Baby Steps: Congressional Action on Medicaid Reform

Report Health Care Reform

Baby Steps: Congressional Action on Medicaid Reform

October 27, 2005 5 min read
Senior Research Fellow, Health Policy
Nina Owcharenko Schaefer is well known as a champion of patient choice and robust competition in America’s health insurance markets.

The House and Senate are poised to move forward on a budget package that would make modest administrative changes to one of the most unsustainable health programs, Medicaid. While improving the program's efficiency is important, Congress should go further and fundamentally reform Medicaid. For Medicaid to survive, federal policymakers must work with the states to make lasting improvements to the program so that it can better serve those most in need.


Meeting the Budget

This past spring, the Senate and the House passed a budget reconciliation package in which the Senate agreed to identify $35 billion in savings and the House agreed to identify $50 billion. Now, the various congressional authorizing committees must report their specific plans to reach those goals. After both chambers pass their approaches, they will have to meet to resolve the differences between them.


The Senate Finance Committee has proposed $10 billion in net savings from changes to the Medicaid and Medicare programs. The proposal identifies $26.064 billion in savings but offsets those savings with $16.64 billion in new spending. The committee identifies a meager $8 billion dollars in savings in Medicaid (compared to $18.64 billion in Medicare) and reallocates $3.72 billion of those savings to Medicaid and State Children's Health Insurance Program (SCHIP) spending.


The House Energy and Commerce Committee is expected to recommend an estimated $18 billion in net savings, with about $12 billion of that coming from changes to the administration of Medicaid, leaving any Medicare changes to the House Ways and Means Committee, which has indicated it will not seek out Medicare savings.


Key Provisions

While there are similarities between the Senate and the House Medicaid proposals, the House approach is more aggressive in some areas and lays important groundwork for future reform efforts in several areas:

  • Prescription Drugs: Both proposals would adjust Medicaid's prescription drug formula for pharmacy reimbursement and rebate calculations.

    Medicaid's price controlled system distorts and adds layers of complexity to the program, especially for prescription drugs. Efforts to establish a formula based on more realistic prescription drug costs are offset by new smoke-and-mirror payment schemes. Congress should focus on transparency in all Medicaid reimbursement and payment mechanisms, especially for prescription drugs.
  • Long-Term Care: Both proposals establish stricter rules on asset transfers for those seeking to qualify for long-term care services under Medicaid. The House Energy and Commerce Committee, however, is far more aggressive in stopping the gimmicks used by middle-class families to qualify for Medicaid long-term care. Both proposals would also encourage the purchase of private long-term care policies based on state "long-term care partnership" plans.

    Unfortunately, the Senate Finance Committee does not go as far as the House Energy and Commerce Committee in reforming long-term care. It is imperative that Congress close the loopholes and end the incentives that encourage middle-class families to shelter their assets to qualify for Medicaid, to ensure the program remains able to aid those who need it most.
  • Benefit and Cost-Sharing Flexibility: The House Energy and Commerce proposal takes important steps to allow states to better design their Medicaid packages. The Senate Finance Committee proposal, however, does not include any additional flexibility for the states in this area. The Energy and Commerce proposal also includes provisions to assist states in adopting consumer-directed approaches, such as Cash and Counseling and Health Savings Accounts.

    Flexibility is an important feature for future reform, and it is unfortunate that is does not appear in the Senate package. Greater flexibility in benefit design and cost-sharing allows states to provide different benefits to specific populations that have varying health care needs. With states expanding Medicaid coverage higher up the income scale, cost-sharing allows states to differentiate between the truly indigent and those with some financial means. Finally, consumer-directed models give states the opportunity to apply proven market approaches to the Medicaid population.

Additional Spending

Both the Senate Finance Committee and the House Energy and Commerce Committee propose new spending, offsetting the savings that they have identified. The Senate Finance Committee sets aside additional funding to provide Medicaid assistance to Katrina-impacted states. It also expands Medicaid eligibility to families that have disabled children and earn up to 300 percent Federal Poverty Level (FPL). The House Energy and Commerce proposal sets aside some funds for hurricane-related health care expenses and hurricane-related energy relief.


Efforts to assist the states in their efforts to provide health care following this year's hurricanes are certainly important. However, the Senate's Medicaid approach is far too prescriptive on the states and too dependent on the Medicaid program.[1] The House Energy and Commerce Committee should instead provide states with direct funding in the form of grants, allowing each state to decide how best to assist those in need and how to compensate providers for their work. In the end, the Medicaid program cannot sustain further expansions that will ultimately result in lower quality and less care for those in need.



The budget proposals from the Senate Finance Committee and the House Energy and Commerce Committee are aimed at improving the efficiency of the administration of the Medicaid program and will lead to minor short-term savings. However, improved efficiency will not bring lasting stability to the program. To save Medicaid, federal and state policymakers must develop a multi-faceted approach to improving the Medicaid program for its beneficiaries and the future.[2]


States should look for ways to mainstream more Medicaid-eligible individuals into private health care coverage and should adopt more care-management and consumer-directed techniques to improve quality and satisfaction for those who must remain on the program.


Federal policymakers should draw on the lessons of welfare reform and provide states with greater flexibility to experiment with different approaches to meet federal goals and benchmarks. They should also enact other key health policy initiatives, such as health care tax credits for lower-income Americans and incentives for the purchase of private long-term care, to preserve and protect Medicaid for those truly in need.


Nina Owcharenko is Senior Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.

[1] For more information on the problems with the Senate approach to Hurricane Katrina-related health care, see Nina Owcharenko, "Katrina Victims Deserve Better than Medicaid," Heritage Foundation WebMemo No. 862, September 26, 2005 at

[2] For a more detailed outline of the problems and solutions for real Medicaid reform, see Nina Owcharenko, "A Roadmap for Medicaid Reform," Heritage Foundation Backgrounder No. 1863, July 21, 2005, at


Nina Owcharenko Schaefer

Senior Research Fellow, Health Policy