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Looking Forward

Over its 50-year history, the Medicaid program has evolved to fill extensive gaps in our health care system, demonstrating remarkable versatility and effectiveness. But its evolution, far from smooth, has been punctuated by controversy and debate regarding who and what Medicaid should cover, who should pay, how Medicaid services should be delivered, Medicaid’s size and impact on state and federal budgets, and even its basic structure. Federal-state tensions are part and parcel of the Medicaid partnership under which states have broad flexibility to design their programs subject to federal minimum requirements and the federal government guarantees matching funds for their Medicaid spending. This compact is at the heart of the Medicaid program’s adaptability to needs and preferences that vary from state to state, and it has catalyzed significant state coverage expansions and flourishing innovation in the design of Medicaid benefits, service delivery, and payment systems. At the same time, also because of this compact, low-income Americans’ access to coverage and care depends on the state they live in and millions remain uninsured, raising major concerns about equity and exposing important costs of federalism.

As this report illustrates, notwithstanding perennial debates about Medicaid’s role, the program has been the principal vehicle of both federal and state efforts to cover the uninsured, transforming gradually from its origins as a small health care safety-net limited to those receiving welfare, into a core provider of health coverage in the U.S. today. Because of Medicaid, low-income pregnant women have access to prenatal care and their babies get a healthy start. Low-income children get recommended immunizations and other preventive and primary care. New research shows that these early benefits also yield longer-run returns in the form of higher educational attainment, earnings, and tax revenues and lower use of other public assistance. Medicaid is also the main coverage program for a large share of Americans with disabilities, many of whom need long-term services and supports for which there is no adequate private insurance alternative. And without Medicaid, it is unclear what the fate of millions of seniors unable to afford Medicare premiums or the staggering costs of long-term care would be. Separate from these standing coverage roles, Medicaid also serves as an adaptable coverage safety net during recessionary periods and public health challenges like HIV/AIDS, mitigating their harmful human and economic consequences.

By covering many of the poorest and frailest people in our society and providing comprehensive benefits, Medicaid also buttresses the other key pillars of our health insurance system. It supports and fills in gaps in private insurance and provides billions of dollars of premium payments to private insurance companies with Medicaid managed care contracts. And it shores up the Medicare program by covering nursing home care and other long-term care for elderly low- and middle-income Americans. The program also provides significant financing for providers and the health care delivery system. In particular, Medicaid payments provide core support for safety-net hospitals and health centers, the nation’s children’s hospitals, and the mental health system, and Medicaid is the major source of revenue for nursing homes and providers of home and community-based services. Medicaid coverage and financing have also been the levers of far-reaching innovation in the delivery of both health and long-term care, as states have used their programmatic flexibility and purchasing power to pioneer new models of care and payment designed to improve quality and lower costs for populations whose complex and expensive needs are a major driver of health care spending in Medicaid and system-wide.

Finally, Medicaid has large impacts on state economies. Federal Medicaid matching payments represent a large infusion of federal revenues into states and over half of all Medicaid spending. A substantial body of studies shows that these Medicaid revenues can have a stimulative effect in states.1 2 3 Namely, as states spend on Medicaid and draw down federal matching funds, the spending filters through state economies, providing increased revenues to providers, including hospitals, private physicians, health plans, nursing homes, and vendors, and, in turn, generating increased employment and productivity both within and outside the health care sector, higher earnings and household spending, and additional state and local tax revenues. Nonetheless, the high cost of the Medicaid program is a lightning rod in the context of competing priorities and balanced-budget requirements at the state level, and in the context of deficit reduction debates and deeper ideological divides at the federal level.

In considering the future of the Medicaid program, five key issues that are likely to be formative and that could play out in different ways stand out. How the debates surrounding these issues are settled will have significant implications for the Medicaid program itself and also for its impact on low-income Americans and on our health care system.

Coverage

Inequities and gaps in Medicaid coverage due to state flexibility are woven into the fabric of the Medicaid program. However, Congress’ expansions of Medicaid over time to cover uninsured Americans nationally, beginning with children, reveal evolving views regarding the boundaries of acceptable variation in coverage under the program. The ACA represents the fullest expression of this evolution. While substantially preserving other domains of state flexibility in Medicaid, the law fundamentally recast Medicaid as a national program from a coverage standpoint both by establishing a uniform national eligibility floor for nonelderly Americans regardless of where they live and by providing for nearly full federal funding of the expansion. The June 2012 Supreme Court decision, which effectively permitted states to opt out of the Medicaid expansion, might be considered the latest manifestation of the federal-state push-and-pull that has always attended Medicaid. The ruling’s disproportionate impact on access to coverage for people of color and residents of the South vividly illustrates how state flexibility in Medicaid, which can be an instrument of innovation and progress, can also hold back efforts to eliminate health and social disparities.

At this writing, the ACA Medicaid expansion has been adopted by more than half the states and millions of low-income Americans have gained coverage as a result. However, the states that have so far not adopted the expansion have left almost 4 million poor uninsured parents and childless adults without access to affordable coverage. What these states ultimately decide about the Medicaid expansion will determine whether the ACA’s vision of Medicaid as the universal program for people with low income is fully realized or, instead, the very gaps in coverage targeted by the health reform law are allowed to persist. Between Summer 2013, just prior to the first ACA open enrollment period, and January 2015, there was a net increase in Medicaid and CHIP enrollment of nearly 11.2 million individuals.4 Numerous factors besides state Medicaid expansion decisions influence Medicaid enrollment growth, including demographics, economic conditions, and take-up rates. But it is notable that enrollment growth was over three times greater in states that implemented the Medicaid expansion than in states where the expansion was not in effect (26% vs. 8%).

Adequate Financing

States’ open-ended access to federal Medicaid matching dollars has undergirded the Medicaid program’s capacity to respond as needs change due to economic vicissitudes and demographic trends, as new technologies emerge and health care costs rise, and as states move in new policy directions. The matching arrangement also gives the federal government and states common stakes in the fiscal management of Medicaid and high program performance. Still, the lack of an automatic adjustment to deal with countercyclical pressures on states remains an important challenge in Medicaid. On two occasions, during the recessions in 2001 and the late 2000s, Congress temporarily increased the federal match rate to provide fiscal relief to the states. Building a permanent mechanism that responds to recessionary pressures into the funding formula to support states could strengthen the Medicaid program.

Proposals to convert Medicaid from an entitlement to states and individuals to a federal block grant program have emerged periodically over the last 20 years and continue to be part of ongoing discussions about financing Medicaid in the future. At the heart of this debate is controversy about the appropriate level of federal financial commitment to Medicaid and whether federal funding should be capped, and about how much discretion states should have over program design. Advocates of a Medicaid restructuring that would involve capped federal funds and reduced federal requirements on eligibility and benefits believe that this approach would help to control federal spending while giving states additional levers to manage within federal funding constraints. However, others raise concerns that limiting federal funding for states would constrain Medicaid’s ability to respond to changing needs and could lock in existing differentials among states. They also argue that, if federal support were diminished, states might scale back Medicaid eligibility, benefits, and provider payment rates, jeopardizing access to coverage and care.

As implementation of the ACA proceeds, continued analysis of the fiscal implications of states’ Medicaid expansion decisions will be important. In the coming years, substantial federal funds will flow into states that expand Medicaid, with relatively small state costs. Based on evidence from earlier studies, the new funds associated with the Medicaid expansion are anticipated to have a noticeable and sustained positive impact on state economic activity.5 The high federal match under the ACA increases the economic returns of Medicaid to state economies, and states that have not adopted the Medicaid expansion, in addition to leaving millions uninsured, are leaving billions of federal dollars on the table. There is also early evidence that state Medicaid expansion decisions have substantial impacts on providers, with a recent study showing that hospitals in Medicaid expansion states saw both greater increases in Medicaid patients and decreases in uninsured patients, and much larger reductions in charity care costs, compared to hospitals in non-expansion states.6

Flexibility

The ACA has triggered new debates about state flexibility, and the large infusion of additional federal financing for Medicaid coverage in the states that adopt the expansion arguably changes the conversation. Although most states that have expanded Medicaid have done so in accordance with the ACA, a small number have secured section 1115 demonstration waivers to implement the expansion in ways that the law does not permit, and more states are pursuing such waivers as a politically viable way to expand coverage and capture the available federal dollars.7 CMS has set some limits on how states can depart from the blueprint in the ACA and exceed normal flexibility, but the agency has so far permitted states to use Medicaid funds to purchase Marketplace plans for newly eligible adults (the so-called “private option”) and to impose Medicaid premiums, cut certain benefits, and charge higher cost-sharing. These approaches, which result in heavier out-of-pocket burdens for low-income beneficiaries, have implications for access to care. Evaluation will be important to guide sound future policy.

As the federal government and states both seek to expand coverage to uninsured adults, the balance that is negotiated between the flexibility requested by states and federal minimum standards will have important implications for how the program evolves in the coming years. While new federal funding for the Medicaid expansion gives the federal government strong leverage in this negotiation, states have key leverage, too. As the federal government assesses each state’s bid, it must weigh the terms of the proposal against the possibility of no Medicaid expansion at all in the state. If history is a guide, the precedents established through section 1115 waivers could set new standards for what defines adequate Medicaid coverage and reshape the program’s role for many beneficiaries in the future. Also, future Administrations could look differently on how to move Medicaid in new directions.

Long-Term Care

With no benefits for extended long-term care under the Medicare program and few affordable options in the private insurance market, Medicaid continues to be the main payer for institutional and community-based long-term services and supports. However, Medicaid provides assistance only for people who meet an income or disability test and have few assets, and individuals who obtain Medicaid assistance for nursing home care must contribute almost of all of their income toward the cost of their care. Although most middle-class Americans cannot afford the high costs of long-term care, under our current system, they cannot qualify for help from Medicaid until they are essentially impoverished, often as a result of spending all their savings to pay for their nursing home care. In addition, although millions of seniors and younger people with disabilities have gained access to home and community-based services because of Medicaid, hundreds of thousands of others who need these services remain on waiting lists due to state Medicaid budget constraints and enrollment caps.

The prohibitive cost of long-term care and strains on access to community-based services are increasingly salient national problems as the baby-boom generation ages into older adulthood. In the coming decades, with increased life expectancy and advances in technology and medical care, the demand for long-term services will burgeon and coverage and financing needs will grow. In the absence of broader systemic change, increased investment in Medicaid would be the best way to meet current long-term care needs and to prepare for future demand. However, establishing alternative sources of assistance and financing for those who need long-term services would help to strengthen Medicaid by reducing pressure on the program and enabling Medicaid resources to be targeted to those most in need.

Innovation

Medicaid coverage and financing have been the levers of ongoing Medicaid innovation in the delivery of care. On the health care front, Medicaid programs were early adopters of primary care medical homes, now widely seen as the cornerstone of person-centered and coordinated care. Adoption of risk-based managed care in Medicaid has served as a strategy for providing access to care for children and parents, but the impact of initiatives to expand managed care to higher-need populations and to contract with managed care plans for long-term services and supports remains to be seen. Many states are pioneering new models of more highly integrated care, especially for beneficiaries with complex needs, including those with long-term care needs and dual eligible enrollees. Such delivery system reform efforts are also leading to new provider collaborations and team approaches to coordinating care. Increasing federal and state use of quality metrics in Medicaid and performance-linked payment approaches in many states show rising federal and state expectations for accountable care.

Medicaid’s impact on the long-term care delivery system has been transformative. While remaining the anchor of coverage and financing for institutional care, the Medicaid program is also responsible for vastly expanding access to home and community-based services and supports over the last two decades, and states continue to shift more long-term care spending to community settings. As a result of the incremental expansion of home and community-based services over time, states now operate around 300 separate section 1915(c) waivers, generating considerable complexity.8 Finding a mechanism to streamline the provision of these services could produce a more rational and navigable delivery system for beneficiaries and ease administrative burdens on states.

Although there is more rebalancing work to be done, especially for elderly individuals, who may have less support in the community, Medicaid benefits and financing for home and community-based services have radically reshaped the long-term care environment, enabling children with disabilities to remain at home and go to school and working-age adults to live independently in the community. By providing community-based alternatives to institutional care, Medicaid has also enabled many older Americans to age in place and set a course to address the impending long-term needs of the baby-boomers, although financing remains a pressing challenge. The profound human and social benefits and economic potential that flow from this reorganization of long-term care are fundamentally gains from the Medicaid program.

 

Medicaid’s Role in Health Care Financing Conclusion

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in Menlo Park, California.