Deficit Reduction Act allows reinvention of Medicaid

April 1, 2007

As healthcare costs continue to spiral out of control, state officials across the country are pursuing creative ways to control the high costs of Medicaid services for low-income women, children, the disabled and the elderly.

Though states are not required to participate in the program, states that do must follow strict and lengthy federal eligibility requirements. The program is complex and restrictive in terms of how a state can design it due to federal regulations. Until recently, federal law required that any changes a state made to the program had to be made equally to all eligible Medicaid recipients; all Medicaid recipients had to have access to the same benefits; and states were limited or prohibited from applying copayments. Under Section 1115 of the Social Security Act, a state can apply for exemption from these requirements by filing a waiver which allows a state to implement an experimental, pilot or demonstration project if it meets certain objectives. Such waivers were highly sought in the early 1990s. In 2001, the Health Insurance Flexibility and Accountability (HIFA) initiative was implemented. HIFA waivers provided flexibility to states to cut benefits or use cost-sharing measures.

Though the 1115 waivers noted above are permitted where they are "likely to assist in promoting the objectives of Medicaid," the question remains as to what constitutes Medicaid's objectives. Without a direct statement identifying the program's objectives, the Health and Human Services Commission has a great deal of flexibility in choosing to grant or deny waiver requests. As a result of this flexibility, there is more of a willingness to permit demonstration projects that involve the private sector. In 2005, Congress passed the Deficit Reduction Act (DRA) which amended Medicaid to allow increased cost-sharing and allow states to use "benchmark" packages rather than full-benefit packages. States are allowed to adopt these measures without applying for a waiver.

Many states throughout the country are taking advantage of these federal changes. One state is implementing a demonstration project that will partly change the state's program from a defined benefit plan to a defined contribution plan whereby eligible recipients are allocated a specified amount to buy a health benefit plan.

Another state is also using the DRA to offer different benefit plans for different Medicaid recipients. The plans provide for different levels of mental health services and specialized services such as developmental disability services. The state expects that the use of these plans will reduce utilization without a demonstrated need for services, i.e., mental health service utilization by child participants without a demonstrated need for those services.

The flexibility provided by the DRA is allowing another state to offer reduced basic benefits to low-income healthy children and adults who are eligible for Medicaid. Under the basic benefit plans, benefits offered to both populations will be limited in scope. To qualify for the "enhanced benefit plan," which offers services that have been cut from the "basic benefit plan," a member must comply with an agreement of rights and responsibilities. Under the agreement, the Medicaid recipient must agree to meet certain requirements in order to continue receiving benefits under the enhanced benefit plan.

This column is written for informational purposes only and should not be construed as legal advice.

Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP in the firm's Austin, Texas, office.