Governors Say Major Reform Only Salvation for Medicaid

The Medicaid program is threatening fiscal disaster for states, said Virginia Gov. Mark Warner (D), chair of the National Governors Association.

In a Webcast sponsored by the Kaiser Family Foundation, Warner said rapidly escalating costs associated with the 40-year-old entitlement program were threatening states with financial ruin.

He called for multiple approaches to reform, including tax credits to provide individuals and families an incentive to purchase long-term-care insurance, regulatory reform to address the problem of “asset transfer” by which families may transfer wealth from an individual so the individual may qualify for Medicaid, widespread incorporation of information technology to improve efficiency, and drug-pricing reform.

Warner is heading a bipartisan coalition of governors who are seeking to present the Bush administration with wide-ranging proposals for Medicaid reform.

“We start with the premise that Medicaid, as it is currently structured, over the long haul can't work, that the status quo is not an acceptable option,” Warner said. “Our state of Virginia has one of the leanest Medicaid programs in the country. If you are an advocate in Virginia, you'd call us cheap, not simply lean. But even with our lean program, we've seen our program go from $3 billion to close to $5 billion by the end of my tenure.

“Medicaid is, in almost every state, the source of spending that's going up the most,” he continued. “On average across the country now, Medicaid costs on a state level are exceeding education costs. So what you have is the very real policy dilemma of pitting the needs of grandma against the needs of the grandkids. And over the long haul, that's a recipe for disaster. If our health care costs are going to subsume our ability to invest in future workforce, that is a true recipe for disaster.”

Intergovernmental Transfers Criticized

In the Webcast, Warner also defended—albeit tepidly—states' use of “intergovernmental transfers” (IGTs), the various strategies by which states have been able to increase federal matching funds for health programs without increasing their own costs. These strategies have come under scrutiny by the Bush administration.

On the day before the Webcast, a report appeared in the New York Times citing Virginia as one of a number of states that were using the transfers to draw down federal dollars.

“This practice started in Virginia before I was governor,” he said. “I think we need to bear in mind that nobody comes to this debate with clean hands....[T]he utilization of these dollars was always blessed by the federal government... .To suddenly say we are going to bring to a dead halt practices that, in some states, provide essential health care to literally millions of Americans who would otherwise not receive health care doesn't seem fair or right.”

A 2002 Urban Institute report gave an example of how an IGT might work: A hospital transfers $10 million to the state, which then makes a $12 million Medicaid payment back to the hospital. If the state has a 50 percent federal matching rate, it gets back $6 million from the federal government. At the end of the transaction, the state has made $4 million, which might be used for general expenditures, and the provider has netted $2 million; only the federal government has expended any funds. (See “States' Use of Medicaid Maximization Strategies to Tap Federal Revenues” at<www.urban.org/url.cfm?ID=310525>.)

Warner said that if the administration was going to go after states for their use of IGTs, then it was equally fair to look at why states have over time assumed more and more of the burden of caring for those “dual eligibles” who qualify for Medicare and Medicaid because they are low income and elderly.

He added that the practice of using IGTs to draw federal Medicaid dollars is being phased out in Virginia.

States Hit With Cost Shifting

Warner said states were being hit with two separate cost-shifting phenomena: the movement of working Americans into the Medicaid program as employers decrease or eliminate health coverage and the movement of increasing numbers of elderly in nursing homes and assisted-living facilities onto the Medicaid rolls as they “spend down” to Medicaid levels or qualify by transferring assets to offspring.

These phenomena, in combination with the administration's proposals to cut federal Medicaid dollars, threaten to bankrupt states, Warner said.

“Maybe the state Medicaid systems could absorb one of those cost shifts, but to have three of them taking place simultaneously means that we are on the road to a melt-down,” Warner said. “I would argue that the president chose the wrong crisis when he focused on Social Security, which even under his own terms doesn't fall into real serious financial ruin until 2042.”

Warner said the solution to the crisis must be likewise multifaceted. Regulatory change to address the problem of asset transfer, for instance, needs to be coupled with the use of tax credits and other incentives for individuals and families to purchase long-term-care insurance, he said.

Warner said one of the greatest areas of potential savings was in the pricing of drugs. Some effort was needed to determine the true cost of research and development, so that the “pain” of price cuts is shared by major stakeholders, including pharmaceutical companies, he said.

Finally, Warner said investment in information technology (IT) is crucial. He cited a major hospital system in his state that had made a $60 million investment in replacing legacy information systems with an electronic medical records system that, for example, helps prevent repeat procedures and tests from being ordered. Such a system also results in better health care, he said.

“But it is going to take the work of not only a Medicaid system, but your hospital providers, your docs, your pharmaceutical companies, your insurers,” Warner said. “And it's going to take both some regulatory changes and some financial incentives. Let's take 10 or 12 states or regions of states and really test out the value of IT in the health care system.”

The Webcast “Kaiser Conversations on Health With Virginia Gov. Mark Warner” can be accessed at<www.kaisernetwork.org/health_cast/hcast_index.cfm?display=detail&hc=1399>.▪