Diane Rowland

At a Glance 

The key to making Medicaid more sustainable is to make it less necessary:  

  • By addressing coverage for the uninsured 
  • By having Medicare offer more comprehensive coverage and long-term care assistance to its low-income beneficiaries 
  • By providing an alternative to Medicaid's spend-down to impoverishment to gain assistance with long-term care costs 

Does the 40-year-old Medicaid program still do what it was designed to do?

Since its enactment in 1965, the Medicaid program has evolved from its welfare roots to become the nation's healthcare safety net, providing health coverage and long-term care assistance to 55 million low-income Americans. Today, it provides health coverage to one in four American children, assists 60 percent of nursing home residents with the cost of their care, and fills in Medicare's gaps for one in five of its elderly and disabled low-income beneficiaries. It now accounts for 17 percent of national health spending and is the primary financing source for the nation's safety net institutions. Despite its substantial role filling the gaps and failures of our overall healthcare system, Medicaid's future is increasingly becoming the topic of major policy debate-over both its structure and costs.

At conferences and in print, Medicaid has been referred to as an "unsustainable and antiquated '60s program in need of modernization, increased privatization, and structural reform." Its critics call for reforms that would convert Medicaid from a "rigid and inflexible bureaucracy" to a program where state innovation could promote more consumer-directed care and federal mandates on benefits and cost-sharing levels would be replaced by broad state discretion over the scope of benefits and cost to consumers. Some argue that federal funds for the program need to be capped to curb state spending and that the program should be transformed to a cash assistance or voucher program to enable the needy to purchase private coverage. Others point to Medicaid's crucial safety net role filling the gaps in our healthcare system for the poor and frail and argue we should be shoring up-not dismantling-Medicaid.

Beneath the increasingly high volume of rhetoric is a program that for 40 years has been on the front line as a health and long-term care program for the poor. Medicaid's long record warrants careful examination in the face of proposals to fundamentally restructure the program. Choices about the program's future should be based on facts and the experience of 40 years, not rhetoric.

Antiquated or Modern?

Although enacted in the 1960s, Medicaid has continually evolved and adapted to changes in the health system and health priorities over its 40-year history. It began as the medical assistance program for the aged, disabled, and families with dependent children on welfare, but today focuses its coverage more broadly on the low-income population. As our uninsured population has swelled, Medicaid has been the vehicle providing coverage to low-income families for whom private insurance is unavailable or unaffordable. It has helped to offset the growth in the uninsured as employer-based coverage has declined.

Mirroring changes in the private sector, it has shifted health coverage for its beneficiaries from a fee-for-service model to a largely managed care system. Today, more than 60 percent of Medicaid's beneficiaries are enrolled in managed care plans. Medicaid has been an innovator-promoting the development of community-based care options as an alternative to institutional long-term care services. In response to rising costs, Medicaid has advanced new approaches to manage prescription drug utilization and for care management for the chronically ill.

The waiver process has allowed states to experiment with new concepts of benefit design, eligibility, and delivery systems. After evaluating these demonstrations, innovations such as managed care have been adopted as standard options that don't require waivers from the federal government. This allows the program to respond to changing healthcare trends and evolve to meet the diverse healthcare needs of its beneficiaries, while also allowing innovations to be tested before wide-scale adoption.

Rigid or Flexible?

The national framework of Medicaid provides states with federal financial support but also gives states substantial discretion over how they structure their programs, what populations and services they cover, and how they pay providers. State expenditures on medical care are matched by federal dollars. Given that federal dollars provide on average 57 percent of total spending, ranging from 50 to 73 percent depending on the state's matching rate, core national standards promote equity across states in return for federal dollars.

In return for federal dollars, federal standards require states to cover certain populations (mostly low-income children and aged or disabled cash assistance recipients) and provide certain benefits (such as hospital and physician care) to key populations. However, states also have the option to obtain federal matching funds to cover broader benefits (such as prescription drugs and community-based long-term care assistance) and additional populations (such as the medically needy who incur medical expenses that result in their spending down to Medicaid eligibility). Waivers provide states with the ability to test innovations and negotiate exceptions to federal rules.

States have taken advantage of Medicaid's flexibility to customize their program's benefits and eligibility standards. Rather than a one-size-fits-all federal program, the scope of Medicaid varies widely across the states as a result. Coverage for adult parents is the most notable eligibility variation, but the scope of benefits and availability of long-term care assistance, especially community-based care, also differ across states. As a result of state decisions on coverage and benefits, roughly 60 percent of all Medicaid spending is for services and populations covered at the option of the states, not as a federal mandate. Medicaid's diversity across the states reflects the different choices and priorities, as well as the demographic and economic differences, among states.

There is always a tension between states and the federal government over the federal rules and the need to obtain waivers to alter key provisions, but the statutory framework of Medicaid does allow for innovations to be tested and alternatives to be developed. The question is not whether states have flexibility, but how that flexibility should be granted and what protections are needed to safeguard coverage for Medicaid's low-income population and to provide accountability for the substantial investment of federal funds.

Public or Private Coverage?

The debate increasingly centers around whether private coverage is a better and more cost-effective alternative to public coverage through Medicaid. The facts are that Medicaid takes the high-risk cases the private sector avoids and provides cost-effective care. Medicaid is not a "publicly run" health system. It is a public financing program that purchases care on behalf of its beneficiaries through the private sector-from private hospitals, physicians, laboratories, home health agencies, and nursing homes. Increasingly, Medicaid has relied on managed care plans to deliver medical care to low-income families and some of the population with disabilities enrolled in the program.

Medicaid's costs reflect the high cost of caring for the very sick and chronically ill in a nation that spends more per capita than any other country. Although children make up half of all enrollees, more than 70 percent of Medicaid's dollars are spent on the one-quarter of enrollees who are elderly or disabled. Medicaid treats a sicker and more disabled population than private insurance, but does so with lower administrative costs and lower per capita costs when adjusted for health status. When Medicaid is providing care to relatively healthy low-income children, its costs, in part due to lower provider payment rates, are below those of private insurance.

Most people who are covered by Medicaid do not have access to private insurance because their employers do not offer them coverage or they cannot afford it, or because they are priced out of the private market due to illness or disability. Medicaid enrollment has grown in recent years as the poor economic conditions, loss of employer-sponsored insurance, and rising poverty rates have made more individuals eligible for Medicaid coverage. Substitution of Medicaid for private coverage is limited, as most people newly enrolled in the program were previously uninsured.

There is little evidence that people inappropriately turn to Medicaid for assistance. The eligibility standards, especially for adults in low-income families, are very low in most states, meaning that a parent working full-time at minimum wage would be ruled ineligible because his or her income of less than $10,700 a year exceeds the eligibility threshold in half the states. Medicaid eligibility for long-term care assistance is also limited to the very poor or those with large medical expenses who have depleted their savings. Medicaid prohibits individuals from transferring savings to others in an attempt to qualify for nursing home care without exhausting their assets. Sixty percent of nursing home residents are not on Medicaid at the time of their admittance to a facility. However, with nursing home care costing on average $70,000 a year, the longer individuals remain in a facility, the more likely they are to deplete their financial resources and qualify for Medicaid. That individuals turn to Medicaid for assistance reflects the lack of coverage for long-term care in Medicare and the limited availability and high cost of private long-term care insurance. 

Unsustainable or Critical Safety Net?

Almost on a daily basis Medicaid is labeled unsustainable and in need of reform. What makes Medicaid appear unsustainable is its role filling the growing gaps and failures in our overall healthcare system. Looking ahead to the aging of the baby-boomer generation, compounded by the continued growth in our uninsured population and the unabated rise in healthcare costs, policymakers are looking to constrain spending. During the recent economic downturn when enrollment swelled as more families lost jobs and income and Medicaid spending increases outpaced state revenue growth, all 50 states implemented actions to slow Medicaid spending. However, during these tough economic times when more people turn to Medicaid for coverage, the open-ended nature of federal matching payments provides assurance to states that as their spending increases, federal funds will expand as well to help meet the increased needs. The surge in Medicaid enrollment during the recent economic downturn demonstrated the importance of Medicaid's countercyclical financing that allowed federal funds to increase commensurate with state spending. Pandemics such as HIV/AIDS and emergencies such as Hurricane Katrina's devastating blow to the Gulf Coast are further examples of when Medicaid financing is called on to provide additional federal funds to states as they respond to emergencies that increase program spending.

While critics say the program is unsustainable, others acknowledge that the continuing and growing holes in our healthcare system put pressure on the program to meet the needs of an expanding uninsured population and the increasing long-term care demands of an aging population. The advocates of Medicaid note the program's ability to address the needs of the low-income population is limited by restrictions that leave non-disabled childless individuals uncovered no matter how poor, force impoverishment to obtain long-term care assistance, and too often underpay providers for the healthcare services provided to America's poorest and sickest. They argue that Medicaid needs improvements and more stable financing to be able to continue to provide cost-effective care to millions of low-income people who, without Medicaid, would have nowhere else to turn.

It is not the structure of Medicaid that makes it appear unsustainable; it is the safety net role we ask Medicaid to fill for our healthcare system. Medicaid is being blamed for the inadequacies and failures of America's healthcare system. In reality, Medicaid fills many of the holes in our health system-by covering some of the low-income uninsured, assisting with the high cost of long-term care, and supplementing Medicare coverage for the low-income elderly and disabled.

The key to making Medicaid more sustainable is to make it less necessary-by addressing coverage for the uninsured, having Medicare offer more comprehensive coverage and long-term care assistance to its low-income beneficiaries, and providing an alternative to Medicaid's spend-down to impoverishment to gain assistance with long-term care costs. If we had universal health and long-term care coverage, the safety net Medicaid provides would hopefully no longer be necessary.


In reality, Medicaid is not a failed inefficient rigid bureaucratic program. Medicaid does remarkably well what it is designed to do: fill in gaps in private insurance and Medicare and assist the poor and frail with their health and long-term care needs without undue financial burden. Its adaptability and flexibility in the face of natural disasters and emergencies, and the substantial size of the population it serves, attest to its value and critical role as our nation's healthcare safety net.

Medicaid has problems-but they are fixable problems. Medicaid could be improved by allowing health coverage of childless adults, using poverty-based guidelines rather than categorical standards for eligibility, adjusting payment levels to close the gap between private provider rates and Medicaid, investing more in IT and care coordination, promoting home and community-based care over institutional care, and providing more counter-cyclical federal financing to help states during economic downturns. These steps would enable Medicaid to be more responsive to future challenges and serve as a stronger safety net while we await broader health system reforms.

Publication Date: Sunday, January 01, 2006

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