Understanding Medicaid

Is MassHealth state government's problem child — or its workhorse?

When Christine St. Pierre was diagnosed a few years ago with diabetes, her doctor suggested it was time to give up living on her own. After all, she had already had a stroke and a heart bypass operation. But she refused.

“I wouldn’t go into a nursing home,” says St. Pierre. But she wasn’t doing well at home, either. She became depressed, venturing out of her senior housing apartment in Peabody only on weekends to go shopping. When she returned home, all she would do is watch TV and feel miserable. “Everything was bothering me,” she says. “I was on my deathbed.”

A drop-in senior center in Lynn saved Christine St. Pierre
from a nursing home—and saved the state a lot of money.

Then a social worker told St. Pierre’s daughter, Linda, about PACE, or Program of All-Inclusive Care for the Elderly. It wasn’t a nursing home. In fact, it was an alternative to one. It would give Linda’s mother a place to go during the day, a place where she could socialize but also have her blood sugar monitored and receive other medical care as needed.

“I’ll never leave this place,” the 84-year-old St. Pierre says happily as she sits in the day center in downtown Lynn, which is operated by the Elder Service Plan of the North Shore. (The nonprofit organization also runs two other day centers in Lynn and one in Beverly, all funded through the PACE program.) St. Pierre moved to an apartment in Lynn to be closer to the center, which she visits five days a week. She says it gives her a reason to get up in the morning. “This program has helped me very, very much,” she says.

Like all participants, St. Pierre receives services based on a care plan developed by a team of specialists, including a doctor, a nurse practitioner, social workers, rehabilitation specialists, and nutritionists. The program’s clinicians say St. Pierre has no need for a nursing home now. And the care she receives through PACE costs the state about half as much as it would if she were in a nursing home.

St. Pierre is part of a cutting-edge experiment in health care delivery not only in Massachusetts, but nationwide. The outcome of this experiment is eagerly awaited by a wide range of players in Massachusetts’s publicly funded health care system: physicians, health care administrators, advocates for the poor, and members of the Romney administration. The governor has proposed investing $140 million in taxpayer money on an expanded version of PACE, called Senior Care Options, in the coming fiscal year. Senior Care Options promises to provide alternatives to nursing home care that are not only more palatable to elders like St. Pierre but also less costly to the state, which pays for nursing home care through Medicaid.

With long-term care accounting for an estimated 25 percent of total Medicaid expenditures, the state is increasingly desperate for ways to control costs. In Massachusetts and elsewhere, Medicaid is the largest and fastest-growing part of government, threatening to swamp state budgets across the country. Some officials, including Secretary of Administration and Finance Eric Kriss, say that unless Medicaid spending is reined in, there may one day be little left in the state budget to fund anything else.

Medicaid is once again a raging bull.

If this alarmist message sounds familiar, it may be because Medicaid was first dubbed a “budget buster” back in 1990. The term was coined by former state senator Patricia McGovern, when she was chairman of the Senate Committee on Ways and Means. At the time, Massachusetts was in the midst of a major budget crisis similar in proportion to the one that began in fiscal 2002 and is not yet over.

Between these budget crises, however, it seemed that the Medicaid spending beast had been tamed. Not only that, Medicaid, because its costs are partly defrayed by the federal government, became the favored financing vehicle for an array of government services to the needy and disabled. Indeed, in the ’90s, Medicaid became the workhorse of the state’s publicly funded health care system. Now the program has turned back into a raging bull, overgrown and out of control.

Or has it? Medicaid may be the single biggest program run by the state, but half of its expenditures are covered by the federal government, which makes every service the state can shift into Medicaid something of a bargain. Overall, in fact, more state dollars are shelled out on education than on Medicaid. And if the rise in spending is the problem, some say that Medicaid is not to blame; health care costs are rising across the board.

“Medicaid is the tail, not the dog,” says John McDonough, executive director of Health Care for All, a grass-roots health advocacy group, and former House chairman of the Legislature’s health care committee. “When medical spending goes up, Medicaid spending goes up. When medical spending goes down, Medicaid goes down.”

What is Medicaid?

Medicaid is a joint state and federal program administered in Massachusetts by the Office of Medicaid within the Executive Office of Health and Human Services. Known here as MassHealth, Medicaid pays for nursing home, hospital, and other medical services for more than 913,000 men, women, and children in Massachusetts. Recipients include low-income women and children, the disabled, the long-term unemployed, and the elderly. While most individuals and families covered by Medicaid have incomes close to the federal poverty level, not all MassHealth recipients are poor. Disabled adults are eligible for coverage no matter their financial circumstances. And nursing home residents can qualify for Medicaid coverage by “spending down” most of their assets or by transferring them to other individuals at least three years ahead of time, or placing them in an asset trust at least five years ahead of time.

Medicaid was established in 1965, the same year as Medicare, but the two programs are very different. Medicare provides health coverage for all people over age 65 and some younger people with permanent disabilities, while Medicaid covers “vulnerable populations” of all ages. Medicare covers only medical expenses, including, in the future, prescription-drug costs under a controversial new law passed last year, but Medicaid pays for a wide range of medical and “medically related” services, including long-term care, that Medicare does not cover. Finally, Medicare is paid for and administered by the federal government, whereas Medicaid is state administered, with the feds providing partial reimbursement. Wealthier states, like Massachusetts, get 50 percent of the costs back on most Medicaid expenditures, while poorer states, like Mississippi, can get up to 75 percent covered by the feds.

Although states run their own Medicaid programs, the federal government sets the rules—or at least the param-eters. According to the Massachusetts Health Policy Forum, a consortium of health care scholars based at the Heller School for Social Policy and Management at Brandeis University, the feds require, among other things, that the states provide Medicaid coverage to children under age 6 in families with incomes below 133 percent of the federal poverty level; to pregnant women in families with incomes below 133 percent of the poverty level; and to children between 6 and 17 in families with incomes below the poverty level. States must also provide Medicaid coverage to elderly, blind, and disabled individuals who are eligible for Supplemental Security Income (SSI) and to certain low-income Medicare beneficiaries. In addition, states have the option of providing coverage for up to 30 other services.

Mandatory benefits for all Medicaid enrollees include inpatient and outpatient hospital treatment, visits to physicians, visits to rural health clinics and federally qualified health centers, medical and surgical dental services, nurse-midwife services, and some prenatal care. Optional services include prescription drugs, individual case management sessions, and preventive and rehabilitative services. Massachusetts has long had one of the more generous Medicaid programs in the country, although several other high-income states, such as California and Minnesota, have provided even more comprehensive benefits. At the beginning of 2002, Massachusetts covered 25 of the 30 optional benefits, according to the Health Policy Forum. However, the state eliminated several of these benefits later that year.

This menu of mandatory and optional services helped turn Medicaid into a health care catch-all. Ron Preston, state secretary of health and human services and a former federal administrator, says this phenomenon dates back to the 1980s, when Congress responded to the Reagan administration’s attempts to reduce discretionary spending by expanding entitlements like Medicaid.

“[They] turned Medicaid into the broadest coverage that exists anywhere in the world,” Preston asserts. “Even countries that have universal health care don’t have coverage like this.” It includes not only nursing homes, but also long-term care in other forms, as well as various social and support services, including those provided by many state agencies. “There are very few places in the health and human services agencies where you won’t find Medicaid someplace.” In the coming fiscal year, Preston says, Medicaid will make up roughly 70 percent of the state’s health and human services budget—or $8 billion out of $11 billion in spending.

Taming the beast

The roots of today’s MassHealth massiveness can also be found in the state’s earlier “budget buster” days. Shortly before McGovern coined the phrase in 1990, Bruce Bullen left his job as her committee’s budget director to join the administration of William Weld, who had just won the governorship. Bullen became head of Medicaid under Charles Baker, the undersecretary for health who became secretary of health and human services (and, subsequently, secretary of administration and finance), and together the two set out to bring the Medicaid program to heel.

As state Medicaid chief, Bruce Bullen reformed the
program to “exercise its purchasing leverage.”

Bullen, who is now chief operating officer at Harvard Pilgrim Health Care (where he works, once again, for Baker, who is CEO), says he and Baker decided Medicaid should “start to exercise its purchasing leverage.” Previously, Medicaid had been a “passive” payer, he says, reimbursing providers for health care bills after the fact—and on their terms. Consistent with the effort then underway to deregulate the hospital payment system, Medicaid, like private insurers, was given the authority to enter into contracts with hospitals and other providers to set payment rates. Among other initiatives, Baker and Bullen also changed the method for paying nursing homes to reflect the level of care needed for each resident. And they moved “aggressively,” Bullen says, to leverage federal Medicare funding for Medicaid programs that mostly served the elderly. For example, they encouraged the nursing home industry to create “Medicare units” within nursing homes, primarily for patients who were recently discharged from hospitals but still needed medical care. They instituted policies to make sure nursing homes could bill Medicare for certain nursing home services, with Medicaid picking up the tab only for what Medicare wouldn’t cover. More controversially, they also introduced managed care to Medicaid, drawing the ire of advocates for the poor, but also bringing the program more into line with private health-insurance practices.

While working to hold down cost increases in services traditionally covered by Medicaid, they also did everything they could to shift programs that had previously been funded fully by the state into Medicaid, in order to gain federal reimbursement. For example, a movement to close down antiquated state mental hospitals led to increased use of acute-care psychiatric facilities, where services could be billed to Medicaid.

Many of these initiatives worked to control Medicaid costs and improve care at the same time, Bullen says. For instance, as a result of a new system providing higher payments for frail residents, nursing homes began competing for “higher acuity,” or higher need, patients, a move that, over a 10-year period, shifted healthier individuals to lower-cost home care, assisted living, and community programs. Millions of new federal Medicaid dollars flowed into state coffers to help pay for the programs. In 1998, according to Bullen, he and Baker obtained a waiver from the federal government to funnel Medicare, as well as Medicaid, dollars to programs like the Romney administration’s proposed Senior Care Options program, which will fund preventive health care and home-based services as alternatives to nursing homes.

Other initiatives were more controversial. The Weld administration’s effort to privatize public health hospitals and state facilities for the mentally ill and mentally retarded caused a political uproar, and the Legislature put on the brakes in the form of the Pacheco Law. In addition, the pursuit of Medicare funds for nursing home and other programs by Massachusetts and other states alarmed the feds, who cracked down on the practice.

Still, Medicaid costs did plateau, with the former budget buster remaining a fairly constant portion of the state budget—about 20 percent—from the mid-1990s to 2000. But John McDonough says it’s not entirely clear who should get the credit. “The truth is, Medicaid was brought under control in all 50 states” at that time, reflecting a period of moderate health care inflation overall, he says. Baker and Bullen “deserve credit for a lot of stuff they did,” says McDonough, who for a time sat on the Harvard Pilgrim board of directors. “But I’m not sure they can really claim, ‘We conquered Medicaid spending.’ If they really did do that, then I say, ‘Bruce, come on back and do it again, because we sure as hell need you right now.'”

Medicaid for all?

By 2001, Medicaid costs were once again on a sharp incline, gobbling up an expanding share of an increasingly strained state budget. This year, MassHealth is projected to eat up 28 percent of state spending, and it could edge toward 30 percent of the budget next year. (And that’s without counting Medicaid funds—$1.3 billion next year—spent through other agencies, such as the Department of Mental Health, but not included in the proposed $6.7 billion MassHealth appropriation.) Some critics blame this return to budget-buster status on the major MassHealth expansions of the 1990s, particularly those intended to reduce the number of uninsured or underinsured state residents.

This expanded coverage—and many of the managed-care initiatives of the mid’90s—become possible because the Weld administration received federal waivers, in accordance with a policy giving the states greater flexibility. One such waiver allowed the state to expand Medicaid coverage for underinsured low-income families, children, and individuals in 1996.

In 1998, the federal State Children’s Health Insurance Program brought even more people under the Medicaid tent. Under SCHIP, families making as much as 200 percent of the federal poverty level could get coverage for children ages 1 to 5, up from the old eligibility level of 133 percent. Coverage was also expanded for pregnant women and the disabled, and extended to persons with HIV and the long-term unemployed.

As a result of these expansions, MassHealth enrollment rose by more than 300,000 people between 1997 and 2002, according to an analysis prepared for the Massachusetts Health Policy Forum. At the same time, the number of uninsured residents in Massachusetts declined from just under 700,000 in 1996 to about 365,000 in 2000.

The new eligibility rules helped to give Massachusetts one of the smallest populations lacking health insurance in the country, but it also helped to make MassHealth “the BMW of entitlements,” according to state Rep. Harriett Stanley, a Democrat from Merrimac. Last year, when she was House chairman of the Health Care Committee, Stanley wrote a paper titled Re-engineering Medicaid, which won the annual “Better Government Competition” sponsored by the Pioneer Institute for Public Policy Research. Stanley charged that MassHealth “has grown far beyond its original purpose as a safety net for those residents with no other health care options.” She urged that Medicaid move toward a “Ford” model, with “fewer options and more premiums and co-payments.”

Defenders of the MassHealth expansions claim that the 300,000 recipients added to the program since 1996 were covered at no additional cost to the state’s General Fund. According to Health Care for All, funding came from a 25-cent tobacco tax passed in 1996, transfers from the state’s Uncompensated Care Pool (which is funded partly by hospitals and insurers and partly by the state), and existing money in the Emergency Aid to the Elderly, Disabled, and Children cash assistance program. New federal money to support medical care for special education students, the mentally retarded, and other populations also helped to defray the cost of new MassHealth members.

But Stanley argued in her paper that “some of the financial underpinning” of the expansion “didn’t work as planned.” She noted that Uncompensated Care Pool costs continued to rise, putting further strains on hospitals; that cigarette taxes didn’t contribute sufficient revenues to offset increased costs; and that a number of managed care initiatives didn’t reduce costs sufficiently. Contrary to Health Care for All’s analysis, Stanley maintained that “the state’s health care providers and General Fund have been supporting the MassHealth expansions of the mid-1990s.”

Former Medicaid chief Bullen says that, in understanding Medicaid’s cost explosion, the expansions of the past decade are a red herring. “It’s surprising to me that sober analysts look at the problem and conclude that the MassHealth expansion is the reason that Medicaid has turned into a budget buster,” he says. He points out that the populations served by the expansion have, by and large, been less costly to the program than the two major groups that have always been covered by Medicaid—the elderly and the disabled.

Indeed, the Health Policy Forum analysis notes that the MassHealth recipients added since 1996 accounted for only one-third of the increase in Medicaid spending between fiscal 1997 and 2002. Long-term and acute care for the disabled and elderly accounted for most of the increase. While the two groups comprise only 32 percent of MassHealth members, they use 71 percent of the spending for MassHealth services. In fiscal 2001, MassHealth spent an average of $2,022 for each member of a family enrolled in the program and $3,460 for each long-term unemployed adult eligible for assistance. That compares with $8,723 for each non-elderly disabled adult and $17,515 for each elderly enrollee.

A dollar short

Whether or not the growth of MassHealth from roughly 670,000 to nearly 1 million Massachusetts residents turned the program back into a budget buster, it did heighten a longstanding complaint of health care providers—including hospitals, nursing homes, and community health centers—that when it comes to paying its bills, Medicaid is a cheat. Matt Fishman, director of community benefits programs at Partners HealthCare System, contends that MassHealth currently pays hospitals in Massachusetts less than 70 cents on the dollar of their costs. The hospitals in the Partners system overall are being paid about 55 cents on the dollar, he says, while teaching hospitals are receiving as little as 50 cents.

Administration officials don’t disagree that providers are underpaid. Speaking to the Greater Boston Chamber of Commerce in February, Gov. Romney himself acknowledged, “like all states, [Massachusetts has been] under-reimbursing providers for their full cost of treating Medicaid patients.” By how much is another matter. “No one other than the hospitals knows what their ‘costs’ are and every hospital seems to have its own method for determining those ‘costs,'” says Executive Office of Health and Human Services spokesman Richard Powers in a written statement. “Only the hospitals themselves know how creative their accounting is.”

In any case, the shortchanging is not over. The governor has proposed $152 million in “savings initiatives” that include cuts in MassHealth payments to acute hospitals and nursing homes, pharmacy providers, rehabilitation hospitals, and durable medical equipment vendors. But providers say such cutbacks don’t “save” anything; they simply shift costs to the providers themselves—and, where providers are able to pass them along, to other payers, such as private health insurers and the employers who pay the premiums. The Massachusetts Hospital Association contends that “the administration’s 2005 budget will impact hospitals negatively by approximately $500 million, which comes on top of years of consistently inadequate payment levels.” In addition, the Massachusetts Extended Care Federation projects that nursing homes might have to cut their workforce by as many as 3,800 jobs across the state if the Legislature were to let the administration’s budget proposals stand.

Rep. Harriet Stanley (right) wants
Medicaid to be a “ford,” not a “BMW.”

Still, given the fiscal circumstances, Health and Human Services Secretary Preston maintains that MassHealth has made out pretty well in the state budget, avoiding cutbacks in the current fiscal year that once looked inevitable. “We worked really hard, and the governor worked really hard, so that that didn’t occur,” he says. “All of our major entitlements are standing. Is there distress in the system? Well, sure…[but if this] were elsewhere in the government, we’d be throwing parties.”

Budget boomerang

Over the past two years, nobody’s been throwing parties over MassHealth. Under the pressure of cost growth and revenue decline during the recent recession, Medicaid has been on a budget (and benefits) roller coaster. In January 2002, then-Gov. Jane Swift eliminated most dental benefits under MassHealth for nearly 600,000 adults. In October of that year, she used her executive powers to eliminate several optional benefits for adult recipients—including dentures, prosthetics, orthodontic braces, chiropractic therapy, and eyeglasses. The estimated savings were $22 million, or $11 million in state costs after federal reimbursement.

In 2003, the Legislature voted to eliminate benefits under the MassHealth Basic program, which served 50,000 low-income, unemployed adults with high health needs. Last August, the Legislature also cut about 10,000 legal immigrants from MassHealth, although coverage was restored later that year to roughly 2,700 of those recipients.

The Romney administration, which had come into office criticizing the coverage rollbacks imposed by Swift, his predecessor, created a new program, called MassHealth Essential, to restore coverage for the long-term unemployed, although the income limits were more restrictive than under the original MassHealth Basic program. MassHealth Essential also capped enrollment at 36,000 people. As of January, about half that number were re-enrolled under MassHealth Essential, according to Victoria Pulos, an attorney with the Massachusetts Law Reform Institute.

‘People should pay a little something.’

But this partial reopening of the MassHealth umbrella came at a price. The administration imposed premiums for the first time on some of the lowest-income MassHealth recipients, ranging up to $15 a month for families making less than 150 percent of the federal poverty level. The administration set up an appeal process in cases of hardship, but it also initiated a termination procedure that would drop beneficiaries from the Medicaid rolls for nonpayment of premiums. Pulos says the Law Reform Institute is concerned about reports that MassHealth had issued, or was about to issue, more than 2,000 termination notices to recipients who were more than 60 days overdue on their premium payments. But the administration is concerned about anyone taking a free ride on health care.

“The governor believes that health care is not free, and that unless you’re dealing with somebody that is really, totally, completely disabled, most of the people on MassHealth should pay a little something toward their care,” says Preston. “There’s an awful lot of middle-class and working-class families out there that don’t get any of these state benefits and who are going through contortions with their personal budgets in order to be able to insure their children and themselves.”

Health care providers and advocates for the poor insist that program cuts and attempts to shift MassHealth costs to recipients are bound to be self-defeating, from a fiscal as well as health care point of view. Bullen, the former Medicaid director in the Weld and Cellucci administrations, agrees.

“I’m not a big proponent of cutting services or eligibility,” he says. “I think [MassHealth programs] should be administered tightly. But I wouldn’t cut them, because the more low-income people you get into the Medicaid system—the people who will be looking to the state for health care—the better it is for the state because you get as much federal help as you can… If we cut MassHealth without thinking, we will throw away a lot of potential federal money.”

Health Care for All insisted in a November 2002 report that the projected savings from MassHealth cuts would be short-term at best because “the needs that [the MassHealth programs] serve won’t go away. Instead the result will be sicker people who require more expensive care in hospital emergency departments or nursing homes.” Not to mention a swelling of the ranks of Massachusetts residents without health insurance. McDonough, of Health Care for All, notes that at the same time MassHealth enrollment dropped from 1 million to 913,000 the number of uninsured was on the rise, from 365,000 to 500,000.

Room for improvement

It’s difficult to find any unbridled optimism about the future of MassHealth. The concerns voiced by Eric Kriss and Harriett Stanley are shared by most analysts, even those who argue against scaling back services and eligibility. And there are ominous new signs coming from Washington, where, McDonough notes, the Bush administration is pushing to change Medicaid into a block grant program, which would get the federal government off the hook when Medicaid costs rise—and leave states holding the bag.

And the federal Medicare program won’t be much help either. Right now, Medicaid covers many of the costs of caring for poor elders that Medicare doesn’t pay for, including nursing homes and prescription drugs. Even the $500 billion Medicare prescription-drug benefit may do more harm than good to MassHealth, according to Nancy Turnbull, executive director of the Massachusetts Medicaid Policy Institute. She says the new program requires states to make payments to the federal government out of their savings from the federal drug benefit, based on a formula she says penalizes states that have been effective in moderating prescription drug cost growth.

All agree on some ways to rein in cost.

Still, there is reason for hope in the Medicaid prognosis. In the short run, there is federal Medicaid money sitting in state coffers, unused, from Washington’s state-budget relief package from last year. Powers, the Health and Human Services spokesman, confirms that the state placed $228.3 million in supplemental federal Medicaid funds into an escrow account. Of that amount, $55 million is being used this fiscal year to supplement the Uncompensated Care Pool, which pays for hospital and community health center care for low-income uninsured and underinsured people. That leaves $173 million available to avoid further cuts in MassHealth. But it is unclear whether the administration intends to use that money for MassHealth or to simply put the money into the General Fund.

In the Legislature, there are signs of interest in restoring provider rate cuts. The House budget would increase the state’s reimbursement to hospitals for providing care to uninsured patients by $65 million, up to $495 million. It would also level-fund MassHealth Essential at $110 million and offer $5 incentives to MassHealth patients who use community health centers for their primary care.

Looking further ahead, there is a range of ideas to rein in Medicaid costs without jeopardizing care or eligibility. Two Romney administration initiatives have drawn praise from providers and consumer advocates alike: the Senior Care Options program and an effort to control drug costs by using cheaper generic alternatives.

Similar to the PACE program that benefits Christine St. Pierre, the Senior Care Options Program would require that teams of specialists prepare care plans for seniors with the intent of providing alternatives to nursing homes. The PACE program serves just 1,500 seniors throughout the state, but Senior Care Options would ultimately serve more than 100,000 people. It would not be restricted to seniors with severe medical problems but would be available to healthier individuals as well.

The prescription drug initiative involves a “preferred list” of thousands of reasonably priced or generic drugs, which doctors are encouraged to prescribe. A doctor who wishes to prescribe a drug not on the list must get approval from MassHealth. The program has already been credited with reducing the growth of MassHealth drug expenditures from 20 percent a year to just 5 percent in fiscal 2004.

The Romney administration is also considering initiatives to manage the care of high-cost MassHealth recipients, including “disease management” programs that identify populations that are at risk for nursing home or hospital admission. The goal is to avoid medical complications that could lead to unnecessarily expensive treatment. This kind of cost-saving initiative—one that saves money by helping vulnerable people stay healthier—is something even those who are fighting cuts in MassHealth can sign on to.

“The stereotype of managed care is that it is a way of withholding services from people,” says McDonough. “But the reality of these new tools is, you identify high-cost cases and you get low-tech, low-cost interventions for behavioral change and self-management,” McDonough says. As examples, he cites the development of treatment plans that require people to stop smoking, to start exercising and dieting, and to get mental health counseling. “Those services enable people to start to get control of themselves and change the behavior which is putting them significantly at risk for expensive hospitalizations.”

Meet the Author
But in this, Massachusetts is playing catch-up. In February, MassHealth officials attended a seminar organized by Partners HealthCare and the Massachusetts Medicaid Policy Institute to hear Florida officials describe their disease management programs. After the presentation, McDonough, who also attended the seminar, asked some Massachusetts officials present what they had done in the area; one, he says, told him they had “taken some baby steps in that direction.”

Preston admits that, “considering the expertise that exists in Massachusetts,” MassHealth is not on the forefront of reform in care management. “We are not anywhere near as advanced as some of the other states in the country in doing some of these things,” he says. Until that changes, expect the saga of Medicaid, with its ups and downs, to continue.

David S. Kassel is a freelance writer in Harvard.