American Voice 2004: Cutting people from Medicaid. Is that legal?

Date: 1 Jun 2004 | posted in: From the Desk of David Morris, The Public Good | 0 Facebooktwitterredditmail

Q. We hear a lot about Medicare but relatively little about Medicaid, the federal health insurance program for low-income families. Yet Medicaid actually covers more people than Medicare. My state is currently cutting people from Medicaid, even while poverty levels increase. Is that legal? Also, I understand that President Bush advocates converting Medicaid into a block grant program, similar to what was done with Aid to Families of Dependent Children in 1996. What would that do?


Let’s start with the basics. The Social Security Act of 1965 authorized Medicaid along with Medicare. Unlike Medicare, states administer their own Medicaid programs. They set benefits and determine eligibility levels, although these cannot fall below the federal minimum standards.[1] No one who meets the eligibility requirements set by states can be denied coverage.

States establish benefit levels. The federal government provides matching funds. All states receive a minimum of a 50 percent federal match, that is, they get $1 of federal funding for $1 of state spending. States with per capita incomes below the national average receive higher matches. Mississippi, with the country’s lowest per capita income, earns the highest match, 77 percent. That means that for every $1 that Mississippi invests in low-income health care coverage it receives from the federal government about $3.40.

There is no ceiling on federal Medicaid expenditures. If state spending on Medicaid increases, federal spending increases.

More than 50 million people in low-income families, half of them children, rely on Medicaid as a source of basic health insurance.[2] Medicaid also provides supplementary operating funds to hospitals, clinics, nursing homes and group homes that provide a disproportionate share of their services to the poor.[3]

Medicaid provides acute and long-term care coverage for low-income elderly and disabled people (about a quarter of Medicaid beneficiaries nationwide).[4] About 6.5 million people qualify for both Medicaid and Medicare. In these cases, Medicaid covers some Medicare expenses that would otherwise be paid by the individual, such as co-pays, co-insurance, premiums and deductibles. Services for the elderly and disabled account for about 70 percent of Medicaid expenditures.[5]

In 1997, Congress supplemented Medicaid with a program for children living in families with incomes between 100 and 200 percent of the federal poverty line. The State Children’s Health Insurance Program (SCHIP), however, unlike Medicaid is capped at $40 billion over 10 years.[6] I’ll discuss SCHIP in more detail later.

In the mid- and late-1990s, rapid economic growth reduced the number of people in poverty and thus the number enrolled in Medicaid. Welfare reforms that de-linked the application for Medicaid from the application for Temporary Assistance to Needy Families also contributed to this decline. (For more information on this and other aspects of welfare see Welfare Reform.) The economic downturn that began in 2001 had two simultaneous impacts on Medicaid: enrollment and spending soared;[7] and state tax revenues stabilized or contracted.[8]

From 1999 to 2003 the number of people enrolled in Medicaid rose by 10 million.[9] Total state and federal Medicaid spending rose from about $200 million in 2000 to $282 billion in 2003. Of the 2003 spending, $161 billion came from the federal government; $121 billion came from states.[10]

Most of this spending growth was a result of the growth in enrollment. Medical costs for Medicaid recipients also increased, but at a pace much less than health care cost increases in the country as a whole, and less than the increases in the cost of insurance from private companies.[11]

Medicaid is the second largest line item in most states’ budgets (after elementary and secondary educations) representing about 16 percent of state budgets on average.[12] In 2003, states sought to address budget gaps in part through reductions in Medicaid spending.[13]

To forestall further cuts the federal government provided $20 billion in fiscal relief to the states in 2003, with the provision that states maintain the eligibility levels in effect in September 2003. Half of the funds were provided through a temporary 2.95 percent increase in each state’s matching rate for Medicaid[14]; the other half was provided in temporary grants.[15]

The 2003 fiscal relief expired on June 30, 2004. As a result, to maintain the same level of benefits and enrollees states will have to dramatically increase their Medicaid spending. Twenty-nine states must increase state spending by $100 million or more to receive the same level of federal financing received under the fiscal relief program. Yet this year, 33 states face budget gaps totaling more than $60 billion.[16]

A number of states have already tackled rising Medicaid expenses by tightening eligibility to bring it down to the federal minimum. This can reduce the number of recipients significantly. The state of Mississippi is a case in point. In May, Governor Haley Barbour signed into law the deepest Medicaid cuts in the history of the program, eliminating from the rolls people in the Poverty Level Aged and Disabled (PLAD) category.[17] Under the old Medicaid rules in Mississippi, elderly and disabled people making less than $12,600 a year qualified. Under the new rules, that limit is around $6,800 a year. The cuts were to take effect on July 1, the day after the federal relief expired, but were pushed back to October 1.[18]

Mississippi’s Medicaid program enrolls 700,000 people (one-quarter of the state’s population of 2.8 million). Some 65,000 will be cut under the new rules.

The state received a waiver from the Department of Health and Human Services to reduce but not totally eliminate coverage to 17,000 of these 65,000 in order to pay for anti-rejection drugs after organ transplants, chemotherapy, kidney dialysis or anti-psychotic drugs. Perversely, because of a provision in the federal regulations, Mississippi’s waiver will force it to reduce Medicaid spending on other recipients. Here’s why.

Under Medicaid, if Mississippi had continued to provide full coverage for the 17,000 people, the state’s receipt of matching funds would have remain unchanged. But by reducing coverage through a waiver, Mississippi operates under different rules. Under the terms of the waiver, overall coverage provided cannot cost the federal government more than the cost of providing coverage to the total number of eligible enrollees.[19] Those covered under the waiver are no longer counted as eligible enrollees. This means that any funds used to pay for waiver services must be offset by reduced spending on those who remain on Medicaid.[20]

Most of the people cut from the Medicaid rolls in Mississippi are eligible for Medicare. The state government benefits from this shift because the costs of Medicare are paid 100 percent by the federal government. However, those cut from Medicaid are hurt because Medicare provides less coverage. For example, Medicaid pays the co-payments, deductibles and premiums of Medicare recipients with incomes at or below 100 percent of the federal poverty level. Also, unlike Medicaid, Medicare has a 100-day limit on stays in nursing care facilities, and does not cover eyeglasses or hearing aids. Most state Medicaid plans include prescription drug coverage; Medicare will not have such coverage until 2006.[21]

Some argue that the state government of Mississippi will also be hurt by these changes. They argue that because of the significant match in federal funds, Medicaid is an important stimulant to the state economy. No other state investment is guaranteed to attract $3.40 in out-of-state income for every $1 spent by the state. Moreover, most of the money is spent on health care services, the vast majority of which are provided inside the state.[22] In the case of Mississippi, the state’s Medicaid spending of $700 million a year brings in more than $2 billion in federal matching funds.

The handsome leveraging ratio for poor states also works in reverse. Mississippi expects to save around $40 million annually through recent restrictions in Medicaid eligibility and coverage.[23] The loss of federal matching funds, however, means Medicaid spending in Mississippi will actually decline by around $136 million.[24]

Some conservative organizations argue that the open-ended federal match for Medicaid encourages states to overspend. The American Legislative Exchange Council, for example, argues that a limit on the federal match is the only surefire way to control state spending.[25]

Others argue that Medicaid is a need-based program. Limiting the federal match may reduce spending but unless the need declines, this simply means that fewer people will have access to medical care.

The Bush administration wants to limit Medicaid spending by converting the Medicaid program to a block grant, with a cap on federal contributions. This is similar to what occurred with non-health-related assistance to low-income families under the 1996 welfare reform.

The President’s 2004 budget included a proposal to allow states to choose either to continue receiving Medicaid funds as matching funds, or convert to a block grant allotted in two parts – one for acute care and one for long-term care. To encourage states to make the switch, the White House asked Congress to appropriate $12.7 billion over 7 years to reward states that chose the block grant option. However, all of this up-front money would have to be paid back, by the state recipients through smaller block grant allotments in 2011, 2012 and 2013.

A bi-partisan task force convened by the National Governor’s Association to consider the proposal failed to reach agreement, effectively killing the initiative.

The White House continues to strongly encourage caps. States that receive a waiver under Section 1115 of Medicaid[26] have been required to accept caps on federal funding even when the state is planning to use the waiver to reduce rather than expand Medicaid eligibility or coverage. For example, the state of Washington had to accept a cap when it sought to impose premiums on children. Florida’s Pharmacy Plus waiver[27] approval includes a $16.7 billion cap on federal matching payments for all services for seniors over the five-year life of the waiver. States unwilling to accept the global cap were not granted waivers.[28]

The President’s 2005 budget does not include a block grant proposal. But it declares its intention to allow states to choose to receive their Medicaid funds “in the form of flexible allotments.”[29] In February 2004 New Hampshire’s governor announced that his state would be the first to test a block grant program.[30] The governors of California, Connecticut and Florida have indicated that they will consider the option. However, the legislatures of New Hampshire and Connecticut have enacted legislation that prohibits the plans from being implemented without their consent.

If Medicaid were converted into a block grant program the spending dynamics may be similar to those under the 1996 AFDC/TANF block grant program. (See Welfare Reform for detailed information.) The states would gain an initial benefit because of the upfront increase in federal spending but over time the federal money available to them would significantly fall below the growing need. One study by the New Hampshire Endowment for Health estimated that the state could lose between $50 million and $190 million over 5 years if it agrees to a cap on federal payments.[31]

As for the State Children’s Health Insurance Program (SCHIP), it is already capped. In the initial years states ran surpluses because enrollment was slow. But it grew rapidly from 1 million in 1998 to 4 million in 2003. As a result, the overall percentage of uninsured poor children was reduced from 22.4 percent in 1997 to 15.4 percent in 2003.[32]

Spending for SCHIP has exceeded annual allocations in many states for several years.

Excess SCHIP costs in recent years have been covered by the surpluses generated in earlier years, and from the willingness of the federal government to reallocate unspent funds among states that have fully used their allotments. But the provision allowing this shift of unspent funds was struck from this year’s budget.[33] Bi-partisan Congressional legislation to preserve that provision was introduced in July, but never made it out of committee.[34] Thus on September 30th, $1.1 billion was returned to the federal treasury. As a result six states will run out of money this year for SCHIP. Seventeen more states are expected to run out of money by 2007, unless they cut enrollment by as many as 200,000 children.[35]

Compounding the problem for states is that the SCHIP program, although set at $40 billion over 10 years, sharply reduces the amount available in the middle years. In 1998 through 2001 the federal payment is $4.2 billion a year. In 2001 and 2002 it drops to $3.1 billion and in 2003 to $3.2 billion. In 2004 and 2005 it increases again to $4.1 billion.[36]

With budget deficits, reduced federal matching funds and a deep-seated reluctance to raise taxes, states have imposed a number of measures reduce the number of children eligible for SCHIP. States have also increased premiums and cost sharing to limit the growth in spending per child, shifting more costs to low-income families.[37]

Between June 2003 and December 2003 the national SCHIP program enrollment declined by 1 percent, about 37,000 children.[38]

Lost in the acronyms and the complex analysis is the stark fact that one way or the other society often ends up paying to cover health care costs for the poor. The uninsured are four times more likely to use the emergency room as a regular source of care than people who have insurance.[39] The cost of uncompensated care (medical services that are paid neither by an insurance company nor by the individual) is over $30 billion annually, most of it paid by federal, state and local governments.[40]


[1] The federal government requires states to provide Medicaid coverage to: individuals who met the eligibility requirements for AFDC as they were in effect in 1996; pregnant women and children under age 6 whose family income is at or below 133 percent of the poverty level; Supplemental Security Income Recipients; recipients of adoption or foster care assistance; individuals who lose their cash assistance from work or from increased Social Security benefits but are entitled to Medicaid for a period of time; and low-income Medicare beneficiaries.

Virtually all states have eligibility guidelines that include more people than the federal required minimum. U.S. Department of Health and Human Services, Medicaid: A Brief Summary.

[2] Some 40 million people are covered by Medicare. About 6.5 million of the low-income elderly people are eligible for both Medicare and Medicaid.

[3] These payments are called Disproportionate Share Hospital (DSH) payments. Both the Medicare and Medicaid programs have made additional payments to hospitals that serve a disproportionate number of low-income patients. Medicare DSH payments total about $4.7 billion annually, Medicaid DSH payments total about $15.5 billion.

[4] U.S. Department of Health and Human Services, Medicaid: A Brief Summary.

[5] John Holahan and Brian Bruen, “Medicaid Spending: What Factors Contributed to the Growth Between 2000 and 2002?” Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, September 2003

[6] States may either expand their Medicaid coverage with SCHIP, in which case the eligibility rules of Medicaid apply, or establish a new program. If a state opts for a separate program, it can choose to enforce enrollment caps and waiting lists for coverage. U.S. Department of Health and Human Services, State Children’s Health Insurance Program Summary.

[7] Between 2000 and 2001 the number of Americans living in families with incomes below 200 percent of the poverty level increased by 3.1 million, while the overall population increased by only 2.6 million. At the same time the rate of employer-sponsored health insurance declined by 2.2 percent for adults and 1.3 percent for children. John Holahan and Brian Bruen, “Medicaid Spending: What Factors Contributed to the Growth Between 2000 and 2002?” Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, September 2003.

[8] Compounding the state budget problem were the permanent tax cuts enacted in states during the late 1990s when the economic boom generated budget surpluses from significant but temporary increases in tax revenues. In 2001 state budget revenue was about $40 billion lower than it would have been if these cuts had not been enacted. Nicholas Johnson, The State Tax Cuts of the 1990s, the Current Revenue Crisis, and Implications for State Services, Center on Budget and Policy Priorities, November 18, 2002.

[9] Eileen Ellis, Vernon Smith and David Rousseau, Medicaid Enrollment in 50 States: December 2002 Data Update, The Kaiser Commission on Medicaid and the Uninsured, December 2003.

[10] Congressional Budget Office, Fact Sheet for March 2004 – Medicaid and the State Children’s Health Insurance Program.

[11] Medicaid spending per enrollee increased 8.6 percent from 2000 to 2002. Per capita health care expenditures increased at twice that rate. National health expenditures per capita, including public health expenditures and spending by people without insurance, increased by 7.7 percent in 2001 and 7.8 percent in 2002. Stephen Heffler et al, “Health Spending Projections for 2002 – 2012“, Health Affairs, February 7, 2003. The Center for Studying Health Systems Change estimates that health care spending per person with private insurance increased by 10 percent in 2001 and 9.6 percent in 2002. Bradley Strunk and Paul Ginsburg, “Tracking Health Care Costs: Trends Stabilize but Remain High in 2002“, Health Affairs, June 11, 2003. The Kaiser Family Foundation and the Hospital Research and Educational Trust found that private insurance premiums increased by 11 percent in 2001 and 12.7 percent in 2002. Employer Health Benefits: 2002 Annual Survey, September 2002.

[12] Unlike the federal government, states cannot run deficits. When facing a revenue shortfall they must balance their budgets through increased taxes or cuts in programs.

[13] In 2003, 46 states implemented rules that restricted the list of covered medicines, 25 restricted eligibility, 18 increased co-payments and 18 reduced benefits Kaiser Family Foundation, Kaiser Commission on Medicaid Facts, State Fiscal Conditions and Medicaid, April 2004.

[14] Thus a state with a 50 percent match saw its matching percentage rise to 52.95 percent.

[15] Kaiser Family Foundation, Kaiser Commission on Medicaid Facts, State Fiscal Conditions and Medicaid, April 2004.

[16] A bill introduced in the Senate to extend the fiscal relief program was referred to the Senate Finance Committee in July. Elizabeth Pham and Emil Parker, “Decline in the Federal Medicaid Match Rate Hits States Hard”, Children’s Defense Fund, July 16, 2004.

[17] Mississippi has a budget shortfall in part because of increases in Medicaid spending, which totaled $100 million from 2002 to 2003. Democrats in the state legislature proposed to cover the shortfall with an increase in cigarette taxes. “We’re not in the worst financial mess in the history of our state because we tax too little. It’s because we spend too much,” said Governor Barbour. In Mississippi, the cigarette tax is 18 cents a pack. The national average is 72 cents a pack. PBS NOW, July 16, 2004.

[18] A lawsuit was filed on September 28 to prevent the changes from coming into effect.

[19] The Mississippi waiver includes a “budget neutrality” clause, which says the federal cost of services provided during the demonstration can be no more than the cost to provide Medicaid services without the demonstration. Centers for Medicare and Medicaid Services, Healthier Mississippi.

[20] There are two types of Medicaid waivers: Section 1915 waivers that are targeted to specific aspects of the program, for example, providing home-based care to people with disabilities; and Section 1115 waivers that can be broader in scope, for example, extending coverage beyond the categories covered by federal matching funds. When a state applies for a Section 1115 waiver, the Centers for Medicare and Medicaid Services compares the projected federal costs with and without the waiver for the period covered by the waiver. These costs must balance. The cap on federal funds can be per capita, in which case it is based on the state’s historical cost of serving the categories of people covered under the wavier, and the per capita amount is adjusted upward annually by a preset amount included in the waiver agreement. In this case, the state cannot claim more than the per person amount times the number of people enrolled under the waiver, even if the increases in per person health care costs are greater than projected. The other possibility is a global cap, which sets an overall limit on federal funds that will be spent on services under the waiver. In this case, the state assumes the risks both of higher than projected costs and of higher than projected enrollment. In the past states have generally implemented mandatory managed care to create these savings, or redirected federal Disproportionate Share Hospital payments toward coverage. Under the Health Insurance Flexibility and Accountability guidelines issued by the Department of Health and Human Services in 2001, states are encouraged to find savings by reducing benefits or increasing cost sharing for Medicaid enrollees. Recently states have been required to accept caps on federal funding even when the state is planning to use the waiver to reduce rather than expand Medicaid eligibility or coverage.

[21] “Retreating on Health Care”, The Commercial Appeal, September 13, 2004. The TennCare program in Mississippi’s neighboring state already operates as a waiver program. Now it is seeking federal approval for changes that will put new limits on prescription drugs, hospital and medical care and introduce higher premium and co-pay schedules. The changes would affect about 270,000 of the TennCare’s 1.3 million enrollees.

[22] Families USA estimated that in 2003. Mississippi would experience the greatest job loss per million-dollar cut in Medicaid (72 jobs, compared to a national average of 37), and would lose the most business activity per million-dollar cut ($6.5 million, compared to a national average of $3.4 million). Families USA, “Medicaid: Good Medicine for State Economies“. January 2003.

[23] Clarion-Ledger, July 11, 2004.

[24] Kaiser Commission on Medicaid and the Uninsured, The Role of Medicaid in State Economies: A Look at the Research, Kaiser Family Foundation, April 2004.

[25] American Legislative Exchange Council, Medicaid’s Perverse Incentives, July 2004.

[26] See footnote 20.

[27] After the enactment of the new Medicare drug law, the Department of Health and Human Services began promoting “Pharmacy Plus” waivers, under which states could provide pharmacy-only benefits to seniors or people with disabilities above the state’s Medicaid eligibility standards. Centers for Medicaid and Medicare Services, Center for Medicaid and State Operations, Pharmacy Plus: A Demonstration Program Under Section 1115, July 31, 2003.

[28] J. Guyer, “The Financing of Pharmacy Plus Waivers”, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, May 2003; U.S. Government Accountability Office, “Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns”, June 30, 2004; Cindy Mann, Financing Under Federal Medicaid and Section 1115 Waivers, Georgetown University Health Policy Institute, September 9, 2004

[29]Department of Health and Human Services FY 2005 Budget in Brief, page 62.

[30] After New Hampshire Governor Craig Benson met with DHHS Secretary Tommy Thompson, the state received approval for $8.4 million in federal reimbursements dating back two years, and permission to continue through 2005 the state’s use of “Medicaid enhancement” to fund acute and long-term care for the poor and close budget gaps. Miami Herald, February 20, 200; Portsmouth Herald, September 10, 2004. A little context may be in order. New Hampshire has for many years transferred federal Disproportionate Hospital Share payments (see note 3 above) to its General Fund to balance the budget rather than to pay for Medicaid services. In 2004 the Center for Medicare and Medicaid Services took action to require New Hampshire to change its method for calculating the hospital provider tax, which will reduce the state’s receipt of DSH funds by about $100 million a year. The loss of these funds, which have never been used for the state’s Medicaid program, has been cited as a major reason the program must be restructured, possibly as a block grant. Cindy Mann, Financing Under Federal Medicaid and Section 1115 Waivers, Georgetown University Health Policy Institute, September 9, 2004.

[31] Associated Press, September 10, 2004.

[32] Kaiser Commission on the Uninsured, Kaiser Family Foundation, July 2004.

[33] The Bush administration argues that the $1 billion of funds lost to the states is being made up by the $1 billion allocated for a new “Cover the Kids” campaign. The money will be distributed over the next two years to states, community groups and religious organizations to foster “a new, community-based approach to enrolling kids in SCHIP.” Others argue that this money is for increasing enrollment, not for increasing services and increased enrollment will simply exacerbate the existing problem of insufficient funds to cover the increased demand. Washington Post, September 25, 2004.

[34] S. 2759 and H.R. 4936 to amend Title XXI of the Social Security Act to modify rules relating to the availability of unexpended SHIP allotments were referred to the Committee on Finance and the Subcommittee on Health, respectively, and have not received further action.

[35] Edwin Park and Matt Broaddus, Congress Can Preserve $1.1 Billion in Expiring Children’s Health Insurance Funds and Help Avert SCHIP Cutbacks, Center on Budget and Policy Priorities, September 24, 2004.

[36] In 2007 $5 billion is allocated.

[37] Ian Hill, Holly Stockdale and Brigette Courtot, Squeezing SCHIP: States Use Flexibility to Respond to the Ongoing Budget Crisis, The Urban Institute, June 2004.

[38] Thirty-seven states actually had enrollment increases, but 11 states and the District of Columbia had offsetting enrollment declines of 145,000. More than half of the decline was in Texas, where fiscal year 2004 began with a legislative directive to cut SCHIP enrollment by over 100,000 children primarily through more restrictive eligibility and enrollment procedures. Kaiser Commission on the Uninsured, Kaiser Family Foundation. July 2004.

[39] Robert Wood Johnson Foundation, Covering the Uninsured.

[40] In 2001 the federal government spent an estimated $20 billion for the uninsured, in the form f DSH payments and support for clinics. State and local governments spent an additional $10 billion. Jack Hadley and John Holahan, “Who Pays and How Much? The cost of caring for the uninsured“, Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, February 2003.

David Morris
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David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.