NCPA | Study #288, Opportunities for State Medicaid Reform

If state Medicaid programs were as efficient as most private-sector health plans, they could spend billions of dollars less to achieve the same health outcomes and would have billions of dollars each year to fund tax cuts or other spending programs.

Section 1115 waivers, granted by the Centers for Medicare and Medicaid Services (CMS), have traditionally been used to test innovative, comprehensive Medicaid reform. In 2001, the Bush administration announced a streamlined waiver process called the Health Insurance Flexibility and Accountability (HIFA) initiative. Through HIFA waivers, states have the opportunity to reduce some benefits in order to increase other benefits, reduce benefits in return for increases in the number of people eligible, and/or reduce benefits for some people in order to create a new set of benefits for others.¹⁰²

There are certain restrictions on the waivers.¹⁰³ They are usually valid for only three years (although they can be renewed). They must be budget neutral (that is, require no additional federal spending). The state must be trying to "research an idea" (rather than just trying to cut costs). Certain populations must be "held harmless" (usually pregnant women and children). Certain benefits must be protected. However, states can adjust almost all benefit, eligibility and reimbursement standards. If the waiver proves unsuccessful at any time, the state can unilaterally cancel it after closing the pro-gram to new enrollees for six months.

In addition, the Deficit Reduction Act of 2005 gives states new authority to adopt many common-sense reforms that formerly required federal waivers. [See the sidebar "The Deficit Reduction Act of 2005."]

The Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005, which was signed into law in February 2006, will have a significant impact on state Medicaid programs. The new law gives states more flexibility in customizing their Medicaid programs and removes obstacles to beneficiary cost-sharing.

Under key provisions of the Act, states now have the authority to:¹

Tailor benefit packages to certain eligible Medicaid populations, as long as the benefits are at least as generous as a Blue Cross Blue Shield plan currently offered to federal workers.
Charge premiums and copayments for beneficiaries whose incomes are over 150 percent of the federal poverty level; however, certain mandatory populations (pregnant women and children) will still be exempt from cost-sharing.
Enforce copayments, meaning health care providers and pharmacists can deny services to nonpayers.
Increase the “look back” period to five years to discourage seniors from transferring assets in order to quality for Medicaid.
Allow states to offer more home care through community-based services as an alternative to costly nursing home care without requiring a waiver.

More extensive changes in Medicaid programs still require HIFA waivers. However, states are uncertain as to how the Deficit Reduction Act will affect their continued use of HIFA waivers.

¹“Deficit Reduction Act of 2005: Implications for Medicaid,” Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, February 2006.

Part II: Recommendations for State Medicaid Reform

The Deficit Reduction Act of 2005