Full text of "Medicaid issues under health care reform : hearing before the Committee on Finance, United States Senate, One Hundred Third Congress, second session, March 24, 1994"

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S. Hrg. 103-937

MEDICAID ISSUES UNDER HEALTH CARE REFORM

1 4. F 49: S. HRG, 103-937

fledicaid Issues Under Health Care R. . .

HEARING

BEFORE THE

COMMITTEE ON FINANCE
UNITED STATES SENATE

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

MARCH 24, 1994

Printed for the use of the Committee on Finance

U.S. GOVERNMENT PRINTING OFFICE
85-416— CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046676-8

I S. Hrg. 103-937

MEDICAID ISSUES UNDER HEALTH CARE REFORM

\. F 49; S. HRG. 103-937

icaid Issues Under Health Care R...

HEARING

BEFORE THE

COMMITTEE ON FINANCE
UNITED STATES SENATE

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

MARCH 24, 1994

MAR 2 1 I

"^•'MClirr.

Printed for the use of the Committee on Finance

U.S. GOVERNMENT PRINTING OFFICE
85-416— CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046676-8

COMMITTEE ON FINANCE
DANIEL PATRICK MOYNIHAN, New York, Chairman

MAX BAUCUS, Montana

DAVID L. BOREN, Oklahoma

BILL BRADLEY, New Jersey

GEORGE J. MITCHELL, Maine

DAVID PRYOR, Arkansas

DONALD W. RIEGLE, Jr., Michigan

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN B. BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB PACKWOOD, Oregon
BOB DOLE, Kansas
WILLIAM V. ROTH, Jr., Delaware
JOHN C. DANFORTH, Missouri
JOHN H. CHAFEE, Rhode Island
DAVE DURENBERGER, Minnesota
CHARLES E. GRASSLEY, Iowa
ORRIN G. HATCH, Utah
MALCOLM WALLOP, Wyoming

Lawrence O'Donnell, Jr., Staff Director
LlNDY L. Paull, Minority Staff Director and Chief Counsel

(II)

CONTENTS

OPENING STATEMENTS

Page

Moynihan, Hon. Daniel Patrick, a U.S. Senator from New York, chairman,

Committee on Finance 1

Packwood, Hon. Bob, a U.S. Senator From Oregon 1

COMMITTEE PRESS RELEASE

Finance Committee Sets Hearing on Tax Treatment of Employer-Based
Health Insurance 1

PUBLIC WITNESSES

Scheppach, Raymond C, executive director, National Governors' Association,

Washington, DC 2

Merlis, Mark, specialist in social legislation, Education and Public Welfare

Division, Congressional Research Service, Washington, DC 5

Dorn, Stan, managing attorney, Washington Office, National Health Law

Program, Washington, DC 8

Wintringham, Karen, senior vice president, corporate development, Health

Insurance Plan of Greater New York, New York, NY 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Dorn, Stan:

Testimony 8

Prepared statement 29

Hatch, Hon. Orrin G.:

Prepared statement 37

Merlis, Mark:

Testimony 5

Prepared statement with attachments 37

Moynihan, Hon. Daniel Patrick:

Opening statement 1

Packwood, Hon. Bob:

Opening statement 1

Scheppach, Raymond C:

Testimony 2

Prepared statement 62

Wintringham, Karen:

Testimony 10

Prepared statement 66

(III)

MEDICAID ISSUES UNDER HEALTH CARE

REFORM

THURSDAY, MARCH 24, 1994

U.S. Senate,
Committee on Finance,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:25 a.m., in
room SD-215, Dirksen Senate Office Building, Hon. Daniel Patrick
Moynihan (chairman of the committee) presiding.

Also present: Senators Baucus, Riegle, Rockefeller, Daschle,
Breaux, Conrad, Packwood, Roth, Danforth, Chafee, and Grassley.

[The press release announcing the hearing follows:]

[Press Release No. H-27, April 21, 1994]

Finance Committee Sets Hearing on Tax Treatment of Employer-Based

Health Insurance

Washington, DC. — Senator Daniel Patrick Moynihan (D-NY), Chairman of the
Senate Committee on Finance, announced today that the Committee will continue
its examination of health care issues with a hearing on tax treatment of employer-
based health insurance.

The hearing will begin at 10:00 A.M. on Tuesday, April 26, 1994 in room SD-215
of the Dirksen Senate Office Building.

"Many of the health care reform proposals before the Committee would limit the
tax-favored treatment of employment-based insurance," Senator Moynihan said in
announcing the hearing. "The Committee will hear testimony discussing the advan-
tages and disadvantages of these proposals and other alternatives for increasing the
cost-consciousness of health care consumers."

OPENING STATEMENT OF HON. DANIEL PATRICK MOYNHIAN,
A U.S. SENATOR FROM NEW YORK, CHAIRMAN, COMMITTEE
ON FINANCE

The Chairman. And now we have the very special opportunity of
having four authorities on the subject of Medicaid which is a mat-
ter of large interest to our committee and to those who are inter-
ested in the whole subject of health care.

I will ask our guests who are departing to allow our panel to get
underway.

Senator Packwood has an opening statement he would like to
make on this or any other subject he so chooses. I really must ask
that everybody pay attention. Senator Packwood has the floor.

OPENING STATEMENT OF HON. BOB PACKWOOD, A U.S.
SENATOR FROM OREGON

Senator PACKWOOD. Mr. Chairman, when we get onto Medicaid
I have to brag a bit about my home State. We are the first State
to really undertake an effort to rationalize, in my judgment, Medic-
CD

aid. We have raised coverage to the poverty level. Most States do
not cover people to that level.

We started this program only in February 1994. We waited for
two-and-a-half years to get a waiver from the Federal Government
and more than 120,000 Oregonians who were below the poverty
level have become eligible for Medicaid coverage and the sign-up is
coming infinitely faster than anyone expected. We are not dis-
appointed.

It is working and in exchange for covering everybody Oregon had
to attempt to, in a rational order, list on a priority list Medicaid
services from one to over 700 and then say how many we could pay
for. We have decided we are not going to pay for a treatment that
does not work. We are not going to treat the common cold anymore.
We do not know how to cure it, so we are not going to treat it. Nor
are we going to treat absolutely incurable illnesses that cannot be
treated.

Will we try to ease suffering? Yes. Ease pain? Yes. But we are
not going to try to cure the incurable. It has had overwhelming
support in the State of Oregon from the philosophical left, from the
philosophical right, from business, from labor, from the Repub-
licans and Democrats in the legislature and Republicans and
Democrats holding statewide offices. And I would hope that it
would be a model for what we might eventually consider at the na-
tional level.

Thank you, Mr. Chairman.

The Chairman. It certainly commends itself. That is what fed-
eralism is supposed to be about and occasionally is. So let us begin
on that subject with Mr. Raymond Scheppach. Do you say it
Scheppach, sir?

Mr. Scheppach. Scheppach, Mr. Chairman.

The Chairman. Scheppach. Is that Dutch or German?

Mr. Scheppach. It is German.

The Chairman. It is German. And you are executive director, of
course, of the National Governors' Association. We welcome you,
sir, and we will put all statements as written in the record. Proceed
exactly as you would like.

STATEMENT OF RAYMOND C. SCHEPPACH, EXECUTD/E DIREC-
TOR, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON,
DC

Mr. Scheppach. Thank you, Mr. Chairman. Good morning, mem-
bers of the committee. I appreciate the opportunity to appear be-
fore you today on behalf of the nation's Governors to discuss the
impact of health care reform on low-income population in the Med-
icaid program.

There are few issues of greater importance to Governors than
how the Medicaid program is integrated into the new health care
system. I am just going to summarize very quickly three basic is-
sues, Mr. Chairman.

Number one, some interim changes that the Governors would
like to have. Second, the Governors' position with respect to the
three major bills that are before the committee. And third, some
general guidelines that we would like you to be aware of as you put
your final package together.

In terms of the interim changes that we would like to have, the
first has to do with the Medicaid managed care waivers. Currently,
we need to have these renewed every 2 years. What we would like
to do is to move toward having an initial three-year waiver with
a five-year renewal without a lot of the paperwork burdens that are
required at this particular time.

A second area of waiver concern is that we are only able to get
one nonrenewable 3-year waiver to have beneficiaries served in
health maintenance organizations where more than 75 percent of
the enrollees are Medicaid beneficiaries. We would like to have
that provision eliminated or at least allow renewability.

Regarding the comprehensive waivers, the so-called 1115(a), re-
search and demonstration waivers, these are nonrenewable and
they go from three to 5 years. We would like to have those renew-
able as well. One of the problems is that once you have dem-
onstrated, successfully, an innovation, even if it is cost effective in
delivering quality care, a state may not continue its operation. We
would like that changed.

Finally, we seek some relief from the Boren Amendment. The
Governors support a proposal to develop a series of safe harbors
which would give States some certainty in setting reimbursement
rates while protecting the financial integrity of providers.

Now, Mr. Chairman, I would like to move on and talk about the
Governors' position on the three major bills. First, on the Health
Security Act. As you are probably aware, we were privileged to
have a State team working with the administration on a number
of the federal/state components.

Therefore, we tend to be relatively supportive of a lot of the Med-
icaid changes that the administration has recommended. Let me
just summarize those very, very quickly.

First, in the administration's proposal, Medicaid acute care serv-
ices are integrated into the same delivery system used by all Amer-
icans. Second, States will have much more financial certainty in
the growth of their Medicaid programs. Third, the so-called mainte-
nance of effort, although we probably would ask for some technical
changes, the concept there is one that the Governors tend to sup-
port.

We also support the fact that there are problems with the Medic-
aid matching formula. The administration has proposed that a
commission look at the formula within the next 3 to 5 years and
make a recommendation back to the Congress. And although we do
not have a formal proposal or policy on this strategy, I do tend to
think Governors could support it.

And finally, in terms of support, we tend to support the new
home or community-based care program. It gives States a fair
amount of flexibility. Moreover, the legislation is currently written
as an entitlement to States as opposed to an entitlement to individ-
uals. Governors support this concept.

There are, however, three areas where we differ with the Presi-
dent's plan and believe that it could be modified. First, the Health
Security Act maintains the link between cash assistance programs
and Medicaid. Governors are forced into the position that if they
are going to make any changes in their SSI or AFDC, they are
automatically going to have some cost implications on Medicaid.

The Governors would rather see a delinking of health care for
the poor from cash assistance programs. They prefer to see the
acute care portion of Medicaid folding into a new low-income pro-
gram, one in which the various Medicaid categories are eliminated.

The Governors' second concern has to do with the qualified Medi-
care beneficiaries or related programs. The so-called QMBs pro-
grams are very complicated. The Governors support federalization
of that particular program rather than continuing it the way it is
under current law.

And finally the Health Security Act reduces the hospital program
to about $800 million annually. This may be insufficient to provide
coverage to these who remain without coverage under the Presi-
dent's proposal. Governors remain concerned about who will pro-
vide and pay for care to undocumented immigrants.

In terms of Senator Chafee's proposal, there are a number of
components that we support there. Number one, States will be able
to establish managed care systems under Medicaid without the
need for waivers. The Governors are very supportive of that par-
ticular component.

Second, Medicaid beneficiaries will be able to use the same
health care delivery system as other Americans. The Governors are
very supportive of that component as well.

And third, they are very supportive of the creation of a new
broad-based low-income program. Despite these areas of support,
Governors strongly oppose the cap on the Federal share of Medic-
aid expenditures. This is a direct cost shift to States.

We also have a problem with the Chafee proposal that reduces
the disproportionate share program to zero. This is probably a big-
ger problem than even under the administration's plan because the
low-income program is phased in over time and, therefore, we
would probably require a higher level of disproportionate share to
continue defraying the costs of uncompensated care.

Finally, with respect to Senator Breaux's approach as Governors
testified somewhat previously on that issue, we have longstanding
policy that is in opposition to the type of swap that the Senator is
recommending, which is essentially for the States to take the long-
term care program in exchange for the acute care. We prefer the
reverse of that swap if, in fact, we got into discussions on that.

Finally, I want to say, Mr. Chairman, from the States' perspec-
tive we would like you to be guided by a number of principles.
First, eligibility for a low-income subsidy program must be rel-
atively simple and uniformly applied.

We need to abolish the complex, categorical eligibility structure
used in Medicaid.

Second, individuals who receive low-income subsidies for the
health care must have access to the same health care delivery sys-
tem as those that receive no subsidies. They need to be fully inte-
grated into the system.

Third, managed care must be an important component of the
health care delivery system. Forty percent of the population of the
United States now is in some type of a network, and yet we have
only about 10 percent of the current Medicaid population in net-
works.

Fourth, States must be assured the stability and predictability in
their contributions toward the funding of the new national low-in-
come subsidy program.

And finally, any Federal cost containment strategy that limits
the financial exposure of the Federal Government for public funded
entitlement programs must also limit the financial exposure of
States.

One of the big problems I think we have in restructuring Medic-
aid, Mr. Chairman, is how do we handle the so-called supplemental
benefit programs — benefits beyond a national care benefits pack-
age. We have been exploring a number of options to add on this
issue. One of those options, of course, is to maintain the entitle-
ment nature of those.

A second option which we are probably less enamored with would
be to have a block grant of flexible money that the States could use
for supplemental benefit package across all low-income recipients.

The third option that we are beginning to look at is, could you
do an entitlement to the State for flexible moneys that could be
used for the supplemental programs. That would mean that the
Medicaid population will have the same basic benefit packages as
everybody else, but there would be a pot of money as in a State
entitlement of flexible money that could be used to fill in around
the various supplemental packages.

Mr. Chairman, members of the committee, on behalf of the Na-
tional Governors' Association leadership, I would like to propose a
bipartisan meeting with Governors in the very near future, so that
they could sit down with this committee and discuss perspectives
on national health care.

Thank you, Mr. Chairman. I would be happy to answer any ques-
tions.

[The prepared statement of Mr. Scheppach appears in the appen-
dix.]

The Chairman. Thank you, Mr. Scheppach.

The committee, Senator Packwood and I will very much look for-
ward to a meeting of that kind.

Senator Packwood. I recall when they were here before they
were very, very good and I would like to see them again.

The Chairman. We will schedule that.

We will hear the whole panel, as is our practice. Good morning,
Mr. Merlis. On behalf of the Congressional Research Service you
are going to speak about some recent trends in the Medicaid pro-
gram.

STATEMENT OF MARK MERLIS, SPECIALIST IN SOCIAL LEGIS-
LATION, EDUCATION AND PUBLIC WELFARE DIVISION, CON-
GRESSIONAL RESEARCH SERVICE, WASHINGTON, DC

Mr. Merlis. Thank you, Mr. Chairman. I have just been asked
to give a little bit of background. My written statement has a num-
ber of tables attached to it and I thought I would just point up a
few highlights in those.

Beginning with Table 1., which shows overall spending growth
from 1988 through 1999, Medicaid since 1988 has gone from 3 per-
cent to 6 percent of total Federal outlays. It now accounts for al-

most half of Federal spending on programs targeted to the low-in-
come population.

Senator PACKWOOD. You said half of all low-income programs?

Mr. Merlis. It is 45 percent of low-income programs. It is a little
over a third of total Federal health spending now.

Much of the growth, as the table indicates, happened over just
a few years, between 1988 and 1992. The program doubled in that
period. Growth since then has slowed down a little bit. Costs are
still projected to grow in constant dollars 50 percent by 1999.

Although there are other factors I am going to get to, a lot of this
spending growth has been fueled by growth in program enrollment.

If you can turn to Table 2., the number of Medicaid recipients
has grown by more than 50 percent between 1988 and this year.
Spending per recipient has not gone up so sharply, as column two
indicates. Except in 1991 and 1992 the per capita cost increases
really were not very different from what you saw in Medicare or
in private insurance.

The Kaiser Commission estimates that 34 percent of the total
Medicaid spending growth between 1987 and 1991 was directly re-
lated to population.

The Chairman. Say that once again.

Mr. Merlis. The Kaiser Commission tried to break down the
components of spending growth between 1987 and 1991 and found
that 34 percent of the growth was related to population growth.

The Chairman. By population growth you mean growth in num-
ber of persons in the program?

Mr. Merlis. Right.

The Chairman. As against the population of the States.

Mr. Merlis. Right.

Using the same method between 1991 and 1995 growth in pro-
gram enrollment accounts for 41 percent of spending increases. So
this is clearly the major single factor driving spending.

Table 3. breaks out the population growth by cash assistance or
welfare status. There is one typo on this table, the column headed
"Blind and Disabled" should read "Aged, Blind and Disabled."

As you can see, the largest growth has been in the column la-
beled "Noncash." This is the pregnant women and kids added by
the statutory expansions of the 1980's. It is the QMBs and various
other noncash groups.

There has been growth, however, in the welfare categories as
well, particularly the jump in AFDC participation in 1991 and 1992
that I am sure you are aware of.

In addition, moving on to Table 4., which goes out a few
years

The Chairman. Could I just ask once again, you say in AFDC
participation. Are you suggesting that the universe of eligible per-
sons remains the same but their participation rose, or do you mean
there is just more of them, the population?

Mr. Merlis. I cannot say that. I only know that the number of
persons receiving AFDC and receiving Medicaid benefits rose dur-
ing that period.

The Chairman. True.

Mr. Merlis. Table 4. carries numbers out to 1995 and this time
breaks people out by demographics. You can see in that table the

sharp recent increase in SSI disabled enrollment. Nevertheless,
over the entire period, it is still basically pregnant women and kids
who are accounting for the bulk of the growth.

Medicaid has had a significant effect on the rate of uninsurance
among children. In 1988 about one in five kids in the United States
was without insurance. The figure for 1992 is down to one in eight
kids. But if you turn to the next table, Table 5., you will see that
the overall impact of Medicaid expansion has not even kept pace
with the drop in employer-based coverage during that period.

Medicaid went from covering about 6 percent of the nonelderly
population to 9 percent, but employer coverage dropped. So the pro-
portion of the population with no coverage increased during that
period.

Finally, Table 6

The Chairman. That is not the same population, Mr. Merlis. The
Medicaid population and the employer-based population are not the
same people.

Mr. Merlis. No, I am not saying Medicaid picked up people los-
ing employer-based coverage. I am saying that the gains,, the in-
roads into the uninsured made by Medicaid were offset by in-
creases in other classes of the uninsured because of lost employer
coverage

The Chairman. Your principal interest is a number called pro-
portion of uninsured.

Mr. Merlis. I am sorry?

The Chairman. If your principal interest is just that percentage
of uninsured.

Mr. Merlis. Yes.

The Chairman. Which is not in itself very helpful. You have to
disaggregate it.

Mr. Merlis. Yes, sir.

Finally, Table 6. breaks out spending growth by type of service.
In the first part of the period there is the conspicuous growth in
inpatient spending, which is very largely fueled by the growth in
DSH payments' which went from under a billion in 1989 to $18 bil-
lion last year.

As you know, some of this funding was recaptured by States
through various mechanisms. But some of it did, in fact, go to hos-
pitals and the Prospective Payment Assessment Commission found
a significant increase in the payment to cost ratio in hospitals as
a result of DSH payments.

Overall, acute care grew much faster than long-term care in the
period ending 1992. In 1988 the acute and long-term care sides of
the program were roughly equal. Now long-term care is down to
about 36 percent. Since 1992 though the growth in the two sectors
has been roughly parallel.

Finally, one last category on the table I want to point to, that
is "Other Insurance Payments." That includes premiums paid to
capitated managed care programs. Overall Medicaid enrollment in
Medicare has grown from about $1.5 million in 1988 to almost $5
million last year. There is continued growth shown on the table for
coming years. Thank you, Mr. Chairman.

[The prepared statement of Mr. Merlis appears in the appendix.]

The Chairman. Thank you, Mr. Merlis. And as always, the Con-
gressional Research Service is indispensable to our groping our way
through.

We would like to get your supplemental statement on the dis-
proportionate share regarding where that money actually went.

[The statement appears in the appendix.]

The Chairman. And now, Mr. Stan Dorn, who is Managing At-
torney of the Washington Office of the National Health Law Pro-
gram. Good morning, Mr. Dorn. I do not think you have been be-
fore the committee before.

Mr. Dorn. No, I have not. It is an honor to be here today, Chair-
man Moynihan.

The Chairman. It is a great pleasure to have you.

STATEMENT OF STAN DORN, MANAGING ATTORNEY, WASH-
INGTON OFFICE, NATIONAL HEALTH LAW PROGRAM, WASH-
INGTON, DC

Mr. Dorn. The National Health Law Program is the legal serv-
ices national backup center that specializes in health issues affect-
ing low-income people. We work with over 1,200 legal services of-
fices across the country to try to help their low-income clients re-
ceive necessary health care.

And before getting into the substance of my testimony, I would
like to take a second to thank the members of this committee for
all your hard work down through the years to make sure that the
Medicaid program improves and better serves the 30 million people
who depend on it for their health care coverage.

The three issues I would like to discuss today are universal cov-
erage, cost sharing and mainstreaming low-income people into the
same programs that serve others. And because of limits of time I
am going to focus my initial remarks on the three bills with prin-
ciple sponsors who are members of this committee — the adminis-
tration's bill, the Managed Competition Act and the Heart Act.

But during the question period I know there are other bills of in-
terest to members of the committee such as Senator Nickle's bill
and I would be delighted to discuss those or any other questions
the committee might have.

The issue of universal coverage is obviously fundamental. The
administration's bill provides universal coverage for all but certain
immigrants. Unfortunately, the Managed Competition Act does not.
It does make important steps forward for people below the poverty
line. However, because of the bill's subsidy structure, people with
incomes above poverty will often go uninsured, even including the
6.2 million Medicaid beneficiaries with incomes above poverty.

Here is an example. Pregnant women with incomes up to 185
percent of poverty are covered today under the Medicaid program
in most States. Under the Managed Competition Act, if their em-
ployer did not choose to provide coverage, they would have to pay
85 percent of the cost of the health insurance policy, which obvi-
ously very, very few of those women could afford. They would lose
the Medicaid coverage they have now because the bill would abol-
ish acute care Medicaid and they would not have coverage.

A second problem with the bill is that low-wage workers at large
companies with over 100 employees as we understand the bill could

not get low-income subsidies no matter how poor they were. That
obviously leaves a gaping hole, including many Medicaid bene-
ficiaries today, and it also makes it more difficult for low-income
people to work their way off welfare. If the job that they want is
with a large company, they may not have health coverage. That is
certainly not the direction that we want to go.

The third bill that I am going to discuss is the Heart Act, spon-
sored by Senator Chafee. The individual mandate approach obvi-
ously has the potential of providing universal coverage, but some
of the details are troubling from our perspective as advocates for
low-income people.

The caps on Federal Medicaid dollars which were mentioned by
my friend from the National Governors' Association are very trou-
bling. After the first year Federal dollars go up by 6 percent per
year regardless of what is happening with health care inflation.

If health care costs are expanding at a rate of 10 or 11 percent
per year in the private sector, those Federal dollars will buy fewer
and fewer health care resources, forcing States to choose between
putting in additional dollars of their own or making large cutbacks.
And if they do make cutbacks, people who lose Medicaid coverage
may or may not get low-income subsidies under the bill because the
subsidies phase-in depends on the certification by the Office of
Management and Budget that there is enough money to pay for the
subsidies. So, unfortunately, the Heart Act does not ensure univer-
sal coverage.

On the second issue, cost sharing, the bills flip around. The ad-
ministration's bill has some significant problems in this area be-
cause it makes everything depend on whether you receive cash as-
sistance. If you get AFDC or SSI your cost sharing is reduced to
$2 every time you go see a doctor.

If you are any other kind of a poor person, it is $10 whenever
you go see the doctor. Now $10 does not sound like much to those
of us sitting in this room, but to the one in 20 households in this
country with incomes below $5,000 a year, that $10 copayment is
the equivalent for an average household of a $75 copayment.

So it is not surprising that many public health studies show sub-
jected to copayments low-income people defer seeking care until
their illness degenerates, they suffer harm and costs are increased.

Now 40 percent of Medicaid beneficiaries today do not receive
cash assistance and most commonly they pay no copayments. Un-
fortunately, this provision of the administration's bill would erect
a new financial barrier to access for these people. And also, it
would once again make it more difficult for people to move from
AFDC to employment because when you do, you have to pay more
for your health care.

This is one of the most important details in the administration's
bill, that from our perspective must be fixed for the bill to accom-
plish its objectives with respect to low-income people.

By contrast, the Managed Competition Act says that everyone
with incomes below 200 percent of poverty pays no more than
nominal copayments, which is a sensible direction, roughly defined
with reference to the Medicaid Act.

And the Heart Act in some ways goes even farther and incor-
porates the full range of Medicaid cost-sharing protections for Med-

icaid beneficiaries. There are some areas where these provisions
need improvement as outlined in my testimony, but in terms of a
basic direction, this is a more sensible way to go.

Low-income people should have cost sharing scaled down to fit
low-income budgets regardless of whether they receive cash assist-
ance or not.

The third issue is mainstreaming and we support the position of
the National Governors' Association that it is critical for low-in-
come people, including Medicaid beneficiaries to have access to the
same health plans that serve their neighbors. We do not want a
health care system that is segregated on the basis of income,
among other reasons, because in much of the country that would
mean segregation on the basis of race. We do not want discreet ra-
cially identifiable health care systems in this country.

Furthermore, we do want a system where low-income people can
vote with their feet and health care plans know if they do a bad
job their customers will leave. It is critical to harness competitive
pressures to promote quality. The administration's bill does quite
well on this score.

Reimbursement is equalized for all consumers, rich or poor, be-
cause of regional health alliances. Low-income people can enroll in
any plan up to the average price. It is a very important, positive
feature of the administration's bill.

The Managed Competition Act unfortunately in operation would
limit low-income people for the most part to the lowest cost plan
in the area, giving rise to the problems I outlined.

And the Heart Act, among other things, would permit States to
enroll Medicaid recipients into health plans for poor people only.

As you can see, our suggestion would be for this committee to
combine the strongest elements of all these various proposals to
come up with an approach to low-income people, including Medic-
aid beneficiaries that would really work and we would be delighted
to work with the committee toward that end.

Thank you.

[The prepared statement of Mr. Dorn appears in the appendix.]

The Chairman. Thank you, Mr. Dorn. That was admirably ex-
plicit.

And now the last of our panelists, representing the Health Insur-
ance Plan of Greater New York, Karen Wintringham, Senior Vice
President.

Ms. Wintringham. Good morning. Thank you, Mr. Chairman.

The Chairman. It seems to me I was enrolled in HIP some 45
years ago.

Ms. Wintringham. And look at how well you have done.

The Chairman. I am still here.

Ms. Wintringham. We must have succeeded. [Laughter.]

STATEMENT OF KAREN WINTRINGHAM, SENIOR VICE PRESI-
DENT, CORPORATE DEVELOPMENT, HEALTH INSURANCE
PLAN OF GREATER NEW YORK, NEW YORK, NY

Ms. Wintringham. Mr. Chairman, and members of the commit-
tee, I am pleased to be here. I obviously represent the Health In-
surance Plan of Greater New York, but I may refer to it as HIP
because it is much briefer.

HIP today serves nearly 1.2 million members in the New York
City metropolitan area, in New Jersey, and not surprisingly in
Florida. We would like to share with this committee some of our
experience in the past 30 years of serving Medicaid members. In
addition to some 80,000 Medicaid members in New York we also
serve other groups requiring special consideration including small
businesses, uninsured employed individuals and uninsured chil-
dren.

We will also provide the committee with some recommendations
on what Congress, the States and health plans should really con-
sider when mainstreaming Medicaid recipients into private sector
and managed care organizations.

I would also like to commend you, Mr. Chairman, for your sup-
port of Medicaid managed care. Your dedicated efforts on behalf of
Medicaid reform have contributed greatly to the larger discussion
about national health reform.

HIP was established nearly 50 years ago. This is not a new orga-
nization. And our mission was really to provide affordable health
care to everyone in our community. Unfortunately, now 50 years
later we still find that there are still barriers to access.

The Chairman. HIP was quite an adventurous idea when it
began.

Ms. WlNTRlNGHAM. It certainly was.

The Chairman. It now is very much mainstream, if I can use
that word.

Ms. WlNTRlNGHAM. Yes.

Controlling Medicaid costs and ensuring access to comprehensive
care rather than episodic acute care has also been at the heart of
New York State's efforts to integrate its Medicaid population into
managed care. The New York statewide Managed Care Act passed
in 1991 will shift half of the State's Medicaid population into man-
aged care plans.

Several proposals for national reform, including the President's
plan and bills that have been introduced by Senators Breaux and
Chafee, would also mainstream the Medicaid population into pri-
vate plans. The consequences of these proposals are considerable
and caution should be exercised.

But the proven success of the prepaid group practice model HMO
upon which these proposals are based results from factors very dif-
ferent from fee-for-service medicine. These include use of a selec-
tive network of providers who have been credentialed, designation
of a primary care physician who knows everything that is happen-
ing to their patients, intensive quality review, emphasis on early
access and preventive services and care that is prepaid with lim-
ited out-of-pocket expenses.

We and other HMOs have also found ways to meet the special
needs of our Medicaid members while providing their health serv-
ices with the same physicians, the same providers and the same
medical centers as all of our other members.

For example, we assign a Medicaid program officer to every new
Medicaid member. These patient advocates encourage the patients
and the members to use preventive services, like screening, routine
examinations and prenatal care. They assist the member in obtain-
ing appointments, they arrange transportation, they help the mem-

ber understand how to use a complicated system, and they assist
in any other way the member needs.

Every teenage mother in our plan, many of whom are AFDC pop-
ulation, have a case manager assigned to them who assures that
they receive all the prenatal services that they need. And we have
found that programs such as these are absolutely vital in our orga-
nization, and others that have tried them, to treat and care for a
Medicaid population in a managed care setting.

Even with these extra services, we have achieved significant sav-
ings for the State, the Federal and in the case of New York, the
city governments. Our premium for Medicaid, including additional
services such as dental, drugs, optical, transportation, methadone
maintenance are approximately $147 per member per month.
When compared to projected costs in the fee-for-service community,
these are about 16 percent lower in our community, which trans-
lates into an annual savings for our plan of approximately $18 mil-
lion for the Federal, State and city governments.

So based on our experience, we recommend that health reform
proposals mainstream Medicaid and other uninsured populations
and that they consider the following elements. First of all, the pro-
posals must recognize that the elements of managed care that are
fundamental to their success must be preserved and to avoid
changes which would jeopardize or undermine those basic ele-
ments.

Any willing provider laws should be preempted. Point-of-service
products should be voluntary. And mandated contracts with all es-
sential community providers need to be reconsidered.

Clearly, funding for providers that have traditionally served low-
income populations must be assured; however, requiring health
plans to contract with every one of these providers threatens the
very success of closed-panel HMOs which already provide com-
prehensive health services.

Just last week the Ways and Means subcommittee adopted an
amendment which would require all health plans to contract with
a broadly defined universe of essential community providers. While
well-intentioned, such an amendment guts our basic ability to as-
sure continuity of care, appropriate use of services, cost contain-
ment, maintaining a complete medical record so that we can look
at outcomes, and providing comprehensive services in one conven-
ient setting.

The government must assure there is an adequate choice, as has
been said earlier, among health plans for all populations. To help
ensure greater choice in underserved areas, we would suggest that
Congress allow health plans to reimburse part or all of the edu-
cational expenses of primary care physicians without those pay-
ments being taxable income to the physicians.

I view this proposal as a positive incentive to try to attract pri-
mary care physicians into professional shortage areas.

And finally, oversight and accountability are vital. However, we
would suggest that health plans that demonstrate expertise and
consistent, good performance be subject to less intrusive oversight
and that health plans that achieve independent accreditation, such
as NCQA certification, should be deemed to have met some ele-
ments of oversight and review process.

Mr. Chairman, my written testimony elaborates on other rec-
ommendations which I would be happy to discuss. But our experi-
ence as a provider of comprehensive services to Medicaid recipients
has been very positive for us, for our physicians, certainly for our
members and for government. Our experience, along with that of
other plans around the country, indicates that reform of the health
system should mainstream Medicaid and uninsured low-income
populations into integrated health plans.

With appropriate attention to the lessons we have all learned,
some of them painful, we believe that Medicaid recipients, like the
nearly 50 million members in HMOs nationwide, can also benefit
from improved quality, access and cost effective medical care.

Mr. Chairman, thank you for giving us the opportunity to testify.
I would be happy to answer any questions.

[The prepared statement of Ms. Wintringham appears in the ap-
pendix.]

The Chairman. We thank you, Ms. Wintringham. You skipped
over in your written statement that it was Fiorello LaGuardia as
Mayor of New York and Dr. George Baehr, a public health doctor,
who conceived the idea of a group health service and a health in-
surance plan. And not the least of things we owe Fiorello
LaGuardia.

I would like to ask Mr. Scheppach as regards — and this is obvi-
ously a self-interested query — the Medicaid formula, which is a
source of great agitation in New York State at least. You have stat-
ed that "with a major restructuring of health care financing the
President's plan includes a strategy for reviewing the State finan-
cial obligations under the new system toward resolving possible in-
equities among States."

I compliment you on the term "strategy" which is a form for not
addressing it in the next century. And the term "possible inequi-
ties," do you want to expand on that? I do not want to press you.
But we are dealing with a formula which reimburses States in ac-
cordance with the square of the differences of their income.

I mean, 18 years ago I proposed square root, just to make the
point of the absurdity of it. And surely it comes from another gen-
eration in American social policy. But do I understand the basic
problem is that by a slight margin there are more States who come
out better in this arrangement than — and you vote one State at a
time, something like that? I do not think you have to answer that.
[Laughter.]

You have constitutional rights that we may be abolishing here.

Mr. Scheppach. Let me just say, Mr. Chairman, those issues are
tough, obviously, for the Association because there are winners and
losers.

The Chairman. Yes.

Mr. Scheppach. I think there is a feeling on some States' parts
that neither the underlying fiscal capacity of the States nor the ex-
tent of vulnerable populations is reflected in the current medical
formula.

Because of its volatile nature, it seemed to make sense that one
would not want to combine a relook at the Medicaid formula one
would at the same time one is doing health care reform. It may
well be better to first address reform and then address the formula.

One option that has been discussed is to have an independent com-
mission make recommendations to Congress on changes to the for-
mula.

The Chairman. The thing that did hurt, however, was when we
found that as you are reading through the 1,300 pages and you get
to long-term health care, and there was that square of the dif-
ferences again as if everything we had said for 18 years was a mat-
ter of no significance. There are costs to that.

I wonder if I could ask Mr. Merlis if we could not get a history
of that, the present formula, from the CRS. Would you just give us
a two or three page?

Mr. Merlis. Sure.

The Chairman. I think it really is Hill-Burton, adapted to Medic-
aid in 1965, something like that.

Mr. Merlis. We have a report on this subject. I will get it over
to you.

The Chairman. Would you do that?

Mr. Merlis. Yes.

The Chairman. Fine. Thank you.

Senator Packwood?

Senator PACKWOOD. Ms. Wintringham, I want to make sure I un-
derstand how the HIP works. The Medicaid people do not have to
join. This is voluntary. They can continue to go to the emergency
rooms and their fee-for — service if the doctors will take them if
they want.

Ms. Wintringham. Well, since 1966 when Medicaid was passed,
HIP has had a voluntary Medicaid program.

Senator Packwood. Right.

Ms. Wintringham. In 1991 the State of New York passed a law
which will move half of the Medicaid population into managed care
plans.

Senator PACKWOOD. But how do you get the

Ms. Wintringham. There is a choice among managed care plans.

Senator PACKWOOD. How do you get them in? Half can be out,
I guess, but how do you get them in? You do not compel them in,
I take it.

Ms. Wintringham. Everyone in that community has to join a
managed care plan, like in southwest Brooklyn.

Senator Packwood. Oh, they do?

Ms. Wintringham. So half of the State's population will be in
managed care.

Senator Packwood. Oh, I see.

The Chairman. Yes.

Senator Packwood. Do you operate principally in New York
City, in the State of York, principally New York City?

Ms. Wintringham. The New York City metropolitan area, yes.

Senator Packwood. So half of them have to be in.

Ms. Wintringham. And the way they are phasing that in is by
community, by area.

Senator Packwood. I understand what you are saying. Every-
body in an area must be in it and I assume you are in all the
areas.

Ms. Wintringham. Right. Correct.

Senator Packwood. Do you have a fair number of competitors?

Ms. WlNTRlNGHAM. Well, in the Medicaid area you would not be
surprised to know that we have had no competition until recent
years. There has been an effort in the State of New York to encour-
age plans that wanted to contract with the largest contractor, the
City of New York, to sign a Medicaid contract.

It has only been as recent as about a year ago that any of our
competitors have elected to enroll Medicaid members in their
plans.

Senator PACKWOOD. But you are breaking even on your Medicaid
patients?

Ms. WlNTRlNGHAM. We are doing very well.

Senator PACKWOOD. You are making a profit on it?

Ms. WlNTRlNGHAM. We are a nonprofit organization.

Senator PACKWOOD. I understand the totality of your bottom line
is zero.

Ms. Wintringham. We are covering our costs and maintaining
new facilities, yes. We are operating the program and are recover-
ing our costs.

Senator Packwood. I am very impressed that you are able to do
it at the cost that you are doing and you will have in those neigh-
borhoods. We do not any longer use 100 percent as universal be-
cause I am sure there are people that just are not going to join no
matter what, even if they live in the neighborhood and they will
go off to the emergency room on occasion when they break their
leg.

But you have come very close to universal coverage in those
neighborhoods.

Ms. WlNTRlNGHAM. And the neighborhoods are all of the neigh-
borhoods as the Chairman knows.

Senator Packwood. I went to NYU Law School and I am some-
what familiar with the subway system and used to ride out to
Brooklyn and Queens and I have some familiarity with the area.
I am very impressed with your success.

Let me ask each of the panelists this. We are going back and
forth over the issue of mandates. There is nothing to Medicaid in
this, now individuals and employees above the poverty level. And
even if we have an employer mandate we are going to have to have
some kind of an individual mandate also.

What would be in your judgment the most effective method of en-
forcement? So that if we say to Suzy Smith or Johnny Jones you
must have a health plan policy and it will provide the following
benefits and now you go out and buy it, and he can buy it from
you if you want or he can buy it from Blue Cross or buy it from
Aetna or MetLife. What would be the most effective method of
making sure it is done?

Ms. WlNTRlNGHAM. That is certainly beyond our expertise. We
provide service once people join us. I think the major concern we
have had over the years is that without adequate insurance reform
that the choices that an individual who wanted to receive coverage
had were very limited.

And so in the State of New York there have been great efforts,
particularly for individual members and small businesses to try to
reform insurance law so that individuals could get access to any
one of those insurance companies or health plans.

Senator PACKWOOD. Well, I am not asking the question right, be-
cause I am presuming

Ms. Wintringham. No, you asked it right. It is just not our area
of expertise to know that.

Senator PACKWOOD. I am presuming in the bill we pass we will
have insurance reform and we will prohibit exclusion on preexist-
ing illnesses and will have some modified form of community rat-
ing. I do not think it is going to be nationwide like Social Security.

So that the access well within reason will be there.

Ms. Wintringham. Right.

Senator PACKWOOD. What is the method of making sure that peo-
ple buy? And again, if it is not your experience, I will go down the
line. Just give us your judgment on how we should do it.

Mr. Dorn. Senator Packwood, as far as the enforcement mecha-
nisms go, that is also outside our area of expertise. But I can make
one or two comments about how to make sure that low-income pop-
ulations learn about this program and actually obtain the benefits
that they need.

One suggestion would be — well, outreach and assistance is abso-
lutely critical. Many low-income people do not read very well or do
not speak English. They may not know about benefits programs.
Every benefit program we have has substantial under enrollment.
There are lots of folks who are eligible who do not know about it,
do not come onto the program.

So some suggestions would be to subcontract with — to have some
kind of a system where you could contract or subcontract with com-
munity agencies in low-income communities that know those com-
munities, that know how to do outreach to those communities, com-
munity action agencies or others, and have them do some outreach
and education.

A second suggestion would be that when you develop the low-in-
come subsidy system, use as at least interim proxies for eligibility
determinations the determinations that have been made on other
low-income programs. In other words, if food stamps or WIC has
found that a given individual has an income below whatever the
income threshold is, you can at least on an interim basis use that
as automatic interim certification of eligibility for low-income sub-
sidies.

That way folks who know about existing programs will automati-
cally be enrolled in this new one. I guess the only point about en-
forcement specifically that I would make is that whatever enforce-
ment mechanisms you use, you do not want to take withdrawal of
health care coverage. You do not want to have that be part of the
picture. You may want to have financial penalties, et cetera, but
it is important to make sure that people are assured health care
coverage even if they do not do what they are supposed to do.

Senator Packwood. What they do in Germany is a payroll deduc-
tion. You have to join and you cannot work if you do not join. That
is a reasonable method of enforcement for those who are at least
in the employment pool.

Mr. Dorn. Well, payroll deductions would be one approach where
you could still keep your insurance if you are working and the
money is taken out, in extra payroll deductions, for example, if you

do not pay in during an earlier period. That is something worth
considering.

But if the committee does go along that line, I would caution it
to have special provisions for low-income people to make sure that
the monthly adjustments that take place are affordable. Most pub-
lic benefits programs have such provisions today where, for exam-
ple, if you receive excess AFDC or excess food stamps, you have a
prospective reduction in your benefits over time, but there are caps
built into the program. You cannot lose more than a certain per-
centage of your subsidy.

Because obviously we do not want low-income people to have to
choose between health care and other necessities of life.

Senator Packwood. Thank you, Mr. Chairman.

The Chairman. Thank you, sir.

Senator Riegle, I must, if I may, excuse myself. I have to get to
the floor where we are voting, whether we realize it or not, on the
future of the President's health care plan by taking all the Medic-
aid— $20 billion in Medicaid expenditures that we were going to
use for health care — and transfering them to the military.

Senator PACKWOOD. That is not quite the way it reads, Mr.
Chairman. [Laughter.]

The Chairman. It is not quite, but that is our argument. [Laugh-
ter.]

Senator Riegle. Well, it is very close to the truth and that is an
important service for the Chairman to render, to go to the floor and
illuminate that issue, because it is tough enough to find a way to
pay for our health care reform — I am talking obviously about the
Medicaid part today — if we are not mindful of how it fits into the
overall direction of which other Federal money is going.

I would like to make just a few observations that touch on some
of the points you have made and then I would like to pose a gen-
eral question to all of you. I think it is clear to anybody that has
studied Medicaid, your experience notwithstanding in terms of how
well you are doing in New York right now, that inadequate Medic-
aid payments to providers is a key problem in the Medicaid pro-
gram when you look at it across the country.

There are some estimates that the Medicaid rates run some-
where in the range of 60 percent, only 60 percent of private rates.
That is really, I do not think, workable over time. I think it gives
you two-tier medicine. In fact, we see that in the fact that many
doctors do not want to serve Medicaid patients. That by itself cre-
ates a kind of cast system in the country and I have a hard time
reconciling that with everything we say we mean to stand for as
a country in our founding documents.

I do not think when we all arrive here by divine help presumably
that we are really consigned to different kinds of health care treat-
ment throughout what may be our life times because of the way
the system is geared.

I also see the cost shifting that is going on across into the private
sector and I see it being loaded up in the areas where good insur-
ance coverage is being offered and the cost shift that is taking
place that lands there, and also the hospitals that sort of end up
being caught in the middle with costs that they are not finally able
to cost shift and just have to eat a lot of that cost. It is up in the

hundreds of millions of dollars a year, for example, just in my
home State of Michigan, just the uncompensated care that hos-
pitals themselves are having to eat and cannot effectively cost
shift.

I think most people view Medicaid as a second-class health care
system and option in our country. It can be painted a different
way. But I think that is the essential reality of the situation.

For all those reasons and more, it seems to me that we have to
figure out how to integrate as wisely as we can Medicaid into this
health care reform picture, where we end up with some kind of an
integrated changed system in that we do not have, in fact, a two-
tiered system.

Each of the plans that is now before the Finance Committee here
treat the Medicaid program differently. The Clinton plan obviously
undertakes to integrate it. We did that earlier in a plan that Sen-
ator Mitchell and Rockefeller and Kennedy and I put together prior
to the Clinton Administration.

Senator Chafee's plan gives the States options. The Breaux plan
appears to do this but it is not exactly clear how that is done. It
gets a little fuzzy.

I would like each of you to comment on which plan in your view
does the best job of accomplishing a sensible integration and assur-
ance that we are going to end up with some kind of a wisely ho-
mogenized system here. So let me just go right down the table and
start with you if I may.

Ms. Wintringham. Senator, we have been very careful not to
take positions on individual bills, in part because they are chang-
ing so quickly. We have really tended to comment

Senator Riegle. If you take the names off, and let us talk about
the mechanics, I mean, because we have to get past that or we will
never get to the end of the game here.

Ms. Wintringham. Sure. And we have really talked more about
the elements that are critical. If you want to take advantage of the
success that has been proven in HMOs, then you have to make
sure that some of those elements that led to that success survive.
And although we will have to change as every other health pro-
vider in the community will, we want to make sure that those ele-
ments that I spoke to earlier have to survive.

If you look across the three unnamed bills, the real difference
from the perspective of the provider is relatively small, that it is
really more a matter of where the funding source would be coming
from and how quickly that population could be incorporated into
managed care.

We certainly have been long supporters of providing the full con-
tinuum of care for any individual member for all of their needs.
And if you look at the Breaux bill where you are really separating
long-term care in Medicaid, obvious concerns from the provider
standpoint that we tend to provide all those services. We have not
yet gotten into the business of providing true custodial long-term
care services.

But as our population has aged, it is very clear we are going to
have to look at that as well, as some other States, such as the
State of Oregon and the Kaiser Plan have done very effectively.

So if we are talking from the perspective of providing health
care, we want to make sure that whatever the needs of the popu-
lation are, we are in a position to provide them. And again, the
bills all make this possible with differences about how quickly or
who is going to be paying us the money. From our perspective,
there is not much difference across those approaches.

Mr. Dorn. Senator Riegle, I am delighted to hear your concern
about this issue. From our perspective there is no bigger access
problem affecting the Medicaid program today than the lack of ac-
cess that comes about as a result of the reimbursement.

The 60 percent figure from the Kaiser Commission that you men-
tioned is just an average. That includes hospital rates that are
much closer to the private sector. So when you are dealing with
out-patient services the gap is much greater.

In California, for example, until the State was sued, their Medic-
aid reimbursement rates for obstetricians were so low that about
one in five women could not find an obstetrician when they were
pregnant. I mean, all across this country people have Medicaid
cards. They cannot find pediatricians to treat their kids. They can-
not find people to set their broken arms. It is a horrendous prob-
lem.

And we see significant differences among the bills. The adminis-
tration's bill makes an enormous step forward by using regional
health alliances to equalize reimbursement rates for all consumers
regardless of income. And in our judgment, this step alone, even
aside from the issues of universal coverage, would be the biggest
step forward for low-income people's health care since the adoption
of the Medicaid Act.

It also promotes mainstreaming by permitting low-income people
to enroll in any plan up to the regional average. The one concern
we have in terms of choice is, we think it is important for people,
low-income consumers, to have a meaningful, affordable choice be-
tween managed care and fee-for-service. Some managed care plans
do a wonderful job, some do not. Some people are well-served in
managed care, some are not.

We think it is critical to leave that choice to the individual family
to figure out how best to meet the needs of the people in that fam-
ily. But overall the administration's bill really does a remarkable
job of mainstreaming low-income people.

Unfortunately, I have to report that the Managed Competition
Act does not do as good a job. Low-income subsidies are pegged to
the lowest cost plan in each area. If a low-income person wishes
to enroll in a more expensive plan, they have to pay a percentage
of the difference in price.

Some people with grave needs for health care that cannot be
served in the cheapest plan in their area may pay that. But for
most people, that means that takes food off your table. That means
you cannot pay your utility bills. So the reality is that most low-
income people under the Managed Competition Act would have no
choice but to enroll in the lowest cost plan, which means segrega-
tion. It means no competitive pressure to promote quality because
the health plan knows that they are dealing to a fair degree with
a captive audience.

And it also means potential fragmented care, where year by year
the lowest cost plan changes. So this is one of the gravest concerns
that we have about the Managed Competitive Act.

The Heart Act is in some ways better than the Managed Com-
petition Act, but it is also problematic. The Medicaid caps, the caps
on Federal Medicaid dollars, we fear could force States to make
cutbacks, to respond to potentially decreasing real Federal dollars
coming into their States.

One way to make cutbacks is to cut reimbursement rates, further
increasing the differential between Medicaid and the private sector.
The Heart Act also gives States increased freedom to enroll Medic-
aid recipients in mandatory managed care plans for poor people
only, no obligation to serve others who are not poor, and that is a
very troublesome segregated two-tier system.

I mean the quality of care protections in that part of the bill are
positive. There are improvements that could be made. But they are
helpful. But there also needs to be competitive pressure to promote
quality where the health plan knows the low-income person can
meaningfully vote with their feet and then there is an incentive to
provide care.

Many HMOs do a wonderful job but some respond to the finan-
cial incentive to underserve by denying people necessary care.
There are some populations that are not well served in managed
care programs. Disabled people, for example, who may need lots of
different specialists who are not part of a particular plan. So we
think choice is really critical.

But overall between the three bills on the point you asked, Sen-
ator Riegle, it is very clear that the administration's bill does a
really wonderful job and the others need some improvement.

Senator Riegle. Mr. Merlis?

Mr. Merlis. I am from CRS and, of course, I cannot take any po-
sition on what the most effective plan is.

Senator Riegle. No, no, forget the names. Let us talk mechanics.
I do not want to get off into that. But if we get boxed by that then
we cannot — I mean, we might as well just fold up and go home. So
do the best you can.

Mr. Merlis. There are a few key issues and one has been alluded
to by you and by a couple of the witnesses. That is the shortfall
in Medicaid payments per unit of service. Some managed care
plans dealing with Medicaid have been able to make up for that
by reducing utilization, shifting people out of emergency rooms, im-
proving coordination of care. But the ability to do that is going to
vary a lot in different States. It is not necessarily going to be the
case that you can make sufficient cuts in Medicaid utilization
through management of care to make up for that shortfall in pay-
ment rates. So it is not certain that it is going to work everywhere.

A second issue is that managed care in Medicaid has had very
little experience in dealing with the SSI, the disabled population,
who are the most costly beneficiaries. Most of the State managed
care programs up until now have dealt only with AFDC bene-
ficiaries who much more closely resemble the kind of patients they
treat in the private sector.

And the ability to achieve the savings that are necessary to inte-
grate Medicaid patients in the private sector and private sector

rates is going to depend on the ability of these managed care enti-
ties to move into management of chronic problems, special popu-
lations such as the chronically mentally ill, people with HIV, that
not all HMOs in the private sector have had very much experience
with.

Senator RiEGLE. You know, let me just stop you for a minute. It
seems to me that if we did not have to worry about the money, if
we had enough money to pay to cover the health needs across the
board and to get these underserved persons with particular prob-
lems dealt with properly, we could get just the mechanics of deliv-
ery done right. Assume that for the moment, and the money was
there to pay for it.

I think, you know, our task would not be nearly so difficult. I
mean we would figure out a way to do it and we would pick one
way or the other and we would do it and then we would see how
it worked. And if it needed adjustment, we would adjust it.

I am concerned that as we come down toward the home stretch
in this debate that there may not be the national will to spend the
money to do the job right. I mean, the problem may be in effect
coughing up the money to do what has to be done here.

Even if you can make a strong economic argument that over 10
or 15 or 20 years you will actually spend less money, that the Ha-
waii experience of 20 years of universal coverage where the cost is
a percentage of the total economy has now dropped way below the
national average, good preventive care and good monitored high
quality care over time saves you money that you otherwise will
spend.

But that is sort of a subtle argument and it is future versus now
and there is a lot of skepticism. I am concerned that when it comes
right down to it, people who have some semblance of health care,
feel pressed financially, may not feel all that charitable in their
hearts about wanting to cough up the additional money that is
needed through whatever taxing, revenue raising measures to get
this job done right for the whole country.

Then if your economic system is not working right, so you have
a growing underclass that cannot escape by a sort of upward mobil-
ity through the economic system, and therefore cannot solve their
own problem, you are really caught in a terrible dilemma because
you have a growing number of people who need health care serv-
ices and who cannot pay for them. And the question is, can we get
everybody else who might have some extra money to help in that
regard and in the process get the system changed and then get our-
selves a healthier population over time.

I mean that is sort of the terrible quandary we are in. I can sort
of feel as this debate sort of comes down to the end here, that the
issue of facing the need to raise an adequate amount of money to
do this and to sort of make the change, assuming we can make
wise decisions about the different mechanics of delivery and quality
into one system, I feel a great pain about it.

Because I think we have finessed that issue. I have never been
convinced that the cost estimates that we have been working with
are solid enough. I do not think they are really earning public con-
fidence.

The other thing is that the question of just off loading this on
the States and telling each one of the 50 States, well, look, why do
you not figure out how you want to do it. These are the param-
eters. But in a sense that is kind of a finesse, too, because then
the responsibility for the delivery is out there and we kind of cut
some corners at this end with respect to the responsibility and the
measurement and the accountability.

It would be much better in my mind if we could have a uniform
national system and everybody was in it, and it had the choice that
you speak about. The quality was high and that we were willing
to face up to what that costs, recognizing that there are efficiencies
in economies that you can start to get on day one and that build
up over time as you get a healthier profile in your people and you
avoid future costs that you otherwise would spend.

I guess I am just sort of stating a concern that I have at this
point in the discussion that I am not sure that we are really facing
up to what has to be done here in terms of just stepping up to the
plate and saying, look, to do this involves spending this much
money. And if we do it right, it will be a bargain and we all ought
to feel better about ourselves and about our country, and about
looking after one another and caring about one another.

I hope we will have the courage to do that. I think the President
has tried, and the First Lady, with their plan to put these issues
out and to try to deal with it in that kind of encompassing way.
But whether or not we are ready to really step up to the plate and
do what is needed I think is very problematical at this point, and
it is a great concern to me.

Let me just have your comment and then we have two other col-
leagues and I will yield to them.

Mr. SCHEPPACH. Let me just say that I think both the adminis-
tration's plan and the Chafee plan will get the low-income popu-
lations into managed care. So I really do not see any difference
there. But both of them also maintain the categorical nature of
Medicaid. So you continue to have Medicaid and then you create
another low-income program.

We think it is a real opportunity to take the acute care portion
of Medicaid and sunset it and fold that into the new low-income
program. Assuring that everyone gets the same benefit package.

And if, in fact, we need some supplemental benefits for those
population broadly defined from low-income populations, then we
need to set up a separate financing mechanism to do that.

The Medicaid program, as you know, continues to be very, very
inflexible and we are very concerned that if we maintain the cat-
egorical nature of that program we will not get the savings, we will
not get the care that we really desire.

Senator Riegle. Thank you very much.

Senator Rockefeller, I must go to the floor, too. I am sitting in
for Senator Moynihan. Let me not only recognize you, but invite
you, if you would, to come on over and do the chairing through
yourself and Senator Grassley.

Senator Rockefeller. Can I do it from here?

Senator RlEGLE. You sure can. I will bring the gavel down.

Senator Rockefeller. I do not need the gavel. I never use a
gavel.

Senator RlEGLE. All right.

Senator ROCKEFELLER. Senator Grassley and I have both been on
the floor trying to protect any semblance of the future of health
care.

Senator Riegle. Good.

Senator Rockefeller. We apologize to the panel members that
we were late. But it is very interesting what is going on there, be-
cause they — the Senator from New Mexico and the Senator from
Nebraska, one Republican and one Democrat — voted for a budget
cut in the Budget Committee. Then they suddenly realized that
half of that money might come out of Defense.

Since they are not very happy about that. They then ignored
what they did and offered another amendment which would elimi-
nate all the Defense cuts, but would take all the cuts out of Medi-
care. This is not a Medicare hearing, but it is really quite some-
thing. The feeling on the floor is that the amendment may carry.

Otherwise, I disagreed with what I heard about what Senator
Riegle said. I have a more optimistic feeling about the future of
health care reform, if he was implying otherwise, and I am not
sure that he was, because I was reading and talking, too.

But I do think that what the President's plan does for the Medic-
aid population is stunning. I think most people do not know about
it. Most people do not know about a lot of things in the President's
>lan because we cannot get through the airwaves and Harry and
^ouise and all the other matters that are less important to our
ives, but claim more of our attention than important things in our
lives.

I think what the President's plan does and I think Senator
Grassley can speak for the Chafee plan, when you take an entire
population and put it inside a general health care system is that
you suddenly present the possibility that doctors will see Medicaid
patients. In West Virginia, in fact, doctors do see most people who
come to them, they are much more generous in that respect than
doctors from other States. They do accept Medicaid patients at a
much higher rate. But they are, of course, underpaid.

Now the chances of that happening are much less good. In other
words, much more favorable in the President's health care plan. It
is very difficult to take a Medicaid population and put it inside a
health care plan. It costs money. That is one of the reasons that
Chuck Grassley and I were down there fighting this amendment
because they are going to take $20 billion out of health care money,
on a quiet Thursday morning.

Obviously, that would have repercussions for Medicaid. It would
have repercussions for everything. It would have repercussions for
veterans who are a very big part of the President's health care pro-
gram. I do not really have so much a question to ask, although I
guess I ought to because it is kind of silly for me to be sitting here
with four panelists.

I used to work for Ray Scheppach and he understands these mat-
ters. It just makes me very angry, I guess, Senator Grassley, and
I think you would share this because I think you want the same
things out of health care that I do. There may be some places
where we approach it differently. But I think in our gut, so to
speak, we start from the same place. I think basically that is what

counts. If your gut is right, things tend to sort themselves out later
on.

It is really annoying when all the good things that can be done
in health care and for the Medicaid population are simply side
tracked so that the public cannot get an understanding.

On the other hand, I will have to say that the health care retreat
that we had this weekend, just the members of the — as I keep say-
ing, the 20 white males on the Senate Finance Committee, was a
very successful one. It was interesting to me that it was really the
first time — we have these hearings, but Chuck Grassley and I do
not talk at these hearings. We ask you questions. Well, I am not
doing that. I am sort of talking to Chuck. But we do not talk to
each other.

If you are going to come out with a bill there has to be a human
relations component. You have to understand where other people
are, and what their requirements are, what their beliefs are so that
you can adjust your own beliefs and hold onto your own beliefs, but
try to get something that works.

I felt, Senator Grassley, that it was a very good weekend in that
respect. We were very honest with each other. There was, I think,
a good deal of optimism that came out of that weekend. Senator
Moynihan was on the Today Show Monday morning and was very
optimistic.

We had an odd instance. I spoke to the League of Lobbyists yes-
terday right after Senator Chafee did. We did not hear each other
speak, but I am told we both gave the same speeches and that they
were basically optimistic. They were upbeat. The feeling that Pete
Stark has now done what he is going to do; Bill Ford will do what
he is going to do; John Dingell is going to do what he is going to
do; Ted Kennedy is going to do what he is going to do.

But it going to end up in this Chamber, Senator Grassley. It will
be ourselves kind of working this thing out, which is the way I
think it ought to work because I think we are a more representa-
tive group of Senators. Representing the Senate in a more mod-
erate fashion perhaps than some other committees.

Senator Grassley. We are like a partisanship in this case.

Senator Rockefeller. Yes. I mean we have from time to time,
I divulged myself a little bit of it on the floor this morning and was
not very happy about it, but I was just angry enough that I went
ahead and did it anyway. But I think we are going to do it here.

What I guess I want to say to all of you who care so much about
these things and fight so hard for them, is I think we will get
health care reform. I think we will get it this year. I think we will
get it with most of the basic principles that are required and I
think that the Medicaid population will be taken into the general
program and in a very interesting symbolism will be no different
than the President of the U.S. or any U.S. Senator.

Everyone will belong to alliances, you know. Bill Clinton will be-
long to an alliance and Sara Jones from somewhere in West Vir-
ginia who is on AFDC will belong to an alliance. Everyone will be
on equal terms. Chuck Grassley and I will belong to an alliance
somewhere and we will all be doing this the same way, just kind
of a one — tier approach which appeals to me.

Senator Grassley, I just kind of thought I would say those things
and now you have better things to say. So let me turn to you.

Senator Grassley. I do not have better things to say. I have
questions to ask. Thank you very much for your participation and
yielding the floor to me.

First of all, because I am late, and if any of these were discussed
with any other members, you would not make me feel bad if you
said read what I said to so and so, so we do not keep you here
needlessly.

Ms. Wintringham, you stated that point-of-service options should
be optional but not mandated. If I remember correctly, the Clinton
Administration required a point-of-service option in managed
health plans because they wanted to retain a greater degree of
consumer choice and thought that having a point-of-service option
would be the best way to do it.

I would like to have your comment on it. But before you com-
ment, why should we not require such an option if the enrollee had
to pay some for it? That is a question, for instance, the Medicaid
beneficiaries, that extra amount that they might have to pay would
not be large but it could be sufficient to discourage some sort of
routine out-of-plan utilization.

Ms. Wintringham. We, as many other HMOs around the coun-
try, have been very strong supporters of choice in the sense of let-
ting every citizen exercise their vote and their right to a vote based
on their experience with a particular plan. So we, as other mem-
bers of this panel, have said whatever model is adopted there
should be a way for each individual member to say I do not like
the way the plan is taking care of me and if that is not resolved
to leave and go to another plan.

Choice should be exercised at the health plan level. As we said
earlier, if you want to take advantage of the success of HMOs, and
if you want to then apply that to larger populations and theoreti-
cally solve the health care problem in the United States, we have
to make sure that any element that is fundamental to their success
in the first place does not go away.

We believe in a system, a panel such as ours, where you have
a wide range of providers to choose from, but they are all taking
care of only our members. And in order to let those members seek
care outside anytime they wanted to will undermine the ability for
us to succeed in a couple of ways.

One is that if you want to hold us accountable, as I believe you
should, for the full range of services provided to our members, if
you want us to look at the care and make sure it is appropriate,
if you want us to look at outcomes based on that care, if you want
us to coordinate everything that is happening to that member and
achieve cost efficiencies, you have to let us be in a position to be
accountable.

And every time someone can go outside the system that we have
created through credentialing, quality assurance reviews, a single
medical record, we lose the ability to be accountable for that serv-
ice.

Another concern that was raised earlier is, what would happen
if there are even modest copays, out-of-pocket expenses for a Medic-
aid population if they had a choice to use a point-of-service option?

I agree with what was said earlier that even at a very modest
level, people will not go for the preventive and up front services
they need. They will withhold care and withhold paying that small
amount until they become very sick. And you have just undermined
the whole process you have tried to put in place, of encouraging
people to come in, to get preventive services, to have screenings, to
get the care up front instead of waiting until they are very sick.

Senator GRASSLEY. Well, let me ask you this. From the title of
your organization, for Greater New York, do you take in any of the
rural areas of up-state New York? What I am getting at here is
what you just said, and you feel strongly about it, that there should
not be any option outside of choosing a plan

Ms. Wintringham. It should not be a mandatory option, right.

Senator GRASSLEY. Will that then work in rural areas?

Ms. WINTRINGHAM. Well, our recommendation is that it not be a
mandatory option, that plans have the option of offering a point-
of-service product. I believe as you go community by community,
you will find communities where it will make sense to create some
sort of network or joint arrangement with local community provid-
ers will do so.

You can still do that through the same sort of mechanisms we
have now, if oversight credentialing and quality assurance, if we
have the option of making those arrangements. We are obviously
not in rural areas in central New York City, although we are in
underserved areas.

Senator GRASSLEY. You are strictly an urban organization?

Ms. Wintringham. We are also in New Jersey and in Florida.
And in parts of New Jersey we obviously have rural circumstances
to deal with. In those neighborhoods we have not installed beau-
tiful $10 million medical centers where all of the care and all of
the specialists are in one site. We have made arrangements with
local community providers to provide care to our members and they
agree in turn to go through our processes of credentialing, having
a unified medical record, going through quality assurance.

So our recommendation is that it be voluntary based on the local
market and the local community.

Senator GRASSLEY. I think you wanted to offer something.

Mr. Dorn. Thank you, Senator Grassley. Unfortunately, after
this gracious agreement with our issue about cost sharing I hate
to disagree on the point-of-service option, but I must. We see the
point-of-service requirement in the administration's bill as being a
very positive feature.

It assures consumers choice. If you are enrolled in an HMO and
someone in your family needs to go outside that HMO for care, you
can make that choice. You pay more, but you can make that choice.

And in addition, it promotes quality. If an HMO starts to see lots
of people using the point-of-service option, then they have to ask
themselves, why are all these people finding our network inad-
equate. Is there some problem that we need to correct here? So we
see this as being something that promotes accountability rather
than undermines it.

The idea about letting people choose plans as opposed to point-
of-service options is problematic. Because perhaps, you know, three
or four people in your family may be served perfectly well in an

HMO but you have one child with a special health need that can-
not be adequately met by providers who happen to belong to that
HMO and you may need your child to go out of the network and
you are willing to pay a little extra for it.

So we see this as a positive measure, promoting choice and pro-
moting accountability. And in recent years, the HMO with point-
of-service option, far from being a problem for the HMOs has ex-
panded greatly in the market. I do not happen to have materials
with me right now, but I would be delighted to provide them to
you, Senator, after the hearing if you would find that of interest.

And I think the suggestion that you made that low income peo-
ple, including Medicaid beneficiaries as well should have this
choice with some increased cost sharing. I think that makes a great
deal of sense. Medicaid beneficiaries may find themselves in a posi-
tion where one member of their family needs to go out of plan, per-
haps somebody with disabilities, perhaps a senior citizen.

Of course, the point was well made that that increase cannot be
the same as that which middle income people would face, but some
kind of modest increase in copayments so that the family has some
financial incentive to stay in the plan. But if they really need to,
they can get out.

So unfortunately I need to disagree, but I wanted to heartily sec-
ond your sentiment, Senator Grassley.

Senator Grassley. Senator Rockefeller, thank you.

Thank you all very much.

Senator Rockefeller. Thank you, Senator Grassley.

Let me just ask a final question. The President is coming here
at noon to meet with some of us on health care reform. I think I
might drop in. [Laughter.]

I would like to have — Ray, I understand you talked on this before
and, Mr. Dorn, you might have and I would like to get comments
again. Because there is a distinction, a very strong distinction, be-
tween the Chafee bill and the President's bill as I see it in the way
the Medicaid population is treated.

One of those is the so-called cap on Medicaid that is in the
Chafee bill, which is at what, 6 percent growth per year when Med-
icaid probably grows last year — what was the increase last year?

Mr. SCHEPPACH. Last year it was only about 12 percent, but for
the 5 years before it averaged 20 percent annually.

Senator Rockefeller. Okay. And some of that is more people
and some of that is health care inflation. But I would just like to
get a sense from you what a 6 percent cap statutory would mean
for health care for Medicaid patients.

Mr. Dorn. Senator Rockefeller, we are very worried about it, as
you can imagine. If real health care inflation goes up at 10, 11 per-
cent per year and Federal dollars flowing into the States are going
up at 6 percent per year and then 5 percent per year ultimately
under the Chafee bill, that means that the dollars will buy fewer
real health care resources in the States and the States will have
to choose between investing more of their resources to maintain the
status quo or making cutbacks — knocking people off Medicaid, low-
ering the scope of services, cutting provider reimbursement rates to
make access even more difficult. We are very worried about this
provision of the bill.

Senator Rockefeller. That is fascinating.

Mr. Dorn. I am sorry?

Senator Rockefeller. That you do not hear this aspect dis-
cussed in the press. I mean I bet there are 30 people in the United
States of America that know about this. That is an obvious exag-
geration. But, in effect, it is the case. I have not heard this dis-
cussed. I have not read about it.

Mr. DORN. It is a very serious problem.

Senator ROCKEFELLER. I interrupted you. Go ahead, please.

Mr. DORN. If I could just take the liberty of raising one other
issue with you, Senator Rockefeller, given that you are soon going
to be meeting with the President, we agree that in many, many re-
spects that the administration's bill does a wonderful job with Med-
icaid recipients. It mainstreams our clients, not just into managed
care plans, but into the same plans that serve middle class people.

If there is one major concern that we would have, it would be in
the area of cost sharing, where under the administration's bill if
you get cash assistance you pay $2 when you go see the doctor; if
you do not get cash assistance, for whatever reason, you pay $10.

That may not sound like much to many of us, but for a very low-
income family, a couple kids get sick, that is half the family's food
budget for the week.

If you have somebody with disabilities, HIV, ongoing health
needs, $10 copays can quickly mean you cannot pay your utility
bills. So we fear that people who do not get cash assistance will
have a new barrier to access in their way.

Forty percent of Medicaid recipients do not get cash aid today
and most commonly they pay no copayments. So there would be a
new barrier. It would also make it more difficult for people to move
from AFDC to employment because you would get punished with
increased costs when you make the right choice.

So if there is one issue where we could improve the administra-
tion's bill, it would be to make sure that all low-income people have
cost sharing scaled down to fit low-income budgets and in appro-
priate cases eliminate it entirely.

Senator ROCKEFELLER. I totally agree with you on that. I am sort
of surprised by that in the President's budget. In the President's
plan, there are a couple areas where I do not agree and that is nat-
ural. Most of them I do. But I think your point is extremely well
taken.

You know, thinking back to my Vista days in Emmons, West Vir-
ginia, $10 is a lot of money.

Mr. DORN. Right.

Senator Rockefeller. It was then and it is a lot today. Are
there any other points that any of you want to respond to? Are
there any other points anybody wants to make?

[No audible response.]

Senator ROCKEFELLER. If not, you are all free to go have lunch.

Mr. Dorn. Thank you.

Mr. Scheppach. Thank you very much.

Mr. Merlis. Thank you.

Ms. Wintringham. Thank you.

[Whereupon, at 12:47 p.m., the hearing was adjourned.]

APPENDIX

Additional Material Submitted

Prepared Statement of Stan Dorn

Good morning, Mr. Chairman and members of the committee. It is an honor to
participate in these historic hearings.

I am Stan Dorn, managing attorney of the Washington office of the National
Health Law Program. Our program is the legal services national back-up center spe-
cializing in health issues affecting low-income people. We work with over 1,200 legal
services offices across the country to help their indigent clients receive necessary
health care, including through Medicaid. I would like to take this opportunity to
thank the members of the Finance Committee for the Committee's leadership in im-
proving Medicaid through the years.

Long ago, I learned one of the cardinal rules of public speaking: never give a
speech with more than three main points. Apparently this rule has origins in Chris-
tian theology. At my peril, I hope to discuss four topics today: universal coverage;
cost-sharing; supplemental services; and mainstreaming low-income people into the
same health care delivery systems that serve those with higher incomes. In each
area, I will describe the issue and compare the three proposals likely to be of great-
est interest to this Committee: the Administration's bill; the Managed Competition
Act of 1993, sponsored by Senator Breaux; and the Health Equity and Access Re-
form Today ("HEART") Act of 1993, sponsored by Senator Chafee.

Although the remainder of my testimony will not focus on Senator Wellstone's
"single payer" proposal, I would be remiss not to note that it would provide univer-
sal coverage, without cost-sharing, through a single system of care, providing com-
Erehensive benefits to all. Medicaid beneficiaries and many other consumers would
e well-served by such a system.

1. UNIVERSAL COVERAGE

The issue of universal coverage is obviously fundamental. Without health care
coverage, consumers' health and well-being are at risk. According to studies in the
New England Journal of Medicine and the Journal of the American Medical Associa-
tion:

• Within six months of losing Medicaid coverage, low-income hypertensive pa-
tients suffered an average increase in blood pressure associated with a four-fold
increased risk of death.

• Compared to the insured, uninsured women with breast cancer are 50% more
likely to die.

• After controlling for factors identified by Congress' Office of Technology Assess-
ment (e.g., income, sex and race), lack of insurance increases risk of death by
25%.

In the context of the Medicaid program, the issue of universal coverage has two
sides: ensuring that coverage is not endangered for America's over 30 million Medic-
aid recipients; and extending coverage to other low-income people, including the one
in three families with incomes below poverty who today are uninsured, often despite
employment

The Administration's bill. The Administration's bill provides coverage to all, ex-
cept certain immigrants. Both current Medicaid recipients and low-income people
without Medicaid coverage would receive health insurance under the Administra-
tion's bill. Some Medicaid beneficiaries would lose health coverage — namely, immi-
grants who now receive full Medicaid benefits as permanent residents under color
of law but would not qualify as legal permanent residents under the definition in
the Administration's bill.

(29)

The Managed Competition Act. For people with incomes below the poverty line,
this bill provides subsidies permitting enrollment in the lowest-cost local plans. This
would extend coverage to many currently uninsured people who live below poverty.

For many families with incomes above poverty, however, this bill will provide lit-
tle coverage. Because it abolishes Medicaid, the bill may actually take away health
insurance from many of the 6.2 million Medicaid beneficiaries who, in 1992, had in-
comes above the poverty line. Such beneficiaries include the following groups:

• In most states, pregnant women with incomes up to 185% of poverty;

• Families that left AFDC because of earnings;

• In many states, infants with incomes up to 185% of poverty, and in all states,
some young children up to 133% of poverty, depending on age;

• People with disabilities who lost SSI because of earnings;

• Certain seniors and people with disabilities who lost SSI due to receipt of Social
Security, including COLAs, survivors' benefits, and special widow's or widower's
benefits; and

• In most states, the "medically needy," who qualify for Medicaid because of their
medical expenses.

Here are some examples of how this bill would work for people between poverty
and 200% of poverty:

• Pregnant women with incomes of 185% of poverty today receive Medicaid cov-
erage in most states. Under the Managed Competition Act, these women would
lose coverage unless they paid 85% of the full cost of an insurance policy, which
few such women could afford. Without health insurance, low-income pregnant
women would receive less prenatal care, increasing the odds of bad birth out-
comes. Such outcomes entail potential tragedy for the family and preventable
costs for the taxpayers.

• Households who work their way off AFDC today receive continued Medicaid
coverage for a year, smoothing the transition from welfare to wages. Such a
household with an income at 150% of the poverty level would lose coverage
under the Managed Competition Act unless it could pay 50% of the cost of an
insurance policy, which few such families could afford. The Managed Competi-
tion Act would create new barriers to employment for such households seeking
to leave welfare.

Moreover, the bill apparently denies low-income subsidies to people, regardless of
income, who work 25 hours a week or more at companies with over 100 employees.
Under this provision, identically needy households would receive radically different
levels of assistance, based purely on the size of their employer. For example, some-
one working 40 hours a week at $5 an hour has annual earnings below the poverty
line for a family of three. If employed at a small company, such a family would have
its premium fully subsidized for a low-cost plan, and, as described below, would re-
ceive substantial assistance with cost-sharing. If employed at a larger company,
such a family would be entirely without assistance. Without employer contributions,
such a family almost certainly could not afford coverage. This provision would erect
a sizable obstacle to employment for low-income families seeking to leave public as-
sistance to work at large or medium-sized companies.

The HEART Act. Potentially, the HEART Act could achieve universal coverage.
Medicaid would remain intact. By the year 2005, low-income subsidies would reach
households with incomes up to 240% of the federal poverty line.

This potential may not be achieved, unfortunately. The bill would limit annual in-
creases in federal Medicaid funds to a fixed percentage — 18.8% during fiscal year
1996, 6% for each of the next four fiscal years, and 5% thereafter. If these increases
are outpaced by general health care inflation, federal dollars would buy fewer and
fewer health care resources. States would be forced to choose between increasing
their investment in Medicaid or cutting Medicaid eligibility, benefits or reimburse-
ment. Many Medicaid beneficiaries could lose current coverage.

This is a serious danger. From 1986 through 1991, for example, private health
insurance premium costs increased at an average annual rate of 11%.

If the bill's low-income subsidies were firmly in place, loss of Medicaid would not
entail a complete loss of coverage, since people losing Medicaid coverage could ob-
tain private insurance. Unfortunately, the availability of low-income subsidies de-
pends on certification by the Office of Management and Budget that the HEART
bill's revenues are sufficient to pay for subsidies. If such certification is not forth-
coming, low-income people, including those who may lose Medicaid coverage, would
not receive necessary subsidies and could go uninsured.

2. COST-SHARING

Health care coverage will be a mirage for the poor unless it is affordable. Cost-
sharing that sounds modest to middle-income people is prohibitive to the poor. For
example, for the more than one in twenty American households with annual in-
comes below $5,000, a mere $10 copayment is the equivalent, for a household with
average income, of a $75 copayment. If several children get sick, or one chronically
ill patient needs several services within a short period, $5 or $10 copayments could
consume the family's weekly food budget. As the late Senator Claude Pepper once
explained, "For the [elderly] poor, a fifty cent co-payment which seems insignificant
to most of us can mean the difference between a needed prescription and a quart
of milk or a loaf of bread."

Public health studies confirm that low-income people may suffer great harm with
substantial cost-sharing. For example:

• One Rand Corporation analysis found that, when California's Medicaid program
imposed a $1 co-payment on the first two physician visits per month in 1972,
physician visits declined by 8%; inpatient hospital utilization rose by 17%; and
overall program costs increased by 3-8%.

• Another Rand Corporation study found that, when low-income people with
heart problems were exposed to a range of co-payments, the resulting hyper-
tension increases were associated with a 10% average increased risk of death
within a year. Congress' Office of Technology Assessment (OTA-BP-H-112, p.
11) recently concluded:

"... Congress should be cautious about the extent to which cost-sharing is relied
on to control costs, especially for sick, low-income individuals. These individuals are
the most likely to benefit from receiving health care services at no out-of-pocket cost
and the most likely to be harmed by patient cost-sharing requirements. Policy-
makers should also be aware that there is no evidence to suggest that cost-sharing's
greater deterrent effect on those with lower incomes ceases at a rigid dollar thresh-
old."

Decisions by state Medicaid programs confirm the wisdom of avoiding substantial
cost-sharing for the poor. Under federal law, such programs may charge up to $3
per service, depending on the dollar value of the service. But as the chart attached
to my testimony indicates, the most common policy is to charge no copayments for
services like physician visits and prescription drugs. These programs, which have
experience working with low-income beneficiaries, have found that it is generally
not helpful to charge copayments. To work effectively with low-income populations,
health care reform should avoid cost-sharing for low-income populations, and at
most charge no more than the nominal copayments used under Medicaid.

Medicaid provides other crucial protections that should be incorporated into
health care reform legislation. Providers may not deny care to those unable to pay
copayments in advance. Certain groups of beneficiaries (e.g., children) and services
(e.g., family planning) are exempt from copayments. States may place caps on
copayments, preventing those with chronic illness requiring multiple services from
being forced to choose between paying for necessary health care and paying for
other necessities, such as utility or grocery bills.

The Administration's bill. For recipients of AFDC or SSI, the Administration's bill
would provide copayments of $2 per doctor visit, $1 per prescription, and $5 per out-
patient psychotherapy visit.

Unfortunately, the picture is very different for low-income people not receiving
cash assistance. They include households whose unemployment insurance has run
out, people with disabilities lasting less than one year, and the working poor. Such
low-income people must pay $10 per doctor visit, $5 per prescription and $25 per
outpatient psychotherapy visit.

These copayments would be prohibitive for families with little or no discretionary
income. They would force dangerous and costly deferral of care until health prob-
lems degenerate into emergencies, contradicting the President's goal that health
problems should receive prompt attention.

Moreover, making receipt of cash assistance the basis for significant help with
cost sharing has the following consequences:

• It punishes poor families who leave AFDC for employment.

• It perpetuates irrational interstate disparities. Families with identical need
would receive very different levels of assistance based purely on the cash assist-
ance rules in their state of residence. (For example, AFDC eligibility for a fam-
ily of three ends at $964 a month in Arizona but at $288 a month in Indiana.)

This approach would also create a new health access barrier for many current
Medicaid beneficiaries. The vast majority would face some increased copayments
under the Administration's bill. This increase would be particularly large, however,

for the nearly 40% of Medicaid beneficiaries who do not receive cash assistance. In
1992, the latter group included over 2 million seniors, over 1 million people with
disabilities and over 5 million children.

For a narrow category of preventive services, including tests, examinations and
prenatal care, cost-sharing is waived under the President's proposal. However, much
primary care remains subject to copayments that are not scaled down to fit low-in-
come budgets and thus will cause dangerous and costly deferral of essential care.

The Managed Competition Act. This bill limits cost-sharing to nominal amounts
for low-income people with incomes below 200% of poverty. Not only does this ap-
proach promote access to care, it avoids the adverse consequences, described above,
of making cost-sharing subsidies depend on receipt of cash assistance.

Unfortunately, the bill leaves it to federal administrative authorities to define
"nominal" copayments. Last year's managed competition bill sponsored by the Con-
servative Democratic Forum provided more assurance of access to care, since it
cross-referenced the Medicaid statute in defining nominal copayments. Neither ver-
sion of the bill incorporates Medicaid's other cost-sharing safeguards.

The HEART Act. Under this bill, Medicaid consumers receive the Medicaid pro-
gram's full cost-sharing protections, described above. Cost sharing is undefined for
other consumers, however, including those with low incomes. The bill directs federal
administrative authorities to develop appropriate standards. While continuation of
Medicaid protections is an important, positive feature of the bill, access to care for
other low-income consumers will not be secure without express cost-sharing protec-
tions, including the protections available under Medicaid.

3. SUPPLEMENTAL SERVICES

In most states, Medicaid benefits exceed those offered by typical private plans, in
several ways. First, Medicaid often covers services such as transportation or case
management, which are needed to ensure that low-income beneficiaries actually re-
ceive health care, not just a health insurance card.

Second, Medicaid covers services that address the above-average health care
needs of much of the Medicaid population, including people with disabilities and
senior citizens. Poverty is associated with risk factors that increase the incidence
of such conditions as breast cancer, hypertension and developmental disability.
Moreover, many people are poor precisely because they suffer from significant ill-
ness that precludes substantial employment. Accordingly, most Medicaid programs
cover services such as rehabilitation or therapy to maintain function; and ongoing
mental health services, particularly for seriously ill children and senior citizens.

Third, Medicaid covers essential services that poor people usually cannot pur-
chase. For example, nearly 90% of state Medicaid programs cover adult dental care
and eyeglasses, which many low-income adults need for work. Missing or disfigured
teeth reduce employment prospects, and inability to see properly can greatly impede
job performance.

At a minimum, health care reform should not deprive these beneficiaries of essen-
tial supplemental services now covered by Medicaid. Coverage of these services
should also extend to other low-income people not covered by Medicaid today.

Before describing the differences between the bills on this issue, I should note
that many of them authorize increased appropriations for supplemental services. In-
creased funding for community health centers, for example, is part of these bills.
The Administration's bill also funds "enabling services," such as transportation and
translation, to help low-income people actually receive care. Unfortunately, there is
no assurance that these newly authorized funds in fact would be spent. A more se-
cure approach would (a) direct the expenditure of funds and (b) establish a supple-
mental benefits package reimbursing supplemental services either through fee-for-
service payments or as part of a capitated rate.

The Administration's bill. The Administration's bill would continue Medicaid sup-
plemental services for low-income children, cash assistance recipients and Medicare
beneficiaries. Adults receiving neither AFDC, SSI nor Medicare, on the other hand,
could not receive federally-funded Medicaid supplemental services. These adults in-
clude many people with disabilities who would suffer great harm without such serv-
ices as ongoing mental health care, or rehabilitation and therapy services to prevent
deterioration in function. Federal financial participation would end for these adults,
forcing states to choose between continuing to provide these benefits entirely at
state expense or making cutbacks in these critical services.

The Managed Competition Act. People with incomes below the poverty line would
receive all services commonly covered by state Medicaid programs. This would pro-
vide supplemental services both to many current Medicaid beneficiaries and to mil-
lions of others with incomes below poverty.

By contrast, low-income people with incomes above the poverty line would receive
no supplemental services. Their coverage would include only the standard package
of benefits, which is not defined in the bill but is left to a federal administrative
agency to determine. As noted above, 6.2 million Medicaid beneficiaries have in-
comes above poverty. Almost certainly, they would lose current, essential supple-
mental services under the Managed Competition Act.

The HEART Act. Under this bill, the Medicaid program would continue offering
supplemental benefits. However, the dimensions of this coverage would depend on
state decisions about optional benefits and eligibility. As noted above, the bill's abso-
lute dollar caps on federal Medicaid funding may put great pressure on states to
make significant cuts in benefits and eligibility. This could substantially reduce
Medicaid beneficiaries' receipt of necessary supplemental services.

4. MAINSTREAMING VS. SEGREGATION

Today, low-income families often receive care from a different health care delivery
system than that serving people with higher incomes. Often, these systems are both
separate and unequal. Medicaid reimbursement, for example, averages 60% of pri-
vate reimbursement, according to the Kaiser Commission. These substantially lower
reimbursement rates have serious consequences:

• Many Medicaid beneficiaries cannot find a doctor willing to see them. For exam-
ple, until California's Medicaid program was sued, it paid so little to obstetri-
cians that over 20% of pregnant women with Medicaid could not find a mater-
nity care provider.

• Many Medicaid beneficiaries receive inferior quality care. A recent New Eng-
land Journal of Medicine study of one state's Medicaid hospital program found
that, when reimbursement fell to 70% of private sector rates, Medicaid patients
with heart disease were less than half as likely, compared to private fee-for-
service patients, to receive potentially life-saving treatment of heart disease.

Even beyond the critical issue of reimbursement, mainstreaming is an important
concern for low-income people. Low-income families should have a meaningful op-
portunity to enroll in the same health plans that serve their middle-class neighbors.
People with disabilities, for example, often need a full range of specialists, who
might not affiliate with health plans targeting low-income people. Moreover, such
freedom of choice provides competitive pressure that promotes quality of care. If
health plans instead know that their low-income consumers lack the ability to "vote
with their feet," they are more likely to provide poor care to their captive clientele.

This issue is also important because, often, health care delivery systems seg-
regated on the basis of income are thereby segregated on the basis of* race. In much
of the country, low income people are disproportionately likely to be people of color.
Under health care reform, we should strenuously avoid the promotion of discrete
health care delivery systems that are racially identifiable.

The Administration's bill. Through the use of regional health alliances, the Ad-
ministration's bill equalizes basic reimbursement for all consumers, regardless of in-
come. The bill also gears premium subsidies to permit low-income people, defined
as cash assistance recipients and people with incomes at or below 150% of poverty,
to enroll in any plan up to the regional average price. If plans at or below that price
are all at capacity, the subsidy expands to permit enrollment in other plans. In
short, the Administration's plan provides low-income consumers with a broad range
of options, expanding access to care, helping prevent segregation and incorporating
competitive mechanisms to promote quality.

The Managed Competition Act. Under this proposal, low-income premium sub-
sidies would be based on the lowest-priced local plan. Low-income consumers wish-
ing to enroll in other plans would be required to pay part of the difference in price.
For most low-income families, these additional payments would require sacrificing
other necessities of life. Only a small proportion would have the ability to choose
any but the least-cost plan. Not only might this result in the problems described
above, it could cause harmful fragmentation of care, as the lowest cost plan could
change from year to year.

Moreover, under this bill, all health plans except the lowest-cost plan in a region
would receive less initial reimbursement for low-income consumers than for others.
This shortfall would be greatest for the lowest-income consumers and the highest-
priced plans. This is because the federal low-income premium subsidy is based on
the cost of the lowest-priced plan. Low-income consumers would pay only a percent-
age of the difference in price between the lowest-priced plan and the plan actually
chosen. The health plan chosen by the consumer would "eat" the difference.

Such reimbursement gaps would increase if the bill's funding mechanisms produce
too little revenue to pay for the bill's contemplated subsidies. If shortfalls occur, low-

income premium subsidies would be reduced across the board, causing all health
plans to lose money by accepting low-income customers.

Obviously, these reimbursement gaps would create great incentives for health
plans to do whatever they can to avoid enrolling low-income consumers. Such dis-
crimination can be accomplished through many subtle means: choice of stations on
which to advertise; choice of doctors and hospitals with which to affiliate; etc.

Fortunately, the bill contains a mechanism to equalize health plans' losses on low-
income consumers. In effect, health plans seeing less than their fair share of low-
income consumers would reimburse plans seeing more than their fair share, using
purchasing cooperatives as intermediaries. If this Committee does not choose to ac-
cept regional health alliances as proposed by the President, a mechanism along
these general lines could be critical to reducing financial incentives for discrimina-
tion. However, the bill's language should make clear that such a mechanism would
prevent the enrollment of low-income consumers from affecting a health plan's gross
income (aside from risk adjustments). More fundamentally, the bill's redistribution
mechanism apparently applies only to plans offered by small employers with rela-
tionships to purchasing cooperatives. Large employers as well should participate in
this mechanism to "share the burden."

The HEART Act. Under this bill, low-income premium subsidies would be based
on the average of the lower-priced local plans (those at or below the average price).
Low-income consumers wishing to enroll in more expensive plans would be required
to pay the full difference in price. While this proposal may provide greater choice
than does the Managed Competition Act, consumer choice remains limited to one-
fourth of health plans. This may pose a particularly serious problem for people with
special health care needs whose providers may not participate in the lowest tier of
health plans.

This subsidy scheme applies to low-income people not on Medicaid. For Medicaid
beneficiaries, the HEART Act presents several problems. First, Medicaid reimburse-
ment shortfalls may worsen in response to caps in federal funding, as explained
above. Second, the bill makes it easier for states to end beneficiary freedom of
choice; it permits states to limit Medicaid beneficiaries' choice to two managed care
plans, which need not serve anyone but Medicaid beneficiaries. Special federal ap-
proval would no longer be required to waive Medicaid consumers' right to freedom
of choice.

This bill contains important and positive quality and access protections that
would apply under such Medicaid managed care systems. We support strong quality
and access standards. Such standards should be in place to benefit all consumers,
and they should be enforceable. However, they are not enough. Obviously, they do
not prevent the development of segregated health care systems. Moreover, the his-
tory of Medicaid is filled with examples of wonderful Congressional enactments that
are not always observed or enforced. Competitive mechanisms to promote quality
care are also essential. Low-income consumers will be at grave risk of receiving in-
adequate care unless they have the ability to take their business elsewhere.

CONCLUSION

If this Committee were required to choose between these three plans as currently
written, we would recommend the Administration's bill as providing the greatest
protection to the most vulnerable consumers. Fortunately, you have an opportunity
to combine the best elements of all these bills, as follows:

Assure universal coverage, along the general lines proposed by the Administra-
tion.1

• For all consumers with incomes below 200% of poverty, limit cost-sharing to no
more than the nominal amounts permitted under the Medicaid program, along
the general lines proposed by the Managed Competition Act, while providing
these low-income consumers with additional Medicaid cost-sharing protections,
as proposed by the HEART bill for Medicaid beneficiaries.2
Furnish the supplemental benefits offered by a majority of state Medicaid pro-
grams to all low-income people below a set income threshold, along the general lines
proposed by the Managed Competition Act, with continuing Medicaid coverage for

xWe would recommend modify the Administration's proposal by eliminating or modify the
statutory caps it would impose on subsidies for low-income people and small business.

2 In addition, we would recommend eliminating cost-sharing for the lowest-income consumers,
including those with incomes below poverty.

other Medicaid beneficiaries, along the general lines proposed by the HEART Act
(but without rigid caps on federal Medicaid dollars) and the Administration's bill.3

Permit low-income consumers to enroll in any plan up to the regional average
price, without reducing reimbursement rates for low-income consumers, along the
general lines proposed by the Administration.

I wish you the best of luck in your historic task. If we can provide any assistance,
please do not hesitate to call upon us.

3 Given the likely greater federal role in administering overall low-income subsidies under
health care reform, we would recommend federal administration of such supplemental benefits,
with state responsibility limited to "maintenance of effort" payments.

STATE MEDICAID COPAYMENT PROVISIONS
October 1993

Physician Office Visits

States

No copayment

31 & DC: AK, CT, DC, DE, GA, HI,
IA, ID, IN, KY, LA, MA, MD, ME, MI,
MN, MO, ND, NE, NJ, NH, NM, NV, OH,
OR, RI, SC, TN, TX, UT, VT, WV

9: AL, KS, MS, MT, OK, PA, VA, WA,
WY

3: CO, FL, ND

1: NC

1: AZ

Varies

6: AR, CA, IL, NY, SD, WI

Prescriptions

States

No copayments

21: AK, AZ, CT, DE, GA, HI, ID,
IN, KY, LA, MN, NE , ND, N J , NM, NV,
OH, OR, RI, TN, UT

$.50

3 & DC: DC, MA, MD, PA

11: FL, IA, KS, MI, MS, MT, NC,

VA, WA, WI, WY

$1.50

1: SC

Varies

14: AL, AR, CA, CO, IL, ME, MO,
NH, NY, OK, SD, TX, WV

Mental Health Visits

States

No copayment

39 & DC: AL, AK, AZ , CT, DE, DC,
FL, GA, HI, ID, IN, KY , LA, MA, ME,
MD, MI, MN, MO, MS, NC, ND, NE, NH,
NJ, NM, NY, NV, OH, OK, OR, RI , SC,
TN, TX, UT, VT, WA, WV, WY

2 : MT , PA

3: CO, IA, KS

1: VA

Varies

5: AR, CA, IL, SD, WI

Prepared by National Health Law Program (202/887-5310) with data from Medicaid Source
Boole: Background Data and Analysis and various sources for updates.

Prepared Statement of Senator Orrin G. Hatch

Thank you Mr. Chairman.

I appreciate the opportunity to hear from our panel of witnesses today regarding
the Medicaid program and how it will fit into the overall context of health care re-
form.

As my colleagues on this Committee well know, Medicaid has been one of the fast-
est growing programs in the Federal budget, and is expected to reach a combined
Federal and state total of nearly $152 billion in expenditures in Fiscal Year 1994.

I was interested to see in the testimony from the Congressional Research Service
that the Office of Management and Budget estimates this figure will increase to
$266 billion in 1999.

It seems to me that even without health care reform, we need to take a careful
look at the rising costs of Medicaid to determine the problems areas as well as ap-
propriate legislative action.

Accordingly, I certainly welcome our witnesses who will provide us with both a
Federal and state perspective, and I look forward to their recommendations on how
we can address the is sue of escalating costs as well as improve the level of quality
and services provided.

Once Again, Mr. Chairman, thank you for scheduling this important hearing.

Prepared Statement of Mark Merlis
recent trends in the medicaid program

Thank you, Mr. Chairman. I am Mark Merlis, a specialist in social legislation in
the Education and Public Welfare Division of the Congressional Research Service.
I am pleased to be here today to provide information on recent trends in the Medic-
aid program. At your request, I will be reviewing overall spending, changes in pro-
gram enrollment, and spending for particular services.

OVERALL SPENDING

In recent years, Medicaid has been among the fastest growing Federal programs.
The Federal share of program spending is expected to reach $85.8 billion in FY
1994, accounting for 5.9 percent total Federal outlays, compared to 2.9 percent as
recently as FY 1988. The program now accounts for 45 percent of all Federal assist-
ance specifically targeted to low-income persons (compared to a combined 22 percent
for family support payments and supplemental security income, or SSI), and 32 per-
cent of Federal health outlays (compared to 53 percent for Medicare).

Much of the growth in Medicaid spending occurred over a very short period in the
late 1980s and early 1990s. Table 1 shows combined Federal and State spending for
each year since FY 1988, along with current services projections through FY 1999.
As the table indicates, spending rose sharply beginning in FY 1988 and more than
doubled between that year and FY 1992. A variety of factors contributed to this ex-
plosive growth, of which the most important were rapid increases in program enroll-
ment and changes in provider reimbursement, particularly for inpatient hospital
services.

Since then, spending growth has been more moderate. Still, the Office of Manage-
ment and Budget (OMB) projects that Federal outlays under current law would
reach $152.2 billion in FY 1999. In constant dollars, that would mean a 50 percent
increase over the next 5 years. Much of this projected increase is attributable to con-
tinued growth in program enrollment.

The Kaiser Commission on the Future of Medicaid has estimated that 34 percent
of the spending growth in FYs 1988-1991 was attributable to growth in the number
of recipients. Applying the same methodology to the figures for the next several
years, it may be estimated that 41 percent of spending increases in the period FYs
1991-1995 will be attributable to enrollment growth.

Table 2 shows the increases in Medicaid recipients since 1988 and the changes
in outlays per recipient. (Recipients are persons on whose behalf Medicaid has paid
a claim during a year; the figures therefore exclude enroliees who have made no use
of their Medicaid benefits.) As the table indicates, once one factors out population
growth and considers per capita spending, outlay increases appear much more mod-
erate. Only in 1991 and 1992 were per capita payment increases very much above
those experienced in other health sectors, such as Medicare or private insurance. It
should be noted that the 1994 and 1995 figures are based on State estimates, with
some Federal adjustments, and may therefore be optimistic. Still, it is clear that
population growth is a central factor in Medicaid spending.

PROGRAM PARTICIPATION

Tables 3 and 4 show changes in the number of Medicaid recipients in recent
years. Table 3 classes recipients by basis of eligibility, while table 4 shows demo-
graphic characteristics.

As table 3 indicates, most of the growth has not been in the categories tradition-
ally eligible for Medicaid, recipients of Aid to Families with Dependent Children
(AFDC) and SSI and the medically needy. The categories labeled "non-cash" have
grown much more rapidly. The 5.3 million new recipients in these categories be-
tween 1988 and 1992 account for 64 percent of the growth in the number of recipi-
ents. Most of these recipients have been enrolled as a result of the statutory expan-
sions in Medicaid eligibility in the late 1980s: coverage of low-income pregnant
women and young children who do not meet welfare standards, the ongoing phase-
in of comparable coverage for older children, and supplemental assistance for low-
income qualified Medicare beneficiaries (QMBs). At the same time, there has been
some growth in the welfare rolls. In particular, there was a jump in AFDC enroll-
ment in 1991 and 1992. A variety of explanations have been advanced for this, but
at least one factor reported by some States has been that families applying just for
Medicaid have also been found to qualify for cash assistance.

Table 4 shows that the largest growth in number of recipients has been among
children. The number of children receiving Medicaid has grown by two-thirds since
1988. Again, this is largely but not entirely attributable to the statutory extensions
of Medicaid to non-welfare children. As the phase-in of coverage for older children
in poverty continues, this population is likely to account for much of the growth in
the remainder of the decade.

Medicaid has made a significant difference in the number of children without
health coverage. The percentage of children under 18 with no health coverage has
dropped from 19.6 percent in 1988 to 12.4 percent in 1992. Overall, however, the
growth in Medicaid enrollment has not meant a reduction in the proportion of
Americans without health insurance. Table 5 shows the percent of nonelderly Amer-
icans receiving coverage from different sources, and the percent uninsured, in 1987
and 1992. Medicaid was the primary source of coverage for 9.0 percent of the popu-
lation in 1992, compared to 6.6 percent 5 years earlier. However, this growth was
more than offset by a drop in the percentage of the population receiving employer-
based coverage, while the percentage receiving other forms of coverage went un-
changed. As a result, the portion of the population without coverage rose nearly as
fast as the percent with Medicaid.

Medicaid coverage is still subject to categorical exclusions. For example, single
adults and childless couples who are not aged, blind, or disabled remain ineligible,
regardless of income. In 1992, Medicaid covered 47.2 percent of persons with family
income below the Federal poverty level, while 28.5 percent of persons in poverty
were uninsured.

SPENDING BY SERVICE CATEGORY

Factors other than population growth, such as changes in service utilization and
reimbursement, account for the remainder of Medicaid spending increases. The Kai-
ser Commission estimated that 31 percent of spending growth in the 1988-1991 pe-
riod was due to general medical price inflation, while 28 percent was due to price
and utilization factors unique to Medicaid. While a case can be made for factoring
out general medical price inflation in this way, Medicaid agencies do not necessarily
consider inflation in setting provider payment rates, and those rates do not always
rise in tandem with increases in charges to private patients. It may therefore be
difficult to separate the relative roles of general inflation and Medicaid policy deci-
sions in fueling spending growth.

Table 6 shows spending growth by service category. All the figures represent only
the Federal share of spending, about 57 percent through most of this period. (Note
that the totals differ from the Federal payment figures in table 1, which include the
Federal share of State administrative expenses and other adjustments.)

The largest increases have been in hospital spending. Payments for inpatient and
outpatient hospital services rose by more than $16 billion between FY 1988 and FY
1992, accounting for 45 percent of total spending growth. Two key factors contrib-
uted to these increases. The first was State responses to litigation or potential liti-
gation under the Boren amendments of 1980 and 1981, which required that State
hospital and nursing facility payment rates be "reasonable and adequate." A number
of courts have found that State systems failed to meet this test and have compelled
payment increases.

The second factor was growth in Medicaid payment adjustments to disproportion-
ate share hospitals (DSHs), those serving large numbers of Medicaid and uninsured

patients. DSH payments grew from an estimated $831 million in 1989 to $18.0 bil-
lion in 1993. The Federal share of DSH payments in FY 1994 is projected to be
$10.5 billion. This amounts to 36 percent of Federal Medicaid payments for inpa-
tient general and mental hospital services, and 13 percent of all service payments.
While some share of the DSH payments has been recaptured by States through such
mechanisms as provider donations, provider-specific taxes and intergovernmental
transfers, hospitals have also benefited. The Prospective Payment Assessment Com-
mission has estimated that Medicaid hospital payments rose from 83 percent of ac-
tual cost in 1991 to 89 percent in 1992; for the hospitals treating the largest share
of low-income patients, Medicaid paid 94 percent of costs. Congress has acted, in
1991 and 1993, to restrict the use of provider donations and taxes and to limit
growth in DSH payments. The result has been the much more modest growth in
hospital payments in the 1992-1995 period.

Other acute care payments have also shown large increases. Many States have
raised physician payments, especially for pediatric and obstetric services. Prices for
pharmaceuticals have risen; this is one area in which Medicaid payments do track
private prices, despite the drug rebates mandated in 1990. Finally, the growth in
"other" acute care spending reflects the improvement in payments to community
health centers, rural health clinics, and federally qualified health centers (FQHCs),
as well as expanded coverage of optional services such as targeted case management
and hospice care.

Between FY 1988 and FY 1992, growth in acute care significantly outpaced
growth in long-term care spending. While the two types of services accounted for
roughly equal shares of Medicaid spending in FY 1988, only 36 percent of spending
in FY 1995 is projected to go for long-term care services. Still, there has been sig-
nificant growth in this area. Nursing facility payments, like hospital payments, have
increased in part as a result of Boren amendment litigation. There have also been
dramatic increases in payments to institutions for mental diseases (IMDs). This
service category has been treated here as long-term care because legislative propos-
als to split Medicaid, federalizing acute care and leaving long-term care to the
States, generally include IMDs among the State service responsibilities. IMD pay-
ments have nearly quadrupled. DSH payments account for 70 percent of this
growth, as some States have increased payments to State facilities and recaptured
the increases through budgetary transfers. Again, this trend is expected to moderate
as a result of recent legislation. The "other" long-term care area shows the expan-
sion of Medicaid home and community-based services programs and increased
spending for personal care services.

The expansion of eligibility for QMBs is seen in the payment increases for Medi-
care premiums and cost-sharing. Finally, there has been dramatic growth in the cat-
egory labeled "other insurance payments." This includes State capitated managed
care programs and such initiatives as the TennCare program, under which bene-
ficiaries in Tennessee will be shifted to prepaid systems. This category of spending
is projected to increase by 30 percent in FY 1995 alone. Overall, Medicaid enroll-
ment in some form of managed care has grown from 1.5 million in 1987 to 4.8 mil-
lion in 1993.

Mr. Chairman, I would be happy to answer any questions.

TABLE 1. Growth in Federal and State Medicaid Spending,

FYs 1988-1999

(outlays in billions)

Annual percent
Fiscal year Federal outlays State outlays' Total change

23.7 54.1

26.6 61.2 13.2%

31.0 72.1 17.8%

41.9 94.5 30.9%

50.3 118.2 25.1%

56.2 132.0 11.7%

1988

30.5

1989

34.6

1990

41.1

1991

52.5

1992

67.8

1993

75.8

OMB current

services estimates:

1994

87.2

1995

96.4

1996

108.2

1997

121.5

1998

136.3

1999

152.2

64.9 152.1 15.0%

72.1 168.5 10.6%

81.0 189.1 12.2%

90.9 212.4 12.3%

102.0 238.4 12.2%

113.9 266.1 11.7%

•State outlays for FYs 1992-1999 based on percentage estimates furnished by Health
Care Financing Administration, Office of the Actuary.

Sources: FYs 1988-1993, OMB, Budget of the United States; FY 1994, OMB
current services estimates.

TABLE 2. Growth in Medicaid Recipients
and Outlays Per Recipient, FYs 1988-1995

Annual per capita

Recipients

Outlays

percentage

Fiscal year

(thousands)

per recipient

increase

1988

22,907

$2,362

1989

23,511

$2,605

10.3%

1990

25,255

$2,857

9.7%

1991

28,280

$3,341

16.9%

1992

31,150

$3,793

13.6%

1993 (est.)

32,961

$4,005

5.6%

1994 (est.)

34,578

$4,399

9.8%

1995 (est.)

35,979

$4,684

6.5%

Source: CRS analysis of data from HCFA-2002 reports; HCFA Justification of
Appropriation Estimates and HCFA-64 reports.

TABLE 3. Trends in Medicaid Recipients
by Cash Assistance Status, FYs 1988-1992

Cash Welfare Recipients

Needy adults Blind Medically

Fiscal year Total & children & disabled needy Non-cash

1988

22,907

12,150

4,442

3,605

3,305

1989

23,511

12,022

4,331

3,431

4,135

1990

25,255

12,125

4,342

3,392

5,280

1991

28,280

12,803

4,563

3,466

7,353

1992

31,150

13,928

4,875

3,656

8,597

Average annual rate of growth:

1988-92 ^0% 3.5% 2.4% 03% 27.0%

NOTE: Totals for 1988-1990 represent beneficiaries in 49 States, the District of
Columbia, Puerto Rico and the Virgin Islands. Totals for 1991-1995 represent
benficiaries in 50 States, the District of Columbia, Puerto Rico and the Virgin
Islands. Detail of recipient totals between 1988 and 1990 do not sum to total
because a number of recipients who may be classified in more than one catgory
during the year. During this period, the "other" category is composed primarily of
children. Due to these definitional changes numbers are not always strictly
comparable.

TABLE 4. Trends in Medicaid Recipients
by Demographic Category, FYs 1988-1995

Fiscal Aged 65 Blind & Needy Needy

year Total and over disabled adults children Other

1988

22,907

3,159

3,487

5,503

10,037

1,343

1989

23,511

3,132

3,591

5,717

10,318

1,175

1990

25,255

3,202

3,718

6,010

11,220

960

1991

28,280

3,359

4,069

6,778

13,415

658

1992

31,150

3,749

4,487

7,040

15,200

674

1993

32,961

3,904

4,961

7,369

16,060

667

1994

34,578

4,077

5,542

7,630

16,657

672

1995

35,979

4,238

6,107

7,868

17,089

677

Average annual rate of growth:

1988-92 8.0% 4.4% 6.5% 6.4% 10.9% -15.8%

1992-95 3.7% 3.1% 8.0% 2.8% 3.0% 0.1%

TABLE 5. Percentage of Nonelderly Population Receiving

Primary Health Coverage from Different Sources,

1987 and 1992

1987 1992

Employer-based 67.6% 63.0%

Medicaid 6.6% 9.0%

Other insurance* 11.4% 11.4%

Uninsured 14.5% 16.6%

'Includes Medicare, veterans' and military coverage, and private nongroup
insurance.

NOTE: Persons reporting multiple sources of coverage are assigned to a primary
source according to coordination of benefits rules under Federal law or typical private
insurance practice.

Source: Congressional Research Service analysis of data from the March 1988 and
March 1993 Current Population Surveys.

TABLE 6. Federal Medical Assistance Payments by Category of Service
Fiscal Years 1988, 1992, and 1995

(dollars in millions)

FY 1988

FY 1992

Annual rate of change
FY 1995 FYs 1988-92 FYs 1992-95

Acute care

Inpatient hospital

6,848

21,506

26,156

33.1%

6.7%

Outpatient hospital

Physician

Prescription drugs (less

rebates)

All other

1,394
1,848
1,989

2,046

3,195
4,036
3,664

5,254

4,330
5,071
5,228

8,725

23.0
21.6
16.5

26.6

10.7

7.9

12.6

18.4

Subtotal, acute care

14,126

37,655

49,510

27.8

9.6

Long-term care

Nursing facility 8,225

Intermediate care 3,339
facility/mentally retarded

Inpatient mental health 804

Other long-term care 1,32

13,928 17,540 14.1

5,013 5,949 10.7

2,695 3,483 35.3

3,210 5,629 24.7

8.0
5.9

8.9

20.6

Subtotal, long-term care 13,675 24,846 32,601

Medicare premiums and 546 1,382 2,332
cost-sharing

Other insurance payments 686 1,927 6,209

16.1

25.9

29.4

9.5
19.1

47.7

29,054 65,808 90,652

22.7%

11.3%

Source: CRS analysis of data from HCFA-64 reports (1988 and 1992); Health
Care Financing Administration, Justification of Appropriations Estimates (1995).

CRS

Congressional Research Service • Library of Congress ■ Washington, D.C. 20540

April 22, 1994

TO Honorable Daniel Patrick Moynihan

FROM Mark Merlis

Specialist in Social Legislation
Education and Public Welfare Division

SUBJECT Medicaid Funding Formula

During the Finance Committee's March 24, 1994, hearing on the Medicaid program,
you requested information about the history of the formula for establishing the State and
Federal shares of Medicaid payments to medical care providers.

The formula is as follows:

State share = f State per capita income \2 % ^ percen(
{National per capita income)

Federal share = 100 percent - State share

The Federal share may not be lower than 50 percent or higher than 83 percent.

The attached excerpt from a 1982 Congressional Research Report describes in detail
the formulas for Medicaid and for State allocations under the Hill-Burton Act (the Hospital
Survey and Construction Act of 1946), as well as the formula once used to establish the
Federal share of benefit payments under Aid to Families with Dependent Children
(AFDC).1 As the report indicates, there is no legislative history to provide a rationale for
the AFDC formula enacted in 1958 or the Medicaid formula enacted in 1965. However,
both follow the precedent of the Hill-Burton formula in using State per capita income as
a measure of need, and in squaring the ratio of State to national per capita income.

The Hill-Burton Act used per capita income as a proxy to measure States' relative
need for hospital beds, because there was an observed correlation between low per capita
income and a low bed-to-population ratio. Squaring the ratio of State to national per

'All States have now elected to use the Medicaid formula for AFDC, instead of the
alternative AFDC formula.

capita income had the effect of increasing allocations to lower income States. Again, there
is no history to indicate why a similar formula was adopted for Medicaid. Per capita
income might be regarded as a measure either of need or of a State's capacity to fund the
program. However, the General Accounting Office and others have suggested that per
capita income is an inadequate measure for either purpose, and that it might be preferable
to use alternate measures of need (such as the percentage of a State's population in
poverty) and fiscal capacity (such as total taxable resources).2

Please contact me if you require any additional information.

Attachment

2See U.S. General Accounting Office. Medicaid: Alternatives for Improving the
Distribution of Funds. Fact sheet for the Honorable Dale Bumpers. GAO/HRD-91-66FS,
May 20, 1991. Washington, 1991.

Congressional Research Service
The Library of Congress

Washington. DC. 20540

ANALYSIS OF FEDERAL-STATE COST-SHAKT.nO IN THE
AID TO FAMILIES WITH DEPENDENT CHILDREN PROGRAM

Education and Public Welfare Division
March 22, 1982

I. CURRENT SYSTEM

Description of Current Formulas

The share of Federal funds available to States for Aid to Families vlth
Dependent Children (AFDC) varies from State to State, depending in part, on
per capita income. The Federal share (matching rate) of AFDC payments is
determined by either the "regular" formula specified in title IV of the Social
Security Act or, if the State has a medical assistance (Medicaid) program
under title XIX of the Act, an alternate formula specified in title XIX of
the Act. States with Medicaid programs may choose either the regular AFDC
formula or the alternate Medicaid formula as a basis for receiving Federal
matching funds for the AFDC program. Currently, only two States ose tbe
AFDC formula.

AFDC Formula

The AFDC formula can be broken down into two parts. The first part of the
formula is uniform for all States, with Federal funds representing 5/6 of the
first $18 per month of the average payment per recipient made by the State multi-
plied by the total number of recipients. The second part of the formula provides
for a specified percentage (50 to 65 percent, based on relative per capita income)
of the next $14 per month of the average payment multiplied by the number of reci-
pients. The maximum amount paid with Federal dollars is $24.10 per recipient

[(5/6 x 18) + (.65 x 14)]. Average payments above $32 are financed from State

and local funds. 5/

The formula used In determining the State and Federal share of payments

between $18 and $32 Is as follows:

2
State share - /"State per capita Income \

^National per capita income/ X 50 percent

Federal share - 100 percent - State share (with Federal minimum of
50 percent and maximum of 65 percent)

As of late 1981, only Texas and Arizona used this formula, which places a
celling on average benefits eligible for Federal matching. Texas found the AFDC
formula advantageous because of its low average benefits (in Fiscal Tear (FT)
1980 average monthly benefits per recipient in Texas amounted to $35.54), and
Arizona was ineligible to use the Medicaid formula because it had no Medicaid
program.

Medicaid Formula

As applied to AFDC benefits, the Medicaid formula is simpler and sometimes
more generous than the AFDC formula. It offers Federal matching dollars for all
AFDC benefit payments, no matter how high tbey are in the aggregate or per reci-
pient. The Federal share is determined by applying the Federal medical assis-
tance percentage to the total amount spent by a State for AFDC benefits. The
law sets lower and upper limits to the Federal medical assistance percentage
(from 50 to 83 percent), but no State now has sufficiently low per capita income
to receive the 83 percent maximum share.

5/ Under the AFDC foster care program the ceiling is $100 multiplied by
the number of foster care recipients, instead of the $32 multiplied by the
number of recipients which is applied under the AFDC program.

Under che Medicaid formula the Federal funding share of AFDC payments or of
medical vendor payments is higher for States with low per capita incomes, and
lower for States with higher per capita incomes. Under the formula, if a
State's per capita income is equal to the national average per capita income,
the Federal share is 55 percent. If a State's per capita income exceeds the
national average, the Federal share is lower, with a statutory minimum of
50 percent. A State qualifies only for the Federal minimum share of 50 percent
if its per capita income exceeds the national average by 5.41 percent or more.
If a State's per capita income is lower than the national average, the Federal
share is Increased. At the present time no State is entitled to receive a
Federal share of more than 77.36 percent. For the outlying areas (Guam, Puerto
Rico, and the Virgin Islands) the Federal Medicaid matching rate applicable to
AFDC is 75 percent (contrasted with a 50 percent rate specified for Medicaid
expenditures), but the law imposes a ceiling on total funding.

The formula used in determining the State and Federal share is as follows:

2
X 45 percent

State share - /State per capita income \
\ National per capita income/

Federal share » 100 percent - State share (with a minimum of
50 percent and a maximum of 83 percent)

The law further provides that the Federal Government will pay half the

costs of State and local administration of AFDC. States decide whether local

governments must help pay for the non-Federal costs of the AFDC program, but

only 11 States, including New York and California, require counties to help pay

AFDC benefits.

Rationale and History of Funding Formulas for AFDC

The legislative histories of the AFDC formula and the Medicaid formula do
not explain their construction or give rationales for their usage. The AFDC

program adopted the basic concept of relating a State '6 matching share to its
relative per capita income in 1958, when the program was 23 years old. In doing
so it used a mechanism earlier developed for allotment of hospital construction
funds in the Hill-Burton Hospital Survey and Construction Act of 1946. The
Hill-Burton formula, discussed below, regarded relative per capita income as a
measure of both State need and State fiscal capacity.

AFDC: 1935-1958

Grants for State Aid to Dependent Children (ADC) were authorized in the
original Social Security Act of 1935 "for the purpose of enabling each State to
furnish financial assistance, as far as practicable under the conditions in such
State, to needy dependent children." The Act authorized the Secretary of the
Treasury to reimburse each State with an approved ADC plan for one-third of its
benefit payments, up to a maximum Federal payment of $6 per month for the first
child in a family, plus $4 per month for each additional dependent child. Thus,
in 1935, the Federal share of AFDC payments was directly related to each child's
AFDC payment.

In 1946, the AFDC Federal matching formula was changed so that the Federal
share of AFDC payments was related to the average expenditures per .child up to
an individual maximum.

In 1950, the AFDC matching formula was changed so that one needy relative
could be included with the dependent child as a recipient for Federal matching
purposes.

From 1956 to 1958 the Federal share of AFDC payments was 14/17 of the first
$17 per month (average per recipient) multiplied by the total number of AFDC re-
cipients plus one-half of the remaining amount up to individual ceilings of $32
for one needy relative, $32 for the first child, and $23 for each additional

child. (For full details of the history of the AFDC funding formula, see Appen-
dix A.) Thus, from 1935 to 1958 the maximum amount that the Federal Government
would pay a State for Its AFDC benefit costs was directed related to each Indivi-
dual's AFDC payment , and the matching rate was the same for States that paid the
same benefits.

During the period 1935-1958 the shifting of AFDC costs to the Federal Gov-
ernment was pronounced (see the table in Appendix A). The way in which the over-
all Federal share was increased, however, was considered Inequitable by some
critics. They maintained that any further expansion should be made in a manner
that took into account the fiscal abilities and needs of the States.

The Hill-Burton Act

Both the National School Lunch Act of 1946 and the Hill-Burton Act (Hospital
Survey and Construction Act) of 1946 employed an index of State fiscal ability
derived from the ratio of State to national per capita income in determining the
allotment of Federal aid. In addition, the Hill-Burton Act adopted a squaring
mechanism as a means of assuring an even larger Federal funding share to those
States with per capita incomes below the national average.

In 1946 there was no acceptable measurement of need for hospital beds.
However, witnesses at Senate hearings 6/ noted a correlation between low per
capita income and a small number of existing beds p*r 1,000 population. The
Congress approved in the Hill-Burton Act a methodology for the distribution of
hospital construction funds which in essence gave relatively poor States propor-
tionately more money in relation to population than it gave to wealthy States.

6/ U.S. Congress. Senate. Hearings before a Subcommittee of the Commit-
tee on Education and Labor on S. 3230, 76th Cong., 2d Sess., 1940. Hearings be-
fore the Committee on Education and Labor on S. 191, 79th Cong., 1st Sess., 1945.

The methodology was incorporated Into lav and Is expressed by the formula:

2
State allotment - population of State x (allotment percentage)
sum of (population of each State x allotment
percentage for each State)

Allotment percentage - 100 percent - State per capita Income x 50 percent

national per capita income

The statute provides that allotment percentages are to be computed between
July 1 and September 30 of each even-numbered year on the basis of the average
per capita Income of each of the States and of the O.S. for the three most re-
cent consecutive years for vhich satisfactory data are available from the De-
partment of Commerce.

The Hill-Burton allocation formula treated relative State personal per
capita income as a surrogate for the need for hospital beds. 'Some students of
the Federal role in health care concluded that State relative per capita income
failed to be a valid indicator of need for general hospital beds. 7/

The 1958 Amendments to the Social Security Act

The 1958 formula increased the Federal Government's share in the cost of
the AFDC program and adopted the principle of variable matching rates, inversely
related to State relative per capita income, for a portion of reimbursements.

The formula under the 1958 amendments provided for a limit on the average
monthly amount of State benefit payments eligible for Federal dollars.
Formerly, the Federal maximum on money payments applied to each Individual
assistance payment. Any amounts paid in excess of the ceilings were excluded

7/ Clark., Lawrence, et al. The Impact of Hill-Burton: An Analysis of
Hospital Bed and Physician Distribution in the United States, 1950-1970. Medi-
cal Care, v. XVIII, no. 5, Kay 1980. Lave, Judith and Lester Lave. The Hospi-
tal Construction Act: An Evaluation of the Hill-Burton programs, 1948-1973.
American Enterprise Institute. 1974.

from Federal financial participation. Under the 1958 amendments, Federal finan-
cial participation was not related to individual assistance payments but to total
expenditures, all of vhlch were matched within the specified average payment per
recipient. This average amount included both money payments to recipients and
medical care on their behalf.

The Federal share of these State expenditures in the 1958 amendments was
14/17 of the first $17 per recipient in the AFDC program. For payments in ex-
cess of that amount, but within the specified average maximums, the 1958 law
provided for variable matching based on per capita income for the most recent
3-year period. 8/ The State percentage for this portion of the formula was
derived by dividing the square of the State's per capita Income by the square of
the national per capita income and multiplying the result by 50 percent. For
States with a per capita income equal to or greater than national per capita
income, the Federal percentage was established at 50 percent. The Federal per-
centage for Alaska and Hawaii was also established at 50 percent. Where a
State's per capita income was less than the average of the nation, the Federal
percentage would have been more than 50 percent but no higher than 65 percent.
If for example, the per capita income of a particular State for the base years
was 90 percent of the corresponding figure for the country as a whole, then the
State percentage would have been 40.5 (.90 x .90 x .50) and the Federal percen-
tage 59.5.

One effect of the 1958 law was to increase the Federal share in State pub-
lic assistance expenditures. The amount of the increase, if any, that reached
Individual recipients depended upon State decisions on use of the extra money.

8/ The 1958 amendments required that the Federal percentage be promulgated
each even-numbered year by the Secretary of Health, Education, and Welfare (now
Health and Human Services).

The 19SS formula allowed flexibility In meeting unusual needs of recipients,
•uch as medical care, and probably minimized the tendency that may have existed
for States to consider the maximum, established only as a limit on Federal cost-
sharing, as a limit on the monthly payment to an individual recipient. Further-
more, administrative and fiscal procedures were simplified. The objective of
the variable portion of the 1958 formula was to achieve a more equitable distri-
bution of Federal funds In relation to the fiscal capacities of the States than
was possible under the previous formula.

The proposal to change the AFDC formula to reflect State fiscal capacity
was made by the Eisenhower Administration. The Administration later objected
to the formula which was adopted by the Congress because it included features
that resulted in an overall increase in the Federal matching share.

The 1965 Amendments to the Social Security Act

Title XIX of the Social Security Act was enacted to extend the Kerr-Mills
medical assistance program for the aged to the AFDC program as well as to other
needy persons. As part of the amendments creating the new Medicaid program, the
Congress agreed to allow States to use, as an alternative financing formula for
the AFDC program, the same formula that had been adopted for the Medicaid pro-
gram.

The Federal share of AFDC expenditures under the medicaid formula was based
upon a uniform formula with no maTlmim on the amount of eligible expenditures.
For the Federal share, which varied inversely to a State's relative per capita
Income, the law Imposed a minimum of 50 percent and a maximum of 83 percent.

In a paper entitled "Regional Disparities in Federal Medicaid Assistance," 9/
Richard Weiss quoted Wilbur Cohen, then undersecretary of the Department of
Health Education and Welfare, as saying that the Medicaid formula was appropriate
on three grounds. First, it was asserted that the formula could not easily be
manipulated by any particular State for its own gain. —Second, the formula, relied. .
upon data — State per capita income statistics — which were published periodically,
and could therefore be easily estimated with reasonable accuracy. Moreover, the
formula would not have required the costly collection or processing of any addi-
tional statistics by the Federal or State governments. Finally, the per capita
income proxy was thought to bear "reasonable relevance" to the concept — tax
capacity — to which the reimbursement formula was supposed to be sensitive.

Procedures and Definitions

Sections 1101(a)(8) and 1905(b) of the Social Security Act require the Sec-
retary of Health and Human Services (HHS) to publish the Federal percentages and
the Federal medical assistance percentages (Medicaid percentages) between Octo-
ber 1 and November 30 of each even-numbered year. The Secretary is to determine
the percentages, by the appropriate formulas, from the Bureau of Economic Analy-
sis (BEA) statistics on average income per person in each State and in the na-
tion as a whole for the three most recent calendar years for which satisfactory
data are available.

An example may make this clearer. The following are Department of Commerce
per capita personal income figures for Pennsylvania and the U.S. for years 1977,
1978, and 1979:

9/ Weiss, Richard. Regional Disparities in Federal Medicaid Assistance.
Northeast-Midwest Research Institute. Nov. 28, 1977.

Pennsylvania $6,969, $7,669, and $8,558

D.S $7,043, $7,854, and $8,773

The average per capita Income figures for Pennsylvania and the U.S. are

([$6,969 + $7,669 + $8,558] t 3) - $7,732

([$7,043 + $7,854 + $8,773] r 3) - $7,890, respectively

To find the State percentage, square both numbers, divide the Pennsylvania

figure by the D.S. figure and multiply by 50 percent.

2
Pennsylvania ($7,732) - $59,783,824

2
U.S ($7,890) - $62,252,100

Federal percentage (AFDC formula)
State Share - .96 x .5 - .48
Federal Share - 1 - .48 - .52
Federal medical assistance percentage (Medicaid formula)
State Share - .96 z .45 - .43
Federal Share - 1 - .43 - .57
These percentage are effective October 1, 1981-September 30, 1983, fiscal
years 1982 and 1983. The 1979, 1980, and 1981 per capita personal Income data 10/
will be used to determine the Federal percentage and the Federal medical assis-
tance percentage for fiscal years 1984 and 1985.

10/ The term per capita Income is defined by the Department of Commerce as
the total personal income of the residents of a given area divided by the resi-
dent population of the area. For example, the 1979 total personal income figure
for Pennsylvania was $100,398 million, the population of Pennsylvania in 1979
was 11,731,000, and thus, the 1979 per capita Income of Pennsylvania was $8,558.
For this purpose, persons are defined as individuals, nonprofit institutions,
private non-insured welfare funds, and private trust funds. The last three are
referred to as "quasi-individuals. "

Total personal income consists of private and government wage and salary
payments In cash and in kind, other labor income, farm and nonfarm proprietors'
income, personal interest Income, rental income, dividends, and transfer pay-
ments, less payroll deductions for social security and unemployment compensation.

Per capita personal income serves as an Indicator of the quality of con-
sumer markets and of the economic well-being of the residents of an area. How-
ever, a high per capita Income Is not always representative of the standard of
living In an area, and conversely a low per capita Income Is not necessarily in-
dicative of the economic well-being of an area. For instance, an unusually high
(or low) per capita income may result from unusual conditions, such as a major
construction project such as the Alaska pipeline or a catastrophe such as wide-
spread crop failures in an agricultural State.

In addition, population is measured at mid-year whereas Income is measured
as a flow over the year. Therefore, a significant change in population during
the year, particularly around mid-year, can cause distortion In per capita
figures.

It should be noted that the substantial differences between estimates
of per capita income made by the Bureau of Economic Analysis (BEA) and the Census
Bureau (both within the Department of Commerce) are due to differences in defini-
tion of income and collection and computation methods. For example, the Census
Bureau computes 1976 per capita income by dividing 1976 total money Income 11/
by April 1977 total population, whereas the BEA derives its 1976 per capita in-
come by dividing 1976 toca.1 personal income by July 1976 total population.

11/ Money income differs from personal income as follows: money income ex-
cludes income in-kind, imputed income, and income of quasi-individuals— which
are included in the personal income definition. Furthermore, It includes items
that are excluded from the personal income definition — income from private pen-
sions and annuities, cash benefits from private workmen's compensation insurance,
regular contributions for support received from individuals not residing in the
same living quarters, income received from roomers and boarders residing in
households, and employee contributions for social insurance.

Congressional Proposals

Some view the current funding formulas for AFDC as Inequitable. Some cri-
tics of the AFDC formula 6ay that per capita Income Is only one gauge of a
State '6 economic condition and that it generally fails to accurately measure a
State's fiscal capacity. In his floor statement on S. 855 (April 1, 1981), the
Medicaid Formula Modernization Act of 1981, Senator Daniel P. Moynihan noted that
the current Medicaid formula ignores the cost-of-living differences among States,
and he maintained that this meant unfair treatment of areas with higher living
costs. He also objected to Inclusion of cash transfer payments in calculating a
State's per capita income, on grounds that this distorted a State's relative
fiscal capacity. States paying relatively high benefits to a large caseload re-
ceive relatively less Federal support than States with smaller welfare burdens.

Further, some say that the spread between low- and high-income States
should be reduced by dropping the squaring mechanism in the formula. These peo-
ple maintain that there is no evidence that an unsquared ratio would not allo-
cate Federal moneys in closer proportion to the true needs of the State. In
1978, because of the dissatisfaction with the squaring rule for per capita income
Congress dropped it from the allotment formula for Federal vocational rehabilita-
tion funds. The Senate Committee on Human Resources recommended the, change for
several reasons. Its report (Senate Report No. 95-899) said that per capita
Income was, "at best, an imprecise measurement of a State's relative ability
to pay," and it complained that the squaring rule weighted allotments "so hea-
vily" against higher per capita income States that it discriminated against the
majority of handicapped persons, who lived In such States. It said, further,
that State differences in ability to pay had narrowed greatly since allotments
began in 1954, partly because the richer States had to contend with higher taxes,
higher costs of living, and "massive public debts" caused by their provision of

social services, and that there no longer was a need Co use the allotment for-
mula as a way to encourage States to begin basic programs of rehabilitation
services.

Over the last six years, a number of bills have been introduced in Congress
to change the AFDC matching formula (see Appendix A). The bills have ranged from
increasing the minimum Federal percentage and/or decreasing the maximum federal
percentage to requiring the Federal Government to pay 100 percent of all AFDC
costs or 100 percent of a specified AFDC income floor. Some bills would change
the AFDC program into a block grant and give States full responsibility for

/^T) O Congressional Research Service • Library of Congress ■ Washington, D.C. 20540

April 22, 1994

TO Honorable Daniel Patrick Moynihan

\
FROM Mark Merlis

Specialist in Social Legislation \

Education and Public Welfare Division

SUBJECT Medicaid Payments to Disproportionate Share Hospitals

During the Finance Committee's March 24, 1994, hearing on the Medicaid program,
you requested additional information about trends in Medicaid payment adjustments for
disproportionate share hospitals (DSHs), those serving high numbers of low-income
patients.

States did not separately report the amount of DSH payments until FY 1992, and did
not provide separate figures for DSH payments to general and mental hospitals until FY
1993. Table 1 shows actual payments for FY 1992 and FY 1993 and projected payments
for FY 1994 and FY 1995. Under Medicaid law, the total amount States may spend on
DSH payments is now subject to annual limits. As the table indicates, FY 1993 payments
recorded to date do not equal the total allotment to States for that year. However, the
totals are subject to change if States report additional retroactive adjustments or if any of
the payments already recorded should be subject to Federal disallowances.

Table 2 shows DSH payments by State and by type of facility for FY 1993. The
figures are current as of April 13, 1994.

Please contact me if you require any additional information.

TABLE 1. Combined Federal and State Medicaid

Payment Adjustments to Disproportionate Share Hospitals,

FY 1992-FY 1995

(amounts in millions)

Inpatient

Institutions for

hospital

mental disease

Total

1992

n/a

$17,455

1993:

Actual, 4/13/94

$13,907

$3,080

$16,987

Allotted

N/A

$17,952

1994 (est.)

$15,487

$3,952

$19,439

1995 (est.)

$15,033

$3,439

$18,472

NOTE: Projected Federal payments for FY 1994 and FY 1995 converted to total
payments on assumption that Federal share remains at FY 1993 level of 54.2 percent.
N/A = not available.

Source: FY 1992 and FY 1993, Health Care Financing Administration (HCFA),
Office of Medicaid Management. FY 1994 and FY 1995, HCFA Justification of Estimates
for Appropriations Committees, Fiscal Year 1995.

TABLE 2. Medicaid Payment Adjustments to Disproportionate Share Hospitals,

by State and Provider Category, FY 1993

(amounts in thousands)

Inpatient

Institutions for

hospitals

mental diseases

Total

Alabama

412,931

109

413,040

Alaska

14,146

Arizona

91,111

Arkansas

2,540

2,542

California

2,542,500

Colorado

128,737

922

129,659

Connecticut

257,606

168,607

426,213

Delaware

5,194

District of Columbia

23,991

14,009

38,000

Florida

175,715

63,978

239,693

Georgia

338,900

Hawaii

44,147

Idaho

979

Illinois

246,781

Indiana

21,263

7,399

28,661

Iowa

3,993

Kansas

4,411

180,007

184,418

Kentucky

136,763

Louisiana

1,046,182

17,805

1,063,986

Maine

108,984

42,865

151,849

Maryland

22,869

97,398

120,267

Massachusetts

324,083

160,400

484,483

Michigan

497,664

56,682

554,346

Minnesota

21,181

6,163

27,343

Mississippi

152,343

Missouri

564,044

139,045

703,089

Montana

469

539

Nebraska

2,100

1,160

3,260

Nevada

73,559

New Hampshire

37,652

New Jersey

764,652

316,113

1,080,765

New Mexico

8,678

New York

2,190,637

593,840

2,784,477

North Carolina

13,206

332,339

345,545

TABLE 2. Medicaid Payment Adjustments to Disproportionate Share Hospitals,

by State and Provider Category, FY 1993— Continued

(amounts in thousands)

Inpatient

Institutions for

hospitals

mental diseases

Total

Ohio

449,020

Oklahoma

18,629

4,847

23,475

Oregon

7,911

10,301

18,212

Pennsylvania

330,680

712,969

1,043,649

Rhode Island

97,084

97,160

South Carolina

412,528

27,231

439,759

South Dakota

Tennessee

427,055

3,191

430,246

Texas

1,513,029

Utah

3,594

860

4,454

Vermont

9,500

9,092

18,592

Virginia

101,276

10,908

112,184

Washington

214,116

43,170

257,286

West Virginia

94,769

Wisconsin

5,447

1,124

6,571

Wyoming

U.S. Total

13,907,279

3,080,072

16,987,350

Source: Health Care Financing Administration (HCFA), Office of Medicaid
Management.

Prepared Statement of Raymond C. Scheppach

Good morning Mr. Chairman and members of the committee. I appreciate the op-
portunity to appear before you today on behalf of the nation's Governors to discuss
the impact of health care reform on the low-income population and the Medicaid
program. There are few issues of greater importance to Governors than how Medic-
aid is integrated in a new health care system.

GOVERNORS' MEDICAID AND LOW-INCOME SUBSIDY POLICIES

The Governors have adopted a two-paged approach in their policies toward re-
forming Medicaid and addressing the needs of the low-income population. First,
even if comprehensive health care reform is enacted this year, states still need some
interim changes to the Medicaid program. Second, the Governors support a major
restructuring of low-income programs as part of national reform.

INTERIM REFORM

The Medicaid program, with its state/federal partnership, has contributed signifi-
cantly to ensuring that a safety net exists for low-income individuals. Irrespective
of its critics, it has been the only nationally organized system of care for many poor
people for the last thirty years. For at least the last five years, however, the nation's
Governors have been calling for changes in the Medicaid program. The administra-
tive and financial burdens resulting from general medical inflation, Medicaid's indi-
vidual entitlement nature, and the proliferation of unfunded federal mandates have
created havoc with state budgets. Its impact has been so great that other state pro-
grams have suffered. The growth in Medicaid, particularly during 1991 and 1992,
was a major reason why states increased taxes by $25.6 billion over this two-year
period. It is no wonder that states have had to cut spending and raise taxes to keep
up with other equally important needs such as education and economic develop-
ment.

Medicaid Managed Care Waivers. The private sector has led a national trend in
health care service delivery toward systems of care. These systems or networks have
been shown to provide cost-efficient care while assuring the patient a medical
home — a reliable place to seek primary care and from which specialty care can be
directed. Yet, as the private sector is moving aggressively toward these networks,
the Medicaid program continues to require states, in virtually all eases, to apply for
a waiver from fee-for-service care in order to enroll Medicaid beneficiaries in such
networks. And while the Bush and Clinton administrations have taken significant
steps toward simplifying the application and renewal process, states still must re-
apply for renewals every two years. Moreover, states have been unable to sustain
networks where there is a predominance of Medicaid beneficiaries because under
current law, states are permitted only one non-renewable three-year waiver to have
beneficiaries served in a health maintenance organization (HMO) where more than
75 percent of the enrollees in the HMO are Medicaid beneficiaries. This requirement
should be repealed or at least modified to give states the opportunity to apply for
renewable waivers. Governors recognize the special significance of consumer protec-
tions and assurance of solvency in establishing these systems of care and they sup-
port federal oversight through the regulatory process.

If the nation is serious about controlling health care costs, giving states the oppor-
tunity to enroll Medicaid beneficiaries in networks, including fully and partially
capitated systems, through the regular plan amendment process is essential to
achieve this goal.

Comprehensive Waivers. Many states have begun to look seriously at comprehen-
sive systems of health care where the artificial categorical barriers of Medicaid are
removed and where states can establish statewide networks of care for additional
low-income individuals. These strategies are being developed in response to the fact
that with efficient cost containment, states may be able to deliver health care to a
greater number of poor people. Unfortunately, there are no provisions in the Social
Security Act that give states any certainty that these networks, once established,
can remain a part of the state's health care delivery structure.

Currently, states have been developing these more comprehensive networks
through the research and demonstration provisions of the Social Security Act (Sec-
tion 1115a). Because Section 1115a was designed for research purposes, it has some
important limitations. States must demonstrate through the application process that
they are testing an innovation. The law requires an evaluation that in some cases
requires control groups. Projects approved under the 1115a process are approved for
a limited time period, usually three to five years at the discretion of the administra-

tion, and require special statutory changes to go beyond the demonstration period.
Finally, these projects must be cost neutral over the life of the project.

Section 1115a is essential to allow the testing of alternative health and social poli-
cies. However, the current statute falls short by requiring statutory changes if a
state wants to continue its successful effort. In short, once a state has proven that
its research project works, it cannot continue without congressional action. Gov-
ernors support changes to the Social Security Act so that a state may apply through
the executive branch of government for renewable waivers of their innovations. This
waiver process should be consistent with the streamlined approaches used by the
Clinton administration and states should have to reapply for these waivers no less
than every five years.

Relief from the Boren Amendment. In 1981, Congress enacted the Boren Amend-
ment to give states more certainty in setting institutional reimbursement rates in
Medicaid. Since then, judicial interpretations have done just the opposite. The Gov-
ernors believe something should be done regarding this amendment as part of
health reform. They are aware that the administration is moving ahead to develop
regulations. Although this effort should be commended, the administration is bound
by the parameters of the statute and the statute appears to give states little flexibil-
ity. And a repeal of the Boren Amendment may be no help to either providers or
states. The Governors support a proposal to develop a series of "safe harbors" that
would give states some protection while protecting the industry. These or other eq-
uitable alternatives could be helpful to states.

NATIONAL REFORM

Regarding national reform, the Governors have called for a federal framework
with state flexibility. NGA policy supports a national benefits package that is com-
prehensive and has a strong emphasis on primary and preventive care. While the
policy does not identify specific benefits to be included, it calls for a package like
one that would be found at an efficiently operated health maintenance organization.
This state/federal reform system would be structured around a managed competition
approach.

Governors believe that the acute care portion of Medicaid should be eliminated
and folded into a broader low-income subsidy program. This new program might be
defined solely by income and assets standards applied uniformly across the popu-
lation. Moreover, the Governors believe that this new low-income suhsidy program
should be incorporated into the overall service delivery structure under managed
competition so that the differences between acute care service delivery for low-in-
come and the rest of the population disappears. Finally, the Governors believe that
managed competition gives consumers the freedom to choose plans based on price
and quality. Given such choice, people are likely to choose managed care systems
and other integrated health care networks.

GOVERNORS' REACTION TO HEALTH REFORM PROPOSALS

Mr. Chairman, within the context of the Governors' policies, I would now like to
briefly address the Medicaid and low-income subsidy program proposals in the
President's health plan and those proposed by Senators Chafee and Breaux.

THE HEALTH SECURITY ACT

The President has chosen to establish a broad-based low-income subsidy program
as part of his comprehensive reform. Governors' policy supports such a program. In
establishing this program, the President has chosen to maintain the general Medic-
aid structure in his health reform package. While the Governors prefer a greater
restructuring of the program, the President's proposals are generally consistent with
the Governors' Medicaid policy. From a state perspective, the President's plan has
the following advantages.

Medicaid acute care services will be integrated into the same service delivery sys-
tem used by all Americans. The Governors support the integration of the cash and
noncash categorical populations the new service delivery system. This unitary acute
care service delivery structure should dramatically reduce the incentive for a two-
tiered health system that results from our current Medicaid program. As we have
seen in the Medicaid program, some education and outreach will be needed as Med-
icaid beneficiaries and others move from a fee-for-service environment into a net-
work environment. Care must be taken that this change occurs as smoothly as pos-
sible without sacrificing quality and access to care.

States will have much more financial certainty in the growth of their Medicaid
budgets. Aid to Families with Dependent Children (AFDC) and Supplemental Secu-
rity Income (SSI) beneficiaries will receive services in the guaranteed national bene-

fits package through regional alliances. With federal matching funds, states will be
required to pay alliances a per capita amount for each beneficiary. That per capita
payment will increase at a predetermined amount each year. This approach gives
states significant stability in a part of their Medicaid budget and is supported by
the Governors.

Maintenance of Effort Payments. States will be required to make lump sum pay-
ments for Medicaid services that previously had been provided to the noncash cat-
egorical populations. Like the cash categorical populations, the payment is based on
expenditures for Medicaid services in the guaranteed national benefits package.
This strategy holds states harmless from unpredictable changes that have been the
hallmark of Medicaid in recent years.

While the Governors are generally supportive of this concept, they are concerned
about some of the growth factors used in the President's plan during the transition
period. During the transition period, both the cash and non-cash categorical expend-
itures will be "grown" by about 12 percent annually. For states that expect their
Medicaid programs to grow at a slower rate, they can only appeal to the secretary
for an adjustment for growth in the cash categorical population, but have no appeal
rights for growth for the non-cash categorical population. As such, this decision may
punish states for operating efficient programs.

1 With a major restructuring of health care financing, the President's plan includes
a strategy for reviewing the state financial obligations under the new system toward
resolving possible inequities among states. The President's plan requires states to
make payments in support of national health reform based on current Medicaid
spending patterns and using current federal Medicaid matching percentages. Be-
cause of the significant differences among states in Medicaid match and program
characteristics, this strategy could punish states with more generous programs by
requiring of them a greater financial maintenance of effort. The extent of this per-
ceived inequity is complicated by real differences among states in their fiscal capac-
ity to support health care. The issue requires reasoned study before changes are
made. I believe that the Governors would support the President's decision to have
a commission review the methodology used to calculate state financial obligations.

The President has enhanced institutional long-term care options and proposed a
new community-based long-term care program that gives states significant flexibility
to meet the individual needs of beneficiaries while protecting the financial exposure
of both states and the federal government. In general, the Governors can support the
incremental changes to Medicaid long-term care in the President's plan. They sup-
port the state option to increase the protected assets limit from $2,000 to $12,000.
The requirement for establishing medically needy programs affects about fourteen
or fifteen states, and because this is a new mandate, it may have significant fiscal
impacts on these states. NGA policy opposes unfunded Medicaid mandates. As we
get a better understanding of the impact of this mandate, we will keep the commit-
tee informed.

New Community-Based Care Program. The President's plan creates a new joint
state and federally financed community-based long-term care program for persons
with significant functional impairments. The Governors support community-based
alternatives to institutional care, and the plan contains several provisions, including
this one, consistent with their position. Not only does the plan increase the avail-
ability of community-based long-term care, but states have significant flexibility in
the program's design to meet the needs of beneficiaries. Although this program re-
quires state matching funds, the match rate is favorable to states. States should be
able to expand some of their state-financed community-based initiatives through
this program

Because of the limitations on federal spending, the President has tried to con-
struct the program so that states' financial obligations are equally limited. The Gov-
ernors strongly support this practice. Limitations on spending must be applied
equally to states and the federal government. However, Governors are concerned
that despite of drafting efforts, the courts might consider this program an individual
entitlement to services.

Areas of Improvement. There are several aspects of Medicaid where the Governors
would suggest program modifications.

Reestablishing the Link to Cash Assistance Programs. Since the mid-1980s, Con-
gress has enacted Medicaid legislation that has delinked Medicaid from its historic
ties to cash assistance programs. Delinking public health care programs from public
cash assistance programs is good public policy. Unfortunately, by requiring per cap-
ita payments for each AFDC and SSI beneficiary, states would be required to con-
sider health care costs when considering policy decisions in the AFDC and SSI pro-
grams. The Governors would support an approach that delinks these programs from
Medicaid.

Qualified Medicare Beneficiaries and Related Programs. The President has chosen
to continue the Qualified Medicare Beneficiary (QMB) program and related pro-
grams, including the program for individuals who are dually eligible for Medicaid
and Medicare. The Governors believe that this decision requires further review.
Members of Congress are well aware of enrollment problems with the QMB pro-
gram. But enrollment problems are just the tip of the iceberg. The administrative
complexity associated with reimbursement is nothing short of astounding for both
providers and states. The Governors support the federalization of this program. If
it is not federalized, they would like to work with subcommittee staff to explore
other options.

Disproportionate Share Hospital Program. The President's plan substantially re-
duces the size of the nation's disproportionate share hospital program. Despite the
nation's best efforts to provide universal coverage, the Governors believe that there
is a small part of the population (at the very least, undocumented immigrants) who
will seek care at hospitals, most likely public hospitals, for whom there will be little
or no compensation. The President allocates about $800 million for this purpose.
This may not be enough and without such additional support, the cycle of cost shift-
ing to the paying population will continue.

As an aside Mr. Chairman, the Governors support a stronger federal financial re-
sponse to the increasing health care burden on states resulting from undocumented
immigrants. Immigration policy is federally developed and federally enforced. The
need for publicly financed health care resulting from these policies and enforcement
activities must also be a pure federal responsibility.

THE HEALTH EQUITY AND ACCESS TO REFORM TODAY ACT

The Chafee proposal takes an incremental approach both to providing health care
to the low-income population and to modifying the Medicaid program. With some
notable exceptions, the Governors can support parts of the Chafee proposals.

States will be able to establish managed care systems under Medicaid without the
need of waivers. Governors believe that this type of flexibility gives states an impor-
tant cost containment tool under proposals where the Medicaid program remains in-
tact. Not only are the states given more flexibility in establishing this important
service delivery approach, it moves this low-income program toward a system of care
that will soon predominate health delivery in the nation. As the nation moves to-
ward receiving care through health care networks, as long as there are strong qual-
ity and consumer protections, the low-income population should be a part of this
trend.

Medicaid beneficiaries will be able to use the same health care delivery systems as
other Americans. At state option, the Chafee plan will permit states to enroll Medic-
aid beneficiaries in health plans. However, the Chafee proposal does establish a
phase-in period for the number of Medicaid beneficiaries that are allowed to enroll
in the plans. Given that the Chafee proposal is a voluntary system, this phase-in
is justifiable and assures that the market is minimally disrupted by the inclusion
of a population whose premium is not negotiated but rather set by the federal gov-
ernment.

Low-income individuals, previously categorically denied participation in Medicaid,
will be eligible for low-income suisidies. The Chafee proposal establishes a new low-
income subsidy program. Eligibility for the program is based on income and phases
in over a seven-year period. Governors support this effort to make health care eligi-
bility dependent on income.

Governors cannot support a cap on the federal contribution to Medicaid spending.
The Chafee plan establishes an annual per-capita federal cap on acute care spend-
ing in the Medicaid program. Thus Governors categorically reject this proposal. The
federal government cannot assume to balance its health care budget problems on
the backs of states when its own actions over the last decade have contributed di-
rectly to this problem. If the federal government wants to limit its financial expo-
sure, the states' financial exposure should be limited as well

Governors cannot support the elimination of the Disproportionate Share Hospital
program. For reasons previously mentioned, the DSH program under Medicaid can-
not be eliminated. States and local governments will continue to rely on those funds
to help defray the cost of uncompensated care. And when compared to the Presi-
dent's plan, the need for the DSH program is even greater given the phase-in of the
broad-based low-income subsidy program. It would seem reasonable however, to re-
visit the DSH program once the broader subsidy program is fully phased-in.

THE MANAGED COMPETITION ACT

Senator Breaux's proposal also establishes a new broad-based low-income subsidy
program and eliminates the complex categorical eligibility categories that now char-
acterize the acute care portion of Medicaid. This proposal goes farthest in meeting
the service delivery and eligibility goals of the Governors. The Governors strongly
support this approach.

Unfortunately, Governors also strongly oppose the financing structure that funds
this approach. Under the Breaux plan, the federal government assumes acute care
costs and states assume all the costs of long-term care over a five year phase-in pe-
riod. When one examines the legislation to understand which services are involved
in the "swap," only a subset of services typically classified as long-term care are in-
cluded in the state responsibilities. As such, the swap is probably less favorable to
states than imagined. However, Governors believe that in the final legislation, the
list of long-term care services for which they would be responsible would grow and
the swap would be unacceptable. Moreover, Congressional Budget Office estimates
of the fiscal impact of this provision do not take into account demographic changes
that will inevitably drive up the costs of long-term care. In fact, Governors have
long-standing policy if there was to be a swap, states should assume the cost of
acute care and the federal government should assume the cost of long-term care.

CONCLUSION

Mr. Chairman, each of the lead sponsors must be commended for their efforts to
reform health care for America's poor. The Governors believe that while it may not
be the most discussed aspect of this health care reform debate, it is one of the most
complex and has the most direct impact on local, state and federal budgets.

While the public policy objectives of Medicaid are sound, the program was de-
signed as a critical safety net in a fragmented and inequitable health care system.
The Governors believe that an unprecedented opportunity exists to re-define health
care for poor people, as well as people with chronic conditions and disabilities, so
that their care is integrated and seamless. They encourage you to be bold in your
restructuring efforts. From the states' perspective, the Governors encourage you to
be guided by the following principles.

• Eligibility for the low-income subsidy program must be relatively simple and
uniformly applied. We need to abolish the complex categorical eligibility struc-
tures like those used in the Medicaid program.

• Individuals who receive low-income subsidies for their health care must have
access to the same health care delivery system as those who receive no sub-
sidies.

• Managed care must be an important component of that health care delivery sys-
tem.

• States must be assured of stability and predictability in their contributions to-
ward the funding of a new national low-income subsidy program.

• Finally, any federal cost containment strategy that limits the financial exposure
of the federal government for publicly funded entitlement programs must also
limit the financial exposure of the states. A cap only on the federal share of the
Medicaid program is simply no solution at all.

The opportunity for major change is upon us and should not be squandered. The
nation's Governors are key stakeholders in ensuring that any new health reform
system includes and integrates health care for the poor. They look forward to work-
ing with this committee as this debate evolves and hope that a true state/federal
partnership can be formed through health care reform. Mr. Chairman and members
of the committee, on behalf of the NGA leadership, I would like to propose a biparti-
san meeting with Governors in the very near future so that they can discuss with
you directly their perspectives on national health reform. The nation's Governors
are ready to work with this committee, Congress, and the administration to craft
meaningful and rational health care reform.

Thank you for the opportunity to appear before you today. I will be happy to an-
swer any questions.

Prepared Statement of Karen Wintringham

My name is Karen Wintringham and I am Senior Vice President for Corporate
Development for the Health Insurance Plan of Greater New York (HIP), a not-for-
profit, prepaid group practice model health maintenance organization. Today, the
HIP system serves nearly 1.2 million members throughout the New York City met-
ropolitan area, New Jersey and Florida.

HIP will share with this Committee our nearly thirty years of experience enrolling
Medicaid beneficiaries and will provide the Committee with some recommendations
on what Congress, the states, and health plans should consider when
mainstreaming Medicaid and other special needs populations into private sector,
managed care health programs. In addition to Medicaid, HIP has also actively en-
rolled other groups that require unique considerations when delivering health care
services including small business, the employed uninsured and uninsured children.

I would also like to commend Chairman Moynihan for his support of Medicaid
managed care. His bills, S. 2077 and S. 3191, the "Medicaid Managed Care Improve-
ment Act of 1991" and the "Medicaid Coordinated Care Improvement Act of 1992"
respectively, would have greatly expanded the numbers of Medicaid recipients with
access to coordinated prepaid health care. The cooperative work done by Senator
Moynihan, his staff, government and industry on Medicaid reform has contributed
greatly to the overall health care reform debate.

HISTORY AND THE CONTEXT FOR REFORM

HIP was established in New York City nearly 50 years ago, as a not-for-profit or-
ganization with a mission to provide affordable health care of high quality to all
members of the community. Its mission was derived from the vision of Mayor
Fiorello LaGuardia and the distinguished public health physician Dr. George Baehr.
They challenged the medical establishment to provide all New Yorkers with access
to medical care.
Today, however, barriers to access continue.

A recent study, conducted by the Eisenhower Center at Columbia University, re-
ported on the "changing structures for delivering health care services to the poor"
in the 1980s.1 The study looked at the nation's four largest metropolitan areas; New
York, Chicago, Houston and Los Angeles. Among its findings were these alarming
observations:

Relatively early in the study, our resident analysts in Chicago, Houston, and
Los Angeles reported the progressive deterioration in the delivery of health care
to the poor and the indigent since the beginning of the 1980s. This finding ap-
peared grossly incompatible with the concurrent escalation in total national
health care outlays, from $250 billion in 1980 to over $600 billion in 1990
(about 140%), despite a generally low rate of inflation after 1982 .... The
starkest impression that emerged from the study was the incontrovertible fact
that notwithstanding $350 billion of incremental annual expenditures over the
decade, the poor and the homeless did not benefit appreciably. In fact, access
to health care for these marginal groups actually declined . . .
A second finding was the substantial variability in access of the poor to medical
care depending on the metropolitan region in which they lived. Although the
study avoided a comparative ranking of the cities with respect to access, had
one been attempted, it would probably have read in descending order: New
York, Los Angeles, Chicago, Houston ....

Irrespective of national trends and national policy, the quantity and quality of
medical care provided to the poor and uninsured in the four metropolitan
areas— and inferentially in urban areas throughout the United States— depend
primarily on the liberality or meagerness of the state Medicaid program on the
one hand and the scope of public institutions on the other, with considerable
importance attaching to the history, capacity, and practices of the voluntary sec-
tor. Outside of New York, the study found a consistent picture of severe system-
wide failure to respond adequately to the needs of the poor ....
Among the study's recommendations:

Closely linked to physician redistribution is the need to move the locus of medi-
cal care from the emergency rooms and clinics of neighborhood hospitals to al-
ternative delivery sites, specifically to conveniently located community clinics
(linked to backup hospitals) and expanded health maintenance organizations
(HMOs). . .2
Testimony presented late last year by Diane Rowland of the Kaiser Commission
on the Future of Medicaid provides clear data on the Medicaid population. "Medic-
aid, our joint federal-state program for financing health care for the low-income pop-
ulation, provides health insurance protection to 23 million non-elderly Americans,

i&nzberg, E. (1994). Improving health care for the poor: Lessons from the 1980s. Journal of
the American Medical Association, 271, 464.
2 Ginzberg, 464-467.

but still covers less than half (48%) of the non-elderly poverty population."3 Accord-
ing to the Health Care Financing Administration, "as of June 1992, thirty-six States
used managed care arrangements to serve approximately 3.6 million Medicaid re-
cipients. This represented a 35% growth from 1991 to 1992." 4 Clearly, there are
considerable numbers of fee-for-service Medicaid recipients and uninsured low-in-
come Americans who could benefit from managed care plans.

NEW YORK STATE AND MEDICAID

New York's involvement with Medicaid is notable. Controlling Medicaid costs and
ensuring access to comprehensive rather than episodic acute care has been at the
heart of New York State's effort to integrate its Medicaid population into managed
care. In 1991, the Governor signed into law the "Statewide Managed Care Act" the
goal of which shifts half the State's Medicaid population into managed care over five
years.5

Many of the proposals for national reform would similarly mainstream the Medic-
aid population into private plans. The consequences for HMOs and other managed
care providers of these changes as well as for the clients enrolled in them are con-
siderable and caution should be exercised by legislators, regulators and health plans
alike. Based on our experience and that of other plans around the country we be-
lieve managed care plans can enhance access, improve quality and control costs.

HIP AND THE MEDICAID POPULATION: LESSONS FOR REFORM

The Congressional Budget Office has recognized the efficiencies of group and staff
model HMOs.

Fully integrated HMOs with their own delivery systems are the forms of man-
aged care for which demonstrated cost savings are the greatest. CBO has esti-
mated that staff- and group-model HMOs reduce personal health expenditures
by 15 percent from their levels under traditional private health insurance with
typical coinsurance.6
Further, the CBO has found:

Moving people from fee-for-service medicine into staff- and group-model HMOs
would reduce health care spending. If everyone with health insurance were to
enroll in these HMOs, national health expenditures could decline by up to 10
percent.7
Among the reasons for the success of the group practice model is the use of a
highly selective provider network that emphasizes the use of credentialed physicians
and the designation of a primary care physician who coordinates all a member's
care; emphasis on early access and preventive care; and care that is prepaid with
limited out-of-pocket payments. The emphasis on preventive care helps providers de-
tect illness at its initial stages, making early intervention possible and helps to
avoid more costly care — often hospitalization — for advanced stages of illness. Fun-
damentally, prepaid delivery systems provide for continuity of patient care.

By 1990, the escalating cost of New York's Medicaid program, which exceeded $7
billion a year for New York City and $10 billion statewide, set the stage for a major
restructuring of health care services delivery to Medicaid recipients. HIP's experi-
ence enrolling Medicaid recipients has helped smooth this transition. Our Medicaid
enrollment as of January 1994 exceeded 76,000, or 8.1% of our total membership
in New York. HIP's Medicaid enrollment represents approximately 50% of New York
City's Medicaid recipients who receive managed care.

Problems in the fee-for-service Medicaid program persist and must be recognized
by legislators if mainstreaming Medicaid recipients into a private, reformed health
system will be successful. These problems include:

1. Lack of access to primary care;

2. Fragmented and uncoordinated care;

3. Lack of preventive care; and

4. High utilization and high cost.

3 Rowland, D. (1993, November). Meeting the health needs of the low-income population in
health reform. Testimony present to the Subcommittee on Health and the Environment, Com-
mittee on Energy and Commerce, U.S. House of Representatives, Washington, D.C.

4 Medicaid Bureau. (July 6, 1993). A health care quality improvement system for medicaid
managed care: A guide for states. Washington, D.C. Health Care Financing Administration, De-
partment of Health and Human Services.

5Chapter 165, Laws of 1991. (18 NYCRR 360-10).

6 Congressional Budget Office. (1993, July). Estimates of Health Care Proposals from the
102nd Congress. Washington, D.C.

7 Congressional Budget Office. (1993, May). Managed Competition and Its Potential to Reduce
Health Spending. Washington, D.C. U.S. Government Printing Office.

Success in providing care to Medicaid recipients requires changing the patterns
of utilization that many Medicaid recipients have developed. Most commentators
agree that Medicaid recipients, usually for want of another alternative, are accus-
tomed to fragmented and episodic care, most frequently using the emergency room
for non-emergent care. They are not accustomed to a comprehensive and methodical
approach to health care delivery. In addition to the emergency room, many Medicaid
beneficiaries will use a variety of delivery sites for care including community health
clinics, outpatient departments in public hospitals, shelters for the homeless, and
disease-specific treatment clinics for AIDS, tuberculosis and other maladies. To
change these patterns, HIP assigns a Medicaid Program Officer to each new Medic-
aid enrollee who helps orient the member to the delivery system. The role of the
Medicaid Program Officer is crucial to the success of HIP's ability to serve Medicaid
recipients. Through the use of these Medicaid Program Officers, HIP encourages
Medicaid members to make use of preventive health care services including routine
examinations, screening, prenatal care, and other preventive health services, includ-
ing the periodicity schedules for Early and Periodic Screening, Diagnostic and Treat-
ment (EPSDT) services and immunizations.

In addition, HIP has a case management program that is available to all HIP
members with chronic or complicated conditions. The case management program
assures that all services required by patients are effectively coordinated, that rou-
tine prenatal visits are scheduled, and that there is appropriate follow up on all
problems that arise. For example, all teenage mothers — many of whom are on
AFDC — are included in the case management program because they are considered
to be at risk.

We have found that these outreach, incentive and orientation programs address
the special needs of our members. HIP's attention to the special needs of our Medic-
aid enrollees does not result in the separation of Medicaid members from other HIP
members. To the contrary, all patients receive care in the same facilities and from
the same doctors. Despite these additional services, we have been able to achieve
significant financial savings.

By way of example, HIP's rate data for Medicaid compared to commercial ac-
counts demonstrates both the additional needs and costs of Medicaid recipients as
well as the savings that can be achieved from enrolling Medicaid in managed care.
HIP's basic community rated per member per month (PM/PM) premium is $128:91.
For Medicaid, additional services are added to the basic rate including dental,
drugs, optical, speech, in some instances methadone maintenance and transpor-
tation resulting in an adjusted PM/PM premium rate of $147. 10. Based on the New
York State Department of Health Data Set, had these Medicaid recipients been in
fee-for-service (FFS), their projected PM/PM costs would have been $174.15, rep-
resenting a 16% difference between HIP's Medicaid premium and what the State
would otherwise have paid. Based on HIP's September 1993 Medicaid enrollment
this translates into a total federal-state savings in FY1993-1994 of $17,854,121
(State estimate).

RECOMMENDATIONS

HIP's experience suggests that large scale reform of the Medicaid program that
would shift Medicaid recipients into managed care can be achieved successfully.
However, such a large scale change raises issues that must be addressed. The effec-
tiveness of any health care delivery system depends in large measure upon the ac-
tive participation and cooperation of those who are receiving care. There is a causal
link between the success of HIP providing care to Medicaid recipients and the fact
that each person enrolled in HIP made a decision to do so. Proposals to mainstream
Medicaid recipients into accountable health plans, many of which will be managed
care entities, offer significant potential for improving health care services, while re-
ducing the high costs of the current Medicaid program. At the same time, it is es-
sential that government and providers work together to develop solutions to poten-
tial problems that could result from a massive integration of Medicaid into private
health plans. Based on our experience, we would recommend that health reform pro-
posals that attempt to mainstream Medicaid and other special needs populations
consider the following:

1. Establish a realistic approach to costs and program goals. The desired
benefits of mainstreaming Medicaid into managed care plans can be attained
only if government continues to view cost containment goals in the context of
the overall program objectives of providing high quality comprehensive health
care. Benefits packages must be comprehensive and reflect the special needs of
low-income populations. In addition to health benefits, the costs of enabling

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services like transportation should be considered when calculating the capita-
tion rate.

2. Share the risk across all health plans. Medicaid recipients are more cost-
ly to serve than HIP's non-Medicaid population. At present, the additional cost
can be accommodated in the community rate because Medicaid membership
constitutes a reasonable proportion of the total membership, and because a sig-
nificant portion of HIP's Medicaid population is in the AFDC category.
Mainstreaming the current cash and non-cash assistance Medicaid population
presents different delivery as well as financial challenges for health plans. We
believe significantly larger numbers of members can be served well within man-
aged care plans, but only if all plans participate and do so under reformed in-
surance practices.

3. The importance of member choice. HIP's success in serving Medicaid re-
cipients appears to be linked to its members' decision to choose HIP as the
source of their medical care. Government must ensure that there is adequate
choice among health plans for all populations. To help insure greater choice in
underserved areas we would suggest that Congress allow health plans to as-
sume part or all of the educational loans primary care physicians have incurred
without such payments being deemed to be taxable income to the provider.

4. Provider selection. Legislators must understand the way in which prepaid
delivery systems operate in order to recognize proposals which seriously threat-
en HMOs and other managed care plans from operating efficiently:

a. Any-willing provider (AWP) laws: State laws which restrict an HMO's
ability to contract with a closed panel of providers or suppliers of services.
AWP laws should be federally preempted.

b. Point-of-Service (POS) products: These are products which allow en-
rol lees to seek care outside of the HMOs provider network for items and
services covered in a benefit package. POS should be permitted by not man-
dated.

c. Essential Community Providers. Funding for providers that have tra-
ditionally acted as a safety net for low income populations must be ad-
dressed. However, requiring that health plans have contracts with every
one of these providers threatens the very nature and success of closed panel
HMOs which provide comprehensive health services. Just last week, the
Health Subcommittee of the Ways and Means Committee in the other body
adopted an amendment which would require all health plans to contract
with a broadly defined universe of essential community providers. Nation-
ally, we believe this could include 3,000 city and county health clinics, 877
federally qualified health centers, 463 disproportionate share hospitals, 409
sole community hospitals, 1,470 rural health clinics, 557 Medicare depend-
ent hospitals, and tens of thousands of practitioners in health professional
shortage areas. While well intentioned, such an amendment guts an HMOs
ability to control the continuity of care, appropriate utilization of services,
contain costs, maintain a continuous medical record to evaluate outcomes
and to provide comprehensive services in a group practice setting.

5. Oversight and Quality Assurance. Because of the considerable enrollment
growth of Medicaid recipients in managed care, increased concern and attention
has been given to the development of a standardized, national quality improve-
ment program. HIP has actively participated in these efforts for both the com-
mercial as well as Medicaid populations. However, we would suggest that
health plans which demonstrate expertise and a consistent, good record be sub-
ject to less intrusive oversight. Further, health plans achieving acceptable inde-
pendent accreditation, such as NCQA certification, should be deemed to have
met some elements of the oversight and review process. To the extent that the
emphasis on managed care is aimed at providers who serve mainly non-Medic-
aid patients, it would be helpful for government to reconsider some of the more
burdensome and conflicting data requirements that are imposed on Medicaid
providers. Some of this work is underway. Over the past two years we have
made significant progress at the federal and state level concerning Medicaid re-
porting requirements. The general direction of that progress has been a decided
move away from encounter and claims data and towards "outcomes" and "per-
formance" information. Currently, HIP participates in the National Committee
for Quality Assurance (NCQA) Health Plan Employer Data Information Set
(HDIS) and its "Report Card" project which seek to develop a common set of
performance measures.

6. Uniform standards and financial solvency. HIP has worked closely with
our trade association and the HMO industry to develop health plan standards
that provide a uniform level of protection for health care consumers, including

low income individuals and families, while creating a level playing field for all
forms of health plans. These proposed standards, which have been presented to
this Committee's staff by the Group Health Association of America (GHAA), ad-
dress the health care delivery system, quality assurance, confidentiality, market
conduct, administration, and health plan fiscal health including solvency and
capitalization. HIP believes that taken together these are the most comprehen-
sive standards to date and would best serve to guarantee all Americans, includ-
ing low income populations, access to quality health care.

7. Beneficiary protections. Plans must administer formal member protections
that provide for prompt attention to member grievances. In addition to statu-
tory requirements that include disenrollment upon one months notice, internal
procedures such as the use of an ombudsman, case manager or Medicaid Pro-
gram Officer, consumer or member council, and internal grievance procedures
should be a part of any plan's beneficiary protections.

CONCLUSION

HIP's experience as a provider of comprehensive services to Medicaid recipients
has been a positive one for HIP, the members it serves and its physicians. As indi-
cated above, the savings we have achieved is also a positive result for government.
Our experience, along with those other plans around the country that enroll Medic-
aid, indicates that reform of the health care system should seek to mainstream Med-
icaid and other special needs populations into integrated health plans. With appro-
priate attention to the lessons we have learned, Medicaid recipients, like the nearly
fifty million Americans who are already enrolled in HMOs, can also benefit from im-
proved quality, accessibility and cost-effective medical care.

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Full text of "Medicaid issues under health care reform : hearing before the Committee on Finance, United States Senate, One Hundred Third Congress, second session, March 24, 1994"

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