

establishing laws or regulations similar to the federal legislative changes

that have been proposed. For example, states may be able to use

legislation or regulation, whichever is most appropriate, to obtain greater

employer cooperation in providing health plan information to the state and

in helping to enroll employees who are parents of Medicaid-eligible

children. Without federal action to address ERISA preemption, however,

any such state initiatives would have no significant impact on self-insured

plans.

Agency Comments

and Our Evaluation

We provided a draft of this report to the HCFA Administrator; HIPP program

officials in Iowa and Texas; and an official of Pennsylvania’s Department

Page 17 GAO/HEHS-97-159 Employer-Based Health Insurance
B-276007 

of Public Welfare, Office of Administration. We discussed the draft with

officials of the Office of Beneficiary Services within HCFA’s Medicaid

Bureau and officials from the three states. With one exception, these

officials generally agreed with our findings.

While the HCFA officials agreed that it would be beneficial for states to

have the authority to pay deductibles and coinsurance using their

Medicaid fee schedules, they did not agree with our conclusion that

section 1906 may be interpreted to provide such authority and believed

that legislative action would be required to permit this. We continue to

believe, however, that section 1906 can be interpreted to authorize states

to pay deductibles and coinsurance using their Medicaid fee schedules,

based on the reference in section 1906(a)(3) to section 1902(a)(25),

which—in a related context—permits states to pay deductibles and

coinsurance using their Medicaid fee schedules. The legislative history

also supports this view. At HCFA’s request, we agreed to provide additional

information regarding our legal interpretation, and the officials indicated a

willingness to reexamine their position at a later date.

HCFA and state officials also provided technical comments that we

incorporated as appropriate.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days after the

date of this letter. At that time, we will send copies of this report to the

Secretary of HHS; the Administrator, HCFA; and other interested parties. We

will make copies available to others on request.

If you or your staff have any questions, please call me or Kathryn Allen,

Acting Associate Director, at (202) 512-7114. Other major contributors to

this report were Ron Viereck, Howard Cott, and Craig Winslow.

Sincerely yours,

William J. Scanlon

Director, Health Financing

 and Systems Issues

Page 18 GAO/HEHS-97-159 Employer-Based Health Insurance
Page 19 GAO/HEHS-97-159 Employer-Based Health Insurance
Appendix 

Scope and Methodology

We focused our work on the HIPP programs implemented in three states:

Iowa, Pennsylvania, and Texas. We selected these programs because our

preliminary work showed that they are considered by state Medicaid

officials, HCFA officials, and other experts as aggressive and successful

programs achieving cost savings. Our findings from these three HIPP

programs cannot be generalized to other states’ HIPP programs.

We conducted structured interviews to obtain information from HIPP

program officials in the three states. In addition, we collected and

analyzed documentation on HIPP program operations from the time

enrollment started in each state (Iowa, 1992; Pennsylvania, 1995; and

Texas, 1995). All of the information we obtained was reported to us by the

program officials, and we did not verify its accuracy.

We contacted HCFA headquarters in Baltimore, Maryland, to obtain

information regarding HCFA’s section 1906 requirements for states, total

section 1906 expenditures reported to HCFA by all states, and other

information on how the states generally are implementing section 1906.

We also contacted HCFA regional offices in Dallas, Texas; Kansas City,

Missouri; and Philadelphia, Pennsylvania, to obtain Medicaid state plan

amendments filed with HCFA by the three states for implementation of their

HIPP programs. In addition, we reviewed relevant studies discussing states’

section 1906 efforts.

We conducted our review between November 1996 and June 1997 in

accordance with generally accepted government auditing standards.

(101526) Page 20 GAO/HEHS-97-159 Employer-Based Health Insurance
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