Testimony – Medicare Reform

Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you today on behalf of the nation’s Governors.

One of the most critical responsibilities we have is to protect and improve the health of our nation’s citizens. To this end, the Medicare program has been tremendously successful. Seniors are more likely to have health insurance coverage than any other group, and, together with Social Security, Medicare has drastically reduced the number of seniors living in poverty. In addition, Medicare has given American families the assurance that they will not have to bear by themselves the burden of illness of their elderly or disabled parents or other family members.

Despite Medicare’s success, the program faces enormous challenges. The trust fund is scheduled to become insolvent within the next decade, and without changes, the status quo is not providing low-income seniors with the comprehensive health care they can and should receive. In recognition of these problems, the Bipartisan Commission on the Future of Medicare was created to find consensus on solutions. While many of the Commission’s proposals are not fully formed, and NGA does not have an official position on them, there are certain basic considerations that must be included in any discussion of Medicare reform.

The primary concern for states in the Medicare reform debate is the issue of dual eligibility — the six million individuals eligible for both Medicare and Medicaid. I will discuss the characteristics of dual eligibles in more detail later in this testimony. The current system contains no coordination between the two programs. We believe better coordination could improve health care alternatives for seniors without adding federal and state costs. We must do better for the sake of seniors, and as states, we know how to do better. Congress must give states the tools with which to integrate funding streams, coordinate care, and improve health outcomes for seniors.

Our proposals to achieve this coordination are detailed below and specific language is included with my testimony. These programmatic changes will give states the ability to make meaningful changes in the Medicare and Medicaid programs that will not only improve health care for beneficiaries but actually save money at the state and federal levels.

Since 1988, the federal government has increasingly passed on to the states the responsibility to cover the cost-sharing responsibilities of many low-income Medicare beneficiaries (e.g., the Qualified Medicare Beneficiary Program, the Specified Low-Income Medicare Beneficiary Program, and the new groups of beneficiaries created by the BBA, the Qualifying Individuals). The nation’s Governors want to ensure that elderly beneficiaries receive the best possible care, and are committed to providing the highest quality of services to seniors who are eligible for Medicaid benefits. But for the QMBs and SLMBs and other groups, Congress should recognize that the strength and responsibility of the Medicaid program is in providing high quality services, not in cutting checks. The governors would therefore recommend that the patchwork of eligibility categories that provide only cost-sharing assistance be streamlined, simplified, and fully federalized.

Beyond these specific changes, Governors ask that you remember the interrelation of the two programs and consider the potential implications for Medicaid before proposing changes to Medicare. There are several legislative proposals that have emerged from the Medicare Commission’s work that contain serious potential cost-shifts to states, and the creation of new unfunded mandates. If any reform proposal is to succeed, it is vital that states be an equal partner with Congress and the Administration in development and implementation.

Integrating Acute and Long-Term Care

The lack of coordination between the Medicare and Medicaid programs contributes to the fragmentation of acute and long-term care. Currently, it is impossible for Medicaid to participate in acute care decisions when Medicare is the primary payer. Medicare’s current managed care program is incapable of addressing these issues, because participating managed care organizations neither are responsible for providing long-term care services, nor are accountable for the cost of such services.

As a result of the lack of clinical care coordination, primary care physicians or specialists frequently are unaware when their patients are admitted to nursing facilities, and home care case managers often are not informed when their clients are hospitalized. This fragmentation of care and lack of accountability for outcomes contribute to higher rates of preventable nursing facility and hospital admissions. Ultimately, poor clinical outcomes and service decisions that are reimbursement-driven lead to higher expenditures for both Medicare and Medicaid.

There must be more effective coordination of acute and long-term care services to better serve beneficiaries and eliminate unnecessary declines in functional status. Two general strategies exist for coordinating care more effectively. The first relies mostly on case management of individuals with acute and long-term care needs. The second, more comprehensive approach is to fully integrate acute and long-term care.

Using Case Management Models and Integrated Care Plans

States and the federal government have begun to assess the efficacy of case management and integrated care programs for seniors. However, there are significant statutory and administrative obstacles to conducting effective coordinated care demonstrations. Among the major administrative obstacles is a federal waiver review process that can take several years to complete.

These federal barriers must be addressed so that interested states can make such demonstration programs broadly available to low-income beneficiaries. The authority to test new approaches could be clarified through explicit legislative authorization or the creation of substantial Medicare waiver authority similar to the waiver options that exist in Medicaid. A simple change to enable the development of such integrated care programs would be the explicit recognition that budget neutrality should be measured across all federal benefit programs, not just the Medicaid program. Integration and coordination can realize savings for Medicare, Supplemental Security Income, Social Security Disability Insurance, and other programs, and states should be allowed to factor in those savings.

In addition, stronger partnerships between the Health Care Financing Administration (HCFA) and states are needed to strengthen the coordination of Medicare and Medicaid. Cooperation between states and HCFA to develop demonstration programs that integrate benefit packages and funding streams would be cost-effective and produce better health outcomes.

Included with my testimony today is some draft language prepared by the National Association of State Medicaid Directors. This language sets forth several options that would remove these federal barriers and allow states to pursue demonstration programs to improve seniors’ health care by coordinating and integrating Medicare and Medicaid.

Integrated Medicare and Medicaid programs are the best way to improve health outcomes for consumers and control spending. The benefits of integrated programs include:

  • a comprehensive service package that recognizes the interaction of acute and chronic needs;
  • greater flexibility for providers and consumers to design a care plan that meets the individual’s needs and is unencumbered by fee-for-service reimbursement restrictions;
  • an emphasis on prevention and coordination of care across providers and settings, including the coordination of medical services and social support services; and
  • the opportunity to hold a single entity accountable for quality of care and health outcomes.

The option to enroll in an integrated plan should be among the Medicare options available to beneficiaries — which currently include traditional fee-for-service plans, Medicare+Choice plans, and medical savings accounts. In particular, federal policies should allow seniors to use their Medicare benefit to enroll in an integrated program administered by a state-federal partnership. States should have the flexibility to determine whether Medicare’s contribution would be paid directly to the integrated plan or collected by the state to make a single combined Medicare-Medicaid payment to the integrated plan.

States are strongly positioned to take the lead in administering and managing integrated programs through state-federal partnerships. One reason for states’ readiness is that many publicly funded health programs are operated at the state level. A second reason is that states already have expertise in managing health plans to improve quality and health outcomes while controlling costs. In addition, states have shown that they can target long-term care services appropriately while maintaining informal care support networks in the home or community.

Current Proposals to Reform the Medicare Program

The Medicare Commission should be commended for its hard work on a vastly complex and important issue. There are no easy solutions to the Medicare reform problem; not only is the trust fund predicted to become insolvent within ten years, but even if the program is maintained at current levels, it does not do nearly enough to promote better health outcomes for the frail elderly.

NGA has not yet developed a position on any of the various legislative proposals to improve, expand, further the solvency of, or otherwise reform Medicare. However, I would like to offer the state perspective on some of the ideas that have been advanced. My comments should not be interpreted as support or opposition, merely a reflection on the proposals that are the most visible to date.

Age Eligibility Proposal

The proposal to increase the age of eligibility from sixty-five to sixty-seven might seem to make sense because it would mirror the gradual change in eligibility for Social Security. This proposal might save money for the trust fund in the short run. However, in the long run, it could have disastrous implications for beneficiaries and for states, which will be left holding the bill. The creation of a two-year window in which seniors will have no access to Medicare will force states to be the only source of health care for dual eligibles, in contrast to the wrap-around coverage that they currently are provided.

Cost Sharing Proposal for Home Health Services

The proposal to increase cost-sharing for home health services has been promoted as a way to contain the rapid increases in expenditures for this service under Medicare. It is unfortunate that these increases are viewed as a negative at the same time that state Medicaid programs have been actively looking to increase expenditures in this area as a way to prevent and substitute for more costly institutional care. Many of the price controls and coverage limitations in BBA were predicated on the concern over the growth in home health care, and states are spending millions trying to compensate for these Medicare changes. This proposal would have a direct impact on state Medicaid programs because states are responsible for all cost-sharing expenses for the 5.4 million dual eligibles.

The proposal to increase cost sharing for home health services would also have an indirect impact on states. Drastic increases in out-of-pocket expenditures can have two unintended consequences. One is that seniors will continue their current utilization patterns and incur enough costs to effectively spend down to Medicaid eligibility. The other is that the coinsurance will have a dampening effect, causing seniors to go without services. Although this may reduce Medicare home health costs in the short run, it will result in an increase in preventable hospitalizations, paid for by Medicare, and nursing home admissions, paid for by Medicaid.

There are also serious financial implications for both programs in light of an upcoming Supreme Court decision (L.C. and E.W. vs. Olmstead). This case could potentially require massive deinstitutionalization and community placements for frail seniors and adults with disabilities, placing massive strains on state and federal budgets. Adding to this burden by requiring additional state spending on cost-sharing would be devastating.

Successful Medicare reform must provide seniors with more options, not fewer. Restricting benefits, placing fiscal barriers in front of beneficiaries, and forcing seniors to rely on the failing fee-for-service system are all proposals that limit access to health care and should be rejected out of hand.

Premium Support Proposals

The cornerstone of the reform proposal generated by the Medicare Commission is what is called the “premium support model.” This model would essentially convert Medicare into a voucher program relying on market factors and individual responsibility to hold down costs. Although Governors do have faith in the health care market and the ability of properly educated consumers to make sensible decisions, they do have serious concerns about some of the unintended consequences of this proposal.

Keep in mind that dual eligibles have practically no experience in the managed care market and, furthermore, have absolutely no fiscal incentive to economize. The 5.4 million dual eligibles currently have no out-of-pocket expenditures and no reason to be fiscally prudent, because Medicaid provides for all of their needs.

It remains unclear what the Medicaid cost-sharing obligation would be for dual eligibles who select a plan for which the beneficiary’s premium exceeds the federal voucher amount. Dual eligibles are not only the poorest of the Medicare beneficiaries, but they have the highest medical needs. Therefore, this demographic group is simultaneously the most expensive to care for and the least able to finance that care without Medicaid’s support. Unless this proposal includes risk-adjusters to account for functional status and institutional placement, it could have monumental fiscal implications for the Medicaid program.

Prescription Drug Coverage

The Medicare program does not have a comprehensive outpatient drug benefit. For the 5.4 million dual eligibles, Medicaid provides coverage for all of their pharmaceutical needs. Other seniors receive drug coverage through Medicare+Choice plans, Medigap, or through costly out-of-pocket expenditures.

Any consideration of adding a prescription drug benefit to the Medicare program must recognize that state budgets have shouldered these costs for years, and that these costs should be borne by the Medicare program. For example, proposals to have states continue to pay for prescription drugs for seniors through the QMB and SLMB programs are essentially unfunded mandates, driving up state costs for what should be a federal benefit.

If Medicare is to add a drug benefit, it should be administered through the Medicare program, not merely delegated to the states to administer on behalf of the federal government. States have gained valuable lessons in providing drug benefits for Medicaid beneficiaries, and should share best practices with HCFA in setting formularies, negotiating rates, and contracting with pharmacy benefits managers.

States are particularly concerned about the above mentioned proposals due to the following concerns.

Medicare and Medicaid Program Dynamics

The Medicare program was originally intended to provide health insurance coverage for the medical needs of older Americans. However, there have always been significant gaps in this coverage. The most important gaps are for preventive care, prescription drugs, and long-term care. Moreover, there are significant beneficiary cost sharing responsibilities under the program. As a result, Medicare covers, on average, only about half of beneficiaries’ health care costs.

The gaps in Medicare coverage are widening. Advances in medical care that have expanded the availability and use of outpatient treatment and home health care have increased beneficiaries’ out-of-pocket costs for Part B premiums, copayments, and prescription drugs. Medical advances have increased life expectancy so that an increasing number of chronically ill seniors need long-term care and support for basic activities of daily living, such as eating, bathing, and dressing.

These factors contribute to, and are compounded by, the challenges facing Medicare that threaten its long-term financial viability.

Although the Balanced Budget Act of 1997 (BBA) ensured the short-term solvency of the Medicare Part A trust fund, the trust fund is projected to go bankrupt in the next decade without further reform. In addition, BBA provisions designed to address fraud and abuse are exacerbating the financial crunch for some seniors. For example, changes in Medicare’s home health payment methodology have led to service reductions that are forcing many beneficiaries to seek private, state, and Medicaid-funded alternatives to supplement or replace their Medicare home health services. Although some seniors can afford to absorb increases in their out-of-pocket costs, the majority cannot; 40 percent of Medicare seniors have annual incomes of less than $15,000 and 70 percent have annual incomes of less than $25,000.

For low-income Medicare beneficiaries, Medicaid fills the gaps in Medicare coverage by providing assistance for Medicare premiums and cost-sharing expenses, and by covering the costs of outpatient prescription drugs and long-term care. Medicaid serves not only low-income Medicare beneficiaries, but also higher income Medicare beneficiaries as well, who turn to Medicaid after exhausting their own resources to pay for their care.

Moreover, because Medicaid’s role in providing coverage for these individuals is supplementary to Medicare, states are in an untenable position. States share the responsibility for providing coverage but lack any way to affect the policies that govern Medicare or to manage the up-front primary and acute care treatment decisions that drive beneficiaries’ use of long-term care services and Medicaid spending.

Characteristics of Dually Eligible Beneficiaries

Although states play a key role in funding the services provided to many low-income seniors, the most evident connection between Medicare and states is for individuals eligible for both Medicare and Medicaid coverage. According to the HCFA, 15 percent of Medicare beneficiaries also are eligible for Medicaid. These dually eligible beneficiaries, however, account for 30 percent of all Medicare spending, or about $62 billion in fiscal 1997.

Dually eligible beneficiaries also are an expensive population for Medicaid programs. Although they account for only 16 percent of Medicaid recipients, dual eligibles account for 35 percent of Medicaid expenditures, or about $58 billion in fiscal 1997.

Dually eligible beneficiaries are a particularly vulnerable and high-cost group. Compared with other Medicare beneficiaries, dual eligibles are more likely to suffer from chronic illness and require significant long-term care and social support services. They also are more likely to live alone or in a nursing facility and are less likely to have a living spouse. Of course, dually eligible beneficiaries are much poorer, on average, than other Medicare beneficiaries. 80 percent of dual eligibles have annual incomes of less than $10,000.

Dually eligible beneficiaries also are different from other Medicare beneficiaries in another, very important way: they do not have the same financial incentive to choose among fee-for-service and managed care options, based on differences in price and benefits, because Medicaid programs cover their out-of-pocket costs and provide comprehensive coverage. National data show that dual eligibles are 75 percent less likely than other Medicare beneficiaries to enroll in managed care plans.

The majority of the 6 million dually eligible beneficiaries, about 5.4 million, receive full Medicaid coverage. Medicaid provides coverage for their Medicare premium and cost-sharing expenses and for services not covered by Medicare, including long-term care and outpatient prescription drugs.

The remaining 600,000 beneficiaries are not eligible for full Medicaid coverage but do receive Medicaid assistance for Medicare premiums and/or cost-sharing expenses. They include individuals with incomes up to 120 percent of the federal poverty level (i.e.”qualified Medicare beneficiaries” and “specified low-income Medicare beneficiaries”) and, at least through 2002, individuals with incomes between 120 percent and 175 percent of the poverty level (“qualified individuals”).

Not included in these population figures are low-income Medicare beneficiaries who are eligible for Medicaid coverage but who decide to forgo such assistance or who are not aware that assistance is available. States have been criticized for failing to enroll 100 percent of eligible seniors in these programs. Although states take their responsibilities seriously and are working with HCFA to identify effective outreach methods, in many cases, the cost of outreach exceeds the value of the benefit to the individual. It simply is not worth the effort for many seniors to apply for federal assistance to receive $1.07 per month.

Allowing the Social Security Administration or some other federal agency to provide assistance to these beneficiaries would streamline a cumbersome system and ensure greater program participation. This common-sense solution would help reverse the trend of creating a patchwork of optional and mandatory eligibility categories that is confusing to both caseworkers and beneficiaries. It would also recognize that the strength of the Medicaid program is in providing vital health care services to low-income beneficiaries, not in cutting checks for a few dollars each month.


The nation’s Governors support Medicare reform to ensure the long-term solvency of the program, and improve its quality for all beneficiaries. As reform measures are considered, however, they must be assessed for the human impact on dual eligibles and the fiscal impact on Medicaid and other state-funded programs. Medicare reform must not create unfunded state mandates or otherwise shift costs to states. Such reform must also account for the fact that dual eligibles, which account for 30 percent of program expenditures, have no incentive to select a health plan based on price because Medicaid pays for their out-of-pocket costs. In addition, Medicare reform should support state flexibility to develop mechanisms to contain the growth in Medicaid spending. Finally, Medicare reform should support state-federal partnerships to coordinate and integrate Medicare and Medicaid to ensure greater accountability for health outcomes.

I thank you again for the opportunity to participate in this hearing. I look forward to answering your questions.