Manatt on Medicaid: Medicaid at 50—The Program’s Evolution and Future

Authors: Cindy Mann, Partner | Deborah Bachrach, Partner | Elizabeth Osius, Manager

Editor’s note: Born as an afterthought to Medicare five decades ago, Medicaid has evolved from an adjunct to state welfare programs into the nation’s largest health insurer. Medicaid’s 50th birthday is a fitting time to consider that evolution, to help chart the path forward. Medicaid is a complex program with a complex history, and understanding its role in the U.S. health system is essential to ensuring that it is performing at optimal levels for its beneficiaries, as well as for states, taxpayers and the myriad healthcare providers, health plans and others touched by the program. In a four-part series supported by The Commonwealth Fund, summarized below, Manatt Health examines Medicaid’s evolution and considers its role in the new coverage paradigm established by the Affordable Care Act (ACA). To access our free white paper, including the full content of all four posts from The Commonwealth Fund blog, click here.

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Medicaid as Health Insurer: Evolution and Implications

On January 1, 2014, a transformed Medicaid program became one of three programs, along with the insurance marketplaces and the Children’s Health Insurance Program (CHIP), offering a continuum of subsidized coverage for people who lack affordable insurance through the workplace. The ACA solidified Medicaid’s health insurance credentials, moving it further along the path, from its origins in the welfare system to the nation’s largest health insurer. And yet efforts to bring Medicaid back to its welfare roots continue to haunt the program, as evidenced by some states’ recent proposals to impose work requirements and eligibility time limits. Medicaid has looked different throughout its complex history, and appreciation of its role today has implications for it and the entire healthcare system.

Medicaid started in 1965 primarily covering people receiving welfare. It didn’t have its own eligibility rules or application process. Like the nation’s welfare system, its support was confined to children and their parents, as well as the elderly, blind and disabled. Enrollment was not encouraged, and most low-income families remained uninsured.

In the late 1980s, concerns about infant mortality and children’s health prompted Congress to extend Medicaid coverage to children and to pregnant women whose earnings put them above welfare eligibility levels. With this striking expansion, Medicaid began its steady march to becoming a health insurance program for low-income individuals.

In 1996, the year of welfare reform, the Aid to Families with Dependent Children program was replaced by the Temporary Assistance for Needy Families block grant to states, with the goal of reducing reliance on welfare by ending the entitlement to cash aid and imposing work requirements and work limits. This same law also further severed the ties between welfare and Medicaid by ensuring that very low-income parents could enroll in Medicaid, regardless of their eligibility for cash assistance.

The enactment of CHIP in 1997 triggered expansions in eligibility and a wholesale overhaul of the way children enrolled in coverage. There has been a lasting impact for kids, with uninsured rates for children dropping from 15% percent in 1994 to 7% in 2013, driven largely by public program coverage. The Medicaid application process for children was greatly simplified and the explicit goal of promoting coverage was a marked departure from the objectives that had characterized the administration of welfare and, derivatively, Medicaid.

These efforts provided a blueprint for the ACA, which completed Medicaid’s evolution. For the first time, Medicaid coverage was to be available to all adults in all states based on their income, whether or not they had children. Expansion, however, became optional after the 2012 Supreme Court ruling. So far, 30 states and D.C. have chosen to expand the program, while 20 states have not yet expanded.

Perhaps as significant, the ACA established new Medicaid eligibility rules and processes aligned not with welfare but with the marketplace. It called for one application, one set of eligibility rules, and one simplified process for enrolling in the appropriate health coverage program. One year after implementation, the national uninsured rate has dropped to a record low, with rates falling most sharply in Medicaid expansion states.

A handful of Medicaid expansion states have adopted alternative policies requiring federal waivers, and now both expansion and non-expansion states are considering welfare-style work or eligibility time limits. Medicaid’s transformation is an important lens through which to consider current as well as the next generation of policies. A clear-eyed vision of Medicaid’s role is essential to accomplish the work ahead in tracking these and other policies.

New Eligibility and Enrollment Rules and Practices for a Revamped Program

Until the ACA, Medicaid eligibility was still constrained by welfare-based eligibility categories, such as children, parents caring for children and pregnant women. The ACA ended those eligibility silos, extending Medicaid to all low-income adults and making tax credits available through the new insurance marketplaces to those with incomes above Medicaid levels but below 400 percent of the Federal Poverty Level.

To accomplish the level of coordination with the marketplace that the ACA envisioned, the law also revamped Medicaid’s eligibility and enrollment process. These changes positioned Medicaid as the foundation of a coordinated set of health insurance programs that make affordable coverage available to nearly all Americans.

While the decision to expand Medicaid to all low-income adults now resides with the states, the changes in how people apply and how eligibility is determined is the law of the land. To appreciate the extent of the change that has occurred, it is helpful to compare the old and the new eligibility processes.

Before the ACA, the Medicaid application process for adults looked a lot like the welfare application process, which did not necessarily encourage enrollment. The result was depressed coverage rates and high levels of churning on and off insurance. But practices that effectively kept eligible people out of coverage had no place in the system envisioned by the ACA, where coverage is both a key goal and the starting point for the delivery of cost-effective, quality care.

To effectuate the new coverage continuum, the ACA requires a single application and uniform income-counting rules for Medicaid, CHIP and the marketplace. There are no interview requirements and, to the maximum extent possible, information provided through applications is verified through electronic data sources. The law similarly streamlined and coordinated the renewal process. Today there is one application, one eligibility determination process and then enrollment in the appropriate program. For Medicaid, these changes are transformative.

Effective implementation of these new rules was a massive undertaking requiring a modern IT structure. Recognizing that Medicaid’s systems had to be modernized, the Centers for Medicare and Medicaid Services (CMS) provided states 90 cents on the dollar for the development of new systems. Funding was conditioned on full integration or a seamless interface with the marketplace and the ability to connect with the federal data services hub.

Since the ACA became law, states and the federal government have been working on these systems. IT-related problems have impeded progress for some, but in every state today the new tax-based rules are used to determine eligibility, people can apply using a single online application that allows them to enroll in the insurance affordability program for which they are eligible, and data-driven verification is in place.

The federally run marketplace and a growing number of state marketplaces also are making the application process highly efficient by using dynamic, online applications that narrow the questions asked based on previous answers and by verifying information against electronic sources all during one application sitting. To date, the connection between the federally run marketplace and state Medicaid agencies has not achieved the same level of integration as state-based marketplaces. Enrollment data confirm, however, that the new eligibility and enrollment systems are—to varying degrees—helping to drive uninsurance to record lows.

Balancing State and Federal Responsibilities

The ACA imposed greater uniformity in certain aspects of Medicaid—chiefly around eligibility and enrollment—to make the continuum of subsidized public and private coverage work. At the same time, federalism—shared authority between states and the federal government—remains firmly in place. Far from diminishing the importance of states, Medicaid’s key position in the healthcare system both enables and requires state-driven efforts to devise value-based, integrated models for delivering and paying for quality care in Medicaid and beyond.

For the past five years, CMS has been supporting states’ efforts to test new approaches to care delivery. States are leveraging their purchasing power in Medicaid and requiring their contracted providers and health plans to become more accountable for the costs and quality of care. Their focus on improving care and lowering costs, coupled with a rapidly changing healthcare system, has triggered far-reaching innovations.

Some states have sought to transform their delivery systems under initiatives established by CMS’s new Innovation Center or with funding and authority granted through a Section 1115 demonstration waiver. Section 1115 of the Social Security Act allows the Secretary of the Department of Health and Human Services (HHS) to fund policies that are not otherwise permitted if she determines they “promote the objectives of the [Medicaid] program.” The Medicaid programs in Oregon, New York and Texas are examples of these delivery system reform waivers.

In addition, several states have secured 1115 waivers to test alternative expansion models. Each of the five alternate expansion demonstrations in effect—Arkansas, Iowa, Michigan, New Hampshire and Indiana—has broken new ground. The demonstrations are testing innovations across a diverse range of areas, from accessing care and coverage to encouraging healthy behaviors. HHS has signaled that some states’ proposed policies—such as enrollment caps and work requirements—will not be approved, because they don’t fit with Medicaid’s objectives. The ACA’s changes to Medicaid underscore the importance of considering state experimentation in the context of the program’s core objectives:

• Providing coverage, access to care and payment for services to low-income populations;
• Aligning with other health insurers to promote quality, person-centered care; and
• Driving value for the dollars spent.

What’s Next?

The changes to Medicaid that have taken hold over the past five years are unprecedented. With new roles come new responsibilities and challenges. Four key areas of focus lie ahead.

First, states that have not yet expanded Medicaid must address the resulting hole in the coverage continuum. Without Medicaid expansion, people don’t get the care they need, states and providers miss out on substantial economic benefits, and delivery and payment reform efforts are handicapped. Regardless of how it is done, Medicaid expansion is an essential component of the coverage continuum and the foundation of healthcare reform.

Second, Medicaid must continue to make progress as a strategic, value-based purchaser of coverage and services. The tools to do so are there, informed by the experimentation and learning going on around the country across a wealth of areas, including integrating physical and behavioral health, reducing preventable hospitalizations and emergency department visits, and supporting individuals who need long-term services and supports. In many cases this work will require major restructuring of how states finance their programs and manage and pay for care, with equally significant restructuring for health plans and providers.

Third, Medicaid needs to be a strong partner—and in some cases a leader—in the systemwide efforts to improve health and healthcare and lower costs. Because it is often the dominant payer, Medicaid can have tremendous leverage with respect to services for children, pregnant women and people with chronic illnesses or disabilities. For these populations, Medicaid can shape practices and markets in new ways that drive improvements in care, health and costs. At the same time, Medicaid should seek to advance marketwide delivery system and payment reforms.

Fourth, the IT infrastructure enabling the gains in coverage and improvements in consumer experience achieved to date needs to be completed in some states and at the federal level, and kept current with new technologies. Along with enabling electronic verification of personal information and integrating with the marketplaces’ data, Medicaid’s IT infrastructure must produce the medical encounter, cost and quality data that states and the public need to ensure the program is operating effectively and efficiently.

As all of this occurs, it will be essential to stay focused on Medicaid’s mission to ensure access to quality and affordable care for the lowest-income Americans, people with disabilities and the elderly. It also will be important to consider Medicaid’s role and responsibilities, not as a public assistance program or an afterthought in the healthcare system, but as one of the most important health insurance programs in the nation.