In concept, Medicare and Medicaid provide essential and complementary services to dually eligible beneficiaries. Medicare is the primary provider of hospital, posthospital, and physician care, while Medicaid provides benefits beyond those covered by Medicare, such as prescription drugs and long-term care. In practice, however, Medicare and Medicaid’s respective roles do not sort this out neatly, and the health financing needs of the dually eligible population surface numerous contradictions and policy conundrums when attempts are made to mesh the two programs. Dual eligibles are among the most vulnerable Medicare beneficiaries. Within this population, however, individuals’ health needs and associated medical costs can vary substantially. Although some individuals incur few or no costs beyond those of the general population, many have substantially greater health care needs and fewer personal resources to meet those needs than the average Medicare beneficiary. By definition, dual eligibles are poor: about 20 percent have annual income of less than $5,000 a year; 80 percent have annual income of less than $10,000. Compared with Medicare-only beneficiaries, dually eligible beneficiaries are more likely to live in a nursing home or live alone; have a serious and chronic condition, and physical or cognitive have less access to a regular source of care and preventive services, and higher use of emergency room care. Medicare is a federally financed health insurance program administered by the Department of Health and Human Services’ Health Care Financing Administration (HCFA). It covers almost all Americans 65 years old and older and certain individuals under 65 who are disabled or have chronic kidney disease. The program provides protection with an acute care focus under two parts. Part A covers inpatient hospital services, posthospital care in skilled nursing facilities (SNF), and care in patients’ homes. Part B covers primarily physician and other outpatient services. In fiscal year 1996, Medicare covered an estimated 38 million beneficiaries at a cost of $197 billion. Medicaid is a health insurance program financed and administered by both the federal government and the states. Its beneficiaries include poor children and their parents as well as low-income elderly, blind, and disabled individuals. In addition to covering primary and acute care, Medicaid covers outpatient prescription drugs and long-term care both in the home and in nursing facilities. Medicaid, however, is not 1, but over 50 separate programs. Although federal law mandates coverage of certain medical services and population groups, it also permits states to choose whether to cover additional services or low-income population groups. Thus, under Medicaid, the populations served and benefits provided vary across states. The percentage of Medicaid expenditures covered by the federal government also varies by state, depending on the state’s per capita income, with a range from 50 to 83 percent. In 1996, the federal government paid 57 percent of the aggregate Medicaid costs of about $160 billion, which provided health care coverage for about 37 million beneficiaries. Both programs have traditionally reimbursed providers through fee-for-service arrangements, but both have been developing managed care components in which beneficiaries obtain care from prepaid health plans. Managed care plans in both programs cover beneficiaries under terms that are different from those under fee-for-service arrangements. For example, managed care organizations are paid a fixed monthly amount for each enrollee to provide or arrange for medical services, which are typically coordinated through a primary care physician. In addition, Medicaid managed care programs differ among states. To implement these programs, states typically seek approval from HCFA to waive certain federal requirements. Named after sections of the Social Security Act that authorize the waivers, 1915(b) program waivers and 1115 demonstration waivers permit states to conduct managed care programs and experiment with plan participation and eligibility rules that would otherwise be prohibited by law. Dually eligible individuals are Medicare beneficiaries first. According to the level of support provided by Medicaid, the dually eligible population is divided into two major groups: (1) those receiving Medicare cost-sharing support and additional Medicaid health care benefits (“full-benefit” individuals) and (2) those receiving help from Medicaid only to cover out-of-pocket costs after payment by Medicare. Collectively, both groups of dually eligible beneficiaries represent about 16 percent of the Medicare population but 30 percent of Medicare expenditures. Similarly, they account for about 17 percent of the Medicaid population but 35 percent of Medicaid expenditures. States vary dramatically in the proportion of Medicare beneficiaries also enrolled in their Medicaid programs. According to one source, in 1993, two states’ Medicaid programs covered more than 20 percent of their Medicare beneficiary populations, whereas eight states’ Medicaid programs covered fewer than 7 percent of their states’ Medicare beneficiaries. These differences may reflect variation across states in demographic composition, state eligibility criteria, outreach efforts, and data reporting practices. for Medicaid primarily because they are “categorically eligible”—that is, they are eligible for such cash assistance programs as Supplemental Security Income (SSI)—or because they are “medically needy,” which means they have incomes or assets above the levels that would make them eligible for cash assistance but their medical expenses relative to their incomes are so substantial that states qualify them for assistance. A much smaller group of Medicare beneficiaries—an estimated 562,000 in 1995—receives Medicaid coverage for certain Medicare financial obligations and includes two subgroups. The first consists of Qualified Medicare Beneficiaries—called QMBs. These people have incomes or assets that exceed the thresholds set for full-benefit eligibility but have incomes that are nevertheless at or below the federal poverty level. Medicaid pays these beneficiaries’ Medicare monthly part B premiums and all copayments and deductibles required under Medicare. The second subgroup consists of Specified Low-Income Medicare Beneficiaries—called SLMBs. These people have incomes slightly above the federal poverty level; Medicaid pays their Medicare premiums but not copayments or deductibles. The Congress enacted the QMB and SLMB programs in 1988 and 1990, respectively, out of concern for the financial hardship that Medicare cost-sharing requirements could pose for low-income people not eligible for Medicaid. As we reported in 1994 and others have stated more recently, since the programs were implemented, many individuals eligible for Medicaid’s cost-sharing support have not taken advantage of it. In 1995, an estimated 37 percent of people eligible for the QMB program were not enrolled, and an estimated 90 percent of people eligible for the SLMB program were not enrolled. Both Medicare and Medicaid devote substantial resources to providing care to the dually eligible population. At the same time, both programs are under pressure to contain cost growth in their respective programs. This makes the substitution of services provided—and the resulting shifting of costs between federal and state levels—one alternative for limiting a program’s fiscal liability. The net burden is likely to fall more heavily on the federal government, as the payer for all Medicare and more than half of Medicaid expenditures. Dual eligibles can obtain similar services from both Medicare and Medicaid, especially home health and nursing facility care. Since 1989, when coverage guidelines were liberalized in response to court decisions, the home health care benefit has been essentially transformed from one focused on patients needing short-term care after hospitalization to one that serves chronic, long-term care patients as well. Between 1989 and 1996, Medicare’s part A home health care payments rose sevenfold, from $2.4 billion to $17.7 billion. As we testified before congressional committees earlier this year, not only has the number of Medicare beneficiaries receiving home health care increased dramatically, but so has the intensity of visits for each beneficiary. reduce its costs by capitalizing on the movement of Medicare’s home health benefit from a post-acute focus to include long-term care benefits. Alternatively, when Medicare’s SNF coverage criteria for daily skilled care are applied more stringently, Medicare’s coverage of a dually eligible patient’s SNF stay may end earlier and Medicaid becomes the primary payer. Such a strict application of Medicare coverage criteria, while advantageous to Medicare, shifts some of the burden of financing SNF care to Medicaid. States are beginning to explore the use of managed care to serve their dually eligible populations. However, using managed care prepaid health plans presents another set of dilemmas. On the one hand, managed care, in principle, offers the potential for a single system of coordinated care to serve a population particularly likely to benefit from such a system. On the other hand, managed care plans—both in Medicare and Medicaid—have little experience serving a population with expensive medical and extensive long-term care needs. In addition, each of the respective programs has different terms for beneficiary and plan participation. Thus, as states consider enrolling dual eligibles in their managed care programs, they face certain barriers that require federal and state cooperation to overcome. With federal waivers from some statutory requirements, several states have removed key administrative obstacles, permitting the enrollment of the dually eligible population. altogether in the case of states that have obtained special approval from HCFA. As states seek greater control of their health financing and care delivery obligations, these program differences may serve as barriers to enrolling dual eligibles in a single managed care plan. Medicare’s liberal disenrollment policy, coupled with its requirement to enroll beneficiaries in plans meeting the 50-percent commercial membership level, complicates states’ ability to use managed care for their Medicaid beneficiaries with Medicare status. For example, a state’s ability to lock beneficiaries into a prepaid plan providing both Medicare and Medicaid benefits for an extended period may have the benefit of stabilizing the state’s fiscal liability for health care, while offering the potential to coordinate care within a single network of providers. But dually eligible beneficiaries who exercise their Medicare right to leave the plan during the Medicaid lock-in period may expose the state to the cost-sharing obligations incurred with a fee-for-service or Medicare managed care provider and preclude the Medicaid plan’s potential to organize a system of coordinated services.