Medicaid Empire: Why New York Spends so much on Health Care for the Poor and Near Poor and How the System Can Be Reformed
Monday, March 20, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, Joe Barnett, and Pamela Villarreal
Table of Contents
- Executive Summary
- Overview of Medicaid
- What Difference Does Medicaid Make?
- How New York Compares to Other States
- Recommendations for New York Medicaid Reform
- How the Federal Government Can Help
- Appendix I: The Federal Medicaid Matching Formula
- Appendix II: Medicaid Regression Methodology
- About the Authors
Recommendations for New York Medicaid Reform
If New York Medicaid were as efficient as the average state program, it 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. Achieving average Medicaid efficiency is a modest goal. A more ambitious goal is to achieve the efficiency of the average private-sector health plan.
New York can improve Medicaid services, while controlling costs, by adopting common-sense reforms, including techniques commonly used in the private sector; by contracting with private sector providers for services; by fundamentally restructuring its program; by giving enrollees financial incentives to reduce unnecessary use of services; and by moving patients out of Medicaid and into private sector plans. As part of this reform effort, the state also needs a complete overhaul of long-term care and home health services.
Some of these reforms could be carried out by the state on its own, while others require what amounts to pro forma approval from the federal government. More aggressive reforms require specific federal waivers. [See the sidebar “Using Waivers to Implement Reforms.”] The most desirable reforms will require federal legislation.
To reduce Medicaid costs, New York should begin by employing measures that are common in the private sector and that achieve results. The following are some examples.
“New York could contract with the most efficient providers for each service.”
Substituting Less-Expensive for More-Expensive Providers. Why pay more when the same quality of care is available for less? Private-sector health plans routinely contract selectively with providers, choosing to direct their enrollees to providers who charge less for the same level of quality. These plans typically require enrollees to use facilities and physicians that are “in network,” or to pay a larger share of the cost if they use providers that are “out of network.” Competition encourages potential contractors to discount services. It also improves quality by giving hospitals incentives to specialize in those services they do well.
Through specialization, hospitals can perform a large volume of procedures, or care for a large volume of patients with similar conditions, at a lower cost. Hospitals can reduce costs by eliminating inefficiencies, including unnecessary services, excessively long hospital stays, excessive compensation to noncritical staff, inefficient staffing levels, and so forth. Hospital executives will find innovative ways to cut costs when they have better incentives to do so. 129
Selective contracting can work for New York Medicaid. There are opportunities to negotiate discounts for most medical services. Other states are using competitive bidding and selective contracting for eyeglasses, medical equipment, transportation and other services. 130 For example, Medi-Cal , California 's Medicaid program, began selective contracting for hospital services in the early 1980s. Four years later the state was spending nearly 8 percent less than it would have without selective contracting.131 The Centers for Medicare and Medicaid Services (CMS) found that contracting reduced per diem charges for hospital stays in California about 16 percent below what they otherwise would have been. The greatest savings were in areas with stiff competition among hospitals.132
“Selective contracting can reduce costs and improve quality.”
Although New York Medicaid managed care plans are free to negotiate with providers, we have seen that there is an unfortunate conflict of interest. Many Medicaid managed care plans in New York City are administered by charity hospitals that have an incentive to use their own facilities as much as possible.
Over the last 10 years, hospital pricing in New York State has been deregulated so that private insurers are free to negotiate hospital charges for both their managed care and fee-for-service plans.133 This allows an insurer or health plan to selectively contract with hospitals for particular services and steer patients to those facilities by requiring a patient or doctor to obtain a preauthorization from the health plan before admission. Unfortunately, New York Medicaid has not taken advantage of this for hospitals serving its fee-for-service patients.134 In New York, hospital reimbursement rates for Medicaid patients are set by the state and do not vary, regardless of the hospital used.
New York Gov. George Pataki has proposed allowing Medicaid to contract for high-cost, specialty hospital services for fee-for-service patients.135 Medicaid would award contracts to selected hospitals and negotiate payment rates for services provided by those hospitals. For example, Medicaid could selectively contract specific high-cost procedures to “Centers of Excellence,” hospitals that perform a high volume of particular procedures for which there is a demonstrated relationship between volume and quality. Hospitals that don't receive contracts would not be reimbursed for providing such services unless they were preauthorized, or the patient was admitted due to an emergency. This is a modest reform that is long overdue.136
Substituting Less-Expensive for More-Expensive Therapies. Treatment in outpatient settings, such as doctors' offices, is generally less expensive than treatment in a hospital. However, Medicaid patients have limited access to physicians other than in public health clinics or hospital emergency rooms. Paying higher fees to physicians could increase patients' access to health care and reduce expensive emergency room visits. The key to improving patient access is to raise reimbursement rates for examinations, tests and procedures that can be performed in a doctor's office.
Performing more procedures in outpatient settings that were once only performed in hospitals (such as minor surgeries that don't require an over-night stay) is a common way of reducing costs.137 A Pennsylvania study found about 10 percent of all hospitalizations for patients under age 65 are potentially avoidable. Caring for these patients in lower-cost, more appropriate settings could have saved about $2.8 billion. In some cases procedures were performed in hospitals that could have been done in outpatient clinics. In other cases, inpatient care could have been avoided by timely physician care.138
Substituting Less-Expensive for More-Expensive Drugs. Managed care health plans use a variety of techniques to control drug costs, including preferred drug lists, formularies, negotiated prices with drug companies and single-source drug distributors. For example, many plans require enrollees to use a specific mail-order drug supplier to avoid a higher copay. Health plans frequently contract with a pharmacy benefit manager (PBM) to handle drug benefits. PBMs require enrollees to obtain a preauthorization to purchase brand name drugs that aren't on their list of preferred or formulary drugs, or to use a non-network pharmacy.
Medicaid managed care plans generally also use PBMs to manage their drug benefits. However, some states have rules and regulations that limit the ability of PBMs to control drug costs. For instance, laws that prevent a PBM from requiring the substitution of generic drugs when they exist are used in some states.139 There are several bills pending in the New York legislature that would limit the ability of PBMs to require the use of mail-order pharmacies.140 New York also has a bill pending that would require PBMs to reimburse any pharmacy willing to meet the requirements of a drug plan.
“New York could use privatesector techniques to control drug costs.”
New York Medicaid should follow the example of other states and encourage the use of less-expensive drug alternatives, where quality is the same — including therapeutic, generic and over-the-counter substitutes. In the past few years, a number of prescription drugs have been moved over the counter, and are available at a much lower cost and without the hassle of obtaining a prescription. For example, take Claritin, a drug used by allergy suffers that was formerly available only by prescription. When it became available over the counter, the price fell substantially. The current prescription version of the drug, called Clarinex, is chemically similar.141 Yet a year's supply of Clarinex costs about $949, compared to only $280 for Claritin and less than $15 for an OTC generic equivalent.142 Another example is the prescription version of the heartburn medication Prilosec, which cost $122.99 for 30 capsules at Walgreens.com, a daily cost of about $4.10.143 Currently, Walgreens.com sells a box of over-the-counter Prilosec with 42 capsules for $25.99, or a daily cost of 62 cents.144
The drug company Glaxo recently asked the Food and Drug Administration for the right to sell the obesity drug Xenical (Orlistat) over the counter. This might be an effective medication for overweight Medicaid patients. Glaxo expects the over-the-counter version to cost about two-thirds less than the prescription price.145 However, doctors will continue to prescribe the prescription version because it will cost Medicaid patients less out of pocket, even if they are charged a small copay (usually $3).
Unfortunately, Medicaid (and Medicare) will not pay for over-the-counter drugs, even if they can be substituted for more-expensive prescription drug therapies. Furthermore, there is a danger that drug formularies will become bureaucratic obstacles to needed therapies. One way to resolve these problems is to allow Medicaid patients to control some of the funds for their own health care. New York should consider allowing patients, rather than bureaucrats, to make these choices.
“Patient satisfaction with Cash and Counseling programs is almost 100 percent!”
Arranging Cash Accounts for Patients with Disabilities. A number of states have received waivers that allow them set up cash accounts which disabled Medicaid recipients can use to manage their own health care dollars and have direct control over the purchase of needed services.146 These programs, called “Cash and Counseling,” use a defined contribution approach.147 The patient is given a set dollar contribution and is free to choose his or her providers. The programs also involve counseling to assure that the patient is well-informed. Under traditional Medicaid, the states select the providers without patient input. Under this program, the patient can now choose his or her own provider. Surveys of participants in the program show that they have a higher quality of life with fewer unmet health needs.148 Remarkably, patient satisfaction is almost 100 percent.149
Reducing Errors in Diagnosis and Care. Eliminating errors in diagnosis can lead to better treatment at lower cost.150 Some of the most dangerous and costly problems in our health system include drug misuse, antibiotic overuse, preventable hospital-acquired infections, and the under-diagnosis and mistreatment of chronic conditions.151 The Institute of Medicine found that between 44,000 and 98,000 people die each year from preventable medical errors.152 A recent report found that nearly 100,000 people may die annually of hospital-inquired infections alone.153
Hospital-acquired infections are the fourth largest killer in America. Even more frightening, a new and deadly infection known as MRSA (methicillin-resistant Staphylococcus auerus ) does not respond to commonly used antibiotics. In 2003, 57 percent of staph infections were a result of MRSA, and the percentage is rising. Additionally, hospital infections add $30 billion annually to the cost of health care. MRSA is commonly spread from patient to patient by doctors and hospital personnel and could be prevented by simple hygiene measures like washing hands before entering each patient's room and changing outer garments between tasks. The problem is getting hospitals to enforce such measures. Some hospitals are taking aggressive steps, and both state and federal policies are changing to reduce this spreading epidemic:
- Some hospitals such as the University of Pittsburgh system are imposing stiff penalties, including termination and suspension of practice privileges, for staff and doctors who fail to wash their hands.
- Some states have passed laws that publicize a hospital's “infection report card,” allowing patients to compare hospital infection rates before considering surgery; ideally, hospitals would compete for patients through reducing infection rates.
- Currently, the Centers for Disease Control and Prevention collect data on hospital infection rates, but it is kept secret; this information should be made available to the public.154
Many Medicaid hospital patients are infected with MRSA. Medicaid should demand that providers institute infection control programs. Payments to hospitals could be adjusted to reward facilities that achieve low infection rates and penalize those with higher infection rates. Hospital-acquired infections are a type of medical error that should be measured for quality ratings and addressed in contracts with providers.
Contracting with the Private Sector . Instead of paying for Medicaid services on a fee-for-service basis, New York Medicaid could contract with hospitals, clinics and physicians for specific services and therapies. This would allow the program to coordinate the care provided and establish quality standards.
Disease Management and Care Coordination. Many patients have multiple illnesses that require treatment by different specialists or in different facilities.155 In many cases they see numerous doctors who prescribe numerous medications to treat a variety of health problems. Unfortunately, these health care providers often have little (if any) contact with one another. The lack of coordination of care leads to poor quality health care and medical errors, such as harmful drug interactions.
“Coordinated care could reduce harmful drug interactions.”
Coordinating care typically involves a case manager who reviews the patient's medical history and claims data, ensures that providers communicate with each other about the patient's condition, and monitors the patient's progress. The program allows health care providers and state social service agencies to exchange relevant information about all the services received by a patient and share it appropriately.
Recent studies have found that seniors often take too many medications – many of which are contraindicated. About 20 percent of seniors have at least one prescription each year that is questionable. All told, about seven million seniors are taking unsuitable drugs.156
Often, a medication is used merely to combat a side effect of another medication.157 Besides ensuring that appropriate care is given and clinical protocols are followed, care coordination can also reduce the risk of adverse drug interactions from inappropriate or contraindicated drugs. A Robert Wood Johnson-funded demonstration project to improve care coordination reduced medications judged to be potentially inappropriate by more than one-third (36 percent) over the course of 18 months.158
Disease management involves developing a treatment plan based on current treatment protocols for patients and training them how to the follow protocols.159 With the help of a case manager, patients formulate a plan for the control and treatment of their condition. The plan is essentially a list of established guidelines indicating which actions to take in response to various symptoms.160 Although monitored by a physician, much of the day-to-day care is administered by patients themselves, so training is a necessary part of such programs.
“Patients can be trained to manage chronic conditions.”
Self-Managed Care. Patients can also be trained to manage their own care, including administering drugs, monitoring vital signs, caring for wounds and so forth. For example, numerous studies have shown considerable benefit from self-management training for patients with Type 2 diabetes.161 Patients can be trained to inject insulin, monitor and maintain a log of blood glucose levels, and use the results to adjust their dietary intake, activity levels and medicine doses.162 In addition, many diabetics can reduce reliance on medications and control their diabetes completely by adhering to a meal plan, losing weight and exercising.163
Diabetes is the sixth leading cause of death by disease in the United States. Diabetics spend four times more money on health care than nondiabetics.164 By one estimate, nearly $2.5 billion in annual hospital costs for diabetes complications could be averted with appropriate care.165
Uncontrolled asthma is another chronic disease that creates large costs for Medicaid, as well as private insurers.166 The Asthma and Allergy Foundations of America estimates nearly 20 million Americans suffer from asthma — resulting in 500,000 hospital stays each year.167 More than 2.5 million school-age children suffer from asthma, missing nearly 15 million school days per year. The economic loss averages out to nearly $800 per child per year.168 A Dutch study comparing self-management to usual care found that those monitoring their own asthma achieved a savings of about 7 percent the first year and a 28 percent savings the second year compared to those in standard care with a primary physician.169
Caring for Special-Needs Patients. The problems of people with disabilities and chronic conditions range from schizophrenia to mental retardation to blindness to diabetes. These conditions require special therapies and specialists that Medicaid patients have difficulty accessing. Managed care plans that receive a payment for each enrollee that is not adjusted for their cost of care have an incentive to avoid enrolling them or to skimp on care. Medicaid should contract with specialists and specialized facilities for these patients, and pay risk-adjusted premiums based on the cost of care and incentives for performance (discussed below). For example, a network providing care for psychiatric patients could be given incentives to use outpatient therapy and drug treatment rather than more costly institutional care when it can achieve the same therapeutic outcomes.
The many different health needs of these groups make it unlikely that a single private insurer will insure the whole group, as a group. The state of Florida contracts with various private sector entities to serve people with specific types of disabilities. This allows benefits to be tailored to the needs of the individual enrollee.170 New York should explore such opportunities. For example, different providers could serve the mentally ill, the physically disabled, the drug addicted and so forth. The comparative advantage of these various providers would reduce costs and increase the quality of service.171
The services provided by contractors could be limited to those related to the disability. Regular Medicaid could provide other health services, or the disabled/chronically ill could be offered premium support to purchase other coverage. Higher-cost individuals with disabilities could be provided a larger personal health account (discussed below) to cover their needs. This would allow them a choice of benefits and health plans similar to the HIFA waivers in Florida and South Carolina.
“Financial incentives to providers can improve performance.”
Pay for Performance. A 2002 National Academy of Sciences report recommended that all federal health programs begin paying for quality care rather than paying for services rendered.172 The NAS says the programs should initially focus on the treatment of health conditions that account for most of the spending in public health programs, such as diabetes, depression, osteoporosis, asthma, heart disease and stroke. Medicare has begun implementing pay-for-performance initiatives.173
If New York only paid providers for outcomes it deemed worthwhile, it might reap significant savings. For example, Bridges to Excellence, an initiative of the Robert Wood Johnson Foundation, pays additional funds to physicians of diabetics in private health plans who achieve certain quality standards. The cost per diabetic is about $175, but that is only half of the estimated saving per diabetic patient from the reduction in treatment complications.174
Pursuing Fraud Aggressively. According to the New York Times , Medicaid has become “an economic engine that fuels one of the state's biggest industries.”175 Any attempt to rein in spending has been fought bitterly by those profiting from them. Doctors, drug makers, hospitals and hospital workers' unions have all fought attempts to provide tighter oversight of Medicaid spending.
State Medicaid claims data and other medical information could be used to identify fraud, abuse, overuse and unnecessary care, but seldom are. Most abuse is identified through tips or other unreliable means. Establishing a state database of billing information on Medicaid providers in New York would be useful. If one provider's Medicaid billing began to increase significantly, case workers could quickly identify and check into the trend.176 The provisions of current “whistleblower” laws that allow private citizens who identify fraudulent providers to receive some of the recovered funds may be useful.
Software firms have developed information technology to more easily examine Medicaid billings using a number of different criteria. Salient Corporation is working with Chemung County, New York, to better manage Medicaid spending. Using Salient Corporation's Muni-Minder software, officials can analyze the billings of individual suppliers, products and services utilization, or individuals, allowing them to uncover inefficiency, waste and abuse anywhere in the program. For example, Muni-Minder allows investigators to quickly identify the number and cost of prescriptions for brand-name drugs filled when a generic was available. A chart of the amount per recipient spent for any provider is easily created with only a few keystrokes.177
“Counties can be given financial incentives to uncover fraud.”
New York counties should have the power to investigate Medicaid billings of all providers and utilization of enrollees within their boundaries. They should, at the very least, have the authority to suspend providers and suppliers suspected of fraud. In cases where there is substantial evidence, counties should also have the authority to prosecute Medicaid fraud within their county. Since local governments pay only one-fourth of the cost of Medicaid, the benefit to them of discovering and eliminating fraud is only 25 cents on the dollar. If they were allowed to keep half of any funds recovered, they would have an incentive to double their efforts.
Finally, New York automatically enrolls recipients of Supplemental Security Income (SSI) in Medicaid. This encourages fraud, because the conditions which qualify many individuals for SSI are difficult to diagnose and easy to fake. New York could better determine who qualifies for Medicaid disability coverage by separating it from SSI coverage. It could provide additional resources to the appropriate screening bureau or create a panel to judge whether individuals are truly disabled. Savings from removing the unqualified from the rolls would serve as the funding source.
New York should reform the way in which it finances Medicaid, and consider reform of private insurance regulations.
Abolishing Unfunded Mandates. New York requires counties to contribute to the cost of Medicaid. Since Medicaid spending is determined by the state government, the way the program is financed violates the principle that those who spend the money should bear the responsibility of paying for it.
To address the growing tax burden on the counties, in 2005 the state capped the rate of increase in the counties' payments. After three years, the annual increase in county Medicaid funding will be permanently capped at 3 percent.178 A further step would be for the state to assume the local share of Medicaid financing. However, a recent report suggests that shifting the local financing share to the state income tax would not save property taxpayers in upstate New York since they would have to pay higher income taxes to make up the counties' share currently paid for with property taxes. The Public Policy Institute of New York State estimates a takeover of local county Medicaid bills by the state would increase the income tax burden of upstate New York by $1.08 billion but would only reduce property taxes by $815 million.179 However, if Medicaid were fully funded by the state, voters would be better able to identify and hold accountable the level of government responsible for their tax increases. This is because New York legislators would have to appropriate funds and raise taxes for any new spending they may be tempted to mandate.
Making Block Grants to Local Governments. One solution to this financing dilemma is for New York state to block grant the funds to localities, and let them locally manage their Medicaid dollars as well as spending on free care by public hospitals and clinics. This would give them more flexibility than state Medicaid regulations and reimbursement rates currently allow.
Deregulating Private Insurance. One reason for Medicaid expansions in recent years is the rising cost of private health insurance. Contributing to that rise are regulations that raise the cost of health care. State insurance laws regulate the premiums that can be charged and to whom an insurer must sell coverage. In many cases, they specify benefits that policies must provide.
Community rating, as we have seen, charges enrollees the same premium regardless of health status. In doing so, it essentially overcharges young, healthy individuals to cross-subsidize older, less healthy individuals. Enrollees who are overcharged are prone to drop their coverage. Guaranteed issue makes it easy for them to wait to obtain insurance until after they become sick. With fewer and fewer healthy individuals to offset the sick, the risk pool becomes increasingly unhealthy. Over time, this cycle causes premiums to skyrocket. Insurance becomes unaffordable.
“Risk pools can cover highcost patients.”
Direct state subsidies are a better way than community rating and guaranteed issue to cover patients who are uninsurable due to chronic health conditions. Thirty-two states have some type of high-risk pool for medically uninsurable residents. Those allowed to join generally have preexisting conditions that make insurance prohibitively expensive or impossible to obtain on their own, but they are not necessarily indigent or low-income. Each state program differs slightly, and maximum lifetime benefits vary. Most have waiting lists to join or waiting periods before covering preexisting conditions. The pools are state-subsidized and are expected to lose money.180
States insurance regulations require private insurers (and often public programs) to cover more than 1,800 specific benefits and service providers (such as acupuncturists and chiropractors).181 These mandates raise the cost of health insurance. Economists estimate that as many as 25 percent of the uninsured are priced out of the market for health insurance due to cost-increasing regulations.182 There are 43 mandated benefits and types of providers in New York state. Although New York has fewer mandates than Minnesota (60) and Florida (50), it has more than Michigan (25) and Wisconsin (29).183
Health Opportunity Programs
Consumer-driven health accounts are a way to give Medicaid patients financial incentives to reduce unnecessary use of medical services and to use those services (or make those lifestyle changes) that will improve their health. Legislation has been introduced in Congress that would establish a five-year demonstration project to allow 10 state Medicaid programs to set up “Health Opportunity Accounts” (HOAs) for Medicaid recipients, similar to Health Savings Accounts (HSAs).184 Proponents hope these accounts will create an awareness of the cost of health care and inject an element of consumerism into the purchase of medical services. Under this proposal, states would receive federal matching funds to contribute up to $1,000 per child and $2,500 per adult into the HOAs. Like personal health accounts in South Carolina and Florida, HOAs could be used to purchase a variety of medical goods and services, and unused funds would be available for future use by participants.185
“Health Savings Accounts let patients control some of the dollars spent on their care.”
When patients have the proper financial incentives, they will be better consumers of health care. Health Savings Accounts (HSA) are one way the private sector is providing such incentives. Innovative state Medicaid programs are finding ways to integrate such accounts into their programs using federal waivers. New York should consider establishing such accounts.
Flexible Spending Accounts in Florida . For example, a new pilot program in Florida is designed to improve outcomes by providing Medicaid enrollees with incentives to become actively involved in their care and treatment. Deposits will be made to a type of flexible spending account (FSA) for enrollees who practice healthy lifestyles. They can use the funds to purchase health care goods and services not covered by their plan. A panel will ultimately decide which activities qualify for this “enhanced benefit credit,” but they will likely include such things as participating in wellness programs, obtaining annual immunizations, or participating in disease management, smoking cessation and weight loss programs. In many cases, participants who leave the Medicaid program will have access to the funds for up to three years and can use them to pay premiums for private insurance.186
Personal Health Accounts in South Carolina . South Carolina plans to allow people to manage their own health care dollars by establishing Personal Health Accounts (PHAs), similar to HSAs.187 They will be able to use the funds to pay for medical services not covered by Medicaid plans or to pay premiums for coverage under their employer's plan. [See the sidebar "Medicaid Reform in South Carolina."]
Since PHAs would be wholly or partly funded with taxpayer dollars, they should be restricted to the payment of medical bills and insurance premiums. Beneficiaries who consume health care wisely and see their PHA balances grow could use the funds for medical services not covered by their health plan. And in the future, they would be able to use unspent balances to pay insurance premiums and buy medical care directly after they leave the Medicaid rolls. Through this account, beneficiaries would manage some of their own health care dollars and thus have incentives to make prudent health care choices.
“Patients can use accounts to purchase services.”
One objection to PHAs is the belief that the poor will forgo needed health care to accrue more cash. However, through a debit card, the state could ensure that the recipient completed certain medical procedures such as child immunizations or prenatal care before accessing any cash. The recipient could then use his or her remaining PHA funds for other health, social, child education or job training needs.
Another objection to allowing Medicaid beneficiaries to exercise choice in health care providers is that the poor, elderly, blind and disabled either lack the ability to choose between plans or may be hood-winked by unethical sales people. Although this may be true of certain populations, it isn't true for most Medicaid recipients. Evidence shows that for certain services, the poor have just as much ability to choose as the middle class.188 Even individuals with mild cognitive disabilities can participate in decision-making regarding their own care if given the opportunity to do so, according to research by the San Francisco-based Family Caregiver Alliance. This might improve their satisfaction, since their preferences often differ from those of family caregivers.189
Alternatives to Medicaid
Economists have long known that competition among producers leaves consumers better off by providing a wider range goods and services at lower prices. In order to increase their profitability, competing firms also have an incentive to seek out information on goods or services their customers might find valuable.
Creating Competition to Insure Medicaid Enrollees. One way to provide an incentive for insurers to compete for the business of Medicaid enrollees is for the state to create a marketplace where providers offer prepaid services to beneficiaries. The role of the state would change from being the buyer of health care to facilitating a real market place in Medicaid.190 The way this might work is for the state to underwrite actuarially fair credits for enrollees to purchase services from providers. Properly designed risk-adjusted payments could avoid the problem of “cherry picking” healthier (that is, cheap to treat) enrollees. Software is available for risk-adjustment.191
An additional method to avoid “cherry picking” is to require an actuarial payment from one provider to another when enrollees switch plans.192 If a chronically ill enrollee leaves one plan for another, they would be required to make a payment to the new health plan. This would make firms less afraid to enroll chronically ill people since a payment would accompany the enrollee. It would also induce providers to provide chronic disease management to prevent enrollees from leaving.193
To further encourage participation in disease management and healthy behaviors, the state could provide a reverse health savings account. This is a type of flexible spending account where enrollees earn credits in return for participating in programs that improve health. These credits could be used to pay out-of-pocket costs. Florida currently is experimenting with this idea in its Medicaid reform plan.194
Encouraging Private Insurance. New York Medicaid has a very rich benefits package. In general, taxpayers generally have lower benefits in their private health insurance plans than those provided to Medicaid enrollees at taxpayer expense. This is unfair and unwise. It is unfair because taxpayers should not be forced to provide others with health benefits more generous than they purchase for themselves and their families. It is unwise because Medicaid recipients are largely insulated from many of the cost-controlling, quality-improving innovations that are available to private sector plans.
“Premium subsidies can replace Medicaid coverage.”
Private sector plans may appear less generous on paper than the current Medicaid program, but they usually allow enrollees to access a greater range of providers and facilities. Enrollees in a Florida pilot program will be allowed to use their Medicaid funds to pay premiums for employer-sponsored plans where they work. New York Medicaid patients should be allowed to enroll in private sector plans, including employer plans and individually owned insurance. They should also be allowed to enroll in the same plans that cover state employees.
Private sector plans have incentives to control costs and improve quality when they compete for customers in the marketplace. Medicaid patients should be allowed to benefit from such competition. The Florida program would allow some Medicaid beneficiaries to choose coverage from among competing private insurers. This would essentially move Florida Medicaid from a defined benefit entitlement to a defined contribution plan.195 Beneficiaries will receive risk-adjusted credits that reflect their health status with which to purchase managed care plans from providers.196
They will be able to choose among competing plans with different benefit packages.197 Counselors will assist patients in picking their benefit package.
Paying for Long-Term Care
Although long-term care is an optional benefit, it is one of the fastest growing areas of state Medicaid spending. Every state provides this benefit, and not just to the poor. Medicaid is paying for the care of a growing number of middle-class seniors. When they retire, most Medicare enrollees do not meet Medicaid income and asset tests for long-term care coverage. However, Medicare has annual and lifetime maximum benefits for nursing home care, which it provides mainly for rehabilitation following injury, illness or surgery. Seniors in need of long-term care who max-out their Medicare coverage, or those who need custodial care rather than medical treatment, must pay the cost out of pocket. However, seniors who exhaust their assets paying for nursing home care may be eligible for Medicaid to pick up the cost, if their incomes are low enough. This provides incentives for seniors to arrange their financial affairs just to meet asset and income tests for Medicaid long-term care benefits.
It is somewhat surprising that more seniors are qualifying for Medicaid long-term care coverage, since the poverty rate among seniors is the lowest of any age group. Furthermore, as a group, seniors have more assets than any other age cohort. According to the U.S. Census Bureau, at all income levels individuals reach age 65 with more household wealth than at any other time in their lives. Wealthier seniors arguably have enough assets to cover the cost of all but the longest nursing home stay. Senior households aged 65 and older have assets worth an average of $108,885, including home equity.198
“Seniors transfer assets to qualify for Medicaid.”
There are several methods that allow individuals to legally impoverish themselves. They can 1) transfer assets to their children, 2) divorce, and 3) set up irrevocable (Miller) trusts. For seniors following these strategies in order to have Medicaid pay for their long-term care, advanced planning is important: they must make their financial arrangements several years before the need arises, and once the need for care arises, they must get into a good-quality private nursing home and be able to pay for the first year's care.
Advanced planning is important because when a state is determining the eligibility of a senior for Medicaid coverage, federal law allows it to “look back” and include as assets any funds that a senior transferred within three years of applying for long-term care benefits.199 An entire industry of attorneys practicing “elder law” has sprung up in recent years to help seniors transfer assets so that they will qualify.
For instance, a growing number of seniors have established Miller Trusts, also known as Qualified Income Trusts.200 Seniors may assign their investment income to the trust, which is designed to limit how the funds are distributed. Trust funds can be used to make certain payments including insurance premiums, support for a spouse, and $60 per month for personal needs. These trusts effectively allow people to hold back income that otherwise would go to reduce Medicaid's cost for long-term care. Most asset transfers by seniors are not made to skirt Medicaid asset tests, and that makes it difficult to identify abuses; according to the 2002 Health and Retirement Study of the National Institute on Aging, one in five elderly households (22 percent) transferred assets in the prior two years.201
Another strategy to transfer assets is a divorce where the “well spouse” retains joint property while the “ill spouse” receives little of value.
“Home care costs much less than nursing-home care.”
Choosing a good nursing home is also important. Seniors can secure places in more expensive, higher-quality nursing homes by proving they have sufficient funds to pay for at least one year of care . Once their funds are exhausted, they generally cannot be discharged because of inability to continue paying their bills.202 At this point they apply for Medicaid. The facility typically accepts the Medicaid reimbursement, while providing care at a loss. To the senior, this is preferable to the typical Medicaid nursing home. Medicaid typically pays nursing homes a fixed daily rate per resident. Only a limited number of nursing home beds are available at such low rates, and there have been problems with the quality of their care. [ For a discussion of steps New York and other states can take to improve the quality of nursing home care, see the side bar on Improving Nursing Home Quality.]
Encouraging Community Care over Institutional Care. Medicaid encourages institutional care over home care. Although many states are beginning to change, they need to increase their use of less-expensive home care.203 Home care often costs only half as much as a nursing home.204 In some high-cost areas, the cost savings from home care may be even greater. For instance, home care in Washington, D.C., costs less than one-third as much as nursing home care. In Manhattan, it costs only about 20 percent as much as a year-long stay in a nursing home.205 Home providers can provide a range of medical services, including occupational or physical therapy. Nonmedical services that can be provided through home care include meals, and help bathing and dressing.206 However, as noted previously, New York spends more on home care, personal care and long-term care than other states, so it doesn't appear the state is saving money. Other states' home and personal care programs are designed as alternatives to nursing home care, rather than functioning as supplemental benefits. New York should follow their lead.
For example, Oregon, Washington and Wisconsin expanded home- and community-based care to help control rapidly increasing institutional care expenditures. These states were able to serve more people while controlling the growth in overall long-term care spending. Between 1982 and 1992 the combined number of nursing home beds in Oregon, Washington and Wisconsin declined by 1.3 percent, while total nursing facility beds nationwide increased by 20.5 percent.207
Ohio's Commission to Reform Medicaid has proposed rewarding families that choose lower-cost options that save the state money, such as care in the home or community. This would allow an elderly parent living with family members to receive a few hours of home or personal care per week that could delay entry into a nursing home for a year. The financial incentive could be to exclude some assets from eligibility tests or shield them from cost recovery.208
“Seniors can be given financial incentives to choose home care.”
For example, the estates of seniors who received a few hours per week of home care might be subject to only 25 percent recapture of the costs paid by Medicaid. The estates of seniors cared for in the community might only be subject to recapture of 50 percent of the associated costs paid by Medicaid. However, as an incentive to family members to seek a lower-cost option for seniors needing long-term care, residents living in nursing homes would be subject to 100 percent recapture of the long-term care expenses paid by Medicaid.
Encouraging Private Insurance Coverage. Private insurance is available to cover nursing home and in-home care, but few seniors purchase them. There are limited state programs to encourage more private coverage. A pilot project in four states — New York, Connecticut, California and Indiana — called the Partnerships for Long-Term Care (PLTC) provides financial incentives to purchase long-term care insurance. The plan allows people to shelter their assets by purchasing a qualifying private insurance policy with a defined amount of coverage. When a policyholder enters a nursing home he or she first relies on the insurance. When the insurance is exhausted, special eligibility rules allow them to receive Medicaid benefits while retaining assets equal to the value of the policy.
“Long-term care insurance helps seniors shelter assets.”
In California and Connecticut Partnership programs, individuals purchase coverage from a number of competing private insurers. For each dollar of coverage, they protect a dollar's worth of assets. For instance, a long-term care policy with $120,000 in benefits allows an individual to shelter $120,000 in assets and still qualify for Medicaid long-term care. Since most nursing home stays are less than one year, very few of those who have purchased policies have applied for Medicaid benefits.
In New York, however, Partnership policies are required to cover the cost of three years of nursing home care or six years of home care — potentially, $200,000 worth of services. In return, participants can shelter all their assets, not just an amount equal to the coverage received.209 Indiana uses a hybrid of the two approaches.
In 2004, just over 45,000 New Yorkers held Partnership-approved policies, less than 2 percent of the senior population. It appears the annual increase in policyholders is about 5,000.210 One way to encourage more New Yorkers to obtain coverage is to reduce coverage limits. The average length of stay for discharged nursing home residents is just under one year (272 days).211 The actuarial firm Milliman USA conducted a study of people with unlimited insurance coverage, and found that less than 8 percent of claims were for periods lasting more than 48 months. More than three-fourths of claims (76.7 percent) were less than two years.212
New York should use the approach of California and Connecticut, allowing Partnership policies to shelter assets equal to the value of the policy selected by the beneficiaries, whether one or two years, or unlimited coverage. This would allow individuals to select the amount of coverage, according to their tolerance for risk.
Encouraging the Use of Assets to Finance Long-Term Care. There are more than 13 million households headed by people aged 62 years or older. Many seniors own their homes, but are reluctant to tap their equity to pay for nursing home care out of fear of losing their homes. However, they could obtain a reverse mortgage, which is a home loan that does not have to be repaid as long as the owner (which could include the spouse of a nursing home resident) lives in the house.213 Six million of these households could each access more than $72,000 in home equity using reverse mortgages.214 This would pay for a year or more of nursing home care and two or more years of home care in most areas.215 (The cost of nursing home facilities varies considerably, even within New York state. For instance, a year-long stay would cost more than $115,000 at a facility on Long Island, but less than $72,000 in central New York.)
Currently, seniors rarely use reverse mortgages for long-term care. Why should they? Home equity is generally an exempt asset when qualifying for Medicaid long-term care. Since seniors can obtain long-term care without taking out a reverse mortgage, they have little reason to do so. The solution is to remove the home-equity exemption and specify that seniors must first exhaust home equity using a reverse mortgage before qualifying for Medicaid long-term care. 216 An added benefit is that more people may plan ahead and purchase long-term care insurance if they are not allowed to shelter their largest asset while still qualifying for Medicaid.
A home sales contract is similar to a reverse mortgage; it allows a senior couple to sell their home now, but live in it the rest of their lives. This would be appealing to married seniors and seniors who are getting rehabilitative care and expect to leave the nursing home.
“There are other ways seniors can finance long-term care.”
Seniors with life insurance policies who enter a long-term care facility may qualify for viatical settlements to assist them with expenses. Viatical settlements are financial arrangements that allow terminally ill individuals to sell their life insurance policies at a discount in return for cash. The purchasing firm pays less than face value (generally 50 percent to 80 percent) depending upon life expectancy. The purchaser pays any remaining premiums and assumes the risk for life expectancy. In other words, the insured is not penalized for living longer than expected. One problem is that not everyone qualifies for this arrangement. Insurers, providers and states use different definitions for what they consider terminal illness. For instance, seniors expected to live more than five years likely will not qualify for this arrangement.217
According to the Federal Trade Commission, there are also tax implications that can be quite complicated. Viatical settlements where life expectancy is less than two years are exempt from federal taxes — although some states do not provide this exemption.218
The federal government should facilitate viatical arrangements and life settlements for people facing long-term care, including limiting tax liability. It should require such arrangements for life insurance owned by individuals applying for Medicaid long-term care coverage. Transfer of ownership of life insurance policies should be treated the same way as other asset transfers.
Increasing Estate Recovery. When beneficiaries die, states can recover the cost of their nursing home care from their estates. That could include a house, for example, since a home is typically not included in assets for determining Medicaid eligibility. Federal law also permits states to recover personal and real property in which the individual has an interest or legal title that aren't included in the probated estate. Some states are aggressively pursing estate recovery, and all states receive federal funds to do so.219
Federal law also allows states to “look-back” at asset transfers three years from the time of death.
Future legislation should require that any funds placed in qualified income trusts be considered income for determining Medicaid eligibility. It could even eliminate the use of trusts that reduce current income. Furthermore, property settlements in divorces made prior to Medicaid eligibility should be subject to the same three-year rule as other divisions of property.
Holding Children Responsible for Their Parents' Care . States should seek to recover current nursing home costs from beneficiaries' families who are financially able to pay.220 About 30 states currently have filial responsibility statutes that require adult children to care for their indigent elderly parents. The statutes vary, but can force adult children to reimburse the state for programs or institutions that have cared for an indigent parent. There is no uniform federal filial responsibility statute. Medicaid costs could be reduced if states began to systematically enforce filial responsibility laws. One benefit would be that when adult children understand they may be responsible for a portion of their indigent parents long-term care needs, they will have an incentive to encourage their parents to plan for the future.
“Children should be asked to contribute to their parents’ care.”
States with filial responsibility statutes take a variety of approaches to enforcement: 21 allow some sort of civil court action to obtain financial support (or cost recovery) and 12 specify a criminal penalty for filial nonsupport; three states allow both civil and criminal actions. Children's liability is limited under a variety of conditions. These include whether the adult child has enough income to actually contribute and if they were abandoned or deserted by the parent.
One possibility is for a state to automatically consider an adult child able to pay toward care of an indigent parent unless they file a public notice that they are not responsible for the debts of the parent. Additionally, adult children who refuse to support their parents could be required to relinquish inheritance rights and rights to any trust set up for them by a parent.