October 2005

Legislative Watch

By George G. Olsen, JD

Congress Ponders Medicaid Reform Proposals

In light of Hurricane Katrina, changing federal insurance programs could become more difficult

Having made extensive changes to Medicare in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Congress has turned its sights on Medicaid, the federal-state program that provides medical care to low income individuals. The Bush Administration and the Republican leadership in the House and Senate have made it clear that they would like to enact long overdue reforms in Medicaid and constrain burgeoning spending in that program. State governments are very cautious about such initiatives, fearing that the legislation would simply shift a greater share of Medicaid costs to already overtaxed state budgets. Patient advocacy groups are concerned that the reforms and budget cuts will unravel the health care safety net that Medicaid provides for the poor.

Given the complexity and importance of Medicaid, there is no shortage of ideas about how to revamp the program. Below are the proposals proffered by the Bush Administration, the National Governors Association (NGA), and the Medicaid Commission, a special body established by Michael O. Leavitt, the Secretary of the US Department of Health and Human Services (HHS), in May 2005 for the specific purpose of making recommendations for short- and long-term reforms in Medicaid.

The Congressional committees with jurisdiction over Medicaid—the Senate Finance Committee and the House Energy and Commerce Committee—will take these recommendations, and a plethora of others proffered by various stakeholders, into consideration when they mark up their Medicaid bills. At this writing, the committees are scheduled to report on their legislation by September 16, 2005. However, this timing may slip due to Congressional actions on issues arising from the aftermath of Hurricane Katrina.

BUSH ADMINISTRATION PROPOSALS
In a letter dated August 5, 2005, HHS Secretary Leavitt transmitted to Congress the Administration's "draft proposals that would protect and strengthen the financing of the Medicaid program." The recommendations advanced by Secretary Leavitt include:

• The Administration's belief that Medicaid "is overpaying for prescription drugs while pharmacies and Medicare can buy drugs wholesale for a lower price." Accordingly, the Administration proposed that the drug reimbursement system be revised to more closely align Medicaid payments to pharmacies with pharmacy acquisition costs by utilizing the average sales price of a drug as the basis for Medicaid payment. HHS anticipates that this approach would generate substantial savings for the Federal government as well as the states.
• Under current law, an individual who inappropriately transfers personal assets in an attempt to qualify for Medicaid long-term care benefits is subject to certain restrictions—eg, the individual will have a period of ineligibility for Medicaid coverage of long-term care services. There are loopholes in this law, which the Administration proposes to close. For example, through creative estate planning, the period of ineligibility will often expire before the individual has even applied for Medicaid. The Administration recommended that, for purposes of determining the start of the period of ineligibility for Medicaid long-term care services, the ineligibility period would begin upon the latter of (a) the asset transfer, or (b) the point at which an individual is eligible for Medicaid and is receiving long-term care services either in an institution or in the community.
• Medicaid is a partnership between the Federal government and the states. State governments have the authority to design and implement their own Medicaid programs, subject to review and approval by the Secretary of HHS. The Federal government matches each state's Medicaid expenditures pursuant to a specific formula. However, the Administration has concluded that some states are utilizing cost-shifting techniques, intergovernmental transfers (IGTs), and other artifices to inflate their Medicaid expenditures, thereby increasing the amount of funding provided by the Federal government. The Administration made the following suggestions to restore financial integrity to Medicaid: (1) restrict the inappropriate use of IGTs and other reimbursement maximization strategies; (2) reduce from 6% to 3% the percentage of provider revenues (attributable to a designated class of health care services) that a state can collect through a tax on such revenues; (3) amend the definition of "rehabilitation services" to clarify that such services "are those necessary for the achievement of specific, measurable outcomes related to restoration of an individual to his or her best possible functional level, so long as they are prescribed and furnished by (or under the supervision of) a physician or other licensed practitioner and are not provided as an intrinsic element of another program"; (4) limit reimbursement for targeted case management services to 50% of the administrative rate; and (5) replace open-ended Federal reimbursement for Medicaid administrative costs with a state-specific amount of available Federal funds.

RECOMMENDATIONS OF THE NGA
The NGA's proposals were set out in a white paper dated August 29, 2005, entitled "Short-Run Medicaid Reform." Its very detailed recommendations encompass several substantive areas.

Prescription Drugs. The NGA contends that there must be greater transparency to pharmaceutical pricing methods for Medicaid. The prevailing payment methodology, it argues, is seriously flawed and must be replaced. To this end, the NGA recommends using the average manufacturer price as the reference price for drug payments. (The Bush Administration had proposed using the average sales price.) The NGA also recommends that states be given the option of using closed drug formularies and afforded the flexibility to determine appropriate pharmacy dispensing fees, increasing the minimum rebates that manufacturers must pay for brand name drugs and requiring Medicaid managed care plans to pay drug rebates, and permitting states to create purchasing pools for drugs.

Long-Term Care. Like the Bush Administration, the NGA is concerned about individuals inappropriately transferring assets in order to qualify for Medicaid long-term care coverage. The Governors recommended that they be provided with enhanced enforcement tools to prevent such activity including (a) increasing the look-back period from 3 to 5 years, (b) commencing the penalty periods at the time of application for Medicaid, and (c) preventing the sheltering of excess resources in annuities, trusts, or promissory notes. The NGA also proposes that home equity be considered a countable asset in order to require individuals to use such equity to offset long-term and other medical expenses that would otherwise be paid by Medicaid.

Cost-Sharing. The Governors contend that they should be empowered "to implement common-sense, enforceable cost-sharing throughout the Medicaid program both to increase responsibility of Medicaid beneficiaries for the cost of their health care, and encourage cost-effective care in the most appropriate setting." The NGA proposes that such cost-sharing flexibility "be completely at state option" and not subject to Federal approval. The states also seek the authority to experiment with Medicaid premiums, although they concede that premiums "may not be appropriate for some beneficiaries."

Benefits. The NGA white paper recommends that states be provided with the authority to tailor their Medicaid benefit structure to meet the specific needs of individual beneficiary populations—eg, the medically frail and the relatively healthy. States would also like to be able to use chronic care management techniques currently in use in managed care models.

REPORT OF THE MEDICAID COMMISSION
The Medicaid Commission transmitted its recommendations to HHS Secretary Leavitt on September 1, 2005. The report contains the following recommendations for achieving $11 billion in savings from the Medicaid programs over the next 5 years:

1. Prescription Drug Reimbursement Formula Reform. The Commission incorporated the NGA proposal to permit states to establish pharmaceutical prices predicated on the average manufacturer price rather than the current methodology based on average wholesale price. In addition, the Commission recommended that drug payment reforms include clear guidance from the Centers for Medicare and Medicaid Services (CMS) on manufacturer price determination methods and the definition of average manufacturer price, easily auditable manufacturer-reported prices, price reporting and rebate payment on a monthly basis rather than quarterly, and new penalties to discourage manufacturers from reporting inaccurate pricing information. The CMS Office of the Actuary estimated that these reforms would generate $4.3 billion in savings over 5 years.
2. Extension of the Medicaid Drug Rebate Program to Medicaid Managed Care. The Commission recommended that current law be changed to permit states to collect drug rebates from managed care organizations and that states be given the option of collecting the rebates directly or allowing managed care plans to access the rebates in exchange for lower capitation payments. The CMS Office of the Actuary estimated that this provision would save $2 billion over 5 years.
3. Change the Start Date of Penalty Period for Persons Transferring Assets for Medicare Eligibility. The Commission proposes that the start date of the penalty period be moved from the date of the transfer to the date of application for Medicaid or the date of admission to the nursing home, whichever is later. The Congressional Budget Office predicts that this reform would provide savings of $1.5 billion over the next 5 years.
4. Increase the "Look-Back" Period from 3 to 5 Years. The Commission recommends that Medicaid applicants be prohibited from transferring resources during the look-back period for less than fair market value and that the look-back period be increased from 3 to 5 years. Savings from this provision would be less than $100 million over 5 years.
5. Tiered Co-Payments for Prescription Drugs. States would be permitted to increase co-payments on nonpreferred prescription drugs beyond nominal amounts when a preferred drug is available and to create tiered co-pay structures to encourage cost-effective drug utilization by all beneficiaries. Savings over 5 years are estimated by the CMS Office of the Actuary to be $2 billion.
6. Reform of the Medicaid Managed Care Organization (MCO) Provider Tax Requirement. The Medicaid Commission recommends that existing law be changed "so that managed care organizations (MCOs) are treated the same as other classes of health care providers with respect to provider tax uniformity requirements. Specifically, States would be required to tax all managed care organizations, not just those with Medicaid contracts, in order to meet uniformity requirements." In addition, states should be prohibited from guaranteeing that tax revenues paid to states by managed care organizations be returned. The Congressional Budget Office projects $1.2 billion in savings over the next half decade.

In addition to short-term recommendations for Medicaid savings, Secretary Leavitt's mandate tasks the Medicaid Commission with making longer-term recommendations on the future of the Medicaid program that are designed to ensure its sustainability in the future. The Commission, by December 31, 2006, will develop proposals that address the following issues, among others:

• Eligibility, benefits design, and delivery;
• Expanding the number of people covered with quality carewhile recognizing budget constraints;
• Long-term care;
• Quality of care, choice, and beneficiary satisfaction; and
• Program administration.

CONGRESSIONAL ACTION
The Budget Resolution adopted by the House and Senate in April 2005 requires the committees of jurisdiction to produce legislation reducing Federal Medicaid spending by September 16, 2005. The legislation must result in at least $10 billion in reductions over the next 5 years. The Senate Finance Committee and the House Energy and Commerce Committee are now working to develop their respective proposals for reducing Medicaid spending. The politics of enacting Medicaid spending cuts are complicated and difficult under the best of circumstances. In light of the severe plight of those displaced and disadvantaged by Hurricane Katrina, they have become infinitely more vexing.

George G. Olsen, JD, is an attorney with the law firm of Williams & Jensen, PLLC, Washington, DC.

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