Medicaid Cost-Sharing Under the Deficit Reduction Act of 2005 (DRA)
Released: 2007-01-25T00:00:00

In health insurance, beneficiaries may face two types of out-of-pocket payments: (1) participation-related cost-sharing, typically in the form of monthly premiums, regardless of whether services are utilized, and (2) service-related cost-sharing, which consists of payments made directly to providers at the time of service delivery. Such beneficiary cost-sharing under Medicaid is described below.

Participation-Related Cost-Sharing

In order to obtain health insurance generally, enrollees may be required to pay monthly premiums and/or, less frequently, enrollment fees. Such charges are prohibited under traditional Medicaid for most eligibility groups. Nominal amounts set in regulations, ranging from $1 to $19 per month, depending on monthly family income and size, can be collected from (1) certain families moving from welfare to work who qualify for transitional assistance under Medicaid, and (2) pregnant women and infants with annual family income exceeding 150% of the federal poverty level (FPL), or, for example, about $19,800 for a family of two.

Premiums and enrollment fees can exceed these nominal amounts for other specific groups. For example, for certain individuals who qualify for Medicaid due to high out-of-pocket medical expenses, states may implement a monthly fee as an alternative to meeting financial eligibility thresholds by deducting medical expenses from income (i.e., the "spend down" method). Cost-sharing is not capped for workers with disabilities and income up to 250% FPL. Premiums cannot exceed 7.5% of income for other workers with disabilities and income between 250% and 450% FPL. (If a state covers both groups, the same cost-sharing rules must apply.) Finally, some groups covered by Medicaid through certain waivers can be charged premiums that exceed nominal amounts.

Under DRA authority, the general rules regarding applicable premiums are specified for three income ranges. For individuals with income under 100% FPL, and between 100% to 150% FPL, premiums are prohibited. Like traditional Medicaid, other specific groups (e.g., some children, pregnant women, individuals with special needs) are also exempt from paying premiums under the new DRA option. For persons with income above 150% FPL, DRA places no limits on the amount of premiums that may be charged.

For the most part, premiums are not used under traditional Medicaid, except for workers with disabilities and waiver populations. Among the four states (Idaho, Kansas, Kentucky, and West Virginia) with approval for alternative DRA benefit packages, only Kentucky imposes monthly premiums: (1) $20/family with children with income over 150% FPL who are enrolled in the State Children's Health Insurance Program (SCHIP; additional details below), and (2) up to $30/family (not to exceed 3% of the adjusted, average monthly income) during the last six months of transitional Medicaid for working families with income over 100% FPL.

Service-Related Cost-Sharing

Beneficiary out-of-pocket payments to providers at the time of service can take three forms. A deductible is a specified dollar amount paid for all services rendered during a specific time period (e.g., per month or year) before health insurance (e.g., Medicaid) begins to pay for care. Coinsurance is a specified percentage of the cost or charge for a specific service rendered. A copayment is a specified dollar amount for each item or service delivered. While deductibles and coinsurance are rarely used in traditional Medicaid, copayments are applied to some services and groups.

The Appendix provides a comparison of the maximum charges allowed for service-related cost-sharing under traditional Medicaid, DRA, and SCHIP. SCHIP is a capped federal grant that allows states to cover low-income, uninsured children in families with income above Medicaid eligibility thresholds. Children may be enrolled in separate SCHIP programs for which SCHIP rules apply (shown in the Appendix ), or in Medicaid, for which traditional Medicaid or DRA rules apply. Some states (e.g., Kentucky) have both types of SCHIP programs (a Medicaid expansion and a separate SCHIP program), for which children with the highest income levels are enrolled in the separate program. Service-related cost-sharing under separate SCHIP programs generally parallels the rules under traditional Medicaid for lower-income subgroups; there are no limits specified for higher-income subgroups. Total SCHIP cost-sharing is capped at 5% of family income per eligibility period.

Service-related cost-sharing under traditional Medicaid is prohibited for the following specific groups and services: (1) children under 18, (2) pregnant women for pregnancy-related services, (3) services provided to certain institutionalized individuals, (4) individuals receiving hospice care, (5) emergency services, and (6) family planning services and supplies. For most other groups and services, nominal amounts are allowed. For example, nominal copayments specified in regulations range from $0.50 to $3, depending on the payment for the item or service. These nominal amounts will be increased by medical inflation beginning in 2006 (regulations not yet released).

Under the DRA option, certain groups and services are also exempt from the service-related cost-sharing provisions. These exemptions are nearly identical to those under traditional Medicaid. However, under traditional Medicaid, all children under 18 are exempt, while under DRA, only children covered under mandatory eligibility groups (the lowest income categories) and certain foster care/adoption assistance youth are exempt. Also, groups exempted from the general service-related cost-sharing provisions under DRA may nonetheless be subject to cost-sharing for non-emergency services provided in a hospital emergency room (ER), and/or for prescribed drugs (see the Appendix ). Under SCHIP, only American Indian and Alaskan Native children are exempt from cost-sharing, and cost-sharing is also prohibited for well-baby and well-child services.

Among the four states with approval for alternative benefit packages via DRA, only Kentucky includes cost-sharing for participants, summarized in Table 1 . For many services across the four Kentucky plans, there is no cost-sharing for beneficiaries. When applicable, copayments for selected non-institutional services, acute inpatient hospital care, and for generic and preferred brand-name drugs are very similar to the maximums allowed under traditional Medicaid. For non-preferred brand-name drugs and for non-emergency care in an ER, a 5% coinsurance charge will be applicable in most cases. For all four Kentucky plans, the maximum annual out-of-pocket expense per member is $225 for health care services and $225 for prescriptions. Additionally, under DRA, the total aggregate amount of all cost-sharing (premiums plus service-related charges) cannot exceed 5% of family income applied on a monthly or quarterly basis as specified by the state. Under Kentucky's DRA SPA, this limit is applied on a quarterly basis.

Consequences for Failure to Pay Cost-Sharing

The rules governing consequences for failure to pay premiums differ somewhat under traditional Medicaid and DRA. Under traditional Medicaid, for certain groups of pregnant women and infants for whom monthly premiums may be charged, states cannot require prepayment, but may terminate Medicaid eligibility when failure to pay such premiums continues for at least 60 days. In contrast, under DRA, states may condition Medicaid coverage on the payment of premiums, but like traditional Medicaid, states may terminate Medicaid eligibility only when nonpayment continues for at least 60 days. States can apply this DRA provision to some or all applicable groups. Under both traditional Medicaid and DRA, states may waive premiums in cases of undue hardship. In Kentucky, benefits are terminated after two months of non-payment of premiums for children in the separate SCHIP program. Upon payment of a missed premium, re-enrollment is allowed. After 12 months of non-payment, payment of the missed premium is not required for re-enrollment. Also, working families with transitional Medicaid will lose coverage after two months of missed premiums unless good cause is established.

There are more differences between traditional Medicaid and DRA with respect to rules for failure to pay service-related cost-sharing. Under traditional Medicaid, providers cannot deny care to beneficiaries due to an individual's inability to pay a cost-sharing charge. However, this requirement does not eliminate the beneficiary's liability for payment of such charges. In contrast, under DRA, states may allow providers to require payment of authorized cost-sharing as a condition of receiving services. Providers may be allowed to reduce or waive cost-sharing on a case-by-case basis. P.L. 109-432 exempts individuals in families with income below 100% FPL from the DRA failure to pay rules for both premiums and service-related cost-sharing. According to state regulations, Kentucky requires all providers to collect applicable cost-sharing from Medicaid beneficiaries at the time of service delivery or at a later date. No provider can waive cost-sharing, but only pharmacy providers can deny services for failure to pay (as per a state law). Finally, under SCHIP, states must specify consequences applicable to nonpayment of premiums and/or service-related cost-sharing, and must institute disenrollment protections (e.g., providing both reasonable notice and an opportunity to pay policies).

Appendix. Comparison of Service-Related Cost-Sharing Rules—Traditional Medicaid, DRA Options, and SCHIP