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Controlling Medicaid Spending in an Aging Population: Cost Versus Equity?

This article first appeared in the
Mar/Apr 2010 print issue of PA TIMES.

Jacqueline L. Angel, Stipica Mudrazija

As Congress ponders options in health care reform, the nation is also facing a dilemma of how to provide cost-effective services that greatly benefit the increasing number of people aging with disabilities. This demographic trend puts substantial additional pressure on health care entitlement programs like Medicaid. Almost half of long-term care is paid for by Medicaid, the public health insurance benefit for almost 60 million low-income individuals.

According to the Congressional Budget Office Medicaid expenses are particularly high for elderly and disabled beneficiaries who account for about two-thirds of the program’s spending. Medicaid long-term care for chronically ill elderly persons represents a large portion, about 17 percent, of the average state budget, with estimated spending of 1.6 trillion dollars over the next two decades.

Although the vast majority of dollars still go to long-term care in nursing homes, the federal government provides a cost-effective mechanism for states to allow individuals with disabilities and the elderly to live in an environment that is less restrictive than institutionalized care and more conducive to independence under the Medicaid home and community-based services 1915(c) waivers (HCBS).

Since the HCBS waiver program’s inception, the number of Americans served by 1915(c) waivers increased dramatically. In 1982, only six states were participating in the waiver program, while by 1997 all 50 states had developed a waiver program with the exception of Arizona, which operates a section 1115 waiver. People who are aged or have physical disabilities comprise the largest number of Medicaid waiver recipients, and consequently states spend about 41 percent of their Medicaid budget on HCBS, more than double than a decade ago.

As a result, several cost-containment strategies are necessary to help offset the cost of the increasing demand for Medicaid waiver services. One strategy embedded in the 1915(c) waivers is the cost-neutrality stipulation which stipulates that average Medicaid acute and long-term care expenditures, including any service or package of services for 1915(c) waiver recipients, not exceed those for institutional care recipients.

To meet this test, states develop waivers with an array of services or with individual cost caps on annual expenditures for services. The Government Accountability Office (GAO) reports that by limiting the amount, scope, and duration of certain services, such as home health care, states are able to control costs for the waiver programs. In addition to cutting benefits, states may choose to control costs by restricting program eligibility, reducing provider reimbursement rates or increasing client co-payments.

This brings us to a core focus of our discussion. How is Medicaid state spending affected by bureaucratic requirements for programs serving elderly persons in community-based long-term care? Do administrative strategies effectively curb access to waiver services by establishing stringent level-of-care (or need) criteria or by using more restrictive eligibility requirements? Conversely, does using broader eligibility criteria increase community-based long-term care placements and thus reduce the amount spent on institutional admissions?

The Cost of Level-of-Care Criteria

To address these questions, data from the CMS-64 expenditure form were appended to a nationwide survey of the largest 1915(c) based programs serving the “aged and disabled” in 50 states and the District of Columbia in 2004. In the analyses, three main types of thresholds were created to determine functional eligibility for program participation: Level I, professional judgment and/or no minimum threshold criteria; Level II, functional criteria only; and Level III, combination of medical needs and at least one additional factor (ADL/IADL limitations and/or cognitive/behavioral limitations). The vast majority of states fit into the second category requiring functional limitations only. About one-half of waiver programs use medical or nursing needs. Cognitive impairments and behavioral problems are only rarely used. Generally, clients must meet more than one criterion to qualify for the programs.

To examine the financial implications of using these minimum threshold requirements for the 1915(c) waiver we estimate models of expenditures per elderly and expenditures per participant for the waiver program taking into account factors associated with higher-term care Medicaid expenditures among older adults, including population characteristics (85 and older, disabled adults, ethnic minorities, living alone), Medicaid administration, and health-related factors.

In general, what the results reveal is a significant amount of variation in the effects of using minimum threshold criteria on state spending even after adjusting for differences in state population and political characteristics. Level II criterion, on balance, lowers expenditures per elderly and per participant by approximately 40 percent compared to Level I. Likewise, Level III criterion decreases expenditures per elderly by approximately 53 percent and per participant by more than 48 percent compared to Level I.

So what are the potential implications of using functional eligibility criteria that result in lower levels of aggregate expenditures in light of challenges that state policymakers will encounter in the future? Will states be more strained by attempting to balance the availability of quality HCBS services with the need to effectively manage state expenditures? Given the recent financial strains in state budgets and pressure placed on policymakers to reduce spending, should home and community-based waiver programs be viewed as a cost-effective alternative to nursing facility care?

For states that choose to use narrower and more specific level-of-care criteria and spend relatively less per elderly and per participant than other states, Medicaid 1915(c) waivers may be a viable, cost-effective alternative. By the same token, while the financial costs to the Medicaid program and state budgets may be less, there may be other costs to potential service recipients, such as limited access, that should not be overlooked.

Our findings suggest, then, the increased use of the 1915(c) HCBS waiver option by states creates an imperative to understand the extent to which stringent functional eligibility requirements contribute to upward trends in Medicaid 1915(c) waiver costs. States using narrower and more specific eligibility criteria have, on average, higher rates of poverty, higher numbers of individuals on waiting lists, and a bias toward spending for institutional care in the past. Surprisingly, factors related to the political environment within states do not account for total Medicaid HCBS expenditures. On the other hand, states using professional judgment, by and large, have a higher level of spending per elderly and per participant on community-based waivers.

Although lower expenditures for HCBS waiver programs could be an indication of cost-effectiveness for state long-term care programs, it is imperative that states are aware that lower levels of spending may also negate the goals of independent living and the provision of quality HCBS services that are apparent in the Olmstead decision. Many states do not keep a waitlist in the 1915(c) waiver program for aged and disabled because they find it more cost-effective than nursing home care.

Consequently, those states with a higher demand for overall use of community-based services will need to explore using new tools and methods like level-of-care requirements to monitor this growth. Furthermore, proposed changes in federal Medicaid policy and financing structure could diminish quality by reducing access to community-based long-term care.To avert this crisis, the federal government could develop uniform criteria to assure equal access to Medicaid community waiver services across states.

These findings augur well for states to take full advantage of the flexibility 1915(c) waivers provide. Nonetheless, important implications arise. There is, to be certain, an important fiscal impact of administrative functional eligibility criteria on Medicaid community-based waivers. Medicaid clients who prefer to use HCBS may be kept on a wait list for a much longer time due to stringent level-of-care thresholds.

The question also remains to be answered by public administrators in the near future of how the determination process will affect the changing needs for assistance, especially among Americans who may be harmed in the next downturn in the economy. Clearly, understanding state plans in meeting the needs of people who qualify for Medicaid long-term care, but desire community-based care, deserves our highest priority.

ASPA member Jacqueline L. Angel is in the LBJ School of Public Affairs at The Univeristy of Texas, Austin. Email: [email protected]

Stipica Mudrazija is also in the LBJ School of Public Affairs.

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