New HHS Secretary Warns States About Using ‘Loopholes, Financial Gimmicks’ To Obtain Additional Federal Medicaid Funds

Newly confirmed HHS Secretary Mike Leavitt on Tuesday said that the federal government could save $60 billion in Medicaid spending over the next decade by closing "loopholes" that allow middle-class seniors to receive benefits, prohibiting what he called "accounting gimmicks" used by states to receive more federal matching funds and eliminating excessive spending on items such as prescription drugs, the Washington Post reports. In his first speech as HHS secretary, Leavitt -- seeking to "dispel fears that President Bush is poised to cap federal spending on Medicaid" -- told a convention of health care executives at the World Health Care Congress in Washington, D.C., that the Bush administration will not limit federal spending on mandatory beneficiaries, according to the Post. However, the Post also notes that he did not directly address the possibility of spending caps on optional patients and services, which account for about two-thirds of Medicaid costs (Connolly, Washington Post, 2/2). Leavitt said the administration will not propose block grants for the program or "cut available resources," and he added that further details of the administration's Medicaid plan will be included in the budget proposal scheduled to be released on Monday (Lueck, Wall Street Journal, 2/2). Leavitt, who was confirmed last week, also said that he will support efforts to move more elderly and disabled beneficiaries from nursing homes to less-costly home- and community-based health care (Washington Post, 2/2).

Future Plans
Leavitt said that President Bush "wanted to join Congress in an effort to rein in the cost of Medicaid," which has risen 63% in the last five years, the New York Times reports (Pear, New York Times, 2/2). With Bush looking to halve the deficit over the next five years, "the fast-growing program has become the biggest target for health care cuts in the budget," the Los Angeles Times reports (Alonso-Zaldivar, Los Angeles Times, 2/2). Leavitt's speech marked "the first hint of the tack Bush would take on the matter," the AP/St. Petersburg Times reports (AP/St. Petersburg Times, 2/2). "Medicaid is not meeting its potential. It is rigidly inflexible and inefficient. And, worst of all, it is not financially sustainable," Leavitt said, noting that his proposals could limit the program's growth to 7% a year. The Congressional Budget Office said last week that, under current law, Medicaid will grow an average of 7.8% in the next 10 years (New York Times, 2/2). Leavitt added, "There is a time in the life of every problem when it is big enough to see but small enough to solve. For Medicaid, that window of opportunity is upon us. The time to act is now." He said HHS aides would provide more details on the $60 billion in savings he proposed (Washington Post, 2/2).

Optional Care Questions
According to the Wall Street Journal, Leavitt "signaled big changes" in Medicaid spending on optional care (Wall Street Journal, 2/2). "Mandatory populations need the help. They must receive the help," Leavitt said, adding, "The optional populations, on the other hand, may not need such a comprehensive solution. Most of them are healthy people who just need help paying for health insurance." Leavitt said that changes to optional care would allow coverage to be expanded to a wider pool of uninsured people. "Wouldn't it be better to provide health insurance to more people, rather than comprehensive care to a smaller group? Wouldn't it be better to give Chevies to everyone rather than Cadillacs to a few?" Leavitt asked. He proposed adopting the approach of SCHIP, which allows states to offer Medicaid benefits, federal health benefits, or a hybrid of private and government-funded plan benefits (CQ HealthBeat, 2/1). According to CQ Today, Leavitt's proposals seem inspired by Medicaid reforms he enacted while governor of Utah (Adams/Schatz, CQ Today, 2/1). In addition, "[o]ne of the biggest changes" Leavitt offered in his speech was proposing a more "flexible package of benefits" to women and children in low-income families, the New York Times reports.

Elderly Asset Shifting
Leavitt said Medicaid could save $4.5 billion over the next 10 years by restricting the ability of middle-class seniors to gain long-term care benefits by transferring their assets to their children (New York Times, 2/2). The tactic, Leavitt indicated, shifts costs from older patients who could afford their own care to the government, CQ Today reports (CQ Today, 2/1). "Medicaid must not become an inheritance protection plan," Leavitt said, adding, "Right now, many older Americans take advantage of Medicaid loopholes to become eligible for Medicaid by giving away assets to their children. There is a whole industry that actually helps people shift costs to the taxpayer" (New York Times, 2/2). He said, "We must close these loopholes and focus Medicaid's resources on helping those who really need it" (Los Angeles Times, 2/2).

State Loopholes Costly
Leavitt "expressed sympathy with governors struggling to balance their budgets" around rising Medicaid costs, but he also "repeatedly" said that some state leaders have "resorted to a variety of loopholes, and in some cases accounting gimmicks," in order to receive an additional $40 billion in federal money over the past decade, the Post reports (Washington Post, 2/2). The Government Accountability Office last week reported that such actions by states "generate excessive federal matching payments" that "cost the federal government several billions of dollars each year" (New York Times, 2/2). Leavitt predicted HHS will "need to have a very uncomfortable but, frankly, necessary conversation with our funding partners, the states," about how some "shift the cost that they claim to pay to the taxpayers of other states." Leavitt said, "States overpay providers, get the overpayment returned to them and spend the same dollars a second time. It's a shell game that makes no one healthier." He added that states also "are shifting costs to the federal treasury for 'administration.' This accounting gimmick encourages wasteful spending and bloated bureaucracy" (AP/St. Petersburg Times, 2/2). He said the federal government will begin to challenge governors who engage in "the seven harmful habits of highly desperate states," although he declined to detail how this plan would be achieved or name which states are engaging in the practices (Los Angeles Times, 2/2). "This isn't about blame; it's a simple statement that it has to stop," Leavitt said (AP/St. Petersburg Times, 2/2).

Potential Savings on Prescription Drugs
According to Leavitt, the federal government could save $15 billion over the next decade by no longer "overpaying for prescription drugs," possibly referring to recent congressional testimony that indicated most states pay significantly more than retail prices for Medicaid drugs (New York Times, 2/2). Leavitt indicated that ending such overpayments could save states $10 billion. Additionally, in response to a question about legalizing the importation of prescription drugs, Leavitt said he is concerned about the safety of the practice but is "open" to the possibility (Wall Street Journal, 2/2).

Reaction
Governors, lawmakers and advocacy groups "immediately voiced opposition" and "fierce protests" to some of Leavitt's proposals, CQ Today reports. Virginia Gov. Mark Warner (D), chair of the National Governors Association, said, "The cuts cause grave concern because the states are still reeling from the budget woes of the last five or six years." Warner added, "To have a major shift that simply passes costs from the federal government to the states will really slow the recovery that most states have started to experience." However, Warner said, governors are more willing to accept changes in Medicaid than they were two years ago, when the Bush administration proposed a cap on federal spending for the program (CQ Today, 2/1). Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured, said that because children account for most mandatory beneficiaries, Leavitt's comments on possible spending limits on optional beneficiaries could indicate that "the potential goal ... is to reduce spending on the aged and people with disabilities, who tend to be classified as optional and are the most expensive" (Washington Post, 2/2). Rowland also said, "It's always a challenge to see how resources can be stretched without jeopardizing care" (CQ Today, 2/1). A California state official, who asked not to be identified, said, "If they push for $25 billion or $50 billion in cuts, you're going to start kicking people off the rolls," adding, "That either means telling a bunch of grandmas they're on the street or taking the number of uninsured to 50 million or 55 million. Neither of those options have good consequences" (Los Angeles Times, 2/1). An unnamed Medicaid analyst said that the "shift in talk away from block grants or caps may be a change in tactics rather than strategy" and might indicate the administration is planning to propose "a specific Medicaid savings figure over the next five years" that could place the burden for achieving savings on congressional committees, CQ HealthBeat reports (CQ HealthBeat, 2/1).

McClellan Backs Leavitt's Pledges
CMS Administrator Mark McClellan on Tuesday said that the Bush administration will neither revive its 2003 plan to cap federal Medicaid spending on optional care nor propose implementing any sort of block grant. Speaking to the AARP board of directors, McClellan said, "We're not making the same allotment proposal this year," adding, "I hope people will take a close look at what the administration is saying and not at what people are saying we're saying." McClellan also repeated Leavitt's goals to save money by eliminating overpayments for prescription drugs and making it easier for states to pay for home- and community-based care, adding that states currently have many obstacles for receiving funds for such care. McClellan said the administration will discuss legislative proposals with Congress to ease funding for long-term care outside of nursing homes. Institution-based care, McClellan said, "is the kind of Medicaid bias that we really need to get rid of." He noted the administration's support for proposals to build assets for long-term care and to spur sales of long-term care insurance policies. McClellan also said that disease management programs could result in more Medicaid savings. "We need to do more to help people save more," he said. Additionally, McClellan "talked up" the new Medicare law, which he said would provide necessary curatives to the program, including preventive care measures, prescription drug coverage and coordinated care, CQ HealthBeat reports (CQ HealthBeat, 2/1).

Gregg Says Medicaid Spending Will Be 'Restrained'
Senate Budget Committee Chair Judd Gregg (R-N.H.) on Tuesday noted that Medicaid's funding level would be "more restrained than what we've seen in the past" and suggested he might consider changes to the program that would "give governors more flexibility with less rate of growth in (federal) dollars." Gregg, a former governor, added that any structural change to Medicaid "has to be done in concert with the governors," and he said that he plans to work with states to "come up with some number that's acceptable" (CQ Today, 2/1). Gregg added that he "expected a possible compromise might involve lower overall funding for Medicaid but more flexibility for the states," CongressDaily reports (Cohn, CongressDaily, 2/1).

Broadcast Coverage
NPR's "Morning Edition" on Wednesday reported on Leavitt's Medicaid address. The segment includes comments from Rep. Patrick Kennedy (D-R.I.) and Leavitt (Rovner, "Morning Edition," NPR, 2/2).

The complete segment is available online in RealPlayer.

In addition, NPR's "All Things Considered" on Tuesday included an interview with Arturo Perez, fiscal analyst with the National Conference of State Legislatures, about states' budgets, including rising costs for programs such as Medicaid. The segment also includes comments from Govs. Phil Bredesen (D-Tenn.), Tim Pawlenty (R-Minn.) Rick Perry (R-Texas) and Arnold Schwarzenegger (R-Calif.) (Siegel, "All Things Considered," NPR, 2/1).

The complete segment is available online in RealPlayer.