Re-engineering Medicaid

Harriett L. Stanley
Massachusetts State Representative

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The Problem

There is no area of Massachusetts state government more in need of an overhaul— or perhaps permanent re-engineering—than the state’s Medicaid program. Known as MassHealth, the Massachusetts Medicaid program has grown far beyond its original purpose as a safety net for those residents with no other health care options. It has become the second largest source of health care coverage in the Commonwealth, behind the array of employer-sponsored programs but ahead of Medicare. MassHealth annual expenditures are approaching $6 billion and represent more than 25 percent of the state budget. Unless serious savings measures are fully implemented in FY 04, the MassHealth budget could actually exceed $7 billion next year. The program’s growth rate far exceeds that of state spending as a whole. Skyrocketing Medicaid costs have already begun to “crowd out” other areas.

Overseen by the Division of Medical Assistance (DMA), MassHealth offers comprehensive care at nominal cost to some 16 percent of Massachusetts residents. MassHealth is geographically concentrated, as more than half of MassHealth members live in just 20 zip codes.

Re-engineering a permanent solution for MassHealth is more easily said than done. Politically, the program has achieved something of a celebrity status, which makes it difficult to even discuss potential changes. Providers of MassHealth services are not only community health centers—they include the state’s most venerable medical institutions. MassHealth is often showcased as one of the nation’s premier examples of what can be done with a publicly funded system. As a result, much time and effort have been spent “protecting and defending” the MassHealth model, even though it has become financially unsustainable.

Historical Background

History is always helpful when it comes to Medicaid. As the chief health policy analyst for the Council of State Governments commented recently, “Understanding the program’s past can help explain some of the unique challenges Medicaid faces currently and into the future.”1 Federal Medicaid reimbursements funded much of the health care development that has taken place in the Commonwealth over 40 years. While Medicaid (nationally) and MassHealth (in the Commonwealth) are most often thought of as safety net or human service programs, their origins were also as economic development programs.

Medicaid’s economic development beginnings go back to the nation’s Main Streets during World War II. As described by Dr. Jerome Grossman, labor was in short supply, women were filling what had been traditionally been men’s jobs, and wage and price controls were in effect. What employers could not offer in raises was offered as a new fringe benefit known as a “hospitalization plan,” the precursor to today’s health insurance. Once offered, this coverage was immediately in demand and became an important part of post-war society.2

That popularity quickly translated into Congressional action, with the 1946 Hill-Burton Act, which provided funds to build community hospitals. Over the next 25 years— from 1946 to 1971—this Congressional initiative provided $3.7 billion in federal money.3 At the same time, the National Institutes of Health (NIH) began using its research dollars to fund medical schools and individual research grants to physicians. These grants were instrumental in creating the base of the Commonwealth’s medical research capability.

By 1961, the new network of hospitals and the growing health care demands of the post-war population combined to cause a doctor shortage. Again, Congress took action by passing the 1963 Health Professionals Act, which provided funds to expand existing medical schools—such as those at Harvard, Tufts, and Boston universities—as well as to create new ones, such as UMass Medical School in Worcester.

Just four years later in 1965, the Medicaid and Medicare programs were created and together provided health insurance coverage to nearly 25 percent of the nation’s population. The federally administered (and federally funded) Medicare system began providing hospitals with financial incentives to expand and increase medical personnel. In Massachusetts, this was particularly important because the Medicare system paid an additional premium to institutions—now known as teaching hospitals and academic medical centers—that trained doctors. The jointly administered (and jointly funded) federal-state Medicaid program developed through a series of federal matches that provided states with funds for establishing certain kinds of programs—but not others.

The Massachusetts Context

Health care delivery is a structural component of the Massachusetts economy. In 2002, direct health care delivery in the Commonwealth was a $41 billion industry.4 In terms of jobs, more than 1 in 10 Massachusetts workers are employed in the health sector.5 Massachusetts used its mid-1990s revenue surpluses to fund huge expansions in the state’s Medicaid program. Today, a good part of the growth in allied health care employment can probably be attributed to MassHealth expansions.

Health care has done almost as much as computers to transform the Commonwealth from an “old economy” state to a “new economy” state. It has created whole new sectors of employment, ranging from futuristic biomedical research and the possibility of personalized pharmaceuticals to home care for seniors choosing to stay in their own communities. In a recent report on economic trends in Massachusetts, health care was identified as one of the four key “industry-clusters” that will drive the state’s economy during the 21st century.6

However, that success has not come without costs. Even though the Commonwealth offers some of the best medical care in the world, it’s also one of the most expensive places in the world to receive that care.7 Every Massachusetts resident subsidizes the state’s standard of medical excellence, whether or not they directly benefit from it. In addition to paying for their own medical coverage, every Massachusetts taxpayer also subsidizes the MassHealth program. That is creating inequities that are both fiscally and “socially” unsustainable.

Consider the following:

  • Total per capita health care spending in Massachusetts for the year 2002 (public and private) far exceeded that of all other states, with an average $6,969 spent per person (see figure 1). That’s 30 percent higher than the 2002 U.S. average of $5,361 per capita.8
  • The cost of private health insurance in Massachusetts is rising much faster than the national average. In 2001, Bay State premiums increased 19 percent for individuals to $3,545 annually and by 11 percent for families to $7,716 annually, while the U.S. average was 9 percent for individuals to $2,652 a year and 11 percent for families to $7,056 a year.9
  • The cost of public health insurance in Massachusetts is also rising faster than the national average— and faster than other states. National spending on Medicaid increased 12 percent in 2002. On average, the state shares of Medicaid spending increased by 13.6 percent in 2002; in Massachusetts the increase was 15 percent.10

As a result of its investment, Massachusetts has accomplished much: fewer than 6.7 percent of the Commonwealth’s residents are uninsured, which is among the lowest rates in the nation. The uninsured rate for those aged 19 to 64 is 9.23 percent, but for the Commonwealth’s children, it’s only 3.2 percent.11

In many cases, the publicly funded MassHealth program offers more comprehensive benefits than do privately funded programs offered through employers. Although this is a highly controversial and often-debated topic, the material contained in figure 2 (next page) should finally frame the debate. The side-by-side comparison contains primary resource material. It was based on a Kaiser Commission model and then supplemented with data from currently offered Massachusetts health plans.

Because MassHealth is less of a logically constructed system than a series of individual, occasionally interconnected and often overlapping programs that evolved over time, funding (rather than function) is the most central control mechanism. This has led to a series of “strip down” budgeting measures aimed at achieving short-term savings, rather than a longterm plan for better management and cost control. The program has not been able to adapt to the recent budget situation. Because MassHealth represents the single biggest piece of the Massachusetts budget, it’s an obvious target for cutting. What it really needs is redesign.

Highest Enrollment Percentages and Lowest Federal Reimbursement Rates

Nationally, Medicaid provides health coverage for about 12 percent of the population;12 in Massachusetts, the comparable figure is about 15 percent of residents. At the same time, the state’s high per capita wealth restricts the allowable level of federal reimbursement.

Because Medicaid is jointly financed between the federal and state governments, the federal government provides matching funds to give states an incentive to participate. The federal financial share of the program is called FMAP (federal medical assistance percentage) and varies from 50 to 76 percent, depending on a state’s wealth. Because Massachusetts is considered a wealthy state, FMAP is generally limited to 50 percent, with 65 percent for certain children’s programs. Nationwide, the federal reimbursement to states for their state-run Medicaid programs averages 57 percent. In Massachusetts, the blended figure is 55 percent.13

While it isn’t widely known, Massachusetts is also one of the states taking a “double hit” on its Medicaid program, meaning that the Commonwealth belongs to both the highest enrollment and lowest reimbursement categories. The only other state in a similar situation appears to be New York.

Program Management

Although the state’s DMA has oversight responsibility for the MassHealth program, it seems to have exercised limited managerial control. The last 10 years have been characterized by a series of almost “ad hoc” policy decisions participated in by government officials as well as prominent members of the state’s health care industry.

Two major policy initiatives formed much of today’s MassHealth program: the 1996- 1997 implementation of the 1115 waiver and the 1998 State Children’s Health Insurance Program (SCHIP) expansions.

The 1115 Waiver

 Section 1115 of the federal Social Security Act allows states to request five-year demonstration waivers to increase flexibility in complying with federal Medicaid mandates as long as health care programs are expanded.

In 1994, Massachusetts designed a new MassHealth program that expanded coverage to several new populations and attracted federal dollars for programs that had previously been solely state-funded. Known as the 1115 waiver, the five-year project was approved by the federal government in 1995, and the legislature passed the requisite legislation in 1996.

DMA’s stated goals for the 1115 waiver included “the broad policy objective of increasing health insurance coverage while curbing the growth of the Commonwealth’s disproportionate share hospital (DSH) and uncompensated care pool (UCP) expenses. The Commonwealth would finance expanded health insurance for the state’s neediest citizens by re-directing state-only expenditures and uncompensated care pool funds; by utilizing revenues from increased cigarette taxes; and placing greater reliance on managed care.”14

The 1115 waiver fundamentally transformed MassHealth. It incorporated previously statefunded programs and thereby allowed the state to receive FMAP for program expansions. It “streamlined” eligibility determinations and enrollment processes and set up an outreach campaign of “unprecedented scope.”15 It also contributed to a 41 percent enrollment increase in the first years, which permanently grew the MassHealth member base. Today’s MassHealth enrollment is more than 50 percent higher than in the pre-waiver period.16

The 1115 demonstration project began on July 15, 1997 and was scheduled to complete its first five-year period on June 30, 2002. However, an early extension request was submitted in 2001 and approved. Significantly, some of the financial underpinnings of the 1115 waiver didn’t work as planned: UCP costs continued to rise, putting further strains on hospitals; cigarette taxes did not contribute sufficient revenues to offset increased costs, creating a cumulative deficit; and after initial progress, managed care did not make the requisite inroads into costs. The state’s health care providers and General Fund have been supporting the MassHealth expansions of the mid-1990s.

It is also worth noting that the Massachusetts Hospital Association (MHA) and the Massachusetts Medical Society (MMS) were major players in the outreach efforts, at least some of which proved beneficial to their industry.

The Price of Increased Enrollment

In the five years between FY 97 and FY 02, MassHealth expenditures increased by $2 billion. It is conventional wisdom (and DMA’s official policy) that the primary factors driving this growth were pharmacy, long-term care, and acute hospital care.

Figure 3 clearly indicates that the increase in MassHealth eligibility coincided with enrollment expansion. The black columns in figure 3 represent MassHealth’s base population in 1997, before the 1115 waiver expansions took place. MassHealth membership had just reached 700,000 and stood at 701,845. Today, DMA projects that MassHealth membership will reach 1,069,688 members for FY 03—an increase of more than 52 percent.17

At a time when the average median family income in the Commonwealth was climbing, the number of those covered by publicly funded health programs also climbed. And, at a time when many other states were seeing membership in their state Medicaid plans level off, in Massachusetts it was exploding.


Federal law requires that state Medicaid programs provide coverage to three distinct groups, known as “populations”: the categorically needy, the medically needy, and certain special groups. States may choose to provide coverage to other populations.

In Massachusetts, those eligible for MassHealth are children, their parents, the elderly, the disabled, and, at times, the long-term unemployed. Generally, all need to have incomes at or under 200 percent of the federal poverty level (FPL). The Commonwealth also covers undocumented immigrants and those who are HIV positive under the “special populations” category. By and large, those not eligible for any of the MassHealth programs are residents who are not disabled, childless couples, and single adults.

Today, the most significant of MassHealth’s eligibility policies might be what is known as the “system generated eligibility decision.” Applicants complete a 4-page application, mail it to DMA, and can generally expect a decision within three to five days. The enrollment process automatically places MassHealth applicants in the richest benefits package for which they qualify.

If a MassHealth applicant is pregnant, the system works even faster. MassHealth Prenatal offers immediate health care services and continues them for 60 days under what is known as “presumptive eligibility.” Under a presumptive eligibility period, a pregnant mother immediately qualifies for the full range of pre-natal services (except delivery) while DMA determines whether or not she qualifies for another of its plans.

Other eligibility and enrollment procedures that were part of the 1115 waiver include the reduction of documentation requirements, the elimination of personal interviews, and the elimination of the asset test.

The Real Costs of Optional Services

Under federal rules, certain services must be offered to Medicaid recipients and are pre-conditions to receiving federal reimbursement. Other services are optional and are offered at the state’s discretion. Mandatory services include physician’s visits, hospital services, and nursing facility services (also known as nursing homes) to any low-income or disabled resident over 21 years of age. Optional services range from prescription drugs to dental, vision, and chiropractic care to personal care attendants and fiscal intermediary services; many optional services were cut in late 2002.

The “richness” of the MassHealth benefit package is an ongoing argument within the Massachusetts health care community. Some health care organizations and state officials observe that Massachusetts falls somewhere in the middle of the states in terms of optional services offered. Others contend that the breadth of the Massachusetts package isn’t obvious from just counting benefits; instead, it’s found in the scope of each optional offering.

Side-by-side comparisons of optional benefits show that Massachusetts ranks second among its peer Medicaid states (those also receiving the lowest 50 percent FMAP) in terms of optional Medicaid offerings.18 Only California offers more optional benefits, which come in the form of low-cost Christian Science services.

MassHealth’s optional services are expensive. In FY 01, optional services cost the Commonwealth $1.187 billion or approximately 25 percent of the program’s direct health care costs. The most expensive optional service was prescription drugs, and the least expensive was psychological consults. The primary users of optional MassHealth services in FY 01 were disabled adults, who accounted for 55 percent of the total costs of optional services.

Optional services make up a significant part of MassHealth’s various health care programs. In many cases, they assist in the effort to keep patients out of more expensive institutional settings. However, MassHealth’s optional offerings often exceed what is purchased through private health insurance. In addition, they are presently offered to MassHealth members with only minimal cost-sharing arrangements. Combined, these policies raise issues of both financial and social sustainability.

A Changing Partnership with the Federal Government

Under the federally established Medicaid structure, each state sets up and runs its own Medicaid program according to guidelines. There are 56 distinct Medicaid programs, including each of the states, the U.S. territories, and the District of Columbia.

Federal control of Medicaid is another frequently debated topic within the Massachusetts health care community. FMAP policies are inherently expansionary. Given that many MassHealth programs were originally established as a means of attracting federal dollars, federal regulations are often cited (and used) as an obstacle to change. As frequently as not, the official response to a program or budgetary inquiry is that “it cannot be done because it will affect the 1115 waiver” or “the federal government requires it.”

Until recently, new approaches to Medicaid weren’t particularly welcome in Washington. During Medicaid’s 38-year history, program administration had been rigid on the part of the federal government, causing state leaders to strike what has been described by the Council of State Governments (CSG) as “a Faustian bargain.” States were forced to surrender substantial control of program design and budgets in exchange for significant federal funding. If a state wanted more flexibility, it had to file a waiver and receive federal approval—an administratively complex and politically exhausting process.

Much of that changed when a former Governor, Wisconsin’s Tommy Thompson, became secretary of the federal office of Health and Human Services. Within a year, the National Governor’s Association had convinced Secretary Thompson that another approach could bring much-needed flexibility to Medicaid.

By mid-2002, the federal agency exercising oversight—the Center for Medicare and Medicaid Services (CMS)—had officially made Medicaid more flexible. Through the Health Insurance Flexibility and Accountability Initiative (HIFA), CMS now offers substantial discretion to the states on the means of structuring (and re-structuring) their programs. Under HIFA, states are allowed to redesign their Medicaid plans as long as the net result is more and/or better coverage and the results are budget neutral for the federal government. This has presented an interesting situation to Massachusetts officials: MassHealth already covers more than 1 million residents with a generous benefits package. Because the number of uninsured is so low (418,000 to 420,000 at the end of 2002),19 taking advantage of HIFA options could be complicated.

Covering the remaining uninsured at existing benefit levels is not financially feasible, which is clearly demonstrated by the ranges shown in figure 4.

Extending coverage to the uninsured at lesser levels would create a potential equity problem because MassHealth’s low-cost benefits package exceeds many of those offered privately, as was shown in figure 2 (page 60). Nor was the option of tightening the coverage of all MassHealth programs enough to finance coverage of the remaining uninsured persons thought to be politically palatable.

As a result, HIFA’s options have not been utilized. During the spring of 2002, Mass- Health administrators chose to hold out for higher revenues—and potentially higher taxes to provide them.20 Existing resources were inadequate and, in the ensuing stalemate, it was largely left to the legislature to make program cuts.

As of early 2003, 11 states were starting to utilize HIFA possibilities, with a great deal of cross-fertilization between redesigned state plans. Six plans have been accepted, three are pending, and two are inactive while being rewritten. Unfortunately, Massachusetts is not one of the states taking advantage of the new flexibility. Governor Swift vetoed several required restructuring items in the FY 03 budget, and DMA is now “considering and assessing several initiatives for FY 04.”21 Thus, possibilities for phased-in FY 03 savings have been lost, ensuring that FY 04 cuts will have to be more severe.

Within the next few years, the first of the “Baby Boomers” will officially enter retirement and the Medicare/Medicaid systems. That, according to the U.S. General Accounting Office (GAO), could force the federal government to allocate two-thirds of its budget to medical care by mid-century and place an unsustainable financial burden on future generations.22 A permanent solution to the cost crisis facing MassHealth needs to be found.

The Solution

This proposal is based on the premise that the current MassHealth program represents the “BMW” of health care plans in Massachusetts. As of early 2003, MassHealth covers more than 1 million Massachusetts residents, who pay only nominal fees for comprehensive coverage. The proposal suggests Massachusetts redesign MassHealth away from the BMW of entitlements and toward the “Ford” model—a state-subsidized insurance program, with fewer options and more premiums and co-payments.

The first part of re-engineering the Commonwealth’s Medicaid program involves drafting a plan and, as more information becomes available and the parts are tested, refining that plan. Implementation could be phased in over about three years. What follows are some “design principles” for a new MassHealth plan:

  1. The position that “Medicaid cannot be touched because it protects society’s most vulnerable citizens” misses a fundamental point: the MassHealth program does not operate at 100 percent efficiency. Those involved in the delivery system—plans, providers, and even the Courts—consistently point out operational inconsistencies (even irrationalities) in MassHealth.
  2. Given the changes that have occurred in the MassHealth plan over the last decade, it is not realistic simply to strip down the program. The key is to gain control over it and to manage future growth. The state budget reality is that costs must be constrained in order to even preserve current coverage.
  3. The costs of health care coverage are always going to be beyond the means of many, who nonetheless need health care. Government has a responsibility to help provide this care; it is simply more cost-effective and more compassionate to offer it through insurance coverage in which patients participate than through programs like the Commonwealth’s uncompensated care pool.
  4. Health care involves individual responsibility, and government’s role should be to enhance (rather than replace) that responsibility. The current budget situation might provide the chance to provide health care in a fundamentally different way to those who need it. Doing so involves restructuring parts of MassHealth away from an entitlement and toward a partnership. That partnership would look like more than a subsidized insurance plan, with patients, plans, providers, and government all participating.
  5. That partnership would recognize that all MassHealth stakeholders have responsibilities to the plan and all will be impacted by redesign. As a major consulting group recently pointed out, “The path of change meanders based on who is pushing the hardest at any point in time—government, insurers, physicians or hospitals. Imagine how much faster and straighter the journey would be if they worked together with a plan in hand that they developed together.”23 Providers are—and will continue to be—on the front lines of MassHealth service delivery. It does not make either short-term fiscal sense or longer-term economic sense to preserve coverage simply by cutting provider reimbursement levels. Providers will be essential to the hands-on phase of implementing any new MassHealth plan.

Here are the “rough schematics” of a new MassHealth plan:

  1. Make aggressive use of the new HIFA flexibility to redesign MassHealth as more of an insurance program. HIFA requires that the quid pro quo for many changes is the extension of health coverage to more people, which would be the remaining 418,000 to 420,000 uninsured in Massachusetts. Given what is known about that population through work recently done by the state’s Division of Health Care Finance and Policy (DHCFP)—that many are willing to pay about $100 monthly for coverage—the insurance approach may prove feasible in slowly offering a buyin to this population and instituting premiums for all MassHealth members under a push-the-envelope approach to HIFA.24
  2. Part of the growth in MassHealth can be attributed to publicly funded outreach efforts and “streamlined” eligibility and enrollment procedures. Although easier enrollment originally had the effect of minimizing the hassle of bringing people into MassHealth, it may also have had the unintended consequence of admitting and retaining residents who are not qualified. Beyond the financial implications, this has a ripple effect that needs to be reversed.

Administrative practices can be reinstated by DMA in very short time frames— and in some cases without legislative approval—to remedy this:

  • Reduce outreach.
  • Require additional documentation for eligibility, including recent tax documents.
  • Drop the present practice of not requiring Social Security numbers for MassHealth enrollment.
  • Drop the practice of not cross-checking MassHealth numbers with other government agencies.
  • Eliminate the policy of automatic placement in the richest benefit package.
  • Reinstate personal interviews, especially for those who claim disability.
  • Reinstate the asset test.
  • Reinstate regular redetermination—perhaps quarterly—and shift the redetermination burden to the MassHealth member.25
  1. Traditional insurance plans require premiums, co-pays, and certain out-of-pocket expenses to be assumed by the patient as part of the health care partnership. Premiums and co-pays should be part of the MassHealth partnership. Effective within 30 days, a system of co-pays should be implemented for all non-categorical MassHealth members. Premiums should be instituted within 6 months.

Prescription co-pays should immediately be increased to $3. (This is the maximum prescription co-payment currently allowed under federal law and was set by CMS 20 years ago—in 1983.) For whatever reason, DMA did not exercise its administrative discretion to increase it, waiting instead for a 2002 legislative mandate to move beyond the 50-cent level. Under federal law, the prescription co-pay is still considered “optional.”

Tiered co-pays for doctor’s visits should be instituted in order to have everyone contribute something toward their personal care and to encourage provision of care in the lowest cost setting. The following represent an example of what might be realistically implemented in a short time frame:

  • Community health centers $1-$3
  • Private physician’s visits $5-$7.50
  • Tiered hospital stays $10-$25 per day/maximum $100-$250
  • Tiered emergency room visits $15-$50 per visit
  1. Make optional services and benefits exactly that—optional. Within 60 days, limit optional services to four visits/occurrences annually, with co-pays to be required at 50 percent of that charged to average private plan member.
  2. Within six to nine months, all “non-categorical” MassHealth members should be required to pay monthly premiums in advance, on a sliding scale according to verified income and assets. (They might also be indexed to inflation.) The following represent examples of what might be realistically implemented in a mid-range time frame:
  3. Given that MassHealth membership is geographically concentrated, apply geographically focused solutions. For example, upgrade lower cost community health centers in those zip codes. Minimal investments in existing operations could provide substantial benefits. Also, expand school health care, extend community health care hours, support weekend clinics in public facilities, and lower the threshold for subsidies to private employers.
  4. Recognize that long-term care is the single largest component of the MassHealth budget and that MassHealth has become more than a safety net. (Fifty-four percent of Medicaid seniors in nursing homes have been in the public system for 10 years or more.26)

Announce DMA’s intention to change asset retention policies, with new plans taking effect between 24 and 30 months from announcement date. In order to prevent elder spend-downs in order to qualify, make the date of eligibility determination no later than the day of the announcement—and perhaps the most recent tax reporting date.

  1. Using HIFA, phase-in a potential “buy-in” to 5 percent of the remaining uninsured and use that expansion to re-design MassHealth as a whole.

Costs and Benefits

Since FY 1990, MassHealth expenditures have grown at a compound annual growth rate (CAGR) of 7.3 percent, with two distinct periods contained within that time frame. From 1990 through 1996, DMA’s budget grew by a CAGR of 5.7 percent. However, during the five years between 1997-2002, which corresponds with the initial time frame of the 1115 waiver, MassHealth’s CAGR increased to 9.86 percent.27

Not only has growth in MassHealth spending grown rapidly during recent years, the program has exceed its budgeted amount in the General Appropriations Act (GAA) in four of the last five fiscal years. Supplemental funding has been required to cover expenditures each time. That means that program management by the DMA has been an issue.

The proposals made in this paper are not designed simply to cut MassHealth expenses or pave the way for entire populations of people to be removed from its rolls. Instead, they’re designed to help manage MassHealth’s expenditure growth and assist in the transition from an entitlement program to a health insurance plan for the Commonwealth’s lowest income residents. For that reason, the benefits outlined here are not all immediate or purely financial; many will accrue over time as MassHealth members do their part to create a sustainable system.

The savings estimates provided below are based on the changes recommended above. Calculations have been provided by, “matched” with, or derived from DMA data provided to the House and Senate Ways and Means Committees in its MassHealth Overview, March 2003.

  1. Reduce outreach. Increased outreach was a key part of the 1115 waiver expansion. In July 1997, DMA embarked on what it described as a “multi-modal publicity campaign to raise awareness about the availability of free/affordable health insurance for qualifying families and children.”28 As part of an effort that cost $1.5 million ($5.33 per newly acquired member), DMA enlisted the assistance of the Massachusetts Hospital Association and the Massachusetts Medical Society and awarded 52 mini-grants ranging from $5,000 to $20,000 for additional outreach. Additionally, DMA assigned 27 existing employees to train outreach staff located in various health care settings about the new eligibility criteria. Outreach is an ongoing activity at DMA. As a certain level of it is expected through existing 1115 waiver requirements, potential savings are minimal.
    Potential annual savings: $500,000
  2. Require additional documentation for MassHealth eligibility, including recent tax documents. Currently, neither tax returns nor bank statements are required for proof of income for those applicants who are working. Requiring the latest versions of both would enable DMA to better verify actual cash flow (as opposed to only reported income) at no cost to the agency.
    DMA also does not require verification that the applicant has no other insurance available. Nor does the Medical Benefit Request form (MBR) require applicants to verify the lack or non-availability of employer-provided insurance. (This is done by independent contractors for DMA from general information after the application has been received.) By instituting the requirement at the outset, DMA would have the option of providing lower-cost premium assistance or denying eligibility to those who have other plans available but won’t use them. Annual gross savings are estimated at $20 million, offset only by the cost of reprinting the MBRs.
    Potential annual net savings: $19.5 million
  3. Require Social Security numbers on the MBRs. This change will impose no additional costs on MassHealth, as it would be covered by the above reprinting of MBRs. The information technology cost of cross-checking the Social Security numbers of those applying for or receiving MassHealth coverage with other state agencies should be nominal—estimated at $750,000—as it could be included as a part of the contractor’s check for potential employer health insurance.
    This change could also help identify some of the immigrants who are not eligible to receive federally funded Medicaid coverage, but have nonetheless been receiving full benefits at full state cost. Their coverage would be reduced in scope to the emergency services of MassHealth Limited. An estimate of annual savings associated with this change is $13 million.
    Potential annual net savings: $12.5 million
  4. Eliminate the cost of automatic placement into MassHealth’s richest benefit package.
    Potential Annual Savings: Unknown
  5. Reinstate personal interviews. This recommendation will impose an administrative cost on DMA. Currently, the agency processes up to 10,000 applications monthly, including 8,000 MBRs and 2,000 “traditional” applications. The agency’s administrative budget is about 3 percent of its annual appropriation, which compares favorable with other insurance plansAssuming that DMA would need to reassign and/or hire 27 employees—the same number used to do 1115 outreach—the cost could be $1.1 million annually. There is also the potential for offsetting savings by limiting benefits or even denying enrollment to unqualified applicants.
    Potential annual cost: $1.1 million
  6. Reinstate the asset test. This policy change can generate approximately $10 million annually for the Commonwealth. MassHealth’s current policy is not to count assets for adults applying for MassHealth coverage. However, by determining the total value of bank accounts, stocks, bonds, CDs and certain real property—such as luxury cars—applicants above a certain limit would not be eligible. There are additional non-financial benefits to be gained from reinstating the asset test. Consistently verifying applicants’ assets can help modify the image of MassHealth as “free and easy.”
    Potential annual savings: $10 million
  7. Reinstate redetermination. MassHealth’s current redetermination practice is nominal. DMA’s position is that frequent redetermination of members imposes a time-consuming burden on the agency. In its 1999 1115 waiver report, DMA stated, “Since applicants at the lower income levels typically have no assets, checking assets was rarely productive for the Division and may have delayed or discouraged applicants who would have been found eligible.” In addition, the status changes of some MassHealth members had proven cumbersome to providers who want to be paid for the services renderedTo the contrary, some estimate a 10 to 20 percent non-eligibility status for MassHealth members undergoing occasional redetermination. State Probate Court officials have indicated that a similar percentage of the cases they hear might benefit from regular redetermination. If a 10 percent ineligibility figure were applied to just two MassHealth populations—non-disabled adults and long-term unemployed adults—potential annual savings could reach $92.7 million.Looking at the issue another way, DMA has calculated that doing certain “tightening of eligibility criteria” can result in a $20 million annual savings. By averaging the calculations, the potential savings are $56.4 million.
    Range of potential annual savings: $20 million to $56.4 million
  8. Require payment of co-payments and premiums by all non-categorical MassHealth members.
    • Co-payments: Under current federal law, most MassHealth members may be charged “nominal” co-payments of up to $3 for each covered service or prescription that costs more than $50. Those MassHealth members who cannot be charged co-payments are children with family incomes below 133% FPL, pregnant women, nursing home residents, and those receiving hospice care. In addition, co-payments are “optional” for MassHealth members. Although providers have the legal right to attempt to collect a co-payment, they do not have the right to refuse service.
      Sixteen states have implemented or raised co-payments for health care services other than prescription drugs in the last two years.29 DMA has had the right to impose nominal co-payments for some time, but has declined to do so— going so far as to lobby against legislative attempts to impose them during 2002. However, the agency has now calculated that collecting $3 co-payments from MassHealth members can generate $15 million annually.
      Other states have already requested—and received—permission from the Center for Medicare and Medicaid Services (CMS) to allow providers to refuse services if the co-pay is refused. Massachusetts has not done so, either as a standalone request or as part of a HIFA waiver buy-in.
      Potential Annual Savings: $15 million
    • Premiums: Under current federal law, premiums cannot be charged to Medicaid/ MassHealth recipients who are considered “categorically needy.” This means a number of MassHealth members can be assessed premiums up to $19 per month, which DMA calculates can generate $6 million annually.
      This paper has proposed tiered premiums, which would require a federal waiver. The tiered plan, if granted, could generate approximately $13 million annually.
      For a number of years, DMA has the option to either rework or request an amendment to the current 1115 waiver that would allow the Commonwealth to charge the $19 premiums to all MassHealth members, including the categorically needy, or to utilize a HIFA waiver to effectively buy into the premium option. DMA has not done so. The average of the two annual savings calculations is $9.57 million.Range of potential annual savings: $6 million to $13 million
  9. Make optional services more optional. Under federal rules, certain services must be offered to Medicaid recipients and are pre-conditions to receiving federal reimbursement. Other services are optional, are offered at the state’s discretion, and are also matchable with federal funds.
    Optional services make up a significant part of MassHealth’s costs. In many cases, they contribute towards keeping members out of more expensive institutional settings. However, MassHealth’s no-cost/low-cost optional benefits sometimes exceed what are available for purchase through private health insurance.
    Optional services cost MassHealth nearly $1.2 billion in FY 01. Nearly 65 percent of that—or $768.9 million—went for pharmacy items, which includes prescription drugs.
    Disabled adults are the major users of all optional services, with about 55 percent of the total ($656.6 million) going toward their needs. Disabled adults are also the prime users of pharmacy, accounting for about 55 percent of those expenditures— or some $423.6 million annually. Somewhat surprisingly, disabled adults incur pharmacy expenditures at more than twice the rate of seniors, whose expenditures totaled $189.3 million.
    For that reason, it makes sense to focus on pharmacy management for cost control in optional services. MassHealth has been able to do much of this without legislative approval but did not get programs underway until late 2001. Preliminary estimates are that just two programs—expansion of the MassHealth drug list to move to greater use of generics and requiring prior authorization for high-use pharmacy members—can save more than $175 million annually.
    However, once pharmacy expenditures are accounted for, there is still some $418 million expended annually for optional MassHealth services. Beyond pharmacy, the three most expensive categories in FY 01 were personal care attendants, dentistry, and day habilitation.
    The personal care attendant (PCA) category costs MassHealth about $135 million each year, of which nearly 75 percent goes to disabled adults. Currently, eligibility evaluations for PCA services are performed by PCA service providers, which is a built-in incentive to recommend the services. PCA evaluations can and should be done by MassHealth staff, which will involve an additional cost of approximately $600,000 but will likely save $6 million, for annual net savings of $5.4 million.
    Potential annual savings on pharmacy: $175 million
    Potential annual net savings for in-house PCA evaluations: $5.4 million
  10. Apply geographically focused solutions.Today, MassHealth services are offered in nearly any setting, ranging from community health centers to Boston’s major teaching hospitals. Existing policy is to offer MassHealth members services closest to where they live and work, even if the nearest setting is the most expensive.
    However, that policy can also support the use of the lower cost alternative settings, such as community health centers. Half of all the MassHealth members live in about 20 zip codes (see figure 5). The majority of the state’s 49 community health centers are located in those areas.
    Community health centers are underutilized resources, often operating with limited staff, consulting—rather than full-time—doctors, and limited hours. This means that incremental investments, such as longer hours, weekend openings and school clinics, can broaden the scope of services offered locally.
    Potential annual savings: unknown
  11. Make Medicaid’s long-term care the option of last resort. Long-term care represents the single largest component of the MassHealth budget. MassHealth has grown to represent far more than a safety net for frail and financially strapped seniors, even though by law it is the payer of last resort.
    Three policies can be implemented almost immediately that will help ease some pressure on MassHealth: impose a requirement that all applicants apply first for Medicare coverage, announce prospective changes in eligibility standards for nursing homes, and conduct regular re-evaluations of nursing home patients.
    Potential annual savings: $10 million
  12. Use HIFA expansions to start covering uninsured and “buy” plan flexibility. Many of the above recommendations are already possible within the more flexibly interpreted federal law and with state legislative changes.
    However, more may well become possible, and this paper contends that the HIFA waiver should now be used to “buy” additional MassHealth flexibility. Expanding coverage to 5 percent of the Commonwealth’s remaining uninsured (21,000 people) could cost the Commonwealth an additional $75.1 million to $123.9 million annually. (See figure 4, page 65.)
    However, by utilizing a buy-in approach at $1,200 per MassHealth member per year, $25.2 million in premium income could potentially be generated. This would bring the net cost to a range of $50 million to $99 million annually.
    Increasing the buy-in to $1,500 per MassHealth member per year, premium income would increase to $31.5 million annually. This would bring the net cost down to $44 to $92 million annually.
    These costs would be more than offset by savings generated through changes outlined above.


The flow of federal dollars—and the infrastructure, systems, and provider arrangements that evolved from it—created a good part of the economic base of today’s MassHealth system. Changing what has been built on that base—or even the base itself—is likely to generate active opposition from most stakeholders in the system, who range from patients to top-end providers of services. Those with an equal stake in the sustainability of Mass- Health—the taxpayers who support it—are likely to be passive participants in the effort.

The availability of federal dollars has always been a powerful incentive to expand the state’s Medicaid program. However, the way in which the dollars were allocated also gave rise to another model in health care—the tendency to trouble-shoot instead of plan. Federal grants were targeted at specific short-term problems, rather than serving as part of an overall health care plan. According to Dr. Grossman’s work, this tendency to fund short-term health care solutions originated in the post WWII period and is still present in the administration of the federal and state Medicaid systems today.30

Historically, providers responded to the power of the federal dollar by building hospitals to deliver health care. When the national Medicaid program evolved into more of a source of operational funding through federal matches, providers responded by developing services meant to maximize state and federal reimbursement. In the mid- 1990s, many providers accommodated the increased patient population made eligible for coverage by MassHealth expansions by growing programs and hiring staff. Not long afterward, though, when MassHealth budgets began accelerating by double-digit rates, providers took some of the first hits when their reimbursements were reduced to levels below charges, and very possibly below costs.

MassHealth will not be easy to change, partly because so many of its participants are understandably focused on protecting their own parts of the system. Where Medicaid once helped expand health care and created health care jobs, a significant re-engineering of the program may now be seen (and portrayed) as a means of cutting jobs, slowing economic development, and restricting access to health care.

Another obstacle to change will be MassHealth’s near-celebrity status within the national Medicaid system. This status has created a culture within the Massachusetts DMA—as well as with many of the advocacy groups that worked closely with DMA to implement expansion—that assumes the program is working close to maximum efficiency. This was demonstrated by DMA’s resistance to any reforms during the 2002 state budget process and the then-Director’s statement that “a tax increase was really the only answer” to skyrocketing program costs.

Despite recent reform and savings initiatives proposed by the Romney administration, that culture hasn’t really changed. As recently as the week of May 1, 2003, a senior DMA official resisted legislative mandating of a potential savings program on the basis that it might impact MassHealth’s 1115 waiver, saying of the waiver, “it’s a national model.”

Replication: Trends in Action

As all states are part of the national Medicaid system, all have HIFA opportunities. However, the possibilities vary in scope according to the size and design of the existing state plan.

HIFA was originally designed to incent and expand employer-based health coverage and utilize State Children’s Health Insurance Program (SCHIP) funds. However, as budget situations worsened, health care-savvy states like Oregon saw HIFA as a greater opportunity—one in which expansions could be accomplished along with the imposition of some budget and management controls on the state program.

An interesting array of states followed—large and small, Republican- and Democratcontrolled— viewing HIFA as an opportunity to rebalance their own Medicaid plans. HIFA also offered a chance to begin reducing the disparity between public and private sector health care benefits for adults.

States using new, HIFA-type approaches successfully include Oregon, Missouri, Rhode Island, and New Mexico.

Oregon became the first state to try the general approach being recommended for the Commonwealth: using HIFA to tighten the entire Medicaid benefit package, while also implementing premiums and co-pays. Not surprisingly, controversy surrounded Oregon’s waiver application, which was seen by many in the health care community as an attempt to cut benefits, rather than rebalance the state program. The issue of co-pays became a central one because of the need to make them more than nominal in order to actually influence consumer behavior.

The Oregon HIFA waiver also raised other questions, such as the amount of expansion that was necessary to qualify for other federal benefits and whether employer-sponsored health insurance could be successfully integrated into a public program.

The contribution or co-pays approach has also been tried in Missouri, where state Medicaid officials implemented a cost-sharing arrangement that holds members responsible for some of their health care costs.

Rhode Island, which borders Massachusetts, has implemented several replicable programs. That state’s version of Medicaid—called Rite Care—has already taken actions recommended for MassHealth: Monthly premiums based on a sliding scale were implemented more than a year ago. As a means of keeping individuals in existing employersponsored coverage and keeping Rite Care in the role of payer of last resort, Rhode Island has begun the computerized match of member files to those of the state’s commercial insurers.

The state of New Mexico took yet another HIFA approach. After looking at its particular demographics, New Mexico decided not to try to integrate employer-sponsored insurance with a public program and, instead, created a standardized benefits package through the state. Although the Bay State’s strong employer base would not necessitate this, in a move that could prove applicable, New Mexico Medicaid officials proposed commercially based co-payments and an annual limit in benefits per person.

Not surprisingly, New Mexico’s waiver request was controversial and ran into intense opposition from the advocacy community.

Initiatives in other states have revealed a number of other issues of relevance to Massachusetts. The first is that this approach will not generate short-term cost savings for Medicaid plans sufficient to solve budget problems. The transition away from an entitlement to an insurance plan for low-income residents is a gradual one, and financial subsidies must be adequate to provide for the transition.

The second challenge is reaching administrative simplicity; Medicaid has become a complex program, and no state has succeeded in making the program more efficient and less complex thus far.

The Commonwealth can and should be a leader in re-engineering Medicaid. The state’s 1115 waiver set a national standard for Medicaid expansions in the mid-1990s. Now, the federal government is encouraging states to push the redesign/expansion envelope and re-think the way long-established core services are offered. Massachusetts can again lead the way.

About the Author

Representative Harriett L. Stanley is a fifth term legislator who represents seven Essex County communities—six small towns and part of the city of Haverhill. During her nine years in the House of Representatives, Representative Stanley has spent six years in leadership positions: four years as Assistant Vice Chair of the Ways and Means Committee and two years as Chairman of the Health Care Committee. She also has worked as an investment banker in public finance, analyzing the financial feasibility of large capital projects, assessing their economic impact on states and regions, and helping to structure bond financings. Representative Stanley received an A.B. in government/ American studies from the College of William and Mary in Virginia, an M.S. in journalism from Boston University, and an MBA from the Harvard Business School.

  1. Trudy Matthews, “Trends in Medicaid Cost Control in the States,” Spectrum: The Journal of State Government, spring 2003.
  2. See Jerome H. Grossman, M.D., “An Economic History of Health Care in Massachusetts 1990-2000,” Pioneer Institute for Public Policy Research, June 2000.
  3. Ibid., p. 4.
  4. “The Feasibility of Consolidated Health Care Delivery in Massachusetts,” LECG, Mercer Government and Human Services Consulting and McDonell Consulting, December 2002.
  5. “State Health Workforce Profile,” Health Resources and Service Administration’s Bureau of Health Professions, December 2000.
  6. “Massachusetts: Toward a New Prosperity,” Department of Economic Development and the UMASS Donahue Institute, 2002.
  7. Alan Sager, Ph.D., and Deborah Socolar, M.P.H., “World’s Most Expensive Health Care: Massachusetts Health Care Costs, 1980 to 1998,” Health Reform Program, Access and Affordability Monitoring Project, Boston University School of Public Health, October 2000.
  8. Alan Sager, Professor of Health Services, Director, Health Reform Program, Boston University School of Public Health, May 2003.
  9. “Employer Health Insurance Survey,” Division of Health Care Finance and Policy, December 2000, and “Employer Health Benefits,” Kaiser, 2001.
  10. “State of the States: Bridging the Health Care Gap,” Academy Health, State Coverage Initiatives, January 2003, pp. 2, 4; DMA data provided to the Massachusetts House of Representatives Medicaid Committee, March 2003.
  11. Massachusetts Survey of Health Insurance Status: Updated Preliminary Survey Results, Division of Health Care Finance and Policy, September 2002.
  12. Health Care Financing Administration, A Profile of Medicaid Chart Book 2000, p. 6.
  13. Ibid., p. 36; DMA data provided to the Massachusetts House of Representatives Health Care Committee, February 2003.
  14. DMA’s 1115 draft Annual Report, May 1999.
  15. Ibid.
  16. These figures come from multiple (and at times conflicting) sources: An Evaluation of Health Care Programs for Low Income Uninsured and Underinsured Massachusetts Residents, DHCFP, September 2000; DMA and DCHFP agency projections, February 2003.
  17. Ibid.
  18. Center for Medicare and Medicaid Services, State-to- State Comparison, January 2003, and DMA Benefit Summary, April 2002.
  19. The estimates of the uninsured come from DMA and DHCFP, “Health Insurance Status of Massachusetts Residents,” January 2003.
  20. Conversations between the author and then DMA Commissioner from May to December 2002.
  21. Recent legislative correspondence with DMA’s Acting Commissioner.
  22. Howard Gleckman, “Welcome to the Health Care Economy,” Business Week Online, August 26, 2002.
  23. “U.S. Hospitals and the Future of Health Care,” Deloitte & Touche, 2000.
  24. DHCFP, “Health Insurance Status of Massachusetts Residents,” January 2003.
  25. Nearly all of these have been recommended by other state agencies, including the Probate Courts, which have access to extensive financial information.
  26. Massachusetts House of Representatives Health Care Committee Staff with data provided by DMA.
  27. Author calculations.
  28. DMA Draft Annual Report on MassHealth 1115 Demonstration Project, May 1999.
  29. “State of the States,” p. 10.
  30. Jerome Grossman, “An Economic History of Health Care in Massachusetts 1990- 2000.”



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