20 STATE LEGISLATURES FEBRUARY 2006

States are scrambling to slow Medicaidgrowth and reform a troubled system that

is devouring their budgets.Medicaid covers about 53 million low-

income Americans, including 13 millionelderly and disabled people. Costs areincreasing by 10 percent a year.

Enrollment growth and increases in health

care costs contribute to Medicaid spendinggrowth as do rising hospital and prescriptiondrug costs. A growing number of beneficia-ries, including the low-income elderly andindividuals with disabilities have greatermedical and long-term care needs.

“Without question, public officials believethat under the current course, Medicaid will

not be sustainable in the long run,” says Ver-non Smith of Health Management Associ-ates, an author of a 50-state survey releasedin October by the Kaiser Commission onMedicaid and the Uninsured.

States across the country want to changethe program fundamentally. The reforms areunprecedented in scope and design. “Statesare proposing remedies that have never beentried before,” Smith says.

IT TAKES FEDERAL OKSubstantial Medicaid innovations require

approval through a Section 1115 Medicaidreform waiver from the Centers for Medicareand Medicaid Services (CMS).

Twenty-five states plan this year to seek anew waiver or amend one already in place,according to the Kaiser study. Their goals areto manage costs, improve access to care andimprove the system and the care it deliversto its beneficiaries. Fourteen states want toreduce the number of people without healthcoverage and 13 states want to reducegrowth in Medicaid costs.

ON THEIR WAYFlorida ranks among the top five states in

both Medicaid enrollment and overall spend-ing, which has grown in the state by 12.5percent annually for the past five years. Theaverage monthly caseload increased from 1.8million in 2000 to 2.2 million today, accord-ing to the Winter Park Health Foundation.The Florida Agency for Health Care Adminis-tration estimates that if something isn’tdone, Medicaid will consume more than halfof all state spending within 10 years.

“We have a responsibility to try to slow

Kristine Goodwin, a former NCSL employee, freelancesfrom her home in Colorado.

DETAILS OF FLORIDA MEDICAID REFORM

Florida legislators had specific goals for the state’s Medicaid reform. These were reflected inthe 1115 waiver approved in October.

u Create a defined contribution managed care model. The state will provide a fixed pre-mium to a managed care organization for each plan member, rather than reimbursingproviders for a defined set of benefits, as in the past. This new system applies primarily toadults, and excludes children with chronic medical conditions, Medicaid-eligible children infoster care, and people with developmental disabilities.u Create three categories of care: comprehensive, catastrophic and enhanced benefits.

Comprehensive Care: The state will provide a risk-adjusted premium for each plan member,and this premium is expected to “cover most services needed by most people, most of thetime,” according to Senator Mike Fasano. The plan is responsible for paying for care up to acertain dollar threshold.

Catastrophic: Individuals who exceed the threshold for comprehensive care will move tocatastrophic coverage, which will cover all services up to a maximum benefit limit. This limitwill be set at an “extremely high” level, according to the Florida waiver application. If an indi-vidual exceeds the benefit limit, his or her additional health care services will shift to uncom-pensated care.

Enhanced Services: Participants who take care of themselves—managing their weight ordiabetes, for example—will accumulate points in an account that they can use to pay forother health needs, such as over-the-counter medicine, eyeglasses or routine dental appoint-ments.u Allow Medicaid recipients to opt out of Medicaid plans, and use premiums to help thempurchase health coverage through their employers.u Require guaranteed funding by the federal government to compensate safety netproviders. Under the agreement reached with the federal government, Florida will spend upto $1 billion each year for the next five years on payments to safety net hospitals—a signifi-cant increase from the $688 million spent in 2005.u Implement reform in phases—starting in two counties—and require legislative over-sight of expansion.u Evaluate the program after two years.

Medicaid Extreme MakeoverWith growing numbers of uninsured people and costs out of control, states are

looking at radical changes to Medicaid.

By Kristine Goodwin

FEBRUARY 2006 STATE LEGISLATURES 21

the rate of growth,” says Senator MikeFasano. In May, Florida lawmakers approveda reform package that creates a fixed pay-ment—or capitated—delivery system thatinitially would operate in two counties ofthe state. The state received a 1115 waiverfor its Florida Medicaid Reform from CMS inOctober. Officials believe the capitated deliv-ery system will lower costs. The fixed pay-ment system offers greater predictability inspending, and proponents believe that infus-ing free market principles into the Medicaidsystem—competition among plans andenhanced consumer choice, as well asresponsibility—will curb costs.

“The fundamental difference will be thatparticipating companies will have the flexi-bility to decide the kind and amount of ben-efits that beneficiaries receive,” says JoanAlker, senior researcher at Georgetown Uni-versity Health Policy Institute. Eligible bene-ficiaries will be able to choose among partic-ipating managed care organizations. Ahealth plan will receive a risk-adjusted pre-mium on behalf of a beneficiary. The plansmust cover all federally mandated services,but they can vary in the scope, amount andduration of benefits they offer.

The state Agency for Health Care Admin-istration will evaluate the plans to ensurethat they are sufficient and that they areequivalent to the benefits enrollees currentlyreceive. Those designing the plans say their

flexibility will benefit enrollees. Participantswill be able to choose the plan that is rightfor them, and a care counselor will be avail-able to help them make informed decisions.

Under Florida’s reform, participating com-panies have the option to customize benefitsto match enrollee needs—by offering onespecialized package for people with AIDS and

another for children with chronic illnesses,for example. Enrollees also will be able to usetheir premium to buy into their employer-sponsored health insurance or private insur-ance. Beneficiaries can earn credits forhealthy behaviors that they can use to payfor certain health-related services or prod-ucts, such as eyewear, hearing aids and smok-

The reform wheels are in motionaround the country. Although specifics

vary, the goals from state to state areremarkably similar. In addition to manag-ing costs and improving Medicaid, stateswant the program to do a better job of giv-ing consumers choice about their coverageand rewarding them for positive behavior.

Many states believe that one way to slowthe growth in spending is to “require orreward greater personal responsibility,” saysVernon Smith of Health Management Associ-ates, an author of a 50-state survey releasedin October by the Kaiser Commission onMedicaid and the Uninsured. Some exam-ples of reform proposals under considerationinclude the following.

Georgia is considering a comprehensiveSection 1115 waiver that would increasecost-sharing for Medicaid and PeachCareenrollees. According to the concept paperthe state submitted to the Centers forMedicare and Medicaid Services, “Everyone,including beneficiaries and providers, needsto share equitably in the solution.” Its solu-tion: a cap on federal spending for three tofive years. The state would be at risk for man-aging costs within that amount, and, likeVermont, would be able to keep the savings.

Lawmakers in Missouri established a Med-icaid Reform Commission in 2005 to investi-gate how to slow the growth in spending,increase access to care and eliminate wasteand fraud. “Changing the focus to healthand wellness will pay off,” says SenatorCharlie Shields, chairman of the commission.“We have the notion that quality doesn’tcost, and in fact it pays for itself.”

South Carolina’s Healthy Connections pro-posal would offer state-funded “personalhealth accounts” that allow enrollees to pur-chase comprehensive health coverage fromstate approved plans and networks. As in

Florida, recipients will have a good deal ofpersonal choice and may “opt out” and usetheir health account to purchase group insur-ance through their employer. A small groupof members—they must be adults with a pri-mary care doctor—will be eligible to choosea self-directed plan. Under this option, mem-bers will use a portion of their accounts topurchase a major medical insurance planthat includes inpatient hospital coverage andrelated costs, as well as preventive services.Members will have flexibility in how they usethe remainder of their accounts, and mayuse the funds to buy other medical servicesdirectly from health care providers. Memberswho spend more than they have in theiraccount will be moved into a full-serviceplan—after they first pay out of their ownpockets a defined “gap” amount.

The state will assess this demonstration tosee if a self-directed plan is viable for Medic-aid enrollees, and what impact such a modelwill have on health status and expenditures.

The West Virginia proposal will requiremembers to agree—in a signed statementwith the state—to abide by certain guide-lines, such as keeping medical appointmentsand sharing in program costs through co-payments. The proposal also provides mem-bers with Healthy Rewards Accounts thatthey can use to pay for health-related costssuch as co-payments. The state also proposesto streamline its administration and tailorbenefits to specific populations’ needs.

SENATOR

CHARLIE SHIELDS

MISSOURI

SENATOR

MIKE FASANO

FLORIDA

OTHER STATES FOLLOWING SUIT

ing cessation programs. Giving consumerschoices “forces the private sector to do a goodjob,” Fasano says.

PRIVATE CONCERNSBut some dispute the idea that private health

plans can deliver better services at a betterprice. Spiraling health care costs have hit theprivate sector, too. Monthly premiums foremployer-sponsored health insurance grew13.9 percent between 2002 and 2003.

“The whole thing doesn’t add up,” saysAlker. She argues that assuming private healthinsurance plans can save money without trim-ming benefits is an untested notion. Alker saysthe reform will work “only if Medicaid benefi-ciaries are now using benefits they don’tneed—and that’s just not true.”

Opponents of the change question whetherprivate insurance plans will join in the game.Florida’s success, according to Smith, “willdepend on the private sector deciding it’sworth it to participate.”

Legislative oversight is an important compo-nent, supporters believe “There is always con-cern when turning things over to the privatesector,” Fasano says. “If there are bumps in the

road, they can be worked out before theprocess goes statewide.”

VERMONT PLAYS, TOOFlorida is not the only state shaking up the

Medicaid community. Vermont sought—and in September

received—federal approval for its Section 1115demonstration waiver, known as the “GlobalCommitment to Health.” The waiver gives thestate new flexibility to coordinate programsand resources, according to Susan Besio, direc-tor of planning for the Agency for Health Ser-vices. By pulling most of the Medicaid popula-tion into one comprehensive effort—thereused to be several waivers in place for differentgroups of people or services—the new designwill improve coordination of programs andfunding, and mitigate problems of “who paysfor what services.”

Vermont hopes to expand coverage, improvethe quality of care and manage costs. “If you cancome up with structures and systems that work,”says Senator Susan Bartlett, “it’s a good bet thatit’ll work for not only Medicaid, but for the restof the health care system.” Among the systemicchanges she hopes to see is a “flip in how we pay

22 STATE LEGISLATURES FEBRUARY 2006

DETAILS OF VERMONT’S GLOBAL COMMITMENT

Vermont’s Global Commitment toHealth section 1115 demonstra-

tion waiver was approved for fiveyears in September.Details of the plan:u Caps overall state and federal Med-icaid expenditures at $4.7 billion overthe next five years. The state projectsthat spending will be at least $263million less than the premiums paidto the managed care organization.With the new federal match, the stateprojects a savings of about $155 mil-lion. The state can use this money toreduce the Medicaid shortfall and alsoinvest in health programs.u Converts the state Medicaidagency—the Office of Vermont HealthAccess—into a public managed careorganization. u Permits Vermont to continue pro-grams for the uninsured, prescriptiondrug coverage and case managementthat were developed under the previ-ous 1115 waiver. It can also keep pro-grams approved under various 1915home- and community-based waiversthat support children with severeemotional disturbances, people withtraumatic brain injuries and peoplewith disabilities who need personalcare services. u Managed care savings can be usedin the following ways: to reduce thenumber of uninsured and underin-sured people; to increase access togood health care for the uninsured; toinvest in health promotion activitiesthat improve the health of Medicaid-eligible people; and to encouragepublic-private partnerships.u Reductions in benefits for optionalpopulations are allowed, as long asthey do not result in more than a 5percent increase or decrease in annualMedicaid expenditures. u Benefits for mandatory populationsmust comply with federal rules;reductions in mandatory or optionalbenefits require a waiver amendment.

for services.” By focusing the state’s resourceson chronic care and early prevention,providers will get paid to keep people healthy,not just treat them when they become sick.“It’s a fundamental shift,” she says.

Unlike Florida, which focused on unleash-ing private market forces, Vermont’s GlobalCommitment places reform in the state’shands by expanding the scope of the stateMedicaid agency—the Office of VermontHealth Access—into a public managed careorganization. The Vermont Agency ofHuman Services will pay a comprehensivepremium to the state managed care group,which in turn will use the premium to drawdown the federal match of 60 percent. Thedesign is unique, but the state has alreadyoperated its own public managed care orga-nization, though on a smaller scale.

Vermont is drawing attention because it isthe first state to accept an overall cap on fed-eral expenditures for Medicaid. The state pre-viously had a cap on each enrollee’s expendi-tures, but the cap could expand if enrollmentexpanded. Under the global cap, this is no

longer possible. The state will receive $4.7billion over the next five years, which it cal-culates will exceed costs resulting in a pro-jected $155 million savings. Vermont intendsto manage beneficiaries’ care actively and usethe money saved on existing health pro-grams to reduce the number of uninsured,and on disease prevention services that pro-mote health. Just as private managed carecompanies invest their profits in extras, Besiobelieves that the reform will give the state thesame ability. Vermont can invest savingsinto programs that “can improve the healthof Vermonters who otherwise wouldn’t bepart of our overall system.”

CONCERNS ARISECritics worry, however, that Vermont’s

decision to accept a global cap will set aprecedent for other states that may notreceive one as generous as Vermont. But inVermont the new waiver no longer includesa per-member-per-month cap that goes up ifenrollment expands. “We had a cap in thepast,” Bartlett says. The new waiver, how-

ever, has sparked a “tremendous distrust inwhy the federal government is allowingthis,” she says.

Other states are watching Vermont, “con-cerned that the [federal] direction might beone of shifting fiscal responsibility to thestates,” Smith says. But Bartlett believes stateofficials and policymakers must examine thepros and cons of Vermont’s approach thor-oughly. State legislators and the governor“don’t want this to fail,” she says.

All eyes are on Florida and Vermont. ChuckMilligan, director of the Center for HealthProgram Development and Managementwarns that the reforms “are the equivalent ofplans on a drawing board, and states need tobe thoughtful in how they use the evidenceto develop their own potential reforms.”

A critical task for states, Milligan believes,is “to think through how the proposedchanges will ripple through the rest of thesystem.” The challenge is daunting, for sure,but as Fasano sees it, “If you don’t try, you’llnever know. If you don’t do anything, thenwe’re in chaos.”

FEBRUARY 2006 STATE LEGISLATURES 23

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