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What's wrong with Block Grants
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Restructuring Medicaid With Block Grants

Medicaid has been one of the U.S. federal government's most successful programs. It has served as a safety net for millions of the poor since 1966 and has resulted in those millions having many of their health care needs met. However, as with Medicare and all health care services in the U.S., the cost of the Medicaid program has been rising steadily. Probably for this reason, and to reduce costs for the federal government, Reagan conservatives introduced block grants as a way to "reform " Medicaid. They did not succeed in doing so, but when the Clinton administration took on the welfare program and axed it, part of the axing consisted of changing AFDC into a block-grant program. The Clinton Administration also introduced SCHIP (State Children's Health Insurance Program) as a block-grant program.

Now Bush is trying to bring block grants to Medicaid. Bush's plan to restructure Medicaid (called "Medi-cal" in California), was outlined by Health and Human Services Secretary Thompson in early 2003. The proposal would also include SCHIP (called "Healthy Families" in California), and would require congressional approval. To better understand the proposal, let's first look at how these two programs operate under current federal law.

At the present time, Medicaid covers two separate groups: the mandatory population and the optional population.

The mandatory population includes poor children, children in foster care, poor pregnant women (whose incomes are below 133% of federal poverty level), 12 million elderly poor and disabled (including older poor people who are on Medicare) and adults on SSI. States are mandated to provide this population with services which include physician and hospital services (see Note below). Other services to this population may be provided at the states' discretion (e.g., prescription drugs, hospice care, dental and vision care).

The optional population includes children and parents with slightly higher incomes than the mandatory population plus the disabled and the elderly in nursing homes. Coverage of this population (or parts thereof) as well as the benefits are granted at the discretion of the states. Also, limited co-payments are allowed for some of the benefits provided to this population. The law requires that benefits to this population be comparable among recipients and of sufficient amount, duration and scope to serve their intended purpose. The optional population makes up about 1/3 of those covered by Medicaid but accounts for 2/3 of the cost of the program.

The total actual cost of benefits to both populations is shared by the states and the federal government. Each state receives from between $1 and $3 from the federal government for each $1 it spends on Medicaid, depending mainly on its population. Moreover, the states are guaranteed additional federal funds if their Medicaid costs increase. In fiscal year 2002, Medicaid covered 47 million people at a total cost (state and federal) of $256 million.

Currently, hospitals which provide significant safety-net care are allowed to bill Medicaid at higher than their actual cost and use the difference to fund charity care.

SCHIP is a program designed to serve children from families with incomes slightly too high to qualify the children for Medicaid. This children's program is funded entirely by a federal block grant. In states where this grant is not used up for services to SCHIP-eligible children, states may use the surplus to cover parents of eligible children.

Bush Administration Proposal

The 2003 Bush administration plan to restructure Medicaid allows states to remain under the existing Medicaid system as described above or to voluntarily participate in a new system with the following key features:

1) The open-ended cost-based federal matching funds would be replaced by block grants. Each state would get two annual allotments: one for ³acute care," corresponding to currently required benefits for the mandatory population as defined, and another "long-term-care" allotment to be used for the benefit of an optional population which the state could redefine to maximize flexibility. Also, states would be able to transfer up to ten percent of one allotment to the other.

2) Comprehensive Medicaid benefits would be preserved for the mandatory population, but states would have carte blanche to alter Medicaid coverage for the optional population.

3) SCHIP coverage and children's Medicaid would be merged into the ³acute care" allotment and the existing SCHIP block-grant program would be discontinued.

4) The initial annual allotments to the states would be based on existing combined federal payments for Medicaid and SCHIP. During the first seven years of operation under the restructured program, annual increases in the allotment would be set slightly higher than 8 1/2 percent. This would create an incentive for states to join the restructured program since 8 1/2 percent is the rate which the Congressional Budget Office estimates for program growth under present law. In years 8 through 10, however, annual increases would be reduced to the extent required to yield an overall 8 1/2 percent per year over the first 10 years. Thereafter, the annual increase would be fixed at 8 1/2 percent, effectively capping the federal Medicaid allotments.

5) States would have to satisfy a "maintenance of effort" requirement which would, in effect, allow them to cap future state Medicaid expenditures at base level augmented only by a medical-care consumer price index increase.

6) Hospitals would no longer be able to bill Medicaid for greater than actual cost, regardless of the level of charity service they provide.

Why We Oppose Block Grants

Bock grants will force states to scale back coverage over time. It would limit the amount of federal funds available for Medicaid based on expenditures today, with low yearly increases certain to be less than their actual cost increases. Essentially, this would freeze their programs at a time when states have already reduced Medicaid coverage and services in order to close budget gaps.

Families USA estimates the loss of public health funding due to block granting would total almost a half trillion dollars over ten years. It would result in loss of health care for nearly 690,000 seniors, nearly 3.9 million children, over 1.2 million disabled and approximately 1.7 million other adults.

One of the major problems with a capped allotment is that it precludes Medicaid from responding to the ebbs and flows of the economy and health care costs. Medicaid is a counter-cyclical program--as the economy weakens and people lose jobs, they can turn to Medicaid for health insurance. With a capped allotment, a state will not receive additional money as it enrolls more individuals. Thus, just when the stresses on Medicaid are greatest, states will have less money to spend per enrollee. Fastest growing states in the West would be especially hard hit.

The cap also destroys Medicaid¹s role as an entitlement program. It is this entitlement that makes Medicaid insurance, that gives beneficiaries the right to obtain needed services in a timely manner. Couched in ³flexibility,² the Bush administration¹s proposal would destroy this individual right. Moreover, flexibility has already failed as a magic bullet. Over the past decade, state flexibility has been greatly enhanced, through the use of waivers, to allow mandatory managed care and other cost containment initiatives. However, Medicaid spending has nevertheless increased. Other factors, largely beyond state control, are at the root of the spending increases--the aging of the population, health care price inflation and increases in the number of people who are unemployed or have disabilities.

States would have complete discretion to determine cost-sharing, including co-pays, deductibles and premiums, for all optional beneficiaries. This marks a change from current law, which specifically prohibits cost-sharing for children in the Medicaid program, limits co-payments to amounts that are ³nominal² and limits cost-sharing for families and children receiving coverage through SCHIP. Without any limitations of co-pays, cost-sharing and premiums, the block-grant proposal would allow states to price coverage above the means of low-income individuals, thereby creating the illusion of decreased demand.

Over 1.5 million individuals with disabilities are now Medicaid ³optional² beneficiaries. The benefits used by individuals with disabilities vary. Children with disabilities may need specialty care, home-based care, medical equipment and, in some cases, institutional care; working individuals with diabilities may need personal attendants, prescription drugs and other supportive services to remain independent; and frail elderly individuals may require home health care or nursing home care. Under the Bush administration proposal, however, states would have unfettered discretion to define both eligibility and benefits so that the coverage needed by individuals with disabilities will not be guaranteed.

Note: These are physician services; laboratory and x-ray services; in-patient hospital services; outpatient hospital services, federally qualified health center and rural health clinic services; EPSDT (early and periodic screening diagnosis and treatment), nursing facility services for individuals over age 21, family planning services and supplies; pregnancy related services; nurse midwife services; certified nurse practitioner services; and health care services (for individuals entitled to nursing facility care).