The New Face Of Medicaid

Seniors and the disabled are pushing the program to the breaking point

At 90, Cecilia Kelroy has the honest eyes and kindly Midwestern look you'd expect of the former postmaster of Mundelein, Ill. She's also the new face of Medicaid. Kelroy moved into a nursing facility after suffering a stroke in 1998. By 2001, her $150,000 nest egg eviscerated by expenses, she went on Medicaid. Now she lives in a nursing home in the Chicago suburb of Libertyville, and this year the federal-state program for the poor will pay $36,135 for her care.

Founded in 1965, Medicaid was long thought of as a safety net for poor mothers and their children. Low-income families and young adults still dominate its rolls, making up about 40 million of the program's 53 million participants. But these days two-thirds of Medicaid funds are spent on seniors and the disabled, mostly for long-term nursing care.

Now, the Bush budget released on Feb. 7 proposes to trim Medicaid spending by about $60 billion over the next decade -- the biggest single cut in the President's drive to halve the deficit in his second term. Governors are bracing for a battle. Their fear: Medicaid costs -- already 22% of state budgets and twice what they spend on higher education -- will skyrocket. Health-care providers and patient advocates are struggling to figure out where the program is headed if the Administration manages to shift more responsibility onto statehouses.

Underlying today's debate is the critical question of how Medicaid can survive as it shifts from funding medical care for the young poor to providing custodial care for the elderly and disabled. Already, Medicaid's seniors claim 26% of the program's budget -- $48 billion in 2003 -- even though they make up just 9% of enrollees. The disabled -- including the mentally ill and those suffering from debilitating chronic diseases or developmental disabilities -- represent 16% of the rolls but take 43% of Medicaid's funds, almost $80 billion in 2003.


Medicaid already pays more than 60% of the nation's total tab for nursing homes, vs. just 5% paid by Medicare, the government's medical insurance plan for the elderly. As more seniors join the program, costs will rise more rapidly. Care for seniors and the disabled averages more than $12,000 annually per person, while caring for a child or young adult costs less than $2,000. And as the 40 million baby boomers age, their growing demand for nursing care threatens to crush Medicaid's original mission of serving impoverished mothers and youngsters.

The White House acknowledges this demographic reality and is responding with more flexibility. For example, Medicaid routinely picks up nursing-home bills for those poor enough to qualify but balks at paying for assisted living or home health care. Dr. Mark B. McClellan, administrator of the federal Centers for Medicare & Medicaid Services, says the Administration will change that. "We shouldn't have an institutional bias in the program," he says, "Many people can get services in their community at a lower cost."

Health experts praise the White House's tilt toward flexibility -- but warn it won't save much money unless states cut the level of care for those elderly who stay at home. Wisconsin, for instance, has already begun a program to assist such seniors. "It's making people feel better about themselves," says Mark Moody, Medicaid administrator for Wisconsin's Division of Health Care Financing. "[But it] isn't necessarily saving us more money."

The Administration also hopes to squeeze out $100 million in annual savings by cracking down on what it sees as a major abuse in the system -- middle-class and wealthy seniors who transfer assets to relatives, impoverish themselves, and qualify for Medicaid to pick up their nursing-home bills.

States are already acting. Many, including Virginia, plan to examine six years of financial statements for Medicaid applicants, up from the current three, for evidence of asset-shifting. After years of benign neglect, others are beginning to enforce the laws already on the books.

Aging baby boomers are not only going to put tremendous pressure on Social Security and Medicare -- but could overwhelm Medicaid as well. That's why the White House wants to use tax subsidies and other incentives to encourage seniors to buy long-term-care insurance to pay for their own old age. So far, such policies -- costly and complicated -- have been slow to catch on. But Medicaid alone will never be able to support the care for those 40 million boomers.

Proposed changes in the care of the elderly and disabled are only one part of a profound shift in the financing of the entire program -- a step that could radically alter the way millions get their health care. In addition to his rather modest budget proposals, Bush is offering states a trade-off. Governors could escape the current complex regime of federal rules and get broad leeway to run Medicaid programs. In return, states would have to accept a cap on federal funding for all but the poorest participants. Says McClellan: "I'd like to see us focus on more effective use of the dollar by giving states flexibility." With a fixed annual contribution, Washington would shift additional risk to states, which could save money by delivering services more efficiently -- or by providing less care. But they would bear the burden of unexpectedly high costs.

That would put tremendous pressure on states to operate the program for less. Some governors, including Jeb Bush of Florida, seem willing to make such a trade. But most state officials fear that the swap could become a multibillion-dollar bait and switch. "The risk is they are not serious about flexibility," says Iowa Governor Tom Vilsack, a Democrat. "All they'd be doing is forcing states to cut benefits" and trim the Medicaid rolls.

Already, states are scrambling to cut costs. "States are under incredible pressure," says John Holahan, director of the Urban Institute's Health Policy Center. A survey by the Henry J. Kaiser Family Foundation found that 47 states are cutting or freezing payments to doctors and hospitals this year: 43 are lowering drug costs, 15 are making it tougher for low-income people to enroll in the program, 9 are cutting benefits, and 9 are increasing patient co-payments. The survey also found that 17 states have targeted long-term care for cuts, either by trimming payments to nursing homes or slashing enrollments.

The most dramatic changes are coming in Tennessee. Its TennCare program was widely considered the most generous state health program in the nation. But costs have outrun revenues, and after years of battling over whether to hike taxes, the state is throwing in the towel. In January, Governor Phil Bredesen, a Democrat, said Tennessee would limit eligibility for the program and cut benefits for those who remained. Health-care advocates estimate that as many as 323,000 adults could lose coverage.

Governors are also struggling with another troubling trend: Waves of low-wage workers are applying for Medicaid because they don't get insurance from their employers. A new Massachusetts study reports that the state spent $52 million in fiscal 2003 to care for 27,000 workers and their dependents at more than 130 companies, including Wal-Mart (WMT ), Dunkin' Donuts (AED ), and Stop & Shop (AHO ). The companies say many of these workers were part-timers or new employees who didn't qualify for employer coverage. And Wal-Mart points to a new survey showing that while 5% of its hourly workers are on Medicaid, 7% were using the program before joining the company.

In the short run, young workers and their families will continue to be a problem for Medicaid. But policymakers in Washington and in state capitals increasingly have their eye on the looming cost of caring for the elderly and disabled. And time is on nobody's side.

By Howard Gleckman in Washington, with Ann Therese Palmer in Libertyville, Ill.

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