Medicaid Empire: Why New York Spends so much on Health Care for the Poor and Near Poor and How the System Can Be Reformed

Studies | Health

No. 284
Monday, March 20, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, Joe Barnett, and Pamela Villarreal


Overview of Medicaid

Medicare and Medicaid were created in 1965 at the height of President Johnson’s Great Society and War on Poverty. Medicare is a federally funded health care program for seniors and the disabled. Medicaid is a joint federal-state program for the poor and near poor. Although each state operates its own program, the federal government sets the parameters for Medicaid and matches state spending. Medicaid has grown far beyond the program originally envisioned and the scope of the current program is staggering. Nationally, Medicaid covers:

  • One in every six people.
  • One in every three children.
  • One in every two births.
  • More than one of every two nursing home residents.

The number of Medicaid enrollees nationwide rose by nearly one-third between 2000 and 2004.5 Currently at 53 million, the number is likely to grow much higher. There are 10 million to 14 million people who are potentially el`igible but have not enrolled.6 Additionally, the number of seniors who qualify for Medicaid long-term care benefits is projected to grow rapidly as the Baby Boom generation begins to retire. The population over age 65 will grow by nearly two-thirds (64 percent) by 2020, and the number of seniors over age 85 will grow by 84 percent by 2025.7

Figure I - Medicaid Enrollees and Expenditures Nationwide

“Ten times as many people are enrolled in Medicaid as receive welfare.”

Although Medicaid is commonly assumed to be a health program for welfare recipients, only a small portion of enrollees receive Temporary Assistance for Needy Families (TANF), the main cash assistance program. Furthermore, the number of individuals receiving TANF has fallen from almost 13 million in 1996 to about 5 million in 2003; as a result, the proportion of Medicaid enrollees who are welfare recipients has also fallen.8 Surprisingly, there are ten times as many people on Medicaid as there are receiving welfare checks.

Who Qualifies for Medicaid? Federal law requires the states to cover certain populations, including low-income seniors and pregnant women, the blind and disabled, and all children living in poverty. The states `an choose to cover children and families above the poverty level. The states also impose their own asset tests to determine eligibility. In New York, for example, a Medicaid-eligible individual can own a home, a car and personal property.

Every state covers some optional Medicaid populations, which are currently about 29 percent of enrollees.9 New York, for instance, extends eligibility to include young children (ages one to five) in households with incomes up to 133 percent of the federal poverty level, and infants to age one and pregnant women with incomes up to 200 percent of the federal poverty level.

In theory, most seniors and most of the disabled are covered by Medicare, a wholly federal program paid for by the federal government. However, there is a class of Medicare recipients called dual eligibles. Although they qualify for Medicare, they can also receive Medicaid because of their low incomes and few assets. Medicare is the primary payer, but states must pay for any benefits Medicare doesn’t pay for if Medicaid covers them. More than one-third of all Medicaid costs are for dual eligibles.10

How Do Enrollees Get Medical Care? On paper, Medicaid coverage appears more generous than the health plans of most other citizens. Potentially, enrollees can see any doctor or enter any facility and have government pay virtually all costs. In practice, things are different.

Access to Primary Care. Physicians and other health care providers can choose whether or not to participate. About 30 percent of doctors do not accept any Medicaid patients, and among those who do, many limit the number of Medicaid patients they will treat. Access to care at ambulatory (outpatient) care clinics is also limited: A recent survey found two-thirds of Medicaid patients were unable to obtain an appointment for urgent ambulatory care. In three-fourths of the cases, the reason was that the provider did not accept Medicaid.11 

Figure II - Optional and Mandatory Spending on Medicaid Populations

Access to Specialists. The number of specialists who accept Medicaid is particularly limited.12 According to a recent New York Times series, for example:13

  • In New York City, a child with an irregular heartbeat was not able to see a cardiac specialist for nearly four months.
  • The parents of a boy needing corrective ear surgery were told the wait could be as long as five years.
  • At specialty clinics run by teaching hospitals in the city, Medicaid patients often have to wait one to three hours for a 5 to 10 minute appointment with a less-experienced medical resident or intern.

The problem is not limited to New York:

  • Physicians say the University of Colorado Hospital is refusing Medicaid patients, and Medicaid enrollees there can face six- to eight-month waits for appointments at specialty clinics.14
  • A 45-year-old Seattle woman admitted to the hospital with a triple fracture of her ankle waited nine days for a doctor to agree to take her case, because none of the orthopedic surgeons on staff would accept Medicaid.15

“Medicaid appears more generous than private health plans, but access to care is more limited.”

Access Through Managed Care Plans. Medicaid managed care plans are one way the states have attempted to expand access to care, control costs and improve quality. The choice of physicians and facilities are limited to the providers in the plan (as in private insurance plans) but contractual arrangements between physicians and the plans ensure a degree of access that Medicaid patients typically do not have. Nationally, about 27 million Medicaid enrollees, 61 percent of the total, are in managed care plans.16 The percentage of Medicaid enrollees in managed care ranges from none in a few states to 100 percent in Tennessee. Of the 4 million Medicaid recipients in New York in 2004, 58 percent (2.3 million) were in managed care plans.17 

Figure III - Who Pays Nursing Home Residents' Bills%3F

Under routine Medicaid, health care providers are reimbursed according to fee schedules set by state administrators; and one reason so many doctors eschew the program is because fee payments are so low. Under managed care, however, the plans receive a set annual fee per enrollee to provide whatever health services the state covers and the plans can negotiate to pay providers higher fees than normal Medicaid rates.18

“Nationwide, one-fourth of Medicaid enrollees account for two-thirds of costs.”

In New York City, Medicaid managed care plans are operated by public hospitals, and outpatient care is provided by clinics and community health centers. Some of the provider networks only serve special populations, such as pregnant women, and once the women give birth, they must transfer to another network.19 Other states contract with networks created by the same private insurers who administer employer-sponsored health plans.20

“One-third of New York Medicaid enrollees account for three-fourths of costs.”

Alternatives to Managed Care. During the 1990s, large insurers and most employers turned to managed care as a way to control costs. One way or another, these systems tended to reward providers for cost control. Managed care has not proved popular with patients, however. Whereas fee-for-service medicine gives providers an incentive to overprovide services, HMO-type fixed payments create incentives to underprovide. All too often, patients viewed managed care as an impersonal bureaucracy that puts cost control ahead of patient welfare.21 We will explore Health Savings Accounts as an alternative to managed care below.

“Two-thirds of Medicaid spending is for optional benefits; one-third is for mandatory benefits.”

Where Do the Dollars Go? Roughly two-thirds of Medicaid spending nationwide is on optional populations and services:

  • The general public tends to imagine the program primarily serves poor women and children; however, although this group includes three-quarters of all enrollees it accounts for less than one-third of the funds spent.22
  • By contrast, the elderly and disabled account for about one-fourth of enrollees but more than two-thirds of all costs. [See Figure I.]

“Medicaid pays the bills of a majority of nursing-home residents.”

States have considerable flexibility to determine the types of services covered by Medicaid. The federal government requires every state to offer 14 mandatory benefits (for example, hospitalization, physician visits and so forth) but allows each state to choose which of 34 optional benefits it will cover, including prescription drugs, and long-term care. [See Appendix Table IIa-c.] Two-thirds of Medicaid spending is on optional benefits. [See Figure II.] 23

Nursing home care is an optional benefit that every state provides. Medicaid pays for 58 percent of all nursing home residents and 43 percent of all long-term care costs nationally. [See Figure III.] Long-term care is used by only 9 percent of all enrollees.24

“The distribution of federal Medicaid dollars does not reflect the distribution of poverty.”

How Is the Federal Contribution Determined? One might assume that the federal government’s Medicaid contribution is based on each state’s poverty population. This is not the case. Using the percentage of the nation’s poor that live in each state as an indication of need, many states receive far more Medicaid dollars than they should while others get far less. [See Table I.] New York, for example, has 8 percent of the nation’s poverty population, but gets 12.9 percent of all federal Medicaid dollars. By contrast, Texas has 10.3 percent of the nation’s poverty population, but receives only 6 percent of federal Medicaid dollars. As Figure IV shows, New York received 68 percent more than it would have based on the distribution of poverty alone.

  • Vermont received more than twice as much as its portion of the poverty population.
  • Maine received almost 97 percent more than it would based solely on the poverty distribution.

Among states that received far less than they should by this criterion:

  • Virginia received only 69 percent of what it should have based on its share of the poverty population.
  • Texas got about 57 percent of the funds it should have based on need.
  • Nevada received only 51 percent.

Figure IV - Federal Medicaid Allocations in Selected States

Poverty versus Other Factors. Arguably, federal Medicaid spending should be based on more than the distribution of poverty.25 We should probably also consider ability to pay as well as differences in the cost of health care. Using state data on poverty, personal income per capita (as a proxy for ability to pay) and personal health expenditures per capita (as a proxy for health care costs), we performed a regression analysis of federal Medicaid dollars spent in each state. [See Appendix Table I.] It shows: 26

  • A 10 percent increase in the poverty rate in a state increases federal Medicaid spending in a state by 8.2 percent.
  • A 10 percent increase in per capita health expenditures increases federal Medicaid spending for a state by 12.6 percent.
  • However, a 10 percent increase in a state’s personal income per capita has no effect on federal Medicaid spending.

“Some states receive far more federal dollars than if the money were distributed based on poverty.”

Based on our analysis some states are receiving far more or far fewer Medicaid dollars than would be indicated, taking into account all three factors. Texas should receive almost 9 percent of federal Medicaid dollars instead of its current 6 percent. By contrast, New York should receive only about 7 percent of total federal Medicaid dollars, instead of its current 12.9 percent.

The Federal Match Formula. What accounts for these disparities in the distribution of federal funds? The answer lies in a formula called FMAP (Federal Medicaid Assistance Percentage or the “federal match”) used to determine the percentage the federal government contributes to each state’s program.

The formula uses the ratio of per capita income in a state to per capita income nationwide (a proxy for both poverty and ability to pay) to determine the federal matching rate. However, there is a 50 percent floor on the federal matching rate and an 83 percent ceiling, designed to bring states closer to the national average in terms of their funding ability. A matching rate of 50 percent means that a state receives one dollar in federal funding for every state dollar spent. There is no limit on the number of state dollars the federal government will match; hence, states that spend more on Medicaid receive more federal dollars.27 [See Appendix I for a detailed explanation of the formula.]

Table I - Federal Medicaid Spending by State versus Poverty Distribution (2004)

“The federal matching formula rewards states that spend more.”

However, the matching rate is enhanced by an additional amount equal to 30 percent of the difference between 100 percent and a state’s calculated matching rate. For a state with a matching rate of 50 percent, the enhancement raises the matching rate to 65 percent. The enhancement benefits high-income states, since it is calculated from the 50 percent floor. New York, for example, receives about $1.86 for every dollar it spends instead of just the dollar-for-dollar match resulting from the 50 percent floor. Mississippi’s enhanced matching rate is 83 percent, so they receive $4.88 for every dollar they spend. However, the formula doesn’t benefit Mississippi more than New York.

The formula’s ability to narrow the disparities between states depends on how much each state spends. In 2004, New York spent twice as much per capita on Medicaid as did Mississippi ($2,165 per capita compared to $1,180 per capita, respectively). Even though New York’s matching rate per dollar is lower, they receive more federal Medicaid dollars ($23.4 billion compared to Mississippi’s $2.7 billion) because they spend more. Indeed, the Government Accountability Office reports that while the federal matching rate moves 30 states toward the national average (including Mississippi), it also moves about 21 states away from the national average (including New York).28

How Much Is Lost to Fraud and Abuse? Fraud and abuse have plagued Medicaid since its inception. In 1997, the General Accounting Office estimated that fraud and abuse may be as high as 10 percent of Medicaid spending.29 For example, a 1993 investigative report of the Illinois Medicaid system by the Chicago Tribune found:30

  • In one year, 71,064 Medicaid patients visited a doctor’s office more than 11 times (compared to a national average of six visits per year), while four patients made more than 300 visits in one year.
  • In one day, one patient saw five doctors, visited a pharmacy seven times and had 22 prescriptions filled with 663 pills.

The Tribune also uncovered “Medicaid mills,” that freely prescribed drugs, syringes and other medical products that were sold by patients on the street.

More recently, a year-long investigation of New York Medicaid by the New York Times found massive provider fraud. For example:31

  • Dr. Rosen, a dentist in New York’s Medicaid program, claimed to have performed nearly 1,000 procedures in a single day.
  • In September alone she claimed to have performed 9,500 procedures.
  • All told, she and a colleague billed New York Medicaid $5.4 million in 2003.

Most fraud is committed by physicians and other providers, rather than patients, but providers often turn a blind eye to unscrupulous patients abusing or defrauding the system. For instance, the Times reports that a Brooklyn doctor prescribed more than $11 million worth of a synthetic growth hormone used to treat AIDS patients over a three year period. Investigators say these patients were part of an elaborate scheme to obtain a drug popular with bodybuilders buying on the black market. New York Medicaid’s yearly cost for this growth hormone grew from $7 million to $50 million within a year of the scheme becoming prevalent.

Another source of fraud and abuse is the federal Supplemental Security Income (SSI) program. Many people with disabilities access Medicaid benefits by qualifying for SSI. Since coverage is often related to medical conditions that are fairly easy to fabricate or exaggerate, individuals and parents have incentives to misrepresent their medical conditions. According to the Government Accountability Office (GAO), “middlemen” who provide translation services to beneficiaries who do not speak English, coach them on feigning and exaggerating mental disabilities in order to receive SSI benefits; middlemen also work with dishonest health care providers to supply faulty medical information. Additionally, a number of SSI recipients have admitted to transferring ownership of assets in order to quality for SSI benefits.

  • Between 1990 and 1994, an estimated $74 million in assets were transferred, including cars, cash, houses and land.
  • Between 1996 and 1997, the Inspector General’s Office received 12,680 complaints of SSI fraud, constituting about 37 percent of all fraud allegations received from the public.

Unlike the poor and near poor, whose income and assets can be documented, these recipients can “game” the system to obtain coverage.32


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