How Medicaid Works: Program Basics

CRS Report for Congress
How Medicaid Works —
Program Basics
Updated January 4, 2006
Elicia J. Herz (Coordinator),
Jean Hearne, Julie Stone, Karen Tritz,
Evelyne P. Baumrucker, Christine Scott,
Chris L. Peterson, April Grady, and Richard Rimkunas
Domestic Social Policy Division


Congressional Research Service ˜ The Library of Congress

How Medicaid Works — Program Basics
Summary
Medicaid is a means-tested entitlement program that has been in existence for
more than 40 years. It provides primary and acute care as well as long-term care to
more than 50 million Americans at a cost to federal and state governments of
approximately $296.3 billion in FY2004. Of all federally supported social programs,
only Medicare comes close to this level of spending, and only Social Security costs
more.
Medicaid is jointly financed by the federal and state governments, but each state
designs and administers its own version of the program under broad federal
guidelines. The complexity of Medicaid presents an enormous challenge for anyone
attempting to generalize about the program. State variability in eligibility, covered
services, and how those services are reimbursed and delivered is the rule rather than
the exception. Furthermore, Medicaid is targeted at individuals with low income, but
not all of the poor are eligible, and not all those covered are poor.
This report summarizes the basic elements of Medicaid, and includes the most
recent data available (ranging from 2000 to 2006, depending on the data source).
Specifically, it describes federal Medicaid rules governing: (1) who is eligible, (2)
what services are covered and how they are delivered, (3) how the program is
financed and administered, (4) key provider reimbursement issues, and (5) the
significant role of waivers in expanding eligibility and modifying services and health
care delivery systems. It concludes with a brief history of Medicaid legislation
enacted since 1996.
This report will be updated periodically.



Contents
Overview ........................................................1
Eligibility ........................................................2
Families, Pregnant Women, and Children.......................3
Section 1931: Persons Qualifying Under the Former AFDC
Program Rules........................................3
Poverty-related Pregnant Women and Children..................3
Transitional Medical Assistance..............................4
Other AFDC-Related Groups................................5
Targeted Low-income Children...............................5
The Aged and Persons with Disabilities............................5
Persons Who Qualify for Supplemental Security Income (SSI)......5
Recipients of State Supplemental Payment (SSP) Benefits..........6
Poverty-related Group for the Aged and Disabled.................6
Coverage for Institutionalized Individuals and Related Groups
Under the Special Income Rule...........................7
Working Individuals with Disabilities..........................7
Qualified Medicare Beneficiaries and Related Groups.............8
Medically Needy.............................................10
Others ......................................................11
Individuals Qualifying Under Demonstration Waivers............11
Women with Breast and Cervical Cancer......................11
Persons with Tuberculosis..................................11
Immigrants ..............................................12
Enrollment ......................................................12
Medicaid and the Poor.............................................17
Benefits ........................................................19
Financing .......................................................30
Reimbursement Policy.............................................32
Reimbursement for Prescription Drugs............................33
Disproportionate Share Hospital Payments.........................33
Upper Payment Limits for Certain Institutional Providers.............34
Administration ...................................................34
Delivery Systems.................................................34
Fee-for-Service ...............................................34
Managed Care...............................................35
Types of Managed Care....................................36
Trends in Managed Care...................................41
Long-Term Care Delivery System................................42



Medicaid Waiver Programs.........................................44
Section 1115 Waiver Demonstration Programs......................44
Financing ...............................................45
Program Types...........................................45
Section 1915(c) Home and Community-based Waiver Programs........47
Legislative History................................................50
List of Figures
Figure 1. Medicaid Enrollees by Basis of Eligibility, FY2002..............14
Figure 2. Medicaid Enrollees by Maintenance Assistance Status, FY2002....14
Figure 3. Medicaid Expenditures per Recipient for Acute and Long-Term
Care by Basis of Eligibility, FY2002..............................29
Figure 4. Medicaid HCBS Waiver Expenditures by Target Population,
FY2003 ....................................................49
List of Tables
Table 1. Federal Share and Total Medicaid Spending, 1998-2004............1
Table 2. Unduplicated Number of Medicaid Recipients
by Eligibility Category for Selected Years .........................15
Table 3. Medicaid Eligibles by Basis of Eligibility by State, FY2002........16
Table 4. Medicaid Coverage by Age and
Family Income, Calendar Year 2002..............................18
Table 5. Uninsured Children Under Age 19, by Eligibility Status, 2002......19
Table 6. Optional Medicaid Services and Number
of States Offering Each Service, September 2003....................21
Table 7. Medicaid Recipients by Service Category,
FY2002 ....................................................26
Table 8. Total State and Federal Medicaid Payments
by Basis of Eligibility, Type of Service, and
as a Percentage of Total Payments, FY2002........................27
Table 9. Federal Medical Assistance Percentage (FMAP)
for FY2003-FY2006, by State...................................31
Table 10. Medicaid Recipients Served Through
MCO and/or PHP Plans by Basis of Eligibility, FY2000..............37
Table 11. Total Medicaid Payments for MCO and PHP Recipients bya
Basis of Eligibility, FY2002....................................40



How Medicaid Works — Program Basics
Overview
Medicaid was enacted in 1965, in the same legislation that created the Medicare
program: the Social Security Amendments of 1965 (P.L. 89-97). It grew out of and
replaced two earlier programs of federal grants to states that provided medical care
to welfare recipients and the aged.
Medicaid is a means-tested entitlement program. It is jointly financed by federal
and state funds. Federal contributions to each state are based on a state’s willingness
to finance covered medical services and a matching formula. Each state designs and
administers its own program under broad federal rules. The Centers for Medicare
and Medicaid Services (CMS), within the U.S. Department of Health and Human
Services (HHS), is responsible for federal oversight of the program. In FY2004, total
federal and state spending on Medicaid reached $296.3 billion (see Table 1), slightly
exceeding net outlays for Medicare. No other means-tested cash or noncash program
comes close to approaching this spending level. In fact, of all federally supported
social programs, only Social Security costs more.
Table 1. Federal Share and Total Medicaid Spending, 1998-2004
($ in billions)
Percentage change
YearTotal Medicaid spendingFederal share in federal share
1998 $177.3 $100.1 6 .6%
1999 $189.9 $107.4 7 .3%
2000 $206.1 $116.9 8 .8%
2001 $228.0 $129.8 11.1%
2002 $258.2 $146.6 12.9%
2003 $276.1 $161.0 9 .8%
2004 $296.3 $175.0 8 .7%
Sources: CRS tabulations of Form CMS-64 data from the Centers for Medicare and Medicaid
Services.
To many, Medicaid is an enigma. The program’s complexity surrounding who
is eligible, what services are paid for, and how those services are reimbursed and
delivered is one source of this confusion. Variability across state Medicaid programs
is the rule, not the exception, and adds to the confusion. Income eligibility levels
vary, services covered vary, and the method for and amount of reimbursement for
services differ from state to state. In addition, more and more states in recent years



have implemented a variety of major program changes using special waiver authority.
Furthermore, Medicaid is a program that is targeted at low-income individuals, but
not all of the poor are eligible, and not all those covered are poor. For populations
like children and families, primary and acute care are often delivered through
managed care, while the elderly and disabled typically obtain such care on a fee-for-
service basis. Nationwide, Medicaid finances the majority of long-term care services.
Such services include, for example, nursing home care and community-based
services designed to support the elderly and disabled in their homes. Recently, some
states have begun to integrate Medicare and Medicaid financing and/or coverage of
acute and long-term care services for these populations.
The complexity of Medicaid presents an enormous challenge for anyone
attempting to make generalizations about the program. This report describes federal
Medicaid rules that govern: (1) who is eligible, (2) what services are covered and
how they are delivered, (3) how the program is financed and administered, (4) key
provider reimbursement issues, and (5) the significant role of waivers in expanding
eligibility and modifying services. It concludes with a brief legislative history of
major laws affecting Medicaid enacted since 1996.
Eligibility
Federal Medicaid statute defines over 50 distinct population groups as being
potentially eligible for states’ programs. Some groups are mandatory, meaning that
all states that participate in the Medicaid program must cover them; others are
optional. Prior to the 1980s, Medicaid eligibility was limited to very low-income
families with dependent children, poor elderly and disabled individuals, and the
“medically needy.” Beginning in the 1980s, additional eligibility pathways were
added to the Medicaid statute to allow for the coverage of higher income children and
pregnant women as well as other elderly and disabled individuals. Most recently,
states were given the option to provide Medicaid to other groups with specific
characteristics including certain women with breast or cervical cancer, to uninsured
individuals with tuberculosis, and to additional working individuals with disabilities.
Not all groups of Medicaid beneficiaries receive the same set of benefits. To
understand the different benefits offered to each group, see “Benefits.”
Medicaid is a means-tested program. To qualify, applicants’ income and
resources must be within certain limits. The specific income and resource limitations
that apply to each eligibility group are set through a combination of federal
parameters and state definitions. Consequently, those standards vary considerably
among states, and different standards apply to different population groups within a
state. For many of those groups, moreover, states have permission under a special
provision, Section 1902(r)(2), to use more liberal standards for computing income
and resources than are specified within each of the groups’ definitions. Most states
use Section 1902(r)(2) to ignore or disregard certain types or amounts of income or
assets, thereby extending Medicaid to individuals with earnings or assets too high to
otherwise qualify under the specified rules for that eligibility pathway.



Families, Pregnant Women, and Children
The two primary pathways to Medicaid for low-income family members,
pregnant women, and children are through (1) Section 1931 of Medicaid statute, for
those families who would have been eligible for cash welfare payments under former
Aid to Families with Dependent Children (AFDC) program rules, and (2) a series of
targeted Medicaid expansions for poor pregnant women and children begun in the
1980s. Other important pathways for low-income family members, including
transitional medical assistance, other AFDC-related groups, and children qualifying
for the State Children’s Health Insurance Program (SCHIP) who are receiving their
health coverage under the Medicaid program, are explained below.
Section 1931: Persons Qualifying Under the Former AFDC Program
Rules. Families who are eligible for Temporary Assistance for Needy Families
(TANF), the welfare program enacted in 1996 to replace AFDC, are not
automatically eligible for Medicaid. Medicaid’s Section 1931, however, preserves
Medicaid entitlement for individuals who meet the requirements of the former AFDC
programs in effect in their states on July 16, 1996. This categorical group was
created when TANF replaced AFDC to ensure that low-income families do not lose
Medicaid as a result of welfare reform. States have significant flexibility in defining
the income and resource standards for those families qualifying for Medicaid under
Section 1931: (1) income standards may be reduced below those in effect in 1996,
but they cannot be lower than those used on May 1, 1988; (2) income and resource
standards may be increased for any period after 1996, but by no more than the
percentage increase in the Consumer Price Index (CPI) for the same period; and (3)
states may use less restrictive methods for counting income and resources than those
in effect on July 16, 1996.
Certain individuals qualifying under the Section 1931 pathway may be denied
Medicaid coverage if they refuse to cooperate with states’ TANF work requirements.
States are permitted to deny Medicaid benefits to nonpregnant adults and heads of
households who lose TANF benefits because of refusal to work, but must continue
to provide Medicaid coverage to their children.
In 2002, 39 states had taken advantage of the flexibility of Section 1931 to
expand eligibility for working families by disregarding some earned income, thereby
allowing families with higher total income to qualify for the program. Additional
states eliminated various income and assets rules, again for low-income working
families, thus expanding their access to Medicaid.1
Poverty-related Pregnant Women and Children. Between 1986 and
1991, Congress gradually extended Medicaid to new groups of pregnant women and
children. Under these provisions, states are required to cover pregnant women and
children under age 6 with family incomes below 133% of the federal poverty income


1 K.A. Maloy , K.A. Kenney, J. Darnell, and S. Cyprien, Can Medicaid Work for Low-
Income Working Families? Kaiser Commission on the Future of Medicaid and the
Uninsured, Apr. 2002.

guidelines.2 Coverage for pregnant women qualifying through this pathway is limited
to services related to the pregnancy or complications of the pregnancy and extends
to 60 days after termination of the pregnancy. Children receive full Medicaid
coverage.
States are required to cover all children over the age of five and under 19 who
are in families with income below 100% of the federal poverty level (FPL). This
requirement has been phased-in since July 1, 1991, and was fully implemented in

2002.


States have the option to go beyond the above mandatory groups to include
pregnant women and infants under one year of age whose family income is over
133% and up to 185% of the FPL. In 2002, 36 states and the District of Columbia
extended coverage to some or all pregnant women and infants in this category.
Transitional Medical Assistance. States are required to offer transitional
medical assistance (TMA) to certain individuals receiving Medicaid under Section
1931 of the Social Security Act. The law permanently requires four months of TMA
for families losing Medicaid eligibility due to increased child or spousal support
collections. It also permanently requires four months of TMA for families losing
Medicaid eligibility due to an increase in earned income or hours of employment.
TMA was established in part to address the concern that individuals receiving AFDC
payments would not seek work or would turn down work opportunities for fear of
losing Medicaid. In 1988, Congress expanded TMA so that states must continue
providing Medicaid for six months to families that were receiving Medicaid under
Section 1931 in at least three of the last six months. The extended TMA coverage
is available to individuals and families who would otherwise have lost such
assistance due to increased work hours, increased earnings, or the loss of a
time-limited earned income disregard. In addition, states are required to extend
Medicaid coverage for a second six months to families that were covered during the
entire first six-month TMA period, and whose earnings are below 185% of poverty.
The provision authorizing TMA receipt for up to 12 months (Section 1925 of the
Social Security Act) was originally authorized to replace the permanent four-month
TMA requirement through FY1998, but its sunset has been repeatedly extended over
the years. If the 12-month TMA provision is allowed to expire, states will still be
required to provide four months of TMA to families that lose Medicaid eligibility due
to an increase in earned income, hours of employment, or child or spousal support,
but not to those who lose eligibility due to the loss of a time-limited earnings
disregard (which allows families to qualify for Medicaid at higher income levels for
a set period of time).3


2 One hundred percent of the federal poverty level (FPL) is equal to $15,670 and 133% of
FPL is equal to $20,841 for a family of three in 2004 in the 48 contiguous states.
3 As of 2001 (the most recent published data available), 15 states had time-limited income
disregard policies for families receiving Medicaid under Section 1931. See K.A. Maloy,
K.A. Kenney, J. Darnell, and S. Cyprien: Can Medicaid Work for Low-Income Working
Families? Kaiser Commission on the Future of Medicaid and the Uninsured, Apr. 2002.

Other AFDC-Related Groups. While the AFDC program no longer exists,
a number of Medicaid eligibility groups tied to states’ former AFDC rules remain.
States must provide Medicaid to recipients of adoption assistance and foster care
(who are under age 18) under Title IV — E of the Social Security Act. In 1999 states
were given the option to extend Medicaid to former foster care recipients who are
aged 18, 19, or 20.
Ribicoff children, a pathway named for the former Senator who sponsored
legislation authorizing this group, are those under age 21 who meet income and
resource requirements for the former AFDC Program but who do not meet other
categorical requirements for AFDC. States have the option to cover Ribicoff children
and have a great deal of flexibility in defining the specific group of children to be
covered under this category. Often states use this authority to cover children in state-
sponsored foster care, children who are institutionalized, or who are inpatients in
psychiatric facilities. Although many of the children who have traditionally been
covered under Ribicoff are now eligible under other poverty-related groups, Ribicoff
remains an important pathway to eligibility for some small groups of older
adolescents in foster care and children in two-parent families.
Targeted Low-income Children. Section 4911 of the Balanced Budget
Act of 1997 (BBA 97, P.L. 105-33) established an additional coverage group for low-
income children. This provision establishes a Medicaid coverage group that is
parallel to the group of children eligible for health coverage under another provision
of BBA 97, the State Children’s Health Insurance Program (SCHIP, Section 4901).
The two provisions allowed states to choose, after the passage of BBA 97, to extend
Medicaid for targeted low-income children, create a new SCHIP program for those
children, or coordinate both programs to cover the target population.
Targeted low-income children are those who are not otherwise eligible for
Medicaid, are not covered under a group health plan or other insurance, and are living
in families with income that is either: (1) above the state’s Medicaid financial
eligibility standard in effect in June 1997 but less than 200% of the FPL; or (2) in
states with Medicaid income levels for children already at or above 200% of the
poverty level as of June 1997, within 50 percentage points over this income standard.
States can either establish a specific coverage group for targeted low-income children
or they can build upon other existing Medicaid coverage groups for children. As of
August 2004, 33 states cover targeted low-income children under Medicaid.
The Aged and Persons with Disabilities
Persons Who Qualify for Supplemental Security Income (SSI). With
one important exception, states are required to provide Medicaid coverage to
recipients of SSI. SSI, authorized under Title XVI of the Social Security Act, is a
means-tested cash assistance program for aged, blind, and disabled individuals whose
income falls below the federal maximum monthly SSI benefit and whose resources
are limited. To qualify for SSI, a person must satisfy the program criteria for age or
disability and meet certain citizenship or United States residency requirements.
Eligibility for SSI is restricted to otherwise qualified individuals whose resources do
not exceed $2,000 for an individual and $3,000 for a couple; certain resources, such
as a person’s home, are exempt. Income cannot exceed the maximum federal SSI



benefit of $579 per month in 2005 for an individual living independently, and $869
for a couple living independently. The SSI benefit level of $579 per month for an
individual is 74% of the FPL.
The major exception to Medicaid coverage of SSI recipients is in states that
exercise the so-called “209(b)” option described in Section 209(b) of the Social
Security Amendments of 1972 (P.L. 92-603). Such states may use income, resource
and disability standards that are no more restrictive than those in place on January 1,

1972. As of 2003, there were 11 Section 209(b) states: Connecticut, Hawaii, Illinois,


Indiana, Minnesota, Missouri, New Hampshire, North Dakota, Ohio, Oklahoma and
Virginia.4 Each of these has at least one eligibility standard that is more restrictive
than current SSI standards, and some have certain standards that are more liberal.
States that use more restrictive eligibility rules under Section 209(b) must also allow
applicants to deduct medical expenses from their income when determining financial
eligibility for Medicaid. This process is sometimes referred to as “spend-down.”5
Recipients of State Supplemental Payment (SSP) Benefits. Many
states provide SSP benefits with state-only dollars on a monthly basis. These
payments are intended to cover such items as food, shelter, clothing, utilities, and
other daily necessities. The amount of the benefit is determined by the individual
states. States may provide supplemental payments to all persons who receive SSI,
and/or to individuals who meet all SSI criteria, other than income. States may also
choose to provide SSP benefits only to particular groups, such as elderly persons
living independently in the community without special needs, or elderly individuals
who require in-home personal care assistance or home-delivered meals. In all of
these cases, states decide whether to extend Medicaid coverage to all SSP recipients,
to only some of these recipients, or to none at all. When a state provides Medicaid
eligibility to persons receiving only SSP — and not SSI — then the maximum
income eligibility standard for Medicaid is an amount equivalent to the combined
federal SSI payment and the SSP benefit. For 209(b) states, however, the effective
maximum financial eligibility standard for these individuals is the 209(b) categorical
eligibility standard plus the SSP payment.
Poverty-related Group for the Aged and Disabled. The enactment of
the Omnibus Budget Reconciliation Act of 1986 (OBRA 86) offered states an option
for covering persons whose income exceeds SSI or 209(b) levels. This option allows
states to cover aged and disabled individuals with incomes up to 100% of FPL. In

2003, 20 states and the District of Columbia used this option.6


4 A 2003 eligibility survey conducted by the American Public Human Services Association
in collaboration with Congressional Research Service.
5 An example of spend-down is as follows: if an applicant has a monthly income of $700
(not including any SSI or State Supplemental Payments (SSP)) and the state’s maximum
allowable income standard for spend-down eligibility is $600, the applicant would qualify
for Medicaid after incurring $100 in medical expenses in that month.
6 A 2003 eligibility survey conducted by the American Public Human Services Association
in collaboration with Congressional Research Service. The District of Columbia allowed
people to qualify up to 100% of FPL. The states included Arkansas (up to 80%), California
(continued...)

Coverage for Institutionalized Individuals and Related Groups
Under the Special Income Rule. States may extend Medicaid to certain
individuals with incomes too high to qualify for SSI, and who are eligible for nursing
facility or other institutional care. Under the special income rule, also referred to as
“the 300% rule,” such persons must (1) require care provided by a nursing home or
other medical institution for no fewer than 30 consecutive days, (2) meet the resource
standard determined by the state, and (3) have income that does not exceed a
specified level — no greater than 300% of the maximum SSI payment applicable to
a person living at home. For 2005, this limit is $1,737 per month (3 times the
monthly SSI payment of $579). States may use a level that is lower than the
maximum of 300% of SSI, if they wish.
Since 1993 (OBRA 93), states that use only the special income rule for
institutional eligibility, and do not use the medically needy option (described below),
must allow applicants to place income in excess of the special income level in a
special trust, often called a Miller Trust, and receive Medicaid coverage for their7
care. Following the individual’s death, the state becomes the beneficiary of amounts
in the trust.
Working Individuals with Disabilities. Concern that many workers with
disabilities would lose eligibility for Medicaid as a result of increased earnings and
yet not have access to affordable or adequate health insurance through their jobs,
prompted Congress to establish a variety of special rules that would protect working
individuals with disabilities from losing their Medicaid benefits. One rule does so
by changing SSI program rules for working persons with disabilities. In order for
disabled persons to qualify for SSI and, thus become eligible for Medicaid, applicants
must establish disability status under the criteria determined by the Secretary of
Health and Human Services (HHS). These criteria are linked to an individual’s
ability to work or earn income from work, commonly referred to as an individual’s
ability to “engage in substantial gainful activity” (SGA). Current regulations provide
that an individual is able to engage in SGA if his or her earnings exceed $830 per
month for 2005. For persons who are blind, SGA is $1,380 per month for 2005.
SGA is defined in federal regulations as paid work involving significant and
productive physical or mental duties.8 Section 1619(a) of SSI law permits those
states that extend Medicaid to SSI recipients to allow certain persons with a disability
who had been eligible for an SSI payment for at least one month and who meet all


6 (...continued)
(100%), Florida (88%), Georgia (100%), Hawaii (100%), Illinois (100%), Maine (100%),
Massachusetts (100%), Michigan (100%), Minnesota (95%), Mississippi (100%), Nebraska
(100%), New Jersey (100%), North Carolina (100%), Oklahoma (100%), Pennsylvania
(100%), Rhode Island (100%), South Carolina (100%), Utah (100%), and Virginia (80%).
7 OBRA 1993 codified a 1990 ruling from the United States District Court for the District
of Colorado that first coined the term “Miller Trust.” See Miller v. Ybarra, 746 F.Supp. 79
(E.D. Colo., 1990).
8 The inability to engage in SGA must be a result of a medically determined physical or
mental impairment expected to result in death or that has lasted, or can be expected to last,
for a continuous period of at least 12 months. A child under age 18 may qualify as disabled
if he or she has an impairment that results in “marked and severe” functional limitations.

other eligibility rules, to continue receiving Medicaid even when they are working
at the SGA level. The amount of their SSI special cash benefits is gradually reduced
as their earnings increase under an income disregard formula9 until their countable
earnings reach the SSI benefit standard or what is known as the breakeven point
($579 per month in 2005).
In addition, individuals who are blind or have a disability can continue to be
eligible for Medicaid even if their earnings exceed the SSI income disregard
breakeven point under a special group referred to as “qualified severely impaired
individuals.” Special eligibility status granted by Section 1619(b)(1) and 1905(q),
under which the individual is considered an SSI recipient for purposes of Medicaid
eligibility (although he or she is not actually receiving a SSI cash benefit) applies as
long as the individual: (1) continues to be blind or have a disabling impairment; (2)
continues to meet all the other requirements, except for earnings, for SSI eligibility;
(3) would be seriously inhibited from continuing to work by the termination of
eligibility for Medicaid services; and (4) has earnings that are not sufficient to
provide a reasonable equivalent to the benefits that would have been available if he
or she did not have SSI, state supplementary payments, Medicaid and publicly funded
personal care.
Other provisions give states even more flexibility to cover working persons with
disabilities. The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) allows states
to provide Medicaid coverage to working individuals with disabilities whose family’s
net income does not exceed 250% of the FPL. Two other provisions were added
under the Ticket to Work and Work Incentives Improvement Act of 1999 (TWWIIA,
P.L. 106-170). The first allows states to further expand Medicaid coverage to
working individuals with disabilities, between the ages of 16 and 64, with incomes
and resources as defined by the state, and allows states to impose premiums and
other cost-sharing on individuals who qualify. The second allows states, under
certain circumstances, to provide coverage to persons whose medical conditions have
improved and who have therefore become ineligible for SSI on the basis of disability.
Qualified Medicare Beneficiaries and Related Groups. Certain low-
income individuals who are aged or have disabilities as defined under SSI and who
are eligible for Medicare are also eligible to have some of their Medicare cost-sharing
expenses paid for by Medicaid. There are four categories of such persons10:
!Qualified Medicare Beneficiaries (QMB). Qualified Medicare
beneficiaries are aged or disabled Medicare beneficiaries with


9 Not all income is counted for SSI purposes. Different exemptions, or disregards, apply for
the different types of income. Earned income that is exempt from being counted includes
the first $65 per month in wages; one-half of all wages over $65; impairment-related
expenses necessary for blind and disabled workers; and income used for a plan for achieving
self support (PASS). Unearned income exclusions include the first $20 per month of non-
needs tested benefits and all of the following: Food Stamps; housing and energy assistance;
state and local needs-based assistance; in-kind support and maintenance payments from non-
profit organizations; and student grants and scholarships.
10 The program known as Qualifying Individuals-2 (QI-2) terminated on Sept. 30, 2002.

incomes no greater than 100% of the federal poverty level and assets
no greater than $4,000 for an individual and $6,000 for a couple.
States are required to cover, under their Medicaid programs, the
costs of Medicare premiums, deductibles, and coinsurance for
Medicare covered benefits for such persons. Other Medicaid
covered services, such as nursing facility care, prescription drugs
and primary and acute care services, are not covered for these
individuals unless they qualify for Medicaid through other eligibility
pathways (e.g., via SSI, medically needy or the special income rule).
!Specified Low-Income Medicare Beneficiaries (SLMB). Specified
low-income Medicare beneficiaries meet QMB criteria, except that
their income is greater than 100% of FPL but does not exceed 120%
FPL. Under this Medicaid pathway, states are required to cover only
the monthly Medicare Part B premium. Other Medicaid covered
services are not covered for these individuals unless they qualify for
Medicaid through other eligibility pathways.
!Qualifying Individuals (QI-1). The QI-1 eligibility pathway applies
to aged and disabled Medicare beneficiaries whose income is
between 120 and 135% FPL. For these individuals, states are
required to pay the monthly Medicare Part B premium, only until the
federal allotment for this purpose is depleted.11 These individuals
are not otherwise eligible for Medicaid.
!Qualified Disabled and Working Individuals (QDWIs). States are
required to pay the Medicare Part A premiums for persons who were
previously entitled to Medicare on the basis of a disability, who lost
their entitlement based on earnings from work, but who continue to
have a disabling condition. Such persons may only qualify if their
incomes are below 200% of FPL, their resources are below 200% of
the SSI limit ($4,000), and they are not otherwise eligible for
Medicaid.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA 2003, P.L. 108-173). This act
provides that, beginning in 2006, Medicaid eligibles who are also eligible for
Medicare will receive outpatient prescription drug coverage through the new
Medicare prescription drug benefit instead of through Medicaid. While this act does
not change Medicaid eligibility rules, it does affect the benefits that the Medicaid
program will be allowed to cover.12 Under MMA 2003, state Medicaid programs will


11 In general, Medicaid payments are shared between the federal government and the states
according to a matching formula (see the section on financing). However, expenditures
under the QI-1 program are paid 100% by the federal government (from the Part B trust
fund) up to the state’s allocation level. A state is only required to cover the number of
persons which would bring its spending on these population groups in a year up to its
allocation level. This temporary program, originally slated to end Sept. 30, 2002, has been
extended through Sept. 30, 2005, by P.L. 108-448.
12 Medicaid eligibility for individuals who now qualify as medically needy by “spending
down” their income on medical expenses (see next section), may be affected. Those
(continued...)

no longer be able to cover any drugs that are to be provided through the Medicare
benefit, or pay the cost sharing amounts for those drugs.
Medically Needy
States may extend Medicaid coverage to persons who are members of one of the
broad categories of Medicaid covered groups (i.e., are aged, have a disability, or are
in families with children), but do not meet the applicable income requirements and,
in some instances, resources requirements for other eligibility pathways. Under this
option, states may set their medically needy monthly income limits for a family of a
given size at any level up to 133 a% of the maximum payment for a similar family
under the state’s AFDC program in place on July 16, 1996. For families of one, the
statute gives certain states some flexibility to set these limits to amounts that are
reasonably related to the AFDC payment amounts for two or more persons. While
133a% of the former AFDC program standard is generally higher than the nominal
income standard for other Medicaid pathways for families, it is generally lower than
the income standard for elderly or disabled SSI recipients.
For all groups, states are required to allow individuals to spend down to the
medically needy income standard by incurring medical expenses, in the same way
that SSI recipients in Section 209(b) states may spend down to Medicaid eligibility.
For elderly and disabled recipients living in the community who must spend down
to qualify for Medicaid, the medically needy income standard leaves individuals with
less money for their living expenses than simply qualifying for Medicaid through
SSI.
Under the statute, states may limit the categories of individuals who can qualify
as medically needy. If a state provides any medically needy program, however, it
must include all children under 18 who would qualify under one of the welfare-
related groups, and all pregnant women who would qualify under either a mandatory
or optional group, if their income or resources were lower. In 2003, CMS reported
that 35 states and the District of Columbia had medically needy programs,13 and 33
of these programs were extended to persons age 65 and older and persons with
disabilities.14


12 (...continued)
individuals may experience delayed Medicaid eligibility or no longer qualify at all because
Medicare Part D will pay some portion of the drug expenses that were formally counted
toward their spend-down amounts.
13 These include Alaska, Arkansas, California, Connecticut, Florida, Georgia, Hawaii,
Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina,
North Dakota, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont,
Virginia, Washington, West Virginia, and Wisconsin.
14 A 2003 eligibility survey conducted by the American Public Human Services Association
in collaboration with Congressional Research Service. States not extending their medically
needy programs to the aged and persons with disabilities include Oklahoma, Oregon, and
Texas.

Others
In recent years, new groups have been added to Medicaid that move the program
further away from its traditional links to cash assistance programs. Demonstration
waivers have given states the flexibility to target enrollment and benefits to various
groups, and two new pathways were added to Medicaid for individuals with specific
medical diagnoses. With specific restrictions, Medicaid is also available to certain
immigrants.
Individuals Qualifying Under Demonstration Waivers. Demonstration
waivers available under the authority of Section 1115 (of the Social Security Act)
enable states to experiment with new approaches for providing health care coverage
that promote the objectives of the Medicaid program. Section 1115 allows the
Secretary of HHS to waive a number of Medicaid rules — including many of the
federal rules relating to Medicaid eligibility.15 The Health Insurance Flexibility and
Accountability (HIFA) Initiative is an explicit effort of HHS to encourage states to
seek Section 1115 waivers to extend Medicaid and SCHIP to the uninsured, with a
particular emphasis on statewide approaches that maximize private health insurance
coverage options and target populations with incomes below 200% FPL. A number
of states have used such waivers to enact broad-based and sometimes statewide
health reforms although demonstrations under Section 1115 need not be statewide.
A number of the demonstrations extend comprehensive health insurance coverage to
low-income children and families who would not otherwise be eligible for Medicaid.
Women with Breast and Cervical Cancer. Woman who are eligible for
Medicaid under this optional coverage group are those who have been screened for
and found to have breast or cervical cancer (including precancerous conditions)
through the National Breast and Cervical Cancer Early Detection Program
(NBCCEDP). Women who qualify must be under age 65, uninsured, and otherwise
not eligible for Medicaid. Benefits are limited to the period in which the beneficiary
requires breast or cervical cancer treatment. In 2003, 47 states16 and the District of
Columbia chose to cover women who meet these requirements.
Persons with Tuberculosis. States may choose to offer Medicaid to people
with tuberculosis (TB) who are uninsured. Individuals qualifying under this pathway
are entitled only to those services related to the treatment of tuberculosis. In 2003,17

13 states and the District of Columbia covered such persons with TB.


15 See also the discussion of Section 1115 waivers below.
16 These include Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut,
Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina,
North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
17 These include California, Florida, Louisiana, Minnesota, New York, Ohio, Oklahoma,
Oregon, Rhode Island, Washington, Wisconsin, Utah, and Wyoming.

Immigrants. Legal immigrants arriving in the United States after August 22,

1996 are ineligible for Medicaid benefits for their first five years here. Coverage of18


such persons after the five-year ban is a state option. States may provide Medicaid
coverage to legal immigrants who resided in the country and were receiving benefits
on August 22, 1996, and for those residing in the country as of that date who become
disabled in the future. States are also required to provide coverage to:
!refugees for the first seven years after entry into the United States;
!asylees for the first seven years after asylum is granted;
!certain individuals whose deportation is being withheld by the
Immigration and Naturalization Service for seven years after the
deportation is first withheld;
!lawful permanent aliens after they have been credited with 40
quarters of coverage under Social Security; and
!immigrants who are honorably discharged U.S. military veterans,
active duty military personnel, and their spouses and unmarried
dependent children who otherwise meet the state’s financial
eligibility criteria.
In addition, states are required to provide emergency Medicaid services to all
legal and undocumented non-citizens who meet the financial and categorical
eligibility requirements for Medicaid, without regard to time in this country.
Enrollment
In FY2005, there were a total of 57.3 million people enrolled in Medicaid at
some time during the year. Nearly one-half of these beneficiaries (28.2 million) were
children and 15.6 million were adults in families with dependent children. There
were also 8.6 million individuals with disabilities, and 4.9 million people over the
age of 65 enrolled in Medicaid that year.19 The latest detailed breakdowns of
enrollment by basis of eligibility (BOE) and major enrollment group are for FY2002,
as shown in Figures 1 and 2, respectively. State-reported data are not available in
a format that allows for examining enrollment by the pathways as described above.
Figure 1 shows that Medicaid enrollment is predominantly non-disabled adults
(e.g., parents) under age 65 and children20 (about 75.1%). Figure 2 shows that


18 At publication, all states except for Colorado and Wyoming have opted to cover this
group, referred to as “optional qualified aliens.” Press reports suggest that Colorado may
re-institute coverage for this group.
19 Beneficiary statistics for FY2005 were taken from Table 11, 2005 CMS Statistics, U.S.
Department of Health and Human Services. See [http://www.cms.hhs.gov/researchers/pubs/
CMSstatistics/2005CMSstat.pdf].
20 Figure 1 shows almost 50% of Medicaid enrollment in 2002 was children (47.7%
children plus 1.7% foster care children). There were additional children on the program in
2002 who qualified on the basis of blindness or disability. Those children are included in
the blind/disabled category.

almost half of Medicaid enrollment in 2002 is through traditional pathways: 35% of
enrollees are SSI recipients, SSI-related enrollees, and members of families that
would have been eligible for former AFDC programs and now qualify through
section 1931, and an additional 9% are the medically needy. Over one-third of 2002
enrollment is through relatively new pathways: 29% of individuals on the program
are enrolled through the poverty-level pathways added to Medicaid since the mid-
1980’s and 10% through demonstration waivers. Finally, about 17% of Medicaid
enrollees are in the “other” group; including foster care children, certain elderly
individuals in institutions, families receiving transitional medical assistance, and
persons receiving state supplementary SSI payments. This “other” grouping includes
over 60 specific eligibility pathways.



Figure 1. Medicaid Enrollees by Basis of
Eligibility, FY2002
Figure 2. Medicaid Enrollees by Maintenance
Assistance Status, FY2002
Enrolled through SSI or
AFDC-Related Group
35%
Others
17%
Medically NeedyPoverty Related
9%29%
Source (fig. 1 and fig. 2): Congressional Research Service (CRS), based on Medicaid Statistical
Information System (MSIS) data from the Centers for Medicare and Medicaid Services (CMS).
Note (fig. 1 and fig. 2): Excludes the territories. Includes Medicaid-expansion State Children’s
Health Insurance Program (M-SCHIP) eligibles. Eligibles include all persons enrolled in Medicaid
during the year whether or not any payments for services were made on their behalf.



Table 2 presents Medicaid recipients by basis of eligibility for selected years
from 1975 through 2000. Since the mid-1970s, the number of individuals receiving
at least one Medicaid service during the year has more than doubled, and during the
1990s, Medicaid enrollment growth quickened. Rates of growth varied by basis of
eligibility. Enrollment among the aged was fairly stable over this period, while the
number of adults and children more than doubled. The biggest increase in enrollment
occurred among the blind/disabled, whose numbers almost tripled between 1975 and

2000.


Table 2. Unduplicated Number of Medicaid Recipients by
Eligibility Category for Selected Years
(in thousands)
FosterAverage
Tot a l Blind/ care annual
Year recipients Aged di sabl ed Chi l dren Adul t s children grow th
1975 20,320 3,577 2,442 9,121 4,271 n/a

1980 20,660 3,439 2,874 8,921 4,585 n/a 0.3%


1985 20,973 3,060 2,947 9,214 5,034 n/a 0.3%


1990 23,964 3,201 3,661 10,783 5,618 n/a 2.7%


1995 35,210 3,938 5,768 16,572 7,376 n/a 8.0%


2000 42,887 3,730 6,890 19,017 8,671 761 4.0%


Source: CRS tabulations of HCFA 2082 data (for 1975-1995) and MSIS data (for 2000).
Notes: For 1975-1995, recipients are those individuals for whom a fee-for-service claim was paid
during the year. For 2000, recipients include both those individuals for whom a fee-for-service claim
was paid during the year AND those for whom a capitation payment was made during the year.
Capitation payments are fixed payment amounts made to managed care organizations, usually monthly,
for each person enrolled. The amounts are prepaid and do not vary by the frequency or type of
services provided during the period over which the payments apply. Capitated service delivery
systems became more prominent under Medicaid starting in 1995, primarily enrolling non-disabled
adults and children. Due to data limitations, about 5.3 million people enrolled in such capitated
arrangements during 1995 (and fewer in earlier years) are not included in this table. See subsection
on managed care for more detailed information on capitated beneficiaries and expenditures.
Totals do not sum because this table does not include recipients of services for whom basis of
eligibility is unknown.
Total recipients in this table include recipients in 50 states and the District of Columbia.
Table 3 shows all Medicaid enrollees in FY2002 by state. Individuals counted
in this table include all recipients plus all other individuals enrolled in the program
in any month whether or not services were paid on their behalf. States are ranked by
the total number of enrollees. California, the state with the highest Medicaid
enrollment, had 9.3 million individuals in the program in 2002. The second highest
enrollment was in New York with 4.1 million enrollees. The top eight states, in
terms of enrollment, accounted for over one-half of the program’s total enrollment.



Table 3. Medicaid Eligibles by Basis of Eligibility
by State, FY2002
(in thousands of people)
Fost er
To t a l B lind/ care
St a t e elig ibles R a nk A g e d disa bled Children children Adults B CCA
AL 845.1 2 0 98.7 191.4 411.3 6 .2 137.5 -
AK 121.4 4 6 6 .6 12.3 74.0 1 .9 26.6 .06
AZ 1,053.6 1 5 43.7 110.0 505.9 7 .9 386.2 -
AR 608.0 2 9 50.5 108.8 304.3 6 .2 138.2 -
CA 9,336.4 1 664.0 989.8 3 ,462.8 158.0 4 ,058.9 2 .92
CO 438.7 3 2 47.6 66.3 219.7 17.3 87.7 .02
CT 488.0 3 0 61.8 60.6 255.4 7 .4 102.7 .09
DE 147.2 4 5 10.8 17.6 64.2 1 .9 52.7 .03
DC 204.6 4 0 13.7 43.8 88.5 6 .7 51.8 -
FL 2,691.54255.6522.31,331.643.4538.5-
GA 1,459.6 1 0 108.7 232.7 845.0 19.6 252.6 1 .14
HI 195.7 4 3 17.4 23.6 86.0 5 .9 62.7 -
ID 196.4 4 2 13.0 26.7 124.8 2 .2 29.8 -
IL 2,076.15279.1300.31,016.184.5395.9.24
IN 881.9 1 9 78.4 116.5 521.2 12.7 152.9 .18
IA 358.7 3 4 41.6 60.7 175.5 10.3 70.6 -
KS 305.1 3 6 30.7 52.9 161.5 12.4 47.6 -
KY 769.8 2 2 72.1 208.0 370.1 9 .4 110.3 -
LA 990.316105.3177.3588.19.5110.2-
ME 346.4 3 5 72.0 119.3 97.2 2 .9 55.1 -
MD 752.1 2 3 55.4 121.6 415.3 17.4 142.4 -
MA 1,204.312116.2243.3482.30.7361.9-
MI 1,527.6999.7297.1804.840.0285.8-
MN 680.6 2 6 69.8 93.9 333.8 9 .0 174.2 .05
MS 708.02574.0161.4384.43.285.0-
MO 1,098.51498.7150.4566.225.1258.1-
MT 106.2 4 9 10.1 17.7 52.7 3 .8 21.9 .09
NE 266.23723.529.9150.310.351.6.07
NV 203.3 4 1 19.6 33.2 95.7 8 .1 46.6 -
NH 115.5 4 7 12.7 14.6 68.9 2 .7 16.6 -
N J982.717111.7178.8462.921.9207.3.06
NM 462.9 3 1 23.4 55.0 290.6 3 .8 90.1 .05
NY 4,139.9 2 398.1 688.0 1 ,737.3 75.1 1 ,241.4 -
N C1,389.511178.3236.3699.116.5259.3-
ND 71.6 5 0 10.0 9 .8 31.9 1 .8 18.1 -
OH 1,754.4 6 144.6 279.5 924.5 33.9 371.5 -
OK 677.8 2 7 63.8 81.3 432.3 6 .4 93.9 -
OR 637.1 2 8 44.3 68.4 247.8 15.0 261.5 -
PA 1,711.0 7 212.5 386.4 779.9 48.6 283.3 .33
RI 204.8 3 9 19.7 38.4 88.8 5 .5 52.2 .17
SC 895.9 1 8 78.1 122.8 463.9 8 .4 222.6 .08



Fost er
To t a l B lind/ care
St a t e elig ibles R a nk A g e d disa bled Children children Adults B CCA
SD 113.9 4 8 10.1 16.4 67.3 1 .9 18.2 .01
T N 1,700.4 8 90.4 340.2 723.9 14.4 531.6 -
T X 3,202.2 3 383.3 379.5 1 ,870.1 34.5 534.6 -
UT 233.2 3 8 12.1 28.1 130.6 6 .7 55.6 .10
VT 157.0 4 4 19.7 19.1 66.3 2 .6 49.2 -
VA 727.8 2 4 98.3 139.4 378.0 14.9 9 7 .15
WA 1,104.8 1 3 79.4 145.9 579.6 16.5 283.3 -
WV 362.3 3 3 29.7 89.8 176.3 6 .7 59.9 -
WI 776.6 2 1 95.5 139.3 335.3 17.9 188.5 .09
WY 69.8 5 1 5 .3 8.8 39.4 2 .2 14.1 -
National
total 51,552.4 4,759.1 8 ,055.1 24,583.0 902.0 13,245.6 5 .9
Source: Congressional Research Service (CRS), based on Medicaid Statistical Information System
(MSIS) data from the Centers for Medicare and Medicaid Services (CMS).
Note: Excludes the territories. Includes Medicaid-expansion State Childrens Health Insurance
Program (M-SCHIP) eligibles. Eligibles include all persons enrolled in Medicaid during the year
whether or not any payments for services were made on their behalf. Totals do not sum because this
table excludes individuals whose basis of eligibility was unknown.
Medicaid and the Poor
In calendar year 2002, Medicaid covered 15% of the total U.S. population
(excluding institutionalized persons) and 53% of those with incomes below the
federal poverty level (FPL), according to estimates from the Medical Expenditure
Panel Survey (MEPS). Because categorical eligibility requirements for children are
less restrictive than those for adults, poor children are much more likely to receive
coverage. Table 4 shows Medicaid coverage by age and income status in calendar
year 2002. The estimates of those with Medicaid coverage include those covered by
the State Children’s Health Insurance Program (through both expansions of Medicaid
and separate state programs). Note that persons shown as receiving Medicaid may
have had other health coverage as well. Nearly all the elderly, for example, had
Medicare.
Of persons with family incomes below poverty, 85% of children under age six
were covered by Medicaid, compared to 37.5% of those 19 and older. Many
individuals, even below the poverty level, are not eligible for Medicaid due to
categorical restrictions. Nondisabled, childless, nonaged adults are never eligible for
Medicaid, regardless of their income, unless their state obtains a special waiver to
cover such individuals. In addition, even those who are eligible may not enroll. For
example, all children under six years old in families with income below 133% of FPL
are a mandatory coverage group. However, 691,000 children in poverty (below
100% of FPL) were estimated to have gone without Medicaid. This is not to say
these children were uninsured. In fact, based on MEPS, only 30% of these children
(204,000) were uninsured for the entire year, half had employer-sponsored coverage,
and the remainder had some other type of public coverage.



Table 5 shows an analysis of all children, regardless of income, using MEPS.
It provides estimates of the number of children who were uninsured in the first part
of 2002 and the number who were also eligible for Medicaid. Ten million children
were estimated to have been uninsured, with 6.2 million of them eligible for public
coverage but not enrolled.
It is necessary to note that the MEPS results shown in Table 4 and Table 5
reflect what is widely referred to as the “Medicaid undercount.” MEPS, along with
other nationally representative surveys on sources of health insurance, have been
shown to undercount the number of people enrolled in Medicaid. One analysis of
2000 data estimated that MEPS undercounts Medicaid enrollment of children by 3
to 7 million; for all ages, the undercount was as much as 10.5 million.21 The impact
of the Medicaid undercount on estimates of the uninsured is debatable. Some
research suggests that the Medicaid undercount is the result of survey respondents
selecting some other source of health insurance besides Medicaid. Although this
results in a Medicaid undercount, it would not cause an overestimate of the
uninsured, since these respondents are still claiming a source of coverage. However,
if Medicaid enrollees fail to respond as having any source of coverage, they would
inappropriately be considered uninsured. Additional research is needed on this topic
to determine the impact of the Medicaid undercount on uninsured estimates.
Another source often used to estimate the uninsured is the Current Population
Survey (CPS). However, analyses show that the magnitude of the Medicaid
undercount in the CPS is significantly more than in any of the other surveys,
including MEPS. As a result, the CPS was not used in this report.
Table 4. Medicaid Coverage by Age and Family Income,
Calendar Year 2002
(in thousands)
Percent with
AgeCovered by MedicaidPersons in Age GroupMedicaid
In poverty (income less than 100% of poverty):
0-5 4 ,048 4,740 85.4%
6-18 6,373 8,535 74.7%
19-64 7,211 18,406 39.2%
65 and older1,1603,93729.5%
TOTAL 18,793 35,617 52.8%
Income between 100% and 199% of poverty:
0-5 3 ,069 5,152 59.6%
6-18 5,485 11,164 49.1%
19-64 4,339 26,517 16.4%
65 and older1,3869,80514.1%
TOTAL 14,279 52,639 27.1%


21 CRS Congressional Distribution Memorandum, Medicaid/SCHIP Enrollees: Comparison
of Counts from Administrative Data and Survey Estimates, by Chris L. Peterson and April
Grady (available upon request from CRS at 7-5700).

Percent with
AgeCovered by MedicaidPersons in Age GroupMedicaid
Income of 200% of poverty or greater:
0-5 1 ,758 13,400 13.1%
6-18 3,082 34,054 9.1%
19-64 3,062 129,958 2.4%
65 and older1,16522,5145.2%
TOTAL 9 ,067 199,926 4.5%
All incomes:
0-5 8 ,875 23,292 38.1%
6-18 14,940 53,753 27.8%
19-64 14,612 174,881 8.4%
65 and older3,71136,25610.2%
TOTAL 42,139 288,182 14.6%
Source: Congressional Research Service (CRS) analysis of the 2002 Household Component of the
Medical Expenditure Panel Survey (MEPS).
Note: In 2002, the poverty threshold for a family with two adults and two children was $18,244.
Table 5. Uninsured Children Under Age 19,
by Eligibility Status, 2002
Eligibility statusMillions of uninsured children
All children10.0
Eligible for Medicaid/SCHIP6.2
Eligible for Medicaid3.4
Eligible for SCHIP2.8
Source: Exhibit 3 from Thomas Selden et al., Tracking Changes in Eligibility and Coverage Among
Children, 1996-2002,” Health Affairs, vol. 23, no. 5 (Sept./Oct. 2004), pp. 39-50.
Benefits
Medicaid’s basic benefits rules require all states to provide certain “mandatory”
services as listed in Medicaid statute. The statute lists additional services that are
considered optional — that is, federal matching payments are available for optional
services if states choose to include them in their Medicaid plans. States define the
specific features of each mandatory and optional service to be provided under that
plan within broad federal guidelines. Those four basic guidelines include:
!Amount, duration, and scope. Each covered service must be
sufficient in amount, duration, and scope to reasonably achieve its
purpose. The state may not arbitrarily deny or reduce the amount,
duration, or scope of services solely because of the type of illness or
condition. The state may place appropriate limits on a service based
on such criteria as medical necessity.



!Comparability. With certain exceptions defined in regulations,
services available to any categorically needy22 beneficiary in a state
must be equal in amount, duration, and scope to those available to
any other categorically needy beneficiary in the state. Similarly,
services available to any medically needy beneficiary in a state must
be equal in amount, duration, and scope to those available to any
other medically needy beneficiary in the state.
!Statewideness. Generally, a state plan must be in effect throughout
an entire state; that is, the amount, duration, and scope of coverage
must be the same statewide.
!Freedom-of-Choice. With certain exceptions, a state’s Medicaid
plan must allow recipients freedom of choice among health care
providers or managed care entities participating in Medicaid.
The Secretary may waive applicability of these requirements under certain
circumstances (see the following discussion of waivers).
The following services are mandatory for most groups of Medicaid recipients:
!inpatient hospital services (excluding inpatient hospital services for
mental disease);
!outpatient hospital care, Federally Qualified Health Center (FQHC)
services and, if permitted under state law, rural health clinic (RHC)
services;
!laboratory and x-ray services;
!certified pediatric and family nurse practitioners;
!nursing facility services for those age 21 and over;
!early and periodic screening, diagnosis, and treatment for children
under the age 21 (EPSDT, defined further below);
!physicians’ services;
!family planning services and supplies;
!medical supplies and surgical services of a dentist;
!home health services for those entitled to nursing facility care;
!nurse-midwife services;
!pregnancy-related services (including treatment for conditions that
may complicate pregnancy); and
!60 days of postpartum-related services.
The statute lists a wide variety of optional benefits that can be covered. Some
of the optional benefits are specific items, such as eyeglasses and prosthetic devices,
that states may include as a Medicaid benefit. Others are types of medical providers,
such as chiropractors and podiatrists, whose services can be considered Medicaid
covered benefits. States have a great deal of flexibility in choosing among the listed


22 To be eligible for federal matching funds, states must provide Medicaid coverage for most
individuals who receive federally assisted income maintenance payments, as well as related
groups not receiving cash payments. These groups are generally referred to as the
categorically needy. States also have the option to provide Medicaid coverage to other
categorically needy groups for whom the eligibility criteria are somewhat more liberal.

items, in defining the scope of selected optional benefits, and in developing programs
that meet the needs of their Medicaid populations. Other optional services include
such items as prescription drugs, and inpatient psychiatric care for individuals under
age 21 or over 65, dental care, physical therapy, case management, and many other
services. Table 6 identifies the major optional benefits provided under state
Medicaid plans in 2003.
Table 6. Optional Medicaid Services and Number of States
Offering Each Service, September 2003
Number of statesa offering services to:
Populations
Bothadded
Medically categorically through
Categoricallyneedyand medically1115
needy onlyonlyneedywaivers
Chiropractors3 — 25 —
Dental4 — 43 —
Dentures4 — 31 —
Diagnostic services4 — 30 —
Emergency hospital services in
non-Medicare participating
hospital3 — 32 —
Eyeglasses4 — 42 —
Home health therapies:
- Physical6 — 43 —
- Speech and language6 — 42 —
- Occupational6 — 43 —
- Audiology services5 — 39 —
Hospice7 — 381
Inpatient hospital and nursing
facility services for 65 andb
older in IMD10 — 33 —
Intermediate care services for
the mentally disabled10 — 311
Inpatient psychiatric
under age 219 — 361
Mental health rehabilitation
and stabilization4 — 41 —
Nurse anesthetists1 — 29 —
Occupational therapy2 — 39 —
Optometrists5 — 47 —
Rehabilitative services
(excluding mental health
rehabilitation)3 — 26 —
Personal care8 — 29 —
Physical therapy3 — 41 —



Number of statesa offering services to:
Populations
Bothadded
Medically categorically through
Categoricallyneedyand medically1115
needy onlyonlyneedywaivers
Physician-directed clinic
services6 — 44 —
Podiatrists5 — 41 —
Prescribed drugs6 — 47 1
Preventive services3 — 34 —
Private duty nursing41221
Prosthetic devices5 — 46 —
Psychologists3 — 32 —
Religious (non-medical) health
care institution2 — 11 —
Respiratory care services for
ventilator dependent3 — 13 —
Screening services3 — 29 —
Skilled nursing facility for
under age 2111 — 39 —
Targeted case management10 — 39 —
Therapies for speech, hearing
and language disorders4 — 38 —
Transportation4 — 46 —
Source: Medicaid At-a-Glance 2003, Publication No. CMS-11024-03. Centers for Medicare and
Medicaid Services, U.S. Department of Health and Human Services.
Notes: Row totals do not sum because a state may appear more than once.
a. Includes all states, the District of Columbia, Puerto Rico and Virgin Islands.
b. In Delaware, Indiana, New York, and Wyoming, only inpatient hospital services are provided to
inpatients in institutions for mental disease (IMDs). In South Dakota and Idaho, only skilled
nursing facility services are provided to inpatients in IMDs.
In addition to the above general rules regarding mandatory and optional benefits,
Medicaid statute specifies special benefits or special rules regarding certain benefits
for targeted groups of individuals. These special categories of benefits include:
!EPSDT. Children under the age of 21 are entitled to the program of
preventive child care called Early and Periodic Screening,
Diagnostic and Treatment (EPSDT) Services. EPSDT is comprised
of screening services including a comprehensive health and
developmental history, comprehensive physical exams, appropriate
immunizations according to the schedule established by the
Advisory Committee on Immunization Practices, laboratory tests
and lead toxicity screening, health education, vision services
including eyeglasses, dental services, hearing services, and other
necessary health care to correct or ameliorate defects, physical and



mental illnesses, and conditions identified through the screening
services. Under EPSDT, if an optional service is determined to be
a necessary treatment to correct or ameliorate a condition identified
through screening, states are required to provide that service, even
if they have not chosen to cover that optional service under the
general benefits rules described above.
!Pregnancy-related services. While all women who qualify for
Medicaid are eligible for pregnancy-related services, women who
qualify under one of the pregnancy-related eligibility groups are
eligible for only pregnancy-related services (including treatment of
conditions that may complicate pregnancy). Eligibility for these
individuals extends through the pregnancy and for a period of 60
days postpartum.
!Benefits for the medically needy. Special benefits rules apply if
states choose to cover medically needy populations. States may
offer a more restricted benefit package for those enrollees but are
required, at a minimum, to offer the following: prenatal and delivery
services for pregnant women; ambulatory services for individuals
under 18 and those entitled to institutional services; and home health
services for individuals entitled to nursing facility services. Broader
requirements apply if a state has chosen to provide coverage for
medically needy persons in institutions for mental disease and
intermediate care facilities for the mentally retarded. If so, the state
is required to cover either all of the mandatory services, or
alternatively, the optional services listed in any seven of the
categories of care and services in Medicaid law defining covered
benefits.
!Tuberculosis (TB)-related services. States are given the option of
providing TB-related services to individuals infected with
tuberculosis who meet certain income and resource requirements but
are not otherwise eligible for Medicaid. TB-related services include
prescription drugs, physicians’ services, outpatient hospital services,
clinic services, FQHC services, RHC services, laboratory and x-ray
services, case management, and services designed to encourage
completion of regimens of prescribed drugs.
!Prescription Drug Coverage for Medicare/Medicaid Enrollees.
MMA of 2003 provides that, beginning in 2006, Medicaid eligibles
who are also eligible for Medicare will receive outpatient
prescription drug coverage through the new Medicare prescription
drug benefit instead of through Medicaid. State Medicaid programs
will be prohibited from covering any drugs that are to be provided
through the Medicare benefit, and from paying the cost sharing
amounts for those drugs. The precise impact of this bill on the
Medicaid drug coverage for dual eligibles is difficult to predict at
this time because the scope of the new Medicare benefit is not
defined in statute. (The statute includes general guidelines that
private insurers and plan sponsors, who will offer and administer
the Medicare benefit, must follow. Under these general guidelines,
specific plan benefits may vary.) Nonetheless, prescription drug



coverage offered by state Medicaid plans to dually eligible
beneficiaries will be considerably reduced.23
!Services for Persons with Sickle Cell Disease. Under P.L. 108-357,
beginning in 2004, an optional benefit was added to the Medicaid
statute defining services to identify, prevent and treat sickle cell
disease and its complications. This benefit includes primary and
secondary medical strategies and treatments for persons with sickle
cell disease who otherwise meet Medicaid financial eligibility
standards. Services include chronic blood transfusion to prevent
stroke among those at high risk, genetic counseling and testing for
persons with the disease or sickle cell trait to facilitate treatment and
prevention of symptoms, and other care to prevent those who have
experienced a stroke from having additional strokes. A rule of
construction in the law notes that addition of this new benefit does
not imply that states could not have covered these services
previously. Related administrative services, including for example,
identification of eligibles and education about the disease and its
complications, are also covered.
In addition, states are able to waive many of the basic benefits rules to provide
special home- and community-based services for persons who are in need of long-
term care and to conduct demonstration projects that test alternative methods of
meeting the overall purpose of the Medicaid statute. These waivers include:
!Home and Community-Based Services (HCBS). Under the HCBS
waiver authority, states can provide special benefits tailored to meet
the long-term care needs of targeted populations. Among the
benefits offered under these programs are case management;
homemaker; home health aide; personal care; adult day health;
habilitation; respite care; day treatment or other partial
hospitalization services; and psychosocial rehabilitation and clinic
services for individuals with chronic mental illness. States can also
cover a wide range of other medical, non-medical, social and
supportive services that allow persons who need long-term care to
remain in the community. (For more information on HCBS waivers,
see the “Medicaid Waiver Programs” subsection below).
!Section 1115 Research and Demonstration Waivers. States have a
great deal of flexibility to define benefits under Section 1115
waivers. Many of the rules outlined above regarding benefits may
be waived. Under comprehensive 1115 demonstrations, states
generally provide a broad range of services statewide. The Bush
Administration has encouraged states to pursue targeted policies
under three waiver initiatives, all using Section 1115 authority.
Under Pharmacy Plus waivers, states are encouraged to provide only


23 For a more thorough description of the provisions in MMA of 2003, see CRS Report
RL32005, Medicare Fee-for-Service Modifications and Medicaid Provisions of H.R. 1 as
Enacted, and CRS Report RL31966, Overview of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003.

pharmacy benefits to low-income seniors and individuals with
disabilities.24 Under Family Planning waivers, states are encouraged
to provide only family planning services to certain individuals of
childbearing age. Under Specialty Services and Populations
Demonstrations, states provide pharmacy benefits to those with
HIV/AIDS and conduct cash and counseling projects that provide
cash to enrollees who may then arrange and purchase certain
services on their own. (For more information on research and
demonstration waivers, see the “Medicaid Waiver Programs”
subsection below.)
Tables 7 and 8 show recipients and expenditures25 by type of service for
FY2002. The single benefit used by the largest number of Medicaid recipients was
prescription drugs, used by 24.4 million recipients, followed by physician services,26
used by 22.1 million recipients. Nursing facility services accounted for the largest
share of Medicaid spending (18.4%), followed by inpatient hospital services (13.6%).
Prescription drugs and physician services, while accounting for the largest number
of users, accounted for 13.3% and 3.9% of all spending on services, respectively.


24 The interaction between the drug coverage that will be available to individuals eligible for
Medicare and Medicaid under the MMA of 2003 and the drug coverage that is available to
these individuals under Pharmacy Plus waivers has yet to be defined. The MMA of 2003
only requires the Secretary to apply coordination requirements to certain prescription drug
plans including those operating under a waiver under Section 1115. The Aug. 3, 2004
proposed regulations clarify that drug coverage under Pharmacy Plus waiver programs will
not be allowed to fill the gap in coverage in the Part D prescription drug benefit. However,
since the MMA allows states to use State Pharmaceutical Assistance Program (SPAP) funds
to assist beneficiaries with out-of-pocket expenditures, the proposed regulations suggest that
Pharmacy Plus waivers will become obsolete in 2006. The proposed regulations assert that
states would be better off using their current Pharmacy Plus spending toward SPAPs as they
are allowed to wrap around the federal Part D benefit.
25 Expenditures shown in Table 8 are those reported by states through the Medicaid
Statistical Information System (MSIS) for FY2002. These data do not match FY2002
expenditures reported above in Table 1 (based on CMS-64 reports). Data reported on form
CMS-64 have always varied from the MSIS reported totals. Because the CMS-64 reports
are filed for financial accounting purposes, they are generally considered to be a more
accurate accounting of total outlays, and are preferred when examining state and/or federal
totals. Those data, however, do not allow for analysis of spending patterns and use of
services for individuals or among groups of individuals (for example, by basis of eligibility).
For such analyses, data from the MSIS are used. Figure 3 also uses MSIS data for this
reason.
26 Capitated payment systems accounted for a larger number of recipients than prescription
drugs (25.9 million recipients versus 24.4 million). Capitated payment services, however,
despite being included alongside such services as prescription drugs and inpatient hospital
services, are not considered a single benefit. The term refers to a managed care delivery
system that provides a specified set of Medicaid benefits to a specified group of enrollees.
(For more information on Medicaid managed care, see “Delivery Systems” subsection.)

Table 7. Medicaid Recipients by Service Category,
FY2002
(in thousands of people, in order of descending number of recipients)
Service categoryNumber of recipients
Acute care
Capitated payment services25,864
Prescribed drugs24,424
Physician services22,103
Outpatient hospital services14,861
Lab and x-ray services14,067
Other care and services10,959
Clinic services9,499
Dental services7,886
PCCM servicesa7,178
Other practitioner services5,571
Inpatient hospital services 5,051
Sterilization services164
Mental health facility services99
Long-term care
Personal support services5,688
Nursing facility services1,766
Home health services1,065
Intermediate care facility for the mentally retarded117
(ICF/MR)
Unknown73
Unduplicated total49,755
Source: Congressional Research Service, based on Medicaid Statistical Information System (MSIS)
data from the Centers for Medicare and Medicaid Services (CMS).
Note: Excludes the territories. Includes Medicaid-expansion State Children’s Health Insurance
Program (M-SCHIP) recipients and expenditures. Recipients are individuals on behalf of whom at
least one payment is made during the fiscal year.
a. PCCM denotes primary care case management, under which primary care providers are provided
with a small fee, usually paid on a monthly basis, for each enrollee for whom they coordinate
primary care services.



CRS-27
Table 8. Total State and Federal Medicaid Payments by Basis of Eligibility, Type of Service, and
as a Percentage of Total Payments, FY2002
(in order of descending total payments)
Total service
Service typepaymentsAgedBlind/disabledChildrenAdultsFoster careUnknown
Millions of dollars
pitated payment services$33,634$2,232$8,450$12,403$7,596$359$2,594
ient hospital services$29,127$1,941$12,090$5,337$5,976$394$3,389
iki/CRS-RL32277cribed drugs$28,408$7,132$16,178$2,198$2,331$362$208
g/wher care and services$19,877$3,144$13,820$1,198$380$756$578
s.ortpatient hospital services$8,471$570$3,642$1,703$1,970$135$450
leakysician services$8,355$568$2,777$2,304$2,220$195$290
://wikiinic services$6,694$315$3,193$1,454$1,099$418$214
httpntal services$2,309$111$409$1,223$433$59$74
b and x-ray services$2,157$86$785$398$738$27$123
tal health facility services$2,122$302$626$501$22$401$271
er practitioner services$842$79$311$265$107$65$16
CM services$200$3$31$124$23$2$17
lization services$166$0$10$2$144$0$10
Subtotal $142,361 $16,482 $62,322 $29,111 $23,039 $3,173 $8,235
ng-term care
rsing facility services$39,282$30,002$8,770$32$42$14$421
onal support services$15,363$3,505$8,262$1,972$350$988$286
F/MR services$10,681$738$9,852$16$4$24$49
me health services$3,925$997$2,670$114$57$84$3
Subtotal $69,251 $35,242 $29,554 $2,135 $453 $1,109 $758
know n $1,879 $9 $13 $1 $1 $0 $1,854
tal $213,491 $51,733 $91,889 $31,247 $23,493 $4,282 $10,848



CRS-28
Total service
Service typepaymentsAgedBlind/disabledChildrenAdultsFoster careUnknown
Percentage of total payments by BOE
pitated payment services15.8%4.3%9.2%39.7%32.3%8.4%23.9%
ient hospital services13.6%3.8%13.2%17.1%25.4%9.2%31.2%
cribed drugs13.3%13.8%17.6%7.0%9.9%8.4%1.9%
her care and services9.3%6.1%15.0%3.8%1.6%17.6%5.3%
tpatient hospital services4.0%1.1%4.0%5.4%8.4%3.2%4.1%
ysician services3.9%1.1%3.0%7.4%9.5%4.6%2.7%
iki/CRS-RL32277inic services3.1%0.6%3.5%4.7%4.7%9.8%2.0%
g/wntal services1.1%0.2%0.4%3.9%1.8%1.4%0.7%
s.orb and x-ray services1.0%0.2%0.9%1.3%3.1%0.6%1.1%
leak
tal health facility services1.0%0.6%0.7%1.6%0.1%9.4%2.5%
://wikier practitioner services0.4%0.2%0.3%0.8%0.5%1.5%0.1%
httpCM services0.1%0.0%0.0%0.4%0.1%0.0%0.2%
lization services0.1%0.0%0.0%0.0%0.6%0.0%0.1%
Subt o t a l 6 6 . 7 % 3 1 . 9 % 6 7 . 8 % 9 3 . 2 % 9 8 . 1 % 7 4 . 1 % 7 5 . 9 %
ng-term Care
rsing facility services18.4%58.0%9.5%0.1%0.2%0.3%3.9%
onal support services7.2%6.8%9.0%6.3%1.5%23.1%2.6%
F/MR Services5.0%1.4%10.7%0.1%0.0%0.5%0.4%
me health services1.8%1.9%2.9%0.4%0.2%2.0%0.0%
Subt o t a l 3 2 . 4 % 6 8 . 1 % 3 2 . 2 % 6 . 8 % 1 . 9 % 2 5 . 9 % 7 . 0 %
now n 0 .9% 0 .0% 0 .0% 0 .0% 0 .0% 0 .0% 17.1%
tal 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
: Congressional Research Service, based on Medicaid Statistical Information System (MSIS) data from the Centers for Medicare and Medicaid Services (CMS)
: Excludes the territories, disproportionate share hospital payments (DSH), program administration, and Medicare premiums. Includes expenditures for Medicaid-expansion State
ldrens Health Insurance Program (M-SCHIP) recipients.



Figure 3 shows average per recipient Medicaid spending by basis of eligibility
for FY2002. The figure points out the relatively low cost of non-disabled children
and adults to the Medicaid program. While these groups comprise the majority of
Medicaid enrollment, their costs are relatively small ($2,090 per adult and $1,397 per
child) when compared with the per recipient cost of the elderly ($13,313), and blind
and disabled ($12,394) recipients. This figure, on the other hand, underestimates the
average cost of long-term care services for the comparatively few users of those
services (see Table 7). Because these averages were calculated for all program
recipients (of any service), they are below the average cost of services for only those
individuals actually using the specific service. This difference is especially
pronounced for long-term care services because relatively few users of those services
account for a small number of very expensive claims.
Figure 3. Medicaid Expenditures per Recipient for Acute
and Long-Term Care by Basis of Eligibility, FY2002
Un k nown $ 2, 694
Children $1,397
Acute care
AdultsLong-term care$2,090
Unknown care
Foster care$5,250
B l i n d/ d i s a bl e d $ 12, 39 4
Age d $13,313
To tal $4, 29 1
$0 $ 2, 0 00 $4 , 00 0 $ 6, 0 00 $ 8, 00 0 $10 , 0 00 $ 12 , 00 0 $14 , 0 00
Source: Congressional Research Service, based on Medicaid Statistical Information System (MSIS)
data from the Centers for Medicare and Medicaid Services (CMS).
Note: Excludes the territories, disproportionate share hospital payments (DSH), program
administration, and Medicare premiums. Includes Medicaid-expansion State Childrens Health
Insurance Program (M-SCHIP) recipients and expenditures. Recipients are individuals on behalf of
whom at least one payment is made during the fiscal year.
In these calculations, total expenditures for long-term care and acute care services
were divided by the total number of program recipients of any service in each
eligibility group, whether or not all of those individuals were users of long-term care
services and acute care services. This results in averages for all recipients that can
diverge from the averages among only those individuals who used that particular type



of service. This is especially true for long-term care where relatively few users
account for a small number of large and costly claims.
For a list of which services were classified as long-term care and acute care, see
Table 7.
Financing
The federal government helps states pay for Medicaid services by means of a
variable matching formula, called the federal medical assistance percentage (FMAP),
which is adjusted annually.27 With specific exceptions (described below), the federal
matching rate, which is inversely related to a state’s per capita income, can range
from 50 to 83%. Beginning in FY1998, the federal matching rate for the District of
Columbia increased to 70% and Alaska’s matching percentage, for FY2001 through
FY2005 was calculated using the three-year average per capita income for the state
divided by 1.05. Federal matching for five territories is 50% with a maximum dollar
limit placed on the amount each territory can receive.
To provide fiscal relief to states, federal matching rates for benefits were
changed temporarily by the Jobs and Growth Tax Relief Reconciliation Act
(JGTRRA, P.L. 108-27), which altered the rates for qualifying states28 for the last two
quarters of FY2003 and the first three quarters of FY2004. For these quarters, the
federal matching percentage for each state is held harmless for declines from the
prior fiscal year, and then is increased by 2.95 percentage points. The federal
matching percentages for all states and jurisdictions for FY2003 through FY2006 are
shown in Table 9.
MMA 2003 includes provisions intended to continue, after 2005, some state
financing of outpatient prescription drugs for individuals dually eligible for Medicare
and Medicaid even though Medicare will be their primary source of drug coverage.
Beginning in 2006, each state will be required to make a monthly payment to the
Secretary of HHS equal to the product of the state’s share of 2003 Medicaid per
capita spending for drugs for all full-benefit dual eligibles29 trended forward to the
current year, multiplied by the total number of such dual eligibles for such state for
the month, and multiplied again by the “factor” for the month. The “factor” is 90%
in 2006, and will phase down to 75% over 10 years. The formula ensures that states
continue to fund a significant share of the cost of the new Medicare drug benefit for
those individuals who would have otherwise been eligible for Medicaid prescription
drugs. A state’s failure to make the required payments will result in interest charges
and in an offset to amounts otherwise payable under Medicaid.


27 FMAP is a measure of the average per capita income in each state, squared, compared to
that of the nation as a whole.
28 For further information on the state eligibility criteria for the higher FMAP, see the
Legislative History subsection.
29 Including the estimated actuarial value of prescription drug benefits provided under
capitated care.

Table 9. Federal Medical Assistance Percentage (FMAP)
for FY2003-FY2006, by State
FY2003FY2004
FY2003Last twoFirst threeFY2004
First twoquartersquartersLast
Statequarters(H.R. 2)(H.R. 2)quarterFY2005FY2006
AL 70.60 73.55 73.70 70.75 70.83 69.51
AK 58.27 61.22 61.34 58.39 57.58 50.16
AZ 67.25 70.20 70.21 67.26 67.45 66.98
AR 74.28 77.23 77.62 74.67 74.75 73.77
CA 50.00 54.35 52.95 50.00 50.00 50.00
CO 50.00 52.95 52.95 50.00 50.00 50.00
CT 50.00 52.95 52.95 50.00 50.00 50.00
DE 50.00 52.95 52.95 50.00 50.38 50.09
DC 70.00 72.95 72.95 70.00 70.00 70.00
FL 58.83 61.78 61.88 58.93 58.90 58.89
GA 59.60 62.55 62.55 59.58 60.44 60.60
HI 58.77 61.72 61.85 58.90 58.47 58.81
ID 70.96 73.97 73.91 70.46 70.62 69.91
IL 50.00 52.95 52.95 50.00 50.00 50.00
IN 61.97 64.99 65.27 62.32 62.78 62.98
IA 63.50 66.45 66.88 63.93 63.55 63.61
K S 60.15 63.15 63.77 60.82 61.01 60.41
K Y 69.89 72.89 73.04 70.09 69.60 69.26
LA 71.28 74.23 74.58 71.63 71.04 69.79
ME 66.22 69.53 69.17 66.01 64.89 62.90
MD 50.00 52.95 52.95 50.00 50.00 50.00
MA 50.00 52.95 52.95 50.00 50.00 50.00
MI 55.42 59.31 58.84 55.89 56.71 56.59
MN 50.00 52.95 52.95 50.00 50.00 50.00
MS 76.62 79.57 80.03 77.08 77.08 76.00
MO 61.23 64.18 64.42 61.47 61.15 61.93
MT 72.96 75.91 75.91 72.85 71.90 70.54
NE 59.52 62.50 62.84 59.89 59.64 59.68
NV 52.39 55.34 57.88 54.93 55.90 54.76
NH 50.00 52.95 52.95 50.00 50.00 50.00
NJ 50.00 52.95 52.95 50.00 50.00 50.00
NM 74.56 77.51 77.80 74.85 74.30 71.15
NY 50.00 52.95 52.95 50.00 50.00 50.00
NC 62.56 65.51 65.80 62.85 63.63 63.49
ND 68.36 72.82 71.31 68.31 67.49 65.85
OH 58.83 61.78 62.18 59.23 59.68 59.88
OK 70.56 73.51 73.51 70.24 70.18 67.91
OR 60.16 63.11 63.76 60.81 61.12 61.57
PA 54.69 57.64 57.71 54.76 53.84 55.05
RI 55.40 58.35 58.98 56.03 55.38 54.45
SC 69.81 72.76 72.81 69.86 69.89 69.32
SD 65.29 68.88 68.62 65.67 66.03 65.07
T N 64.59 67.54 67.54 64.40 64.81 63.99
T X 59.99 63.12 63.17 60.22 60.87 60.66
UT 71.24 74.19 74.67 71.72 72.14 70.76



FY2003FY2004
FY2003Last twoFirst threeFY2004
First twoquartersquartersLast
Statequarters(H.R. 2)(H.R. 2)quarterFY2005FY2006
V T 62.41 66.01 65.36 61.34 60.44 58.49
V A 50.53 54.40 53.48 50.00 50.00 50.00
WA 50.00 53.32 52.95 50.00 50.00 50.00
WV 75.04 78.22 78.14 75.19 74.65 72.99
WI 58.43 61.52 61.38 58.41 58.32 57.65
WY 61.32 64.92 64.27 59.77 57.90 54.23
America
Samoa 50.00 52.95 52.95 50.00 50.00 50.00
Guam 50.00 52.95 52.95 50.00 50.00 50.00
N. Marina
Is lands 50.00 52.95 52.95 50.00 50.00 50.00
Puerto
Rico 50.00 52.95 52.95 50.00 50.00 50.00
Virgin
Is lands 50.00 52.95 52.95 50.00 50.00 50.00
Source: Table prepared by the Congressional Research Service (CRS).
Reimbursement Policy
For the most part, states establish their own rates to pay Medicaid providers for
services. By regulation these rates must be sufficient to enlist enough providers so
that covered services will be available to Medicaid beneficiaries at least to the extent
they are available to the general population in a geographic area. The Balanced
Budget Act of 1997 (BBA 97, P.L. 105-33) required that beginning October 1, 1997,
states must provide public notice of the proposed rates for hospitals, nursing
facilities, and intermediate care facilities for the mentally retarded and the methods
used to establish those rates.
All providers are required to accept payments under the program as payment in
full for covered services except where states require nominal cost-sharing by
beneficiaries. States may generally impose such charges with certain exceptions.
They are precluded from imposing cost sharing on services for children under 18,
services related to pregnancy, family planning or emergency services, and services
provided to nursing facility residents who are required to spend all of their income
for medical care except for a personal needs allowance. Effective August 5, 1997,
states are permitted to pay Medicaid rates, instead of Medicare rates, to providers for
services to dual eligibles (those Medicare beneficiaries who are also eligible for full
Medicaid benefits) and qualified Medicare beneficiaries (QMBs; see “Eligibility”
subsection). Effective in 2006, Medicaid programs are prohibited from paying the
cost sharing charges for Medicare covered drugs under the MMA 2003 prescription
drug benefit.
Certain types of providers are subject to special rules. Three such circumstances
are discussed in detail below.



Reimbursement for Prescription Drugs
The Omnibus Budget Reconciliation Act of 1990 (OBRA 90, P.L. 101-508)
established rules for Medicaid reimbursement of prescription drugs. Medicaid
payments for drugs are subject to upper payment limits. For drugs with generic
versions available from three or more manufacturers, the upper payment limit is
150% of the average wholesale price. For other drugs, the upper payment limit is
either the estimated price paid by the provider for the drug plus a dispensing fee or
the provider’s usual charge for the drug to the general public.
In addition, drug manufacturers participating in the Medicaid program must
provide rebates to states. Rebates, intended to ensure that states pay the “best price”
for Medicaid pharmaceuticals, vary depending upon whether the drug is available
from multiple sources (a generic version of the drug is available) or available from
a single source (a generic version of the drug is not available). The rebate for drugs
ranges from 11% to 15.1% of the average manufacturer price.
Disproportionate Share Hospital Payments
States must provide for additional payments to hospitals serving a
disproportionate share of low-income patients. Medicaid disproportionate share
hospital (DSH) payments must follow a formula that considers a hospital’s charity
patients as well as its Medicaid caseload. Beginning in FY1992, state DSH payments
were limited as part of an effort to rein in fast growth. DSH payments were limited
to 12% of total Medicaid spending. The 12% figure was phased in through the use
of state-specific DSH allotments (caps on federal matching payments) for each
federal fiscal year. BBA 97 lowered the DSH allotments by imposing a freeze and
making graduated proportional reductions for 1998-2002. MMA 2003 included a
special rule for calculating DSH allotments for certain years. Under the new law,
DSH allotments to states for FY2004 and for certain subsequent fiscal years are
increased by 16% over the amounts authorized under prior law. Thereafter, annual
DSH allotments for a state equal the allotment for the preceding fiscal year increased
by the percentage change in the medical care component of the Consumer Price Index
for All Urban Consumers.
Other ceilings as well as a floor are imposed on DSH allotments. They include
a cap on DSH payments to institutions for mental disease and other mental health
facilities; and a cap on DSH payments to specific hospitals equal to a percentage of
each hospital’s uncompensated care costs. This “hospital specific” cap for all public
hospitals in the nation for a two-year period beginning in state FY2003 is equal to
175% of uncompensated care costs. For private hospitals, the ceiling is at 100% of
uncompensated care costs. Finally, certain low DSH states are guaranteed a floor on
their DSH allotments. Under MMA 2003, states in which total DSH payments for
FY2000 are less than 3% of the state’s total Medicaid spending on benefits,
allotments for FY2004 through FY2008 will be equal to 16% above the prior year
amounts. For FY2009 forward, as for all other states, the allotment for low DSH
states for each year equals the prior year amount increased by inflation.



Upper Payment Limits for Certain Institutional Providers
In 1987, the Secretary of HHS issued regulations establishing separate upper
payment limits for inpatient and outpatient services provided by different types of
facilities. An aggregate upper payment limit was established for each type of
institutional provider of Medicaid services by ownership (state versus other) that
would not exceed what would have been paid for those services under Medicare
payment principles. In 2000, the Secretary determined that some states made
arrangements with city or county facilities to pay these facilities at inflated rates. The
city or county facilities then transferred some or all of the enhanced payments back
to the state. BIPA 2000 addressed these funding methods by requiring regulations
to provide separate upper payment limits for private and non-state public facilities
up to 100% of the Medicare rate for such services. Later, through regulation, the
Clinton Administration allowed payments to city and county public hospitals up to
150% of the Medicare rate for their services. In January 2002, the Bush
Administration changed the special rule for city and county hospitals to 100% of the
Medicare rate.
Administration
Medicaid is a state-administered program. At the federal level, the Centers for
Medicare and Medicaid Services (CMS) of the U.S. Department of Health and
Human Services (HHS) is responsible for overseeing state operations.
Federal law requires that a single state agency be charged with administration
of the Medicaid program. Generally, that agency is either the state welfare agency,
the state health agency, or an umbrella human resources agency. The single state
agency may contract with other state entities to conduct some program functions.
Further, states may process claims for reimbursement themselves or contract with
fiscal agents or health insuring agencies to process these claims. The federal share
of administrative costs is 50% for all states, except for certain items for which the
authorized rate is higher.
Delivery Systems
There are two systems for delivering services under Medicaid: fee-for-service
and managed care. These systems differ in how the state pays for the services it
covers, and how the individual accesses service providers. Most states use a
combination of both of these systems to deliver Medicaid services. The primary
elements of these systems and initiatives to deliver long-term care services are
discussed below.
Fee-for-Service
The fee-for-service system has been the primary method of paying for and
delivering Medicaid services since the program’s enactment in 1965. Under fee-for-
service, a Medicaid beneficiary determines, in consultation with a physician, the type



of services needed and can receive those services from any Medicaid participating
provider. States may limit the amount of services or require prior approval of
services, but the individual retains significant flexibility. The provider receives
payment from the state Medicaid agency for that particular service based on rates
established by the state. States have significant flexibility in developing how
payment rates are calculated and there is significant variation by state and by service.
For example, the rate may be related to the actual cost of the service for an individual
provider or could be a fixed, pre-determined amount for a particular procedure.
Although enrollment in managed care has increased over the last decade, the
fee-for-service system continues to be a widespread and important service delivery
mechanism. The fee-for-service system is used for individuals whose Medicaid
eligibility group or geographic location is not served through managed care, or for
persons who opt out when managed care is voluntary. The fee-for-service system is
also used for those Medicaid services not covered by a managed care contract.
For individuals who live in rural areas and individuals who are elderly or have
a disability, fee-for-service continues to be the dominant delivery system. States
have tended to exclude these groups from managed care programs. Individuals in
rural areas often have limited choice of managed care plans and service providers.
Individuals who are elderly or who have a disability, often have complex medical
conditions which can be costly and require specialty care, and their health status can
be unpredictable. Though individuals who are elderly or who have a disability tend
to be excluded, states have started to develop managed care approaches for these
groups to contain cost and test alternative delivery systems as discussed below.
Under a primarily fee-for-service system, state Medicaid expenditures and the
number of enrollees has increased significantly. Over the 10-year period between
1985 and 1995, state Medicaid expenditures increased from $18.2 billion to $67.3
billion, an average growth rate of 14% annually. This increase primarily reflected
increases in medical costs and increases in the number of Medicaid enrollees, among
other causes. Between 1985 and 1995, the number of Medicaid enrollees increased
66% from 21.8 million to 36.2 million. During that period, states also lacked a
coordinated system for delivering services. No one was designated to assist the
individual in sorting through his or her health care options or ensuring timely access
to appropriate services. In an effort to slow the growth of expenditures and improve
service delivery, many states turned to managed care for many of their enrollees.
Managed Care
The number of Medicaid beneficiaries enrolled in a managed care plan of any
type increased from 9.5% of the Medicaid population in 1991 to 59.1% in 2003. As
of June 30, 2003, 25.3 million individuals receiving Medicaid were enrolled in some
form of managed care. Alaska, Mississippi and Wyoming were the only states that
did not use managed care to deliver services to Medicaid beneficiaries.
Under managed care, the state contracts with a plan(s) to provide an agreed upon
set of benefits. The contract could include a comprehensive set of services or include
only one service, for example, case management. For each managed care contract,
the state establishes fixed, prospective, monthly, per-person payment rates referred



to as a “capitation” payment for the covered services. The capitation rate is based on
the average cost of services for a defined group. After determining the average cost,
states may use a variety of actuarial methods to adjust the average cost for specific
individuals by age, geographic location, and/or diagnosis. For example, a state may
establish different rates for men and women, and different rates for specific age
brackets. The plan would receive the rate associated with the individual enrolled
based on that person’s gender and age. The capitation payment does not vary on a
monthly basis if the volume of services actually used by the individual differs from
that assumed in the capitation payment. The plan also negotiates payment rates with
participating providers. In contrast, under fee-for-service, the state establishes the
provider payment rates as described earlier. The goal of managed care is to reduce
unnecessary service use, improve access to quality health care by having a central
point of contact, and increase care coordination thereby reducing expenditures.
Types of Managed Care. Managed care plans vary in the financial
responsibility or “risk” the plan assumes and the services they provide. In a risk-
based managed care contract, the plan is fiscally responsible for the provision of all
services agreed upon in the contract regardless of actual use by beneficiaries. Under
a non-risk based contract, states either implement processes to share the financial
burden with the plan or the state assumes full financial responsibility for the services
provided. For example, in a non-risk based contract, at the end of the fiscal period,
a state may modify the payments to a managed care plan if actual service use differs
from projected use (upon which the original capitation payment was based).
There is also significant variation in the amount and types of services that each
state includes in its Medicaid managed care contracts. Some states contract with a
plan for a limited benefit package such as case management, dental, or mental health
services. Other states have included a comprehensive30 set of services.
The primary types of Medicaid managed care arrangements are described below:
!Managed care organization (MCO). Under a managed care
organization (such as a health maintenance organization or HMO),
the entity has a comprehensive, risk-based contract with the state.
The state pays the organization a fixed, prospective, per person per
month rate for providing medical care for all plan enrollees.
!Pre-paid health plan (PHP). Pre-paid health plans refer to risk-
based contracts that include less than a comprehensive set of
services (such as only behavioral health services), or non-risk based
contracts for any package of services. Essentially, such plans do not
have a risk-based contract with the state for a comprehensive set of
services.


30 The law considers a service package to be “comprehensive” if it includes inpatient
hospital services and any of the following services, or any three or more of the following
services: (1) outpatient hospital services, (2) rural health clinic services, (3) federally
qualified health center (FQHC) services, (4) other laboratory and x-ray services, (5) nursing
facility service, (6) early and periodic screening, diagnostic, and treatment (EPSDT)
services, (7) family planning services, (8) physician services, or (9) home health services.

!Primary care case management (PCCM). Under a PCCM model,
providers receive a per person, monthly fee for coordinating each
enrollee’s care. The provider is not fiscally responsible for the
services used by the individual. All services are provided through
the fee-for-service delivery system. The PCCM must be a physician
or licensed health care professional; this provider acts as a care
coordinator and/or gatekeeper to the services specified under the
PCCM contract.
There are also several hybrids of the MCO, PHP and PCCM models. Most
states have implemented multiple models. For example, a state may have an MCO
for children and families enrolled in Medicaid and a PHP for mental health services
for individuals with a relevant disability. As of June 30, 2003, 47 states and the
District of Columbia were using some form of Medicaid managed care, 44 states had
risk-based plans31 and 29 states had non-risk PCCM plans.32
As discussed earlier, managed care has primarily included low-income adults
and children, as shown in Table 10. Based on the most recent data available, of the
21.3 million Medicaid recipients enrolled in a managed care organization or pre-paid
health plan in FY2000, 78% were low-income adults and children, 18% were
individuals with disabilities and the elderly, and 5% had an unknown basis of
eligibility.33
Table 10. Medicaid Recipients Served Through MCO and/or
PHP Plans by Basis of Eligibility, FY2000
(in thousands of people)
Blind
andFoster
State TotalaAgeddisabledChildrenAdultscareUnknown
AL — — — — — — —
AK — — — — — — —
AZ 650 29 90 379 137 8 6
AR — — — — — — —
CA 5,778 501 863 2,409 1,152 125 728
CO 343 39 58 162 50 16 17
CT291 — 12136475
DE100 — 1051362 —
DC101 — 36630 — 1
FL 769 19 116 480 126 9 1 9
GA22 — 4154 — —
HI167 — 5847143


31 Includes PHPs and hybrid managed care models.
32 CMS, 2003 Medicaid Managed Care Enrollment Report, Breakout of Managed Care
Entities by State, see [http://www.cms.hhs.gov/medicaid/managedcare/mctype03.pdf].
33 Does not total to 100% due to rounding. This does not include individuals only receiving
PCCM services.

Blind
andFoster
State TotalaAgeddisabledChildrenAdultscareUnknown
ID — — — — — — —
IL237 — 11735517
IN178 — 61313614
IA2522461335696
KS57 — — 4311 — 2
K Y 700 49 184 346 97 8 16
LA — — — — — — —
ME3 — — 21 — —
MD 507 7 71 335 77 15 2
MA 779 2 117 385 255 1 19
MI 1,055 10 185 596 181 24 59
MN 375 35 4 229 105 1 1
MS9 — 351 — 1
MO395 — 127799134
MT3 — — — 2 — —
NE172113116358 —
NV71 — — 4717 — 7
NH7 — — 61 — —
NJ 560 33 19 403 95 1 8
NM2971282174434
NY 1,082 9 9 0 570 304 4 104
NC62 — 6391114
ND1 — — 1 — — —
OH362 — 627382 — 1
OK382 — 372746911
OR 508 35 53 207 198 12 3
PA 1,015 66 215 510 180 26 18
RI123 — 1764411
SC43 — 3363 — —
SD99101656152 —
T N 1,552 87 315 637 452 12 49
T X 727 40 64 504 114 3 1
UT 195 9 2 1 103 35 6 2 1
VT66 — 135292 —
VI21323014437 — —
WA 613 3 3 466 126 1 14
WV — — — — — — —
WI 342 1 10 221 106 3 1
WY — — — — — — —
U.S. total21,2639922,70011,4564,6473301,137
Percentage
of total5%13%54%22%2%5%



Source: Congressional Research Service (CRS) tabulation of data from the Medicaid Statistical
Information System (MSIS) for FY2000 for all states except Hawaii. Hawaii did not report MSIS data
for FY2000. CRS approximated FY2000 data for Hawaii using data reported for FY1999.
Note: Excludes the territories, disproportionate share hospital payments (DSH), program
administration, and Medicare premiums. Includes expenditures for Medicaid-expansion State
Childrens Health Insurance Program (M-SCHIP) recipients.
a. Does not include individuals who only received primary care case management services (PCCM).
— Denotes no managed care program, except in some cases states reported capitation payments as
part of other services and did not report these payments in the MCO or PHP categories. This was most
likely to occur when there was only one service provided under that managed care program (e.g.,
transportation). Alternate data sources from the Centers for Medicare and Medicaid Services website
[http://www.cms.hhs.gov/medicaid/managedcare/mmcns600.asp] show that Alabama, Arkansas, and
West Virginia had capitated MCO or PHP programs during FY2000.
Medicaid expenditures in FY2002 for services provided in managed care or a
pre-paid health plan followed a similar pattern, as shown in Table 11.34 Of the
$33.6 billion in Medicaid expenditures for individuals in a managed care
organization or pre-paid health plan, 61% were for low-income adults and children,
32% were for individuals with disabilities and the elderly, and 8% were for
individuals whose basis of eligibility was unknown.


34 Expenditures shown in Table 11 are those reported by states through the MSIS database
for FY2002. See footnote 20 for further information.

Table 11. Total Medicaid Payments for MCO and PHP Recipients
by Basis of Eligibilitya, FY2002
(in millions of dollars)
Foster
Blind/care
State Total Aged disabled Children Adults chi l dren Unknow n
AK — — — — — — —
AL $580 $2 $70 $202 $11 $4 $291
AR — — — — — — —
AZ $2,450 $435 $980 $626 $393 $12 $3
CA $5,038 $473 $883 $2,421 $1,076 $48 $136
CO $532 $48 $180 $127 $60 $50 $68
CT$513 — $1$335$168$9 —
DC$217.00 — $43$100$69$1$4
DE$209.00$2$54$56$96$1 —
FL $1,119.00 $107 $394 $407 $181 $8 $23
GA — — — — — — —
HI$222.00 — $4$90$109$9$10
IA $183.00 $1 $42 $78 $49 $9 $4
ID — — — — — — —
IL$209.00$2$1$138$66 — —
IN$259.00 — $8$165$82$1$3
KS$100.00 — — $62$36 — —
K Y $418.00 $13 $174 $185 $37 $5 $4
LA — — — — — — —
MA$612.00$29$215$194$165 — $9
MDb $1,125.68 $4 $415 $409 $279 $19 $0
ME — — — — — — —
MI $2,738.73 $7 $687 $463 $292 $14 $1,275
MN $992.02 $226 $15 $501 $242 $5 $3
MO$611.19$3$2$407$179$20 —
MS — — — — — — —
MT — — — — — — —
NC$33.21 — $6$14$13 — —
ND$5.30 — — — — — $4
NE$79.70$2$19$28$20$10 —
NH$17.98 — — $16$1 — —
NJ $996.60 $27 $195 $424 $337 $1 $13
NM $760.98 $1 $57 $107 $28 $6 $561
NV$110.65 — $2$47$47 — $15
NY $2,376.04 $248 $441 $910 $747 $13 $16
OH$595.26 — $6$346$242 — —
OK$381.93$2$100$209$35 — $36



Foster
Blind/care
State Total Aged disabled Children Adults chi l dren Unknow n
OR $869.32 $69 $244 $188 $336 $24 $9
PA $3,566.27 $346 $1,789 $912 $454 $58 $7
RI$192.60 — $2$81$105$5 —
SC$62.28$10$10$28$8 — $5
SD$6.79$1$1$4$1 — —
T N $1,991.14 $30 $694 $458 $796 $13 $2
T X $1,137.79 $65 $201 $681 $186 $2 $2
UT $297.05 $13 $88 $81 $36 $4 $75
VA$586.50$17$243$225$101 — —
VT — — — — — — —
WA $659.26 $3 $4 $387 $264 $1 $1
WIb $713.02 $46 $178 $248 $234 $7 $0
WV$67.49 — — $39$13 — $15
WY — — — — — — —
U.S. total$33,634.46$2,232$8,450$12,403$7,596$359$2,594
Percentage
of total7%25%37%23%1%8%
Source: Congressional Research Service, based on Medicaid Statistical Information System (MSIS)
data from the Centers for Medicare and Medicaid Services (CMS).
Note: Excludes the territories, disproportionate share hospital payments (DSH), program
administration, and Medicare premiums. Includes expenditures for Medicaid-expansion State
Childrens Health Insurance Program (M-SCHIP) recipients.
a. Does not include individuals receiving only primary care case management services (PCCM).
b. States may report negative claims to reconcile expenditure costs.
— Denotes no managed care program, except in some cases states reported capitation payments as
part of other services and did not report these payments in the MCO or PHP categories. This was most
likely to occur when there was only one service provided under that managed care program (e.g.,
transportation). Alternate data sources from the Centers for Medicare and Medicaid Services website
[http://www.cms.hhs.gov/medicaid/managedcare/mctype02.pdf] show that Arkansas and Georgia had
capitated MCO or PHP programs during FY2002.
Trends in Managed Care. In the early and mid-1990s, states significantly
expanded enrollment in Medicaid managed care programs, but this growth is
slowing. In FY2002 and FY2003, the number of individuals enrolled in a managed
care plan as a percentage of all Medicaid eligible individuals increased 1.3% and
2.6% respectively. This is a significant decrease over the 61.1% and 38.4% annual
growth rates of FY1994 and FY1995, respectively. The expansion of Medicaid
managed care in the early and mid-1990s should be viewed in the context of a
general trend toward managed care across many sectors of the U.S. health care
system. Despite the significant growth of managed care both in Medicaid and the
overall health care system, the extent to which it has accomplished the goal of
controlling health care expenditures and increasing quality has been inconclusive.



Finally, in both Medicaid and the U.S. health care system in general, managed
care continues to evolve. Some of these changes include plans entering and exiting
certain geographic locations, and company consolidations and bankruptcies. In
general, Medicaid beneficiaries in managed care have been increasingly enrolled in
plans that are only serving Medicaid beneficiaries. From June 30, 1998, through
June 30, 2003, the number of commercial managed care plans providing services to
Medicaid beneficiaries declined an average of 10% per year.35 As a comparison, the
number of managed care plans serving only Medicaid beneficiaries declined 2% per
year over the same time period.36 This evolution of the managed care market is not
necessarily negative if it strengthens the overall delivery system, but it may result in
decreased continuity of services and additional administrative costs if beneficiaries
must switch providers or re-enroll in a different plan.
Long-Term Care Delivery System
“Long-term care” refers to a wide range of supportive and health services for
persons who have lost the capacity for self-care due to illness, frailty, or a disabling
condition. It differs from acute care in that the goal of long-term care is not to cure
an illness that is generally of short duration, but to allow an individual to attain and
maintain an optimal level of functioning over the long-term.
Since the establishment of the Medicaid program in 1965, long-term care
services (i.e., nursing home and home care) have been delivered largely through the
fee-for-service delivery system. A 1981 amendment to the Medicaid statute
established Section 1915(c) waivers, giving states the option of providing home and
community-based services to individuals who would otherwise be eligible for
institutional care. Many states arrange for these services to be delivered on a fee-for-
service basis, often using case managers to determine service needs and authorize
delivery. Concerns about uncoordinated long-term and acute care, inefficiencies in
disease management for persons with multiple chronic conditions, and growing costs,
however, have encouraged federal and some state governments to develop alternative
systems to pay for and deliver long-term care services.
In recent years, many of the alternative delivery systems that states and the
federal government have developed coordinate long-term care services for dual
eligibles — persons who are eligible for both Medicaid and Medicare — through
managed care programs. One example is the Program for All-Inclusive Care for the
Elderly (PACE), originally modeled after the On Lok Senior Health Services pilot
project in San Francisco. PACE makes available all services covered under both
programs without amount, duration or scope limitations, and without application of
any deductibles, copayments or other cost sharing. Under the program, certain low-
income individuals age 55 and older, who would otherwise require nursing home
care, receive all health, medical, and social services they need. An interdisciplinary
team of physicians, nurses, physical therapists, social workers, and other


35 A commercial managed care plan may provide services to individuals who have private
health insurance, Medicare beneficiaries and/or Medicaid beneficiaries.
36 CMS, Medicaid Managed Care Enrollment Statistics, 1998 through 2003, see
[http://www.cms.hhs.gov/medicaid/managedcare/enrolstats.asp] for additional information.

professionals develop and monitor care plans for enrollees. Monthly capitated
payments are made to providers from both the Medicare and Medicaid programs. As
specified in Medicare and Medicaid statutes, the amount of these payments from both
programs must be less than what would have otherwise been paid for a comparable
frail population not enrolled in the PACE program. Payments are also adjusted to
account for the comparative frailty of PACE enrollees. PACE providers assume the
risk for expenditures that exceed the revenue from the capitation payments. The
Balanced Budget Act of 1997 made PACE a permanent benefit category under
Medicare and a state plan optional benefit under Medicaid. As of February 2005,
there were 32 PACE sites across 18 states.
Other examples of state initiatives to provide coordinated long-term care
services include the Minnesota Senior Health Options (MSHO), the Wisconsin
Partnership Program, and the Continuing Care Network (CCN) demonstration of
Monroe County, New York. The MSHO program combines Medicare and Medicaid
financing to integrate acute and long-term care services for dually eligible seniors
residing in seven counties in Minnesota. The program consolidates all Medicare and
Medicaid managed care requirements into a single contract overseen by the state,
allowing MSHO to reduce duplication and resolve important differences across
Medicare and Medicaid delivery systems. Like PACE, the Wisconsin Partnership
Program pays capitated payments to providers to coordinate acute and long-term care
services for persons who would otherwise qualify for nursing home care. It also
places a strong emphasis on services provided in home and community settings. This
program, however, was designed specifically to serve rural areas. New York’s CCN
project enrolls at least 10,000 elderly beneficiaries, including 1,500 who had been
certified for care in a nursing facility. To participate, enrollees must be age 65 or
over, eligible for Medicare and/or Medicaid, and reside in the program’s service area.
Capitation payments made to CCN are intended to cover all of Medicare’s acute care
services for this population and most of Medicaid’s long-term care services.
Medicaid prescription drug coverage, for example, is paid separately on a fee-for-
service basis.
States have also experimented with other initiatives that capitate payments for
acute and long-term care services under the Medicaid program only. Examples of
these demonstrations include the nation’s only statewide mandatory Medicaid
managed care program — the Arizona Long-Term Care System (ALTCS) — and
small, voluntary programs such as Florida’s Community-Based Diversion Pilot
Project. Florida’s Diversion program serves selected metropolitan areas and counties.
Case managers employed through both of these programs arrange Medicaid long-
term care services and coordinate with Medicare providers to deliver acute care
services.
All of these programs were designed with the expectation that they would
control costs and reduce administrative complexity. They also intend to delay
institutionalization, and thus incur savings for Medicaid through the provision of
expanded home and community-based care options and, in some cases, greater
beneficiary control over services. Those programs that also capitate Medicare are
intended to reduce hospitalization and skilled nursing facility expenditures as well
as other acute care costs associated with institutional care. While these initiatives



exist in a number of states, they account for a relatively small share of total Medicaid
spending for long-term care.
Medicaid Waiver Programs
Under current law, states have the flexibility to waive certain Medicaid program
requirements to provide services to individuals not traditionally eligible for
Medicaid, limit benefit packages for certain groups, and provide home and
community-based services to people with long-term care needs, among other
purposes. States must submit proposals outlining terms and conditions for proposed
waivers to CMS for approval before implementing these programs. The two primary
provisions of the Social Security Act used today that authorize states to implement
waiver programs are Section 1115 and Section 1915(c).
In recent years, there has been increased interest among states in demonstration
programs as a means to restructure Medicaid coverage, control costs, and increase
flexibility. Whether large or small reforms, the waiver programs have resulted in
significant changes for Medicaid beneficiaries nationwide.
Section 1115 Waiver Demonstration Programs
Section 1115 of the Social Security Act provides the Secretary of Health and
Human Services (HHS) with broad authority to waive certain statutory requirements
in the Medicaid program allowing states to conduct research and demonstration
programs to further the goals of Title XIX.37 Under Section 1115, the Secretary may
waive Medicaid requirements contained in Section 1902, known as freedom of
choice of provider, comparability, and statewideness (see “Benefits” subsection for
a discussion of these requirements).
States often use Section 1115 waivers to offer different service packages or a
combination of services in different parts of the state, test new reimbursement
methods, change eligibility criteria in order to offer coverage to new or expanded
groups, cover non-Medicaid services (e.g., cash and counseling demonstrations),38
or contract with a greater variety of managed care plans. Demonstration programs


37 Section 1115 also authorizes the Secretary to conduct research and demonstration projects
under several other programs authorized in the Social Security Act, including TANF, SSI
and SCHIP.
38 Cash and counseling demonstrations are designed to test a consumer-directed approach
to the financing and delivery of personal attendant services (e.g., assistance with activities
of daily living such as eating, bathing, toileting, transport from bed to chair, etc.) for elderly
and disabled individuals. These demonstrations provide cash payments to enrollees so that
they may directly arrange and purchase services that best meet their needs. States must
submit a Section 1115 waiver for a Cash and Counseling demonstration if: cash is provided
directly to an individual; cash is used to pay a legally responsible relative (e.g., spouses or
parents); the state intends to change Medicaid eligibility requirements; and/or the state
intends to waive the requirement to pay only those agencies that have provider agreements
with the state.

are generally approved for a five-year period, however CMS has granted program
extensions for many of the comprehensive waiver programs (i.e., programs that
generally offer a statewide comprehensive service package to populations
traditionally eligible for Medicaid as well as expansion populations). Some of these
extensions have allowed Section 1115 waiver programs to remain in operation for 10
or more years. For example, Arizona’s entire Medicaid program operates under the
Section 1115 waiver authority, and this program is in its 22th year.
While Section 1115 is explicit about provisions in Medicaid law that may be
waived in conducting research and demonstration projects, a number of other
provisions in Medicaid law and regulations specify limitations or restrictions on how
a state may operate a waiver program. For example, one provision restricts states
from establishing waivers that fail to provide all mandatory services to the mandatory
poverty-related groups of pregnant women and children; another provision specifies
restrictions on cost-sharing imposed under demonstration waivers.
Financing. Approved Section 1115 waivers are deemed to be part of a
Medicaid state plan and are financed through federal and state matching funds at the
regular FMAP rate. However unlike regular Medicaid, costs associated with waiver
programs must be budget neutral to the federal government over the life of the
waiver program. To meet the budget neutrality test, estimated spending under the
waiver cannot exceed the estimated cost of the state’s existing Medicaid program39
under current law program requirements. For example, costs associated with an
expanded population (e.g., those not already covered under the state’s Medicaid
program), must be offset by reductions elsewhere within the Medicaid program.
Several methods used by states to generate cost savings for the waiver component
include (1) moving part of the Medicaid population into managed care; (2) limiting
benefit packages for certain eligibility groups; (3) providing targeted services to
certain individuals so as to divert them from full Medicaid coverage; and (4) using
enrollment caps and cost-sharing to reduce the amounts states must pay.
Program Types. CMS classifies Section 1115 waiver programs into five
distinct categories. They are:
!Comprehensive demonstrations. These demonstrations provide a
broad range of services that are generally offered statewide. As of
January 2003, there were 19 operational (i.e., approved and
implemented) Medicaid comprehensive state reform waivers.40
FY2003 state-reported enrollment estimates for the comprehensive


39 Current law program requirements may include hypothetical program expansions
allowable under current law (e.g., groups of eligibles, services or payments which could
have been but were not previously covered or provided) as well as program terminations
(e.g., the elimination of the state’s medically needy program).
40 States with comprehensive demonstration waivers include Arizona, Arkansas, California
(Los Angeles county), Delaware, District of Columbia, Hawaii, Kentucky, Maryland,
Massachusetts, Minnesota, Missouri, New York, Oklahoma, Oregon, Rhode Island,
Tennessee, Utah, Vermont, and Wisconsin.

demonstration waivers totaled approximately 7.0 million,41 and
federal expenditures for these programs were approximately $19.5
billion. 42
!Family planning demonstrations. These demonstrations provide
family planning services for certain individuals of childbearing age
in 17 states.43 For the family planning demonstrations, FY2003
enrollment counts totaled 2.1 million, and federal expenditures were
approximately $426 million.44
!Specialty services and population demonstrations. These
demonstrations generally include programs that provide cash to
enrollees so that they may directly arrange and purchase services that
best meet their needs. In addition, they also include waivers to
provide pharmacy benefits to persons with specific conditions, such
as HIV/AIDS. In FY2003, there were 11 such operational programs
in eight states.45 These demonstrations covered just under 8,000
individuals at a federal cost of approximately $99 million.46
!The Health Insurance Flexibility and Accountability Initiative
(HIFA). These demonstrations are designed to encourage states to
extend Medicaid and SCHIP to the uninsured, with a particular
emphasis on statewide approaches that maximize private health
insurance coverage options and target populations with incomes
below 200% FPL. As of January 2003, there were seven Medicaid


41 California’s Section 1115 waiver program (i.e., Los Angeles county) uses demonstration
authority to provide financial support to continue county delivery system restructuring
efforts. Because of the nature of the demonstration project, California does not submit
enrollment estimates to CMS. In states where multiple demonstration populations are
covered under a comprehensive waiver project (e.g., the project includes a family planning
component, a pharmacy-only component, and/or a HIFA component, etc.), enrollee counts
reported here include enrollees for whom the state reports expenditures associated with this
population under the comprehensive demonstration waiver project number.
42 New York’s FY2003 state-reported estimate was based on historical spending.
43 States with operational family planning demonstration waivers as of Jan. 2003 included
Alabama, Arizona, Arkansas, California, Delaware, Florida, Maryland, Mississippi,
Missouri, New Mexico, New York, Oregon, Rhode Island, South Carolina, Virginia,
Washington and Wisconsin.
44 Arizona, Delaware, Missouri, New York, and Rhode Island report their family planning
demonstration enrollees and expenditures as a part of their comprehensive demonstration
waivers. FY2003 state-reported expenditures for Florida were reported as a part of the state
plan expenditures. FY2003 state-reported expenditures for Maryland were reported as a part
of the state’s Title XXI state plan expenditures. Mississippi’s family planning waiver was
implemented on Oct. 1, 2003.
45 States with specialty service and population demonstration waivers as of Jan. 2003
included Arkansas (two waivers), Colorado (two waivers), District of Columbia, Florida,
Maine (two waivers), New Jersey, Oregon, and Wisconsin.
46 FY2003 state-reported enrollment data were not available for Wisconsin.

Section 1115 waivers approved under the HIFA initiative.47 Six of
the seven HIFA programs (Illinois, Michigan, New Jersey, New
Mexico, New York, and Oregon) are Medicaid/SCHIP combined
waivers. A combined HIFA waiver generally means that the state
will finance changes to its Medicaid program using unspent SCHIP
funds. FY2003 state-reported enrollment and expenditure data show
that these demonstrations covered just over 180,000 individuals at
a federal cost of approximately $988 million.48
!Pharmacy plus demonstrations. These demonstrations provide
comprehensive pharmacy benefits for low-income seniors and
individuals with disabilities with income at or below 200% FPL.
The demonstrations may provide pharmaceutical products, assist
individuals who have private pharmacy coverage with high
premiums and cost sharing, or provide wraparound pharmaceutical
coverage to bring private sources of pharmacy coverage up to the
level of desired demonstration benefit coverage. Enrollees will not
be eligible for the comprehensive Medicaid benefits available under
the state’s Medicaid plan. In FY2003, there were six approved
Pharmacy Plus waivers.49 Enrollment counts totaled approximately

309,000 at a federal cost of approximately $1.1 billion.50


Section 1915(c) Home and
Community-based Waiver Programs
In 1981, Congress added Section 1915(c) to the Medicaid statute. Section51
1915(c) authorizes the Secretary of HHS to waive certain requirements of Medicaid
law to allow states to cover a range of home and community-based services for
persons who would otherwise be eligible for Medicaid-funded institutional care. The

1915(c) waivers, often referred to as home and community-based services (HCBS)


waivers, were designed to reduce the institutional bias in the Medicaid program that
made it easier for persons to qualify for Medicaid coverage of institutional care than
for care in the home or in the community.


47 States with approved Medicaid or Medicaid/SCHIP combined HIFA waivers include
Illinois, Maine, Michigan, New Jersey, New Mexico, New York, and Oregon. HIFA
waivers authorized solely under the SCHIP program are not included.
48 FY2003 state-reported expenditure data were not available for New Mexico. FY2003
state-reported enrollment data were not available for New York. Oregon’s comprehensive
waiver project includes a HIFA component. Enrollee counts for whom the state reports
expenditures associated with this population under the comprehensive demonstration waiver
project number are not included here.
49 As of the fall of 2003, states with approved Pharmacy Plus waivers included Florida,
Illinois, Indiana, Maryland, Wisconsin, and South Carolina.
50 Maryland reports its pharmacy expenditures as a part of the state’s comprehensive
demonstration program.
51 States can waive statewideness and comparability, and may apply certain institutional
eligibility rules to persons in home and community-based waivers.

The waivers allow states to cover a broad range of medical and non-medical
social services to enable people with chronic long-term care needs to remain in the
community. Unlike the budget neutrality test required for Section 1115 waivers
(where estimated spending under the waiver cannot exceed the estimated costs of the
state’s existing Medicaid program), the cost-effectiveness test under 1915(c)
prohibits expenditures from exceeding the cost of institutional care that would have
been provided to waiver recipients absent the waiver.52 To assist states in containing
costs, Section 1915(c) allows states to place caps on the total number of individuals
that may be covered under each waiver and/or set expenditure restrictions on a per
capita basis (e.g., not to exceed $20,000 per year per waiver recipient) or on an
aggregate basis (e.g., a cost cap applied to all persons under a waiver in the state).
Medicaid regulations require that waiver participants fall into one of the
following target groups: the aged, persons with physical disabilities, persons with
mental retardation or developmental disabilities (MR/DD), and persons with mental
illness. Generally, states must apply for separate waivers to serve these different
groups. Section 1915(c) also gives states the flexibility to define the categories of
individuals within these broader target groups who may be eligible for certain
waivers and the services they will receive. States may also limit eligibility for
services to individuals who have certain conditions, such as HIV/AIDS.
Further, eligibility is limited to individuals who would otherwise be eligible for
institutional care provided in a hospital, nursing facility or intermediate care facility
for the mentally retarded (ICF/MR). There are no federal requirements that describe
the level and or severity of functional limitations that individuals must have to be
admitted to an institutional setting and thus be eligible for a 1915(c) waiver, although
states generally determine eligibility for long-term care services based on a test of
applicants’ functional limitations for most waiver programs. The design of these
tests varies across states, but often includes tests to determine an applicant’s
limitations in ability to carry out activities of daily living (ADLs) and instrumental
activities of daily living (IADLs).53
Although these programs are optional, all states provide some HCBS waiver
services to certain Medicaid enrollees with long-term care needs. As of June 2003,
CMS reported that 275 programs were in operation across the country. In FY2002,
the most recent year for which data are available, 1915(c) waivers served 874,520
individuals. The most recent expenditure data from FY2003 showed that total
Medicaid spending on 1915(c) waivers reached $18.6 billion versus $11.2 billion in
FY1999.


52 Section 1915(c) waivers are prohibited from covering expenses for room and board, while
such costs would be covered by Medicaid in an institutional setting.
53 ADLs refer to activities necessary to carry out basic human functions, and include the
following: bathing, dressing, eating, mobility inside the home, toileting, and transferring
from a bed to a chair. IADLs refer to tasks necessary for independent community living, and
include the following: shopping, light housework, telephoning, money management, and
meal preparation.

The cost of providing waiver services to recipients varies across target
populations (see Figure 4). Spending on waivers for persons with MR/DD, for
example, totaled $14 billion in FY2003, accounting for 75.2% of total HCBS waiver
spending. Waiver spending on elderly individuals and persons with physical
disabilities totaled $4.2 billion in FY2003, accounting for 22.8% of total spending
on HCBS waivers. Waivers for individuals with HIV or AIDS totaled $76.1 million
(0.4%), for technology dependent or medically fragile individuals totaled $91.2
million (0.5%), and for persons with brain injuries totaled $163.2 million (0.9%). In
addition, three small waiver programs serving individuals with a primary diagnosis
of mental illness totaled $37.1 million and accounted for about 0.2% of all HCBS
waiver expenditures.
Figure 4. Medicaid HCBS Waiver Expenditures
by Target Population, FY2003
Persons with Tech Dependent/
Mental IllnessMed Fragile*
0.2%0.5%Elderly & Physical
Disability 22.8%
Persons with Brain
Injury
0.9%
HIV/ AID S
0.4%
MR/ DD**
75.2%
Source: S. Eiken, and B. Burwell,Medicaid HCBS Waiver Expenditures, FY1998 through
FY2003,” The MEDSTAT Group, May 20, 2004.
* Persons who are technology dependent or medically fragile.
** MR/DD = Persons with mental retardation and/or developmental disabilities.
Data are provided to CMS through Form 64 reports by states. Eiken and Burwell report that FY2003
waiver expenditures may be understated by about 2-3% since they do not include all prior period
adjustments or corrections submitted by states to CMS. CMS Form 64 data are by date of payment,
not by date of service. CMS 64 data on HCBS waiver spending represent only Medicaid fee-for-
service spending, not spending through capitated managed care programs. Arizona, Florida,
Wisconsin, Texas, and Minnesota are examples of states that pay for at least some HCBS waiver
services through capitated long-term care programs. Totals may not sum to 100% due to rounding.



Legislative History
Below is a summary of major Medicaid changes enacted in public laws passed
during 1996 forward. (For legislative history prior to 1996, see the 1996 edition and
earlier editions of the Green Book: Background Material and Data on Programs
Within the Jurisdiction of the Committee on Ways and Means.)
Contract with America Advancement Act of 1996, P.L. 104-121:
!Alcoholics and drug addicts. SSI benefits are terminated for
individuals receiving disability cash assistance based on a finding of
alcoholism and drug addiction. Persons who lose SSI eligibility may
still be eligible for Medicaid if they meet other Medicaid eligibility
criteria. States are required to perform a redetermination of
Medicaid eligibility in any case in which an individual loses SSI.
Personal Responsibility and Work Opportunity Reconciliation Act of 1996, P.L. 104-

193:


!Eligibility. A new cash welfare block grant to states, Temporary
Assistance for Needy Families (TANF), is established. The
automatic link between AFDC and Medicaid is severed. Families
who meet AFDC eligibility criteria as of July 16, 1996 are eligible
for Medicaid, even if they do not qualify for TANF. States must use
the same income and resource standards and other rules previously
used to determine eligibility, including the prereform AFDC family
composition requirement. A state may lower its income standard,
but not below the standard it applied on May 1, 1988. A state may
increase its income and resource standards up to the percentage
increase in the Consumer Price Index (CPI) subsequent to July 16,
1996. States may use less restrictive methods for counting income
and resources than were required by law as in effect on July 16,
1996. States are permitted to deny Medicaid benefits to adults and
heads of households who lose TANF benefits because of refusal to
work; states may not apply this requirement to poverty-related
pregnant women and children.
!Disabled children. The definition of disability used to establish the
eligibility of children for SSI is narrowed. Children who lose SSI
eligibility may still be eligible for Medicaid if they meet other
Medicaid eligibility criteria. States are required to perform a
redetermination of Medicaid eligibility in any case in which an
individual loses SSI and that determination affects his or her
Medicaid eligibility.
!Aliens. Legal resident aliens and other qualified aliens who entered
the United States on or after August 22, 1996 are barred from
Medicaid for five years. Significant exceptions are made for such
aliens with a substantial U.S. work history or a military connection.
Except for emergency services, Medicaid coverage for such aliens



entering before August 22, 1996 and coverage after the five-year ban
are state options.
!Administration. A state may use the same application form for
Medicaid as they use for TANF. A state may choose to administer
the Medicaid program through the same agency that administers
TANF or through a separate Medicaid agency. A special fund of
$500 million is provided for enhanced federal matching for states’
expenditures attributable to the administrative costs of Medicaid
eligibility determinations due to the law.
Balanced Budget Act of 1997, P.L. 105-33:
!Eligibility. The Balanced Budget Act restores Medicaid eligibility
and SSI coverage for legal immigrants who entered the country prior
to August 22, 1996 and later become disabled; guarantees continued
Medicaid eligibility for children with disabilities who are expected
to lose their SSI eligibility as the result of restrictions enacted in
1996; and extends the period that states must provide coverage to
refugees, asylees, and individuals whose deportation has been
withheld from five to seven years. States are permitted to provide
continuous Medicaid coverage for 12 months to all children,
regardless of whether they continue to meet income eligibility tests.
States are permitted to create a new Medicaid eligibility category for
working persons with disabilities with income up to 250% of
poverty and who would, but for income, be eligible for SSI. Such
individuals can “buy into” Medicaid by paying a sliding scale
premium based on the individuals’ income as determined by the
state.
!Payment methodology. The law repeals the Boren amendment,
which directed that payment rates to institutional providers be
“reasonable and adequate” to cover the cost of “efficiently and
economically operated” facilities, and repeals the law requiring
states to assure adequate payment levels for services provided by
obstetricians and pediatricians. The requirement to pay federally
qualified health centers and rural health clinics 100% of reasonable
costs is phased out over six fiscal years, with special payment rules
in place during fiscal years 1998-2002 to ease the transition.
!Payments for disproportionate share hospitals. This law includes
several provisions affecting disproportionate share hospital (DSH)
payments provided to hospitals that treat a disproportionate share of
the uninsured and Medicaid beneficiaries. It reduces state DSH
allotments by imposing freezes and making graduated proportionate
reductions. Limitations are placed on payments to institutions for
mental disease. The Act establishes additional caps on the state
DSH allotments for fiscal years beginning in 1998 and specifies
those caps for 1998-2002. States are required to report annually on
the method used to target DSH funds and to describe the payments
made to each hospital.
!Managed care. The law eliminates the need for 1915(b) waivers to
enroll most Medicaid populations in managed care. States can



require the majority of Medicaid recipients to enroll in managed care
simply by amending their state plan. Waivers are still required to
mandate that children with special health care needs and certain
dually eligible Medicaid-Medicare beneficiaries enroll with managed
care entities. The law establishes a statutory definition of primary
care case management (PCCM), adds it as a covered service, and
sets contractual requirements for both PCCM and Medicaid
managed care organizations. The act also includes managed care
provisions that establish standards for quality and solvency, and
provide protections for beneficiaries. The law repeals the provision
that requires managed care organizations to have no more than 75%
of their enrollment be Medicaid and Medicare beneficiaries, and the
prohibition on cost sharing for services furnished by health
maintenance organizations.
Nursing Home Resident Protection Amendments of 1999, P.L. 106-4:
!Transfer or discharge of nursing facility residents. This law
prohibits the transfer or discharge of nursing facility residents, both
those covered and not covered by Medicaid, as a sole result of a
nursing home’s voluntary withdrawal from participation in the
Medicaid program, except under certain circumstances.
!Information for new residents. For new residents, meaning those
entering a facility subsequent to the effective date of the facility’s
withdrawal from Medicaid, the following information must be
provided orally and in writing: (a) notice that the facility does not
participate in Medicaid, and (b) the facility may transfer or discharge
such a new resident when that resident is no longer able to pay for
his/her care, even if such a new resident is covered by Medicaid.
!Facility requirements. Facilities that voluntarily withdraw from
Medicaid are still subject to all applicable requirements of Title
XIX, including the nursing facility survey, certification and
enforcement authority, as long as patients covered under Medicaid
prior to the facility’s withdrawal continue to reside in the facility.

1999 Emergency Supplemental Appropriations Act, P.L. 106-31:


!Tobacco settlement payments to states. Amounts recovered or paid
to states by manufacturers of tobacco products as part of the
comprehensive tobacco settlement of November 1998 or to any
individual state based on a separate settlement or litigation shall be
retained in full by such states. That is, such states do not have to pay
the federal government a portion of these amounts equal to the
applicable (state-specific) federal medical assistance percentage.
!Restriction on use of tobacco settlement funds. States receiving
these sums are not permitted to use these funds to pay for
administrative expenses incurred in pursuing such tobacco litigation.



Medicare, Medicaid, and State Children’s Health Insurance Program (SCHIP)
Balanced Budget Refinement Act of 1999, incorporated by reference in the
Consolidated Appropriations Act for Fiscal Year 2000, P.L. 106-113:
!Increase in DSH allotments for selected states. The law increases
the federal share of DSH payments to Minnesota, New Mexico,
Wyoming, and the District of Columbia for each of fiscal years

2000-2002.


!Administration. The law extends beyond FY2000 the availability of
a $500 million fund created to assist with the transitional costs of
new Medicaid eligibility activities resulting from welfare reform,
and allows these funds to be used for costs incurred beyond the first
three years following welfare reform.
!Federally qualified health center (FQHC) services and rural health
clinics (RHCs). The law slows the phase-out of the cost-based
system of reimbursement for services provided by FQHCs and
RHCs, and authorizes a study of the impact of reducing or modifying
payments to such providers.
!Payments for monitoring services and external review requirements.
The law provides that states will receive enhanced matching
payments for medical and utilization reviews for Medicaid fee-for-
service, and quality reviews for Medicaid managed care, when
conducted by certain entities similar to peer review organizations.
It also eliminates duplicative requirements for external review, and
requires the DHHS Secretary to certify to Congress that the external
review requirements for Medicaid managed care are fully
implemented.
!Federal matching for disproportionate share hospital payments.
The law clarifies that Medicaid disproportionate share hospital
payments are matched at the Medicaid federal medical assistance
percentage and not at the enhanced federal medical assistance
percentage authorized under Title XXI (SCHIP).
!Outpatient drugs. The law allows rebate agreements entered into
after the date of enactment of this act to become effective on the date
on which the agreement is entered into, or at state option, any date
before or after the date on which the agreement is entered into.
!Disproportionate share hospital transition rule. The law extends a
provision included in the Balanced Budget Act of 1997 related to
allocation of DSH funds among California’s hospitals.
Foster Care Independence Act of 1999, P.L. 106-169:
!Former foster care children. States are given the option to extend
Medicaid coverage to former foster care recipients ages 18, 19, and
20, and states may limit coverage to those who were eligible for
assistance under Title IV-E before turning 18 years of age. The law
also includes a “sense of Congress” statement indicating that states
should provide health insurance coverage to all former foster care
recipients ages 18, 19, and 20.



Ticket to Work and Work Incentives Improvement Act of 1999, P.L. 106-170:
!Employed, disabled individuals. States can opt to cover working
persons with disabilities at higher income and resource levels than
otherwise permitted (i.e., income over 250% of the federal poverty
level and resources over $2,000 for an individual or $3,000 for a
couple). States may also cover financially eligible working
individuals whose medical condition has improved such that they no
longer meet the Social Security definition of disability. States can
require these individuals to “buy in” to Medicaid coverage. These
individuals pay premiums or other cost-sharing charges on a sliding
fee scale based on income, as established by the state.
Agriculture Risk Protection Act of 2000, P.L. 106-224:
!Information sharing. This law allows schools operating federally
subsidized school meal programs to take a more active role in
identifying children eligible for, and enrolling such children in, the
Medicaid and SCHIP programs. It permits schools to share income
and other relevant information collected when determining eligibility
for free and reduced-price school meals with state Medicaid and
SCHIP agencies, as long as there is a written agreement that limits
use of the information and parents are notified and given a chance to
“opt out.”
!Demonstration project. The law also establishes a demonstration
project in one state in which administrative funds under the Special
Supplemental Nutrition Program for Women, Infants and Children
(WIC) may be used to help identify children eligible for, and enroll
such children in, the Medicaid and SCHIP programs.
Children’s Health Act of 2000, P.L. 106-310:
!Rights of institutionalized children. The law requires that general
hospitals, nursing facilities, intermediate care facilities and other
health care facilities receiving federal funds, including Medicaid,
protect the rights of each resident, including the right to be free from
physical or mental abuse, corporal punishment, and any restraints or
involuntary seclusions imposed for the purposes of discipline or
convenience. Restraints and seclusion may be imposed in such
facilities only to ensure the physical safety of the resident, a staff
member or others. Additional requirements govern reporting of
resident deaths, promulgation of regulations regarding staff training,
and enforcement. (Other Medicaid requirements regarding restraints
and seclusion for inpatient psychiatric services for persons under age

21 are specified in federal regulations.)


!Children’s rights in community-based settings. The law also
includes requirements for protecting the rights of residents of certain
non-medical, community-based facilities for children and
adolescents, when that facility receives funding under this act or
under Medicaid. For such individuals and facilities, restraints and



seclusion may only be imposed in emergency circumstances and
only to ensure the physical safety of the resident, a staff member or
others, and less restrictive interventions have been determined to be
ineffective. Use of a drug or medication that is not a standard
treatment for a resident’s medical or psychiatric condition is
prohibited. Likewise, use of mechanical restraints is prohibited.
Seclusion may only be used when a staff member is providing
continuous face-to-face monitoring and when strong
licensing/accreditation and internal controls are in place. (Time out
is not considered to be seclusion.) Additional requirements govern
reporting of resident deaths, promulgation of regulations regarding
staff training, and enforcement.
Breast and Cervical Cancer Prevention and Treatment (BCCPT) Act of 2000, P.L.

106-354:


!Eligibility. The law establishes a new optional coverage group
under Medicaid for uninsured women who are under age 65, have
been screened under the Centers for Disease Control and
Prevention’s Breast and Cervical Cancer Early Detection Program
and need treatment for breast or cervical cancer, and who are not
otherwise eligible for Medicaid under a mandatory coverage group.
States have the option of extending presumptive eligibility to these
women; presumptive eligibility allows individuals whose family
income appears to meet applicable financial standards to enroll
temporarily in Medicaid, until a final formal determination of
eligibility is made. Medicaid providers are the only entities qualified
to determine presumptive eligibility for these women.
!Benefits. Medicaid coverage is limited to medical assistance
provided during the period in which the individual requires breast or
cervical cancer treatment.
!Financing. The federal share of Medicaid payments for this group
uses the enhanced matching rate structure under the State Children’s
Health Insurance Program, which ranges from 65 to 85%.
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000,
incorporated by reference in P.L. 106-554:
!Disproportionate share hospitals. State DSH allotments for 2001
and 2002 are increased. It also extends a special DSH payment rule
for hospitals in California to qualifying facilities in all states, and
provides additional funds to certain public hospitals not receiving
DSH payments.
!Federally qualified health centers (FQHCs) and rural health clinics
(RHCs). The law replaces cost-based reimbursement with a
prospective payment system for FQHCs and RHCs.
!Upper payment limit rules. It also modifies proposed rules
governing upper payment limits on inpatient and outpatient services
provided by certain types of facilities, and requires that the final
regulations be issued by the end of 2000.



!Other provisions. Additional changes affect extensions of Section

1115 Medicaid waivers, Medicaid county-organized health systems,


the federal medical assistance percentage for Alaska, transitional
medical assistance for welfare-to-work families, determination of
presumptive eligibility for children, outreach to and enrollment of
certain Medicare beneficiaries eligible for Medicaid cost-sharing
assistance, PACE waivers, and posting of information on nursing
facility services.
Native American Breast and Cervical Cancer Treatment Technical Amendment Act
of 2001, P.L. 107-121:
!Eligibility. This law allows states to include in the optional
Medicaid eligibility category created by the Breast and Cervical
Cancer Prevention and Treatment (BCCPT) Act of 2000, American
Indian and Alaskan Native women with breast or cervical cancer
who are eligible for health services provided under a medical
program of the Indian Health Service or a tribal organization. All
provisions under the BCCPT Act of 2000 apply to such women.
Public Health Security and Bioterrorism Preparedness and Response Act of 2002,
P.L. 107-188:
!Waiver of provider requirements and Medicare+Choice payment
limits. The law authorizes the Secretary to temporarily waive
conditions of participation and other certification requirements for
any entity that furnishes health care items or services to Medicare,
Medicaid, or SCHIP beneficiaries in an emergency area during a
declared disaster or public health emergency. During such an
emergency, the Secretary may waive: (a) participation, state
licensing (as long as an equivalent license from another state is held
and there is no exclusion from practicing in that state or any state in
the emergency area), and pre-approval requirements for physicians
and other practitioners; (b) sanctions for failing to meet requirements
for emergency transfers between hospitals; (c) sanctions for
physician self-referral; and (d) limitations on payments for health
care and services furnished to individuals enrolled in
Medicare+Choice (M+C) plans when services are provided outside
the plan. To the extent possible, the Secretary must ensure that M+C
enrollees do not pay more than would have been required had they
received care within their plan network.
!Notification to Congress. The law also requires the Secretary to
provide Congress with certification and written notice at least two
days prior to exercising this waiver authority. It also provides for
this waiver authority to continue for 60 days, and permits the
Secretary to extend the waiver period.
!Evaluation. The Secretary is further required, within one year after
the end of the emergency, to provide Congress with an evaluation of
this approach and recommendations for improvements under this
waiver authority.



Health Care Safety Net Amendments of 2002, P.L. 107-251:
!Study of migrant farm workers. This law requires the Secretary to
conduct a study of the problems experienced by farm workers and
their families under Medicaid and SCHIP, specifically, barriers to
enrollment, and lack of portability of Medicaid and SCHIP coverage
for farm workers eligible in one state who move to other states on a
periodic basis. The Secretary must also identify possible strategies
to increase enrollment and access to benefits for these families.
Strategies to be examined must include (a) the use of interstate
compacts to establish portability and reciprocity, (b) multi-state
demonstration projects, (c) use of current law flexibility for coverage
of residents and out-of-state coverage, (d) development of programs
of national migrant family coverage, (e) use of incentives to private
coverage alternatives, and (f) other solutions as deemed appropriate.
In conducting the study, the Secretary must consult with several
groups. The Secretary must submit a report on this study to the
President and Congress in October 2003. This report shall address
findings and conclusions and provide recommendations for
appropriate legislative and administrative action.
Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27:
!Temporary increase in the federal medical assistance percentage
(FMAP). With respect to expenditures for Medicaid benefits, this
law increases FMAP for all 50 states, the District of Columbia and
five commonwealths and territories for a period of five calendar
quarters, including the last two quarters of FY2003 and the first
three quarters of FY2004. There is a two-step process for
determining the increase. First, each state’s FY2003 FMAP, as
would otherwise be calculated, must be at least equal to the state’s
FY2002 FMAP, and second, the FMAP determined under this step
is increased by 2.95 percentage points. For the FY2004 FMAP
change, the same calculations (substituting FY2003 for FY2002) are
applied to determine the temporary increase. The law also increases
the limitation on payments for the commonwealths and territories.
!State eligibility for increased FMAP. To qualify for the increased
FMAP payments, a state cannot have a Medicaid plan with more
restrictive eligibility rules than the plan in effect on September 2,
2003. If a state restores the program eligibility to the levels in effect
on September 2, 2003, then the state would qualify for increased
matching payments for the entire quarter in which eligibility is
reinstated. If a state expands eligibility rules after the beginning of
the higher payments (April 1, 2003) and before September 2, 2003,
the state is not eligible for the higher payments for the period
beginning on April 1, 2003 to the date that eligibility was expanded.



SCHIP Financing Act of 2003, P.L. 108-74:
!State eligibility for increased FMAP. This law modifies the
requirements regarding state eligibility for the temporary increase in
FMAP payments authorized under P.L. 108-27 (see above).
Specifically, P.L. 108-74 provides that if a state reduces eligibility
after September 2, 2003, and later restores eligibility to the
September 2, 2003 levels, the state would qualify for the higher
payments from the date of the eligibility restoration rather than for
the entire calendar quarter. In addition, if a state expands eligibility
rules after the beginning of the higher payments (April 1, 2003) and
before September 2, 2003, the state is eligible for the higher
payments for the period beginning on April 1, 2003 to the date that
eligibility was expanded.
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L.

108-173:


!Disproportionate share hospital payments. This law establishes a
temporary 16% increase in DSH allotments to states for FY2004 and
for certain subsequent fiscal years. Allotments for subsequent years
will be equal to FY2004 amounts unless the Secretary of HHS
determines that the allotments as would have been calculated under
prior law equal or exceed the FY2004 amounts. For such fiscal
years, allotments will be equal to allotments for the prior fiscal year
increased by the percentage change in the CPI-U for the previous
fiscal year. The law also changes the definition of a low DSH state
to those states in which total DSH payments for FY2000 are less
than 3% (rather than 1% as under prior law) of the state’s total
Medicaid spending on benefits. In addition, P.L. 108-173 increases
the floor allotment amount for low DSH states for FY2004 through
FY2008 by 16% each year (over the prior year amount). For
FY2009 forward, as for all other states, the allotment for low DSH
states for each year equals the prior year amount increased by
inflation. Finally, as a condition of receiving federal Medicaid
payments for FY2004 and beyond, states are required to submit a
detailed annual report and an independent certified audit on their
DSH payments to hospitals.
!Clarification regarding non-regulation of transfers. In accordance
with certain specified criteria, and on a temporary basis (through
December 31, 2005), the law clarifies that the non-federal share of
Medicaid funds transferred to the state from a specific public,
regional medical center may be used by the state as the non-federal
share of Medicaid expenditures. This provision targets, but is not
limited to, a medical center located in Memphis, Tennessee.
!Exempt prices of drugs provided to certain safety net hospitals from
the Medicaid best price drug program. The law modifies the
definition of “best price” for the purpose of calculating Medicaid
drug rebates to also exclude the discounted inpatient drug prices
charged to certain public safety net hospitals. Such hospitals must



also comply with the auditing and record keeping requirements
applicable to other providers with similar exemptions from
Medicaid’s “best price” determinations.
!Extend special treatment for a specific Medicaid provider. The
moratorium on the determination of Saginaw Community Hospital
in Michigan as an institution for mental disease (IMD) is
permanently extended. That is, this facility is not to be designated
as an IMD for Medicaid purposes.
American Jobs Creation Act of 2004, P.L. 108-357:
!Optional Medicaid benefit. The law adds a new optional benefit that
includes primary and secondary medical strategies and treatments for
persons with sickle cell disease who otherwise meet financial
eligibility standards. Services include chronic blood transfusion
(with deferoxamine chelation) to prevent stroke among those at high
risk, genetic counseling and testing for persons with the disease or
sickle cell trait to facilitate treatment and prevention of symptoms,
and other care to prevent those who have experienced a stroke from
having additional strokes. A rule of construction in the legislation
notes that the addition of this new Medicaid benefit does not imply
that states could not have covered these services previously. Related
administrative services, including for example, identification of
eligibles and education about the disease and its complications, are
also covered.