Opportunities for State Medicaid Reform

Policy Reports | Health

No. 288
Thursday, September 28, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, and Pamela Villarreal

How Medicaid works

Figure I - Optional and Mandatory Spending on Medicaid Populations

Medicare and Medicaid were created in 1965 as part 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 Medicaid program, the federal government sets the parameters 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  The current enrollment of 53 million is likely to go much higher.  An estimated 14 million additional people are potentially eligible but have not enrolled.6   Furthermore, the number of seniors who qualify for Medicaid long-term care benefits is projected to grow rapidly as the baby boomers begin to retire.  The population over age 65 will grow nearly two-thirds (64 percent) by 2020, and the number of seniors over age 85 will grow four-fifths by 2025.7

“There are 10 times as many people on Medicaid as on 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 2003.8  As a result, there are 10 times as many people on Medicaid as there are receiving welfare checks. 

Figure II - Medicaid Enrolles and Expenditures Nationwide

Who Qualifies for Medicaid?  Federal law requires states to cover certain populations, including low-income seniors and pregnant women, the blind and disabled, and all children living in poverty.  In addition to the federal income test, states also impose their own asset tests to determine eligibility.  In most states, a Medicaid-eligible individual can own a home, a car and personal property. 

States can choose to cover children and families above the poverty level.  Every state covers some optional Medicaid populations, and overall they comprise about 29 percent of enrollees.9  Optional populations are typically above the poverty level and include pregnant women, infants and young children.  Some states extend eligibility to families at 200 percent to 300 percent of the poverty level, though many of these higher-income groups are enrolled in the State Children's Health Insurance Program (SCHIP), which provides insurance for children whose parents are not eligible for Medicaid.

  • 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.
  • Tennessee's TennCare program covers all infants in families up to 185 percent of the federal poverty level.

In theory, most seniors and most of the disabled are covered by Medicare.  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 benefits the vast majority of Americans receive through private health plans and insurance.  Potentially, enrollees can see any doctor or enter any facility and have government pay virtually all costs.  In practice, things are different. 

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

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

Access to Primary Care.  Physicians and other health care providers choose whether or not to participate in Medicaid.  About 30 percent of doctors do not accept any Medicaid patients, and among those who do, many limit the number they will treat.  Access to care at ambulatory (outpatient) 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 the provider did not accept Medicaid.11

Access to Specialists.  The number of specialists who accept Medicaid is particularly limited.12  According to a recent New York Times investigation:

  • In New York City, a child on Medicaid with an irregular heartbeat was not able to see 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.13

The problem is not limited to New York City.  In 2003, the Denver Post reported that physicians were claiming the University of Colorado Hospital was refusing Medicaid patients, and Medicaid enrollees faced six- to eight-month waits for appointments at specialty clinics.14  In Washington, 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

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

Access through Managed Care Plans.  Medicaid managed care plans are one way states have attempted to expand access to care, control costs and improve quality.  The plans receive a set annual fee per enrollee to provide whatever health services the state covers, and the plans can negotiate higher provider fees than normal Medicaid rates.16  In most states, managed care plans limit the choice of physicians and facilities (as in private insurance plans), but contractual arrangements between physicians and the plans ensure a degree of access Medicaid patients typically do not have.  Enrollees who are not in managed care are treated under the old fee-for-service model, but are limited to those doctors and hospitals who participate in Medicaid.  Nationally, 61 percent of Medicaid enrollees, about 27 million people, are in managed care.17  The percentage of managed care enrollees ranges from none in a few states to 100 percent in Tennessee.18

In some states, Medicaid managed care plans are operated by public hospitals, and outpatient care is provided by clinics and community health centers.  Some 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

Where Do the Dollars Go?  Although less than one-third of enrollees are optional populations, roughly two-thirds of Medicaid spending nationwide is on optional populations and services. [See Figure I.]  Poor women and children, most of whom the states are required to cover, make up three-quarters of all enrollees but account for less than one-third of the funds spent.21  By contrast, the elderly and disabled account for about one-fourth of enrollees but more than two-thirds of all costs.  [See Figure II.]

States have considerable flexibility to determine the types of services covered by Medicaid.  They are required to offer 14 mandatory benefits - such as hospitalization, physician visits and so forth - but they are allowed to choose which of 34 optional benefits to cover, including prescription drugs and long-term care.  [See Appendix Table IIa-c.]

Nursing home care is an optional benefit 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.22

Table I - Fereral Medicaid Spending by State versus Poverty Distribution

“Many states receive far more Medicaid dollars than they need, while others get far less.”

How Is the Federal Contribution Determined?23  One might assume that the federal government's 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 need 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 poor, but receives only 6 percent of federal Medicaid dollars. As Figure IV shows:

  • New York received 68 percent more than it would have if the distribution of funds were based on poverty alone.
  • Vermont received more than twice as much as it would if based solely on its poverty population.
  • Maine received almost 97 percent more.

Among states that received far less than they would have by this criterion [see Figure IV]:

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

“The distribution of federal funds isn’t based on poverty.”

Poverty versus Other Factors.  Arguably, federal Medicaid spending should be based on more than the distribution of poverty.24  It should also consider states' ability to pay as well as regional 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), a regression analysis of federal Medicaid dollars spent in each state shows:25 

  • A 10 percent increase in the state's poverty rate increases federal Medicaid spending in that state by 8.2 percent.
  • A 10 percent increase in the proportion of personal income spent on health increases federal Medicaid spending in 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.

This implies that per capita health expenditures have a substantially greater effect on the amount of federal funds a state receives than its poverty distribution and that a state's ability to pay has virtually no effect.  Thus, even taking all three factors into account, the current distribution of federal funds is still very unequal:

  • Instead of its current 6 percent of federal Medicaid dollars, Texas would receive almost 9 percent if ability to pay and other factors were considered.
  • By contrast, instead of its current 12.9 percent, New York would receive only about 7 percent of total federal Medicaid dollars.

These disparities in the distribution of funds are due to the Federal Medicaid Assistance Percentage formula (FMAP), or the "federal match," used to determine the percentage the federal government contributes to each state's program.  If federal funds were distributed based solely on poverty, some $44 billion - about one-fourth of federal Medicaid spending - would have been distributed to different states in 2004.  [See the sidebar "The Federal Matching Formula."]

Figure IV - Federal Medicaid Allocations in Selected States

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