Texas Medicaid spending is on an unsustainable trajectory. The program’s expenditures now consume 25 percent of the state budget, making it increasingly difficult to adequately address other vital state needs. With the recent recession and a slowly recovering economy, Texas is struggling to close budget gaps. The problem has been exacerbated by an increase in Medicaid enrollment and spending, which is a reflection of the tough economic times.
This is not the first time, nor is it likely to be the last, that the counter-cyclical nature of the Medicaid program has created a heavy burden on the state. Although reductions have been seen in services and provider payments, the state’s ability to meet other important commitments continues to be challenged. Even in good economic times, Medicaid spending has outpaced growth in state tax revenues. With new federal mandates and changing demographics, the budget needs of the program will consume more and more of the state’s available revenues. Under the existing program structure, there is no relief in sight.
Texas Medicaid expenditures totaled approximately $28 billion in 2011. The largest share of total Medicaid spending, nearly 23 percent, provides long-term care services and supports to roughly 400,000 aged and disabled Texas Medicaid enrollees. 1 With an existing interest list for long-term community-based care services exceeding 100,000 people, and the senior population projected to double by 2030, the demand for and cost of these services will continue to expand. There is little room within the existing Medicaid structure to divert resources to pay for this growing long-term care expense given the limited availability of optional programs or benefits on the acute care side of the program. Bottom line, with the entire program consuming 25 percent of the state budget, there is little room to infuse more state revenue into the program.
The Medicaid program structure itself is much to blame for today’s problems. The federal-state matching program creates enticing opportunities for states to maximize federal funding. An open-ended ability for Texas to draw down federal dollars with relatively modest state contributions has grown the program well beyond its intended scope. Despite the recognition that the state is on a financially deleterious path, perverse incentives persist. Federal restrictions on state reductions, together with the natural reluctance on the part of the state to reduce state expenditures when it can mean a two-fold loss of federal contributions, make it almost impossible to rein in Medicaid program costs. As such, it is time to discuss fundamental reform of the Medicaid program.
Fundamental structural change must begin by ending states’ open-ended entitlement to federal funding. This can be done by eliminating the link between state contributions and federal matching payments, through a federal block grant to the states. The federal government would benefit from a defined and predictable expenditure trend line, and the state from a steady federal revenue source. States would be motivated to clarify goals and manage programs efficiently. It would provide states with flexibility in how to best meet program goals as well as increase state accountability for program outcomes.
Within a block grant, Texas could restructure its long-term care delivery system to better meet the needs and preferences of its residents while also staying within budgetary constraints. One such approach would be to modify the Medicaid benefit entitlement. The current “one size fits all” approach often entitles Medicaid enrollees to unnecessary, even unwanted benefits, and has the unintended consequence of providers receiving de facto entitlement to provide a broad range of services to enrollees.
The approach put forth in this report could function within the context of a block grant scenario. It would establish and fund financial accounts for enrollees to purchase long-term care services and supports (LTCSS). The funding amount would be based on the needs of each individual, with assessments being performed by independent, accredited professionals. Providers would be pre-approved and regulated by the state (using sufficient, but not excessive regulation). The approach to creating the participating pool of providers should foster quality, price competition, and innovation; thus, providing program participants the best value, as well as appropriate and preferred care. The program participants would retain unused funds for future care and support needs.
Nursing home care would be excluded from this system, but still be a covered service financed through the traditional Medicaid structure. The level of care threshold for Medicaid approval of nursing home placement could be set at a high, but reasonable level to maximize the use of community-based care. Institutional care would only be used when less expensive community-based options have been exhausted. Systems would be established to ensure that the long-term care services and acute care services are coordinated and not duplicative.
Moving to a defined level of financial support will provide budgetary control with options to address potential budget shortfalls. With a defined financial benefit, the State, if need be, could uniformly reduce all participants’ future allocations, prioritize the provision of services based on the level of need, or increase the state contribution.
It is important to remember that while any significant reduction in spending will involve painful trade-offs, the unsustainable nature of the current spending trajectory mandates that action be taken. The framework proposed here offers several advantages. It will turn program participants into engaged cost-conscience participants, providing them with real incentives to use cost effective services. It will foster competition within the provider community, keeping prices in check and encouraging innovation. Finally, the approach will allow Texas to refine benefit entitlements to target individual care needs, while taking into account financial and informal support circumstances.
This major restructuring is not an immediate solution to Texas’ current budget issues. As such, incremental program changes that could have a short and medium term impact are also discussed. Options at the forefront of current discourse between Texas officials and advocates include:
1. Tightening up the estate recovery program
2. Eliminating Miller Trusts
3. Including nursing home, 1915(c) waiver, and other long-term care populations in the dual eligible integrated care demonstration project
4. Requiring Supplemental Security Income (SSI) children to be enrolled in risk based managed care
5. Instituting parental financial contributions for children receiving LTCSS
6. Using waivers to provide a more limited entitlement for LTCSS
7. Imposing some financial responsibility on adult children whose parents are receiving Medicaid coverage for LTCSS
8. Adopting some different approaches to providing community care
9. Competitively bidding nursing home care.
10. Closing or downsizing the Texas State Supported Living Centers
Some of these changes can be accomplished in the short term; others would likely require a waiver or could be incorporated as part of a more comprehensive restructuring of the program.
James C. Capretta is a fellow at the Ethics and Public Policy Center and a visiting scholar at AEI.