Federal Budget, Reconciliation, and Medicaid

Hurricanes Katrina and Rita and their aftermath delayed the federal budget reconciliation process for six weeks.  

On November 18, 2005, the House of Representatives passed its reconciliation package (H.R. 4241) cutting approximately $50 billion from the federal budget over five years, including approximately $11 billion from the Medicaid program.[1] Earlier in November, the Senate passed its version of the reconciliation package (S. 1932) cutting $35 billion over five years, including approximately $4.3 billion from Medicaid program.[2] 

The House and Senate will reconcile their differences, which will be returned to the full floors of both chambers for a final vote and, if approved, sent to the President for his signature or veto.

The House Version:  Of the approximately $11 billion in Medicaid cuts, $6.5 billion comes from increasing the states’ ability to impose recipient cost-sharing and create alternative benefit packages.  Cost-sharing was a large source of contention.  In addition, the states could provide a new benefit package that must be actuarially equivalent to a benchmark package. This new benefit design flexibility would only apply to certain optional Medicaid populations.  Optional populations account for one third of Medicaid enrollment.[3]

The House also reduced Medicaid spending by $2.5 billion, over five years, by increasing penalties on individuals who transfer assets for less than market value in order to qualify for Medicaid-sponsored long term care. The provision also makes individuals with housing equity above $750,000 ineligible for Medicaid long term care, and expands the “look-back” period to 5 years. 

The reconciliation package limits payments for prescription drugs, changes the current Medicaid prescription drug payment formula to a new system based on the retail average manufacturers’ price, and increases the drug rebate required from manufacturers. The total savings from these prescription drug changes is approximately $2.0 billion.

In addition, the bill provides relief for victims of the recent hurricanes. The legislation would increase the federal match assistance percentage (FMAP) to 100 percent for Medicaid and State Children’s Health Insurance Program (SCHIP) enrollees who lived in Louisiana, Mississippi, and parts of Alabama prior to Katrina until May 15, 2006. Finally, $90 million is appropriated for high-risk pools in 2006 to maintain the operations of existing, qualified high-risk pools.[4]

The Senate Version:  Unlike the House version that cuts $11 billion from the Medicaid program, the Senate version only cuts $4.3 billion from Medicaid.  Instead of further Medicaid cuts, the Senate Finance Committee cut Medicare by approximately $5.7 billion.

The majority of Medicaid cuts come from changes in the prescription drug payment policy. The reform creates a new federal upper payment limit for pharmacy reimbursement, defines a weighted average manufacturers’ price as the new basis for the payment system, and redefines the average manufacturer price. The remaining cuts- approximately $850 million- come from provider tax reforms, tightened rules against fraud and abuse, and a reform of the Medicaid asset transfer rules.

The Senate package does not allow additional cost-sharing nor does it permit benefit package re-design.

The Senate version also provides relief for victims of Hurricane Katrina by reimbursing states with a 100 percent FMAP for Medicaid and SCHIP enrollees who lived in Louisiana, Mississippi, and parts of Alabama prior to Katrina until May 15, 2006.[5]

The Medicaid Commission:

The Medicaid Commission has already submitted its recommendations for finding $10 billion savings in the Medicaid program. On October 26-27 2005, the commission reconvened to work on phase two of its charter: to propose long-term solutions to address the program’s escalating costs. The meeting focused on the populations (mandatory and optional) served by Medicaid, best practices of the states, and disease management strategies.  The Commission must submit recommendations by December 31, 2006.