Medicaid and the Continuing Budget Fight:
Principles to Guide Medicaid Action

June 8, 2005

On April 28, 2005, Congress adopted a budget resolution that, among other things, could lead to very significant and harmful cuts to Medicaid. The resolution requires the Senate Finance Committee to identify $10 billion in budget cuts over the next five years. Similarly, it requires the House Energy and Commerce Committee to propose $14.7 billion in cuts over the same period. The cuts identified by these committees will be included in an omnibus budget reconciliation bill.

Although the budget resolution does not explicitly direct these cuts to come from any specific programs, Medicaid has clearly been targeted. The Bush Administration, through Health and Human Services (HHS) Secretary Mike Leavitt, has made it clear that it wants the $10 billion in Finance Committee budget cuts to come from Medicaid. The HHS Secretary has announced a new Medicaid Commission that has two stated purposes: first, the Commission will be asked to make recommendations by September 1, 2005 for achieving $10 billion in Medicaid cuts; and second, the Commission is expected to issue a more comprehensive report on long-term changes to the program by December 31, 2006.

As many organizations argued during the process of developing the budget resolution, reducing the federal commitment to Medicaid is likely to intensify the health care cost pressures that states are already facing and amplify risks leading states to institute additional, larger Medicaid reductions that could increase the number of low-income people who are uninsured or underinsured.  As Congress turns its attention to developing specific policies to reduce federal Medicaid expenditures, much is at stake.  The Senate Finance and House Energy and Commerce Committees will mark up their proposed budget cuts for inclusion in the reconciliation bill; these Committees must complete this work by September 16.

First, it is important to emphasize that there is no requirement to cut $10 billion from Medicaid. The cuts can occur through savings in other programs and at least portions of these expected savings should come from other programs not targeted toward low-income Americans. To the extent that Congress seeks budget savings from the Medicaid program, certain principles should guide their work. This document suggests what those principles should be and ways in which some Medicaid savings can be achieved while protecting from harm the very people Medicaid was designed to serve. The principles include the following:

• Health and long-term care coverage must continue to be guaranteed for those who qualify for Medicaid. Like Medicare, Medicaid assures that people who qualify must be enrolled and not be placed on waiting lists. Any changes in this basic principle would leave vulnerable people without access to health care, undermining the very purpose of the Medicaid program.
  
• Financing should continue to be fully shared between the federal government and the states without caps. Today, the federal government guarantees to states that it will pay at least half of Medicaid's costs. Policies that shift costs and risks to the states or that impose caps on federal payments to the states (such as block grants) will lead to fiscal burdens on the states that they cannot afford and will result in significant cutbacks of coverage and a weakening of the health care system.
  
• Benefits and cost-sharing should reflect the needs and economic circumstances of the people served by Medicaid. The Medicaid benefit package should be comprehensive and ensure that people are able to access benefits they need. Needed medical services should be available and affordable to the elderly, children, people with disabilities, and other adults covered by the program whose low incomes make it impossible for them to afford significant out-of-pocket costs. Changes that would effectively deny access to needed care or saddle low-income people and their families with costs they cannot afford to pay are counterproductive and inconsistent with the program's mission.

As the process moves forward, cost efficiencies should be identified that would not harm the vulnerable populations Medicaid serves and that could strengthen the program's sustainability. Among the cost efficiencies that are worthy of consideration are the following:

• Prescription drug cost containment: Changes could be instituted to help the federal government and the states reduce the rapidly increasing costs of prescription drugs. Such policies would need to be crafted carefully with appropriate safeguards to ensure that people are able to get the drugs they need and Medicaid gets the best price possible for drugs, and to encourage responsible prescribing, dispensing, and utilization of drugs. Strategies that may be worth considering include: changing the formula for calculating Medicaid "best price" and Medicaid rebates; changing the reimbursement rates to pharmacists for dispensing drugs; and improving the management of the prescription drug rebate program.
  
• Protecting program integrity: Medicaid already does a better job of holding down health care costs than the private market, but policies that increase efficiency by improving the integrity of the program should be considered.  If at times a small number of those who make money from Medicaid engage in activities that result in inappropriate or excessive payments at the expense of the program and those who depend on it, these problems should be addressed.  This is an area that needs to be explored carefully to see if budget savings can be achieved in ways that would strengthen program integrity and assist states while protecting low-income people and families.

Center on Budget and Policy Priorities         *            Families USA