Whither Medicaid?
A Briefing Paper on Mental Health Issues in Medicaid Restructuring

Mental disorders impose a significant burden on individuals and their families—and on the healthcare system. Studies across nations show that the prevalence of mental disorder is higher than that of any other class of chronic conditions.^[1] Since the vast majority of health expenditures in the United States are concentrated in a small number of persons with one or more chronic conditions—and since one of the top five conditions, as measured by the economic burden it creates, is a mental illness (depression and manic depression)—it is good public policy to ensure that individuals with mental disorders receive early and effective treatment.^[2]  Failure to provide the effective treatments that now exist^[3] burdens both the health system and other social services.

One of the most important financing streams for provision of mental health care is Medicaid.  Medicaid provides more than half of the resources for state and local community mental health services, making it the primary funding source of public mental health system services for low-income people with mental disorders. 

In addition, Medicaid is an important source of mental health care for people who receive their services from the private mental health sector. In one study an average of 52 percent of Medicaid beneficiaries who used mental health services went to providers who were not part of the public system for at least some of their care.^[4] This is a critical and appropriate role for Medicaid.  Public mental health systems, with very limited resources, prioritize services to adults and children with major functional impairments. Often, people with mild or moderate mental disorders who require treatment cannot access care through the public system. Yet low-income individuals who qualify for Medicaid can access mental health care from private providers who participate in Medicaid.

Looked at from the Medicaid perspective, people with mental disorders represent a significant proportion of the 51 million covered by the program. Sixteen percent of adult enrollees (aged 21-64) and 8 percent of children on Medicaid use mental health or substance abuse services.^[5]  From 9% to 13% of Medicaid spending is for mental health care. Moreover, many of the individuals with mental disorders in the program are people receiving disability benefits—the group of Medicaid beneficiaries who use a high level of services.^[6]  Others, particularly children, also use a high level of mental health services.^[7]  For these individuals, Medicaid policies that ensure provision of early intervention with high-quality, cost-effective care represent an important investment.

How People with Mental Disorders Qualify for Medicaid: Mandatory & Optional Categories Are Both Important

Medicaid eligibility is complex. State Medicaid programs must, by law, cover certain groups of individuals (“mandatory” eligibility categories). Others can be covered if the state elects to do so (“optional” eligibility categories). Significant numbers of people with mental disorders are found in both categories, as shown in the attached chart comparing various optional and mandatory groups covered under Medicaid.

For example, a large number of individuals with mental disorders on Medicaid are eligible because they receive federal disability benefits. Over a quarter of those receiving Supplemental Security Income (SSI) disability benefits, 1.4 million, are people with psychiatric disabilities. Generally, SSI recipients fall within the mandatory eligibility category. At the same time, the percentage of individuals with psychiatric disabilities who receive Social Security Disability Insurance (SSDI) is also high— 26.8 percent, or 1.6 million people in 2001.^[8]  However, individuals on SSDI are eligible for Medicare and only eligible for Medicaid if they have low incomes (generally because their SSDI benefit is low as a result of a very limited work history). Since the criteria for eligibility based on disability are the same under SSI and SSDI, there is essentially no difference in level of disability and need for services between these two groups.

SSDI recipients can qualify for Medicaid under several optional eligibility categories, such as the option to cover people with disabilities with incomes at or below the federal poverty level and the medically needy option (see below). States can also opt to cover individuals with disabilities who receive state SSI supplements and working adults with disabilities. Since Medicaid’s mental health coverage is significantly better than Medicare’s, particularly for the intensive rehabilitation services people with serious disorders need, the option to cover SSDI recipients is extremely important.

Children in the child welfare system represent another large group of Medicaid recipients with a significant need for mental health services. From 35 to 85 percent of such children have been found to have moderate to severe psychological problems.  Several studies confirm that these children are high users of mental health services.^[9]  Federal law provides Medicaid coverage for children in foster care and adoption families, primarily through mandatory eligibility rules, but some children can qualify only through optional categories.

Low-income parents and children are covered under both mandatory and optional categories. Mandatory eligibility covers pregnant women and children up to age 6 in families with incomes up to 133 percent of the federal poverty level and older children up to 100 percent of poverty. States can opt to raise these income limits to 185% or 133% of poverty respectively. States also have the option to cover children who qualify for the State Child Health Insurance Program (S-CHIP), whose families can have incomes as high as 250 percent of poverty. Adults with serious mental illnesses have high rates of poverty, and thus many mothers with mental illness and their children are covered through these options. Little or no difference is found between individuals in the optional or mandatory low-income categories in their level of need for mental health treatment or in their ability to access adequate treatment without Medicaid coverage.

Another critically important eligibility option for people with mental disorders allows coverage of individuals who have high medical costs and who can qualify as “medically needy.”  They must spend down their income, but once they have spent a certain amount (varying by state), Medicaid will pay any additional covered health care costs. These individuals must still meet the eligibility standards of some category of Medicaid (such as by being disabled), but need not meet the Medicaid income test. 

Those cited above are just a few examples of optional eligibility categories that are important to individuals with mental disorders. In most cases, individuals in an optional eligibility category have the same or similar characteristics and almost the same income level as those in mandatory categories.  All have low-incomes with a significant percentage needing and using mental health services.

Medicaid Provides Unique Mental Health Service Options

Certain mental health services are mandatory under federal law and must be offered to all Medicaid beneficiaries in all states. Other services are optional for adults, but must be available to children when medically necessary. The mandatory mental health services include inpatient and residential treatment, and outpatient physician and hospital services. For adults, the array of community-based services normally offered through public mental health systems falls into the optional category. These include intensive community services to prevent deterioration, maintain or restore functioning and assist individuals with daily living (Rehabilitation Services); case management to organize the complex array of services adults with serious mental illness need (Targeted Case Management); medications; clinical services; and personal assistance.

A similar array of services is required for children through the mandate, known as Early and Periodic Screening, Diagnosis and Treatment (EPSDT), that requires coverage of all optional services when necessary for a child.

In addition, Medicaid covers transportation to services and, through administrative activities, for outreach to homeless individuals and others.

Medicaid thus covers and pays for a significant share of the services offered through public mental health systems—hence its importance in funding such systems.

Medicaid Cost Increases

A program the size of Medicaid (which represented 15 percent of state budgets in 2004^[10]) attracts policymakers’ interest, particularly in hard economic times. Medicaid coverage was expanded significantly in the 1980's and early 1990's to include many more low-income children and their families. Also contributing to much of its recent growth are conscious actions by states to ensure that health care services furnished through various state systems are billed to Medicaid whenever possible. Services that used to be fully state-funded in the late 1970's and early 1980's have gradually been shifted to the Medicaid budget. For example, between 1987 and 1997, Medicaid’s share of state and locally administered mental health care increased by 50 percent.^[11]  This trend is also clear in child welfare and public health. The growth in Medicaid over the past two decades has greatly aided states, as the federal government contributes, on average, 57 cents for every 43 cents the states spend.^[12]

The result, however, is that Medicaid is one of the most costly items in state budgets, because it now carries a fiscal burden previously borne by other state budget line items. The resulting high price-tag has led states to make cuts in Medicaid as they have faced effects of the recent economic downturn. But the shift of state activities into Medicaid has also raised the stakes at the federal level, and federal policymakers now view Medicaid as a program ripe for review and revision.

To some extent, this is an appropriate time to re-examine Medicaid, a program enacted in the 1960s that has been amended piecemeal many times but never reviewed in toto. However, given the role the program now plays in underwriting health and mental health care for so many low-income and disadvantaged Americans and so many public systems, changes should be made only after thorough review of all the implications. The stakes are now very high, and the ramifications of any changes must be fully explored.

Proposals for Change

Changes either underway or under discussion today include proposals designed to reduce federal costs while shifting Medicaid resources to non-covered individuals:

Block Grants

Altering Medicaid’s basic structure to create a block grant that gives states a capped amount of resources.  A State would still be required to provide mandatory services to mandatory populations, but could provide optional populations with reduced benefits (and offer different packages to different groups).  As under current law, states could also drop optional populations from the program entirely.

This approach would have the program abandon its longstanding role as an insurer of needed care and would disenfranchise people from an entitlement to needed services.  It would allow states to offer reduced benefits to some optional eligibility groups or to cut people off the program entirely.  Yet, as discussed above, many people in the optional categories have very similar characteristics and need for mental health care, as well as having incomes that are too low to permit them to pay for their care. A study of the fiscal impact of this approach estimated that under a block grant, 3.8 million children and 1.2 million people with disabilities could lose coverage they would otherwise have.^[13]  A block grant proposal would place beneficiaries at even further risk because it would eliminate uniform federal standards and safeguards that ensure quality and accountability. For example, states could place day and visit limits on mental health care or offer different coverage to people in urban and rural areas.

A block grant would eliminate the state and federal sharing of all costs. If states spent more, the federal government would no longer provide matching funds. Instead, the state would receive a finite amount from the federal government.  Should there be a downturn in the state’s economy, putting more people out of work and making them eligible for Medicaid, state spending would rise but, unlike today, the federal contribution would not.

Although this proposal has not moved forward, Secretary of Health and Human Services Tommy Thompson has indicated that he would like to reopen discussion on it with the governors.

Waivers

Waivers that allow a state flexibility in how it runs its Medicaid program, in return for an agreement that the federal contribution can be capped.

Although the block grant proposal discussed above so far has been rejected, a few states have recently begun negotiations with the federal government to obtain through waivers the greater operational flexibility a block grant would allow.  Although this would give the states some new options, the quid pro quo is that these “research and demonstration” projects must be  budget-neutral to the federal government. This would be achieved through a state’s agreement to accept a capped federal contribution. In many respects, then, these waivers would permit states to institute a form of block grant. States negotiating for such waivers include New Hampshire, Florida, Connecticut and California.^[14]

Waivers of basic entitlement rules that permit states to drop some optional eligibility groups and replace them with previously non-covered individuals with higher incomes who lack insurance coverage.

This proposal is already in place. Under the newly created Health Insurance Flexibility and Accountability (HIFA) waivers, states may trim benefits for low-income individuals currently on the program in order to cover additional uninsured individuals. Due to a federal requirement that these waivers be budget-neutral to the federal government, states must either cut optional services or optional populations from the program to pay for the new coverage. Newly covered individuals need not be provided the full Medicaid package of services, and many are given only the most basic primary health care coverage. States with these waivers have provided little, if any, mental health coverage to the newly covered population.

These waivers may not achieve their cost-control objectives. In Oregon, which made significant cuts through a waiver in 2003, many of the people who lost Medicaid coverage had very low incomes and significant health care needs, even though they were considered “optional” Medicaid populations. Following the cuts, visits to emergency rooms by the uninsured increased 17 percent in just three months at one major hospital.^[15]

Children's Services

Eliminating the mandate that children receive all medically necessary services (EPSDT).

Some claim that the range of Medicaid services for children is too expansive and far more comprehensive than services available to children who are covered under their family’s insurance plan. A benefit package modeled on insurance policies is proposed. However, these policies typically have drastic limits on covered mental health services and would be highly inappropriate for children with serious mental disorders, who are disproportionately represented on Medicaid.  Medicaid is specifically designed to b the safety net health care program and the populations it serves generally have far higher need than do those in private insurance plans.

Spending Cuts

Cuts in the federal share for certain services or unspecified cuts in the program to reduce federal costs.

In the FY 2005 Budget Resolution approved by the House of Representatives, cuts of $2.2 billion over five years were proposed for the Medicaid program. In follow-up action, some House members, with the Administration’s support, proposed reducing the federal match for targeted case management (a service of critical importance for people with serious mental illnesses). Neither proposal has become law, but both continue to be seen as viable options by some policymakers (officials at CMS have indicated their intent to cut federal funding for targeted case management administratively).

Other Proposed Policy Changes

Another set of proposed policy changes to Medicaid address issues regarding mental health care coverage and delivery.  Unlike the proposals above, these could strengthen the Medicaid program, and help people achieve recovery. 

Consumer-Directed Services

Demonstrations of consumer-directed services for adults with mental illness and parents of minor children with mental or emotional disorders to test ways consumers can make choices on how their Medicaid benefits are used and how funding is spent.

These demonstrations would build on similar approaches now being tested for individuals with developmental disabilities and the frail elderly. To date none are specifically targeted to people with mental illnesses, and certain aspects of Medicaid policy and mental health funding under Medicaid will require a different type of design for projects for this population.

Comprehensive Services

Allowing payment for a comprehensive package of services instead of requiring providers to account for each and every separate activity furnished—this can be accomplished by authorizing the use of case rates, bundled rates and other mechanisms that allow the state to purchase an individualized mix of services.

Newer and effective mental health services furnish a range of separate activities through a single plan and often offer more than one such activity or Medicaid service on a given day. Examples are wraparound programs for children with intensive needs (such as Wraparound Milwaukee in Wisconsin)^[16] or comprehensive programs for adults with serious mental disorders (such as The Village program in Los Angeles).  Current Medicaid rules discourage this bundling of care, despite the evidence of its success.

Child and Family Services

Altering rules that prevent family members from receiving needed services

Children live and grow in families, and services that focus on the child in isolation are less effective—in the case of very young children, absurd. Medicaid, however, pays only for explicit, covered services for a specific covered individual. Family services are not covered when the other family members are not themselves Medicaid-eligible.

Home and Community-Based Services

Expansion of needed home and community-based services for children with serious mental disorders so that they may be eligible for services while remaining with their family and not only when they are placed in a residential treatment setting.

Current law permits provision of home- and community-based alternatives for children who would otherwise be placed in psychiatric hospitals, but not for children otherwise in residential treatment programs.  Yet these are by far the more prevalent placements.

Peer Support Programs

Coverage of peer support groups for adults with mental illness and families of children with mental or emotional disorders.

Current law permits individuals who have themselves experienced a mental illness to provide services under Medicaid, when authorized by the state. These peer services are extremely valuable. However, peer support groups, where individuals gather to share common experience and help each other, are not a covered Medicaid service. These inexpensive options often alleviate or avoid crisis situations and facilitate successful community living.

Fiscal Reforms

Altering the financing of Medicaid to increase the federal share.

If the federal government more aggressively improved financial management of the program it could create a comprehensive plan for Medicaid’s financial integrity.

Steps should be taken to place Medicaid on a more solid financial footing.  In 2003, Congress authorized a higher federal match under Medicaid to help the states because of the fiscal crisis.  These increased funds proved invaluable to states as they struggled with tight budgets, however this fiscal relief expired on June 30, 2004.  Extending the relief would help the states as the economic downturn continues and widespread state Medicaid shortfalls are anticipated.

In addition, a report by the Kaiser Commission on Medicaid and the Uninsured has recommended that the Centers for Medicare and Medicaid Services (CMS), the agency that administers the program, take steps to improve auditing and create a chief financial officer to oversee Medicaid’s financial controls.^[17]  Such steps would ensure financial integrity without making wholesale arbitrary cuts.  Such auditing, however, must be done in a manner consistent with existing regulations and guidelines and should be transparent so as to ensure it is not used merely as a tool to achieve savings.

Coverage/Eligibility

Expanding the program to cover more low-income people.

There is, in particular, a need to cover single adults without disabilities who live in poverty and who cannot qualify under the existing program rules.  Public mental health systems are increasingly unable to serve uninsured individuals with very serious mental disorders due to the fact that these individuals are not covered under Medicaid.  Many of these persons do not have federal SSI benefits (which would qualify them for Medicaid), either because they have chosen not to apply, have lost the benefit, are awaiting a decision from Social Security or, despite a very serious illness, are not considered disabled by SSA.  As a result, they go without care until they are in crisis, when their costs must be absorbed as uncompensated care by hospitals and states.

Whither Medicaid?

Medicaid is at a crossroads. The first four restructuring proposals described above represent a clear threat to recipients with mental disorders.  The second seven represent important proposed modifications that would make the program more appropriate as the largest funding source of public mental health systems. Medicaid thus has two futures. Under one scenario, the program would be altered to cut thousands of individuals with mental illnesses out of the program or off services that are effective for them. Public mental health systems could be thrown into chaos by such a set of federal policies. Cuts made in mental health services due to the recent economic downturn could pale in comparison. Alternatively, a serious and thoughtful examination of Medicaid could build upon new momentum for comprehensive wraparound programs for adults and children, expansion of less traditional services and consumer-directed services. Which way will it go?

There is no consensus on these issues among policymakers.  In 2003, the Bush Administration proposed the block grant approach, but the nation’s Governors rejected it. Yet Secretary of Health and Human Services Thompson and leadership in the House of Representatives have indicated strong interest in reviving the block grant and other options (including the first 5 above). The Senate Finance Committee, which has jurisdiction over Medicaid, has written to CMS objecting to the wholesale changes the agency is instituting through the series of waivers now being approved but the agency is continuing to approve HIFA and other similar waivers. Advocates for the program press for improved operations, greater fiscal stability, new opportunities for evidence-based and emerging best practices and expanded eligibility, but their pleas are unheard.          

The future may be uncertain but, without doubt, the stakes are high. Mental health advocates should be heard regarding the impact of these proposals on people with mental disorders. All policymakers (and candidates for office) need to understand the role Medicaid plays in supporting mental health systems. Unless mental health issues are considered, policies may be adopted that do not protect access for low-income people to mental health services.

The plight of individuals who do not qualify for Medicaid (generally due to having higher income) illustrates the threat. According to a government study, thousands of families are giving up custody to state child welfare or juvenile justice systems just to enable the child to receive critically needed mental health services.^[18] Cutting people with mental disorders off Medicaid, or depriving them of the services that are most effective, will not eradicate mental disorders.  It will only impose higher future costs on taxpayers and immediate and future misery on people with mental illnesses and their families. Oregon’s cuts (see above) resulted in large coverage losses and access problems as well as new sources of stress for health care providers.^[19]

Conclusion

Medicaid is a complex program meeting the needs of multiple low-income populations. It is a critical safety net and one that aids states at times of economic downturn by increasing resources through the federal match. Policies to drastically alter the fundamental underpinnings of Medicaid—such as block grants or federal caps—are counterproductive. People with mental disorders are particularly vulnerable because they qualify through many of the optional eligibility categories and need the optional services. The resulting lack of access would exacerbate their health and mental health problems and their disability, leading to increased institutionalization, homelessness, incarceration or reliance on welfare. Furthermore, drastic changes to Medicaid could threaten the viability of the fragile public mental health system.

Everyone benefits when individuals with mental disorders are able to live, work, learn and participate fully in their communities. Medicaid plays a critical role in achieving this goal. Unless the right policy choices are made, the consequences for people and for states will be dire.

Table 1: Eligibility Categories Important to
People with Mental Illnesses

Mandatory Categories	Optional Categories
— Individuals on SSI—27% of recipients in 2000 were disabled by mental illness	— Individuals on SSDI (same standard of disability as SSI recipients) with high medical costs (medically needy); 26.8% of recipients are disabled by mental illness. — Individuals receiving state SSI supplements
— Individuals on SSI who return to work and lose cash benefits but need Medicaid to meet their medical costs (Section 1916(b))	— Individuals with disabilities with incomes  under 100% of federal poverty level — Working people with disabilities can be covered under the Ticket to Work Act (33 states) and through a buy-in program also authorized under the Ticket to Work Act (27 states). Working people with disabilities can also be covered if they earn less than 250% of poverty and would qualify but for earnings, or if they have potentially serious disabilities.
— Children 0-6 in families with incomes under 133% of the federal poverty level	— Children 0-6 in families with incomes under 133% but over 185%  of the federal poverty level (41 states)
— Children 6-17 in families with incomes under 100% of the federal poverty level	— Children 6-17 in families with incomes over 100% but under 133% of the federal poverty level (30 states) — Children aged 18-19 in families with incomes over 200% but under 300% of poverty  (13 states)
— Children in federal foster care program and adoption assistance. (Title IV-E)	— Children in state adoption assistance programs (check) — Children 18, 19 or 20 who have aged out of foster care. — Children with disabilities who would otherwise be in an institution (TEFRA) (20 states)
— Elderly individuals receiving SSI based on age and income	— Elderly individuals in a psychiatric hospital — Elderly individuals in an IMD or a nursing home — Elderly individuals with incomes under the poverty level
— Other children, adults and elderly persons who meet federal eligibility requirements	— Children, adults and elderly people who would meet state Medicaid eligibility standards but for income/assets and whose high medical costs enable them to spend down to Medicaid eligibility levels (medically needy) (36 states)

Notes

[1].  The WHO World Mental Health Survey Consortium (2004). Prevalence, severity and unmet need for treatment of mental disorders in the World Health Organization World Mental Health Surveys. Journal of the American Medical Association. 291. 21: 2581-2590

[2].  Druss, Benjamin G., Marcus, Steven C., Olfson, Mark, et al (2001). Comparing the national economic burden of five chronic conditions. Health Affairs.  20. 6: 233-241.

[3].  U.S. Department of Health and Human Services.  (1999)  Mental Health: A Report of the Surgeon General.  Rockville, MD: US Dept of Health and Human Services, Substance Abuse and Mental Health Services Administration, Center for Mental Health Services, National Institutes of Health, National Institute of Mental Health.

[4].  Coffee, R.M. et al., (2001). Mental Health and Substance Abuse Treatment: Results from a Study Integrating Data from State Mental health, Substance Abuse and Medicaid Agencies.  Rockville, MD: Center for Substance Abuse Treatment & Center for Mental Health Services, Substance Abuse and Mental Health Services Administration, US Department of Health and Human Services.

[5].  Buck, Jeffrey A. and Miller, Kay (2002). Mental Health and Substance Abuse Services in Medicaid, 1995. US Department of health and Human Services (DHHS Publication Number (SMA) 02-3713).

[6].  Vladek, Bruce (2003). Where the action really is: Medicaid and the disabled, Health Affairs, 22:1, 90-100.  Washington DC: Project Hope.

[7].  Children and adolescents enrolled in Medicaid have more than 1,300 annual outpatient speciality visits per 1,000 children, while the comparable number for children with private insurance is 462. Source: National Advisory Mental Health Council Workgroup on Child & Adolescent Mental Health Intervention Development and Deployment (2001).  Blueprint for Change: Research on Child and Adolescent Mental Health. Washington, DC: National Advisory Mental Health Council, National Institute of Mental Health.

[8].  Office of Policy, Office of Research, Evaluation and Statistics. Annual Statistical Report on the Social Security Disability Insurance Program, 2001. (2002). Baltimore, MD: US Social Security Administration.

[9].  Chernoff, R., Combs-Orme, T., Risley-Curtiss,  C. & Heisler, A.  Assessing the health status of children entering foster care. Pediatrics 93(4): 594-601, 1994; and Rosenbach, M., Lewis, K., and Quinn, B. Health Conditions, Utilization and Expenditures of Children in Foster Care: Final Report. September 19, 20000 Cambridge, MA: Mathematica Policy Research.

[10].  Kaiser Commission on Medicaid and the Uninsured.  State Fiscal Conditions and health Coverage: An Update on FY 2004 and Beyond.  Washington, DC: Kaiser Commission on Medicaid and the Uninsured; September 2003.  At www.kff.org.

[11].  Buck, J.A. Spending for state mental health care, Psychiatric Services 52(10) October 2001: 1294.

[12].  In some states, the non-federal share of Medicaid is contributed by counties as well as the state.

[13].  Families USA (January, 2003). Medicaid: Good Medicine for State Economies.  Washington, DC: Families USA.

[14].  BNA’s Health Care Policy Report. Washington, DC: Bureau of National Affairs, Inc. May, 10, 2004.  650-651.

[15].   Mann, Cindy and Artiga, Samantha (2004). The Impact of Recent Changes in Health Care Coverage for Low-Income People: A First Look at the Research Following Changes in Oregon’s Medicaid Program. Washington, DC: The Kaiser Commission on Medicaid and the Uninsured.  At www.kff.org.

[16].  Wraparound Milwaukee is described in the Interim Report to the President of the President’s New Freedom Commission on Mental Health.  October, 2002. Page 8.

[17].  Kaiser Commission on Medicaid and the Uninsured Medicaid’s Federal-State Partnership: Alternatives for Improving Financial Integrity. Washington, DC: Kaiser Commission on Medicaid and the Uninsured. February, 2004. At www.kff.org/medicaid

[18].  General Accounting Office (April, 2003), Child Welfare and Juvenile Justice: Federal Agencies Could Play a Stronger Role in Helping States Reduce the Number of Children Placed Solely to Obtain Mental Health Services. Washington, DC: General Accounting Office (GAO-03/397).

[19].  Mann, Cindy and Artiga, Samantha (2004).  he Impact of Recent Changes in Health Care Coverage for Low-Income People: A First Look at the Research Following Changes in Oregon’s Medicaid Program.  Washington, DC: The Kaiser Commission on Medicaid and the Uninsured.  At www.kff.org.