Upton and Hatch's Blueprint to Reform Medicaid

This week, Senator Orrin Hatch (R-UT), Ranking Member of the Senate Finance Committee, and Rep. Fred Upton, Chairman of the House Energy and Commerce Committee, released a blueprint for Medicaid reform centered on a per capita cap and reforms to increase flexibility for state Medicaid programs. The Upton-Hatch proposal is really the first time in recent years we’ve seen a truly comprehensive plan to reform Medicaid enter the discussion on reforming federal health spending, which is usually dominated by Medicare policy. Their proposed framework offers a valuable contribution to the debate and many of their options can be implemented independently or easily adjusted in a number of ways to reduce Medicaid costs and improve quality of care.

Earlier this year, Senator Hatch proposed several reforms to federal health entitlement programs that could be considered in a bipartisan deficit reduction package. Among them was a proposal to apply a per capita cap on Medicaid to slow spending growth in the program. The idea of a per capita cap, or a limit on the amount of federal dollars spent on each Medicaid beneficiary, has been around since the mid-1990s. It emerged as a compromise between the current federal matching scheme and a switch to block grants for Medicaid.

Under the Upton-Hatch Medicaid plan, a cap would be placed on each of the four major beneficiary groups – aged, blind and disabled, children, and adults – and based on the product of the state’s number of enrollees in each of the categories and the per capita amount for each category. Caps would grow by a “realistic exogenous and appropriate growth factor” for each state and rebased every 5 years if average per capita costs grow slower than the target growth rate. States in the top quartile of per capita spending would have a slower growth rate while those in the bottom quartile would have a faster growth rate to account for geographic spending variation. 

The proposal would also require CMS to project aggregate federal Medicaid expenditures and states would not receive additional funding unless they can demonstrate higher than projected enrollment. While the blueprint does not include any savings estimates, this policy has the potential to significantly slow and reduce future Medicaid spending. However, excluded from the cap are certain dual eligibles whose Medicaid expenses are limited to cost-sharing and premiums, DSH payments, GME payments, CHIP payments, Indian Health Service enrollee payments, other partial Medicaid benefit enrollees.

In addition to the per capita cap, the Upton-Hatch proposal includes a number of other Medicaid reforms to help increase flexibility for state Medicaid plans and slow cost growth. Some of these include:

• Allowing flexibility in benefit design: The Upton-Hatch blueprint would offer states a menu of options from which to design Medicaid benefits, similar to those currently available to them under CHIP. It would also allow states to offer value-based insurance design plans with lower cost sharing for higher-value services and higher cost sharing to discourage low value services. Other reforms would give states the ability to reward beneficiaries with incentive payments and/or lower cost-sharing to encourage the use of higher value services.   
• Increasing transparency and value-based purchasing: The proposal would encourage health providers to make pricing data more widely available by requiring states to release Medicaid claims data to certified entities. Upton and Hatch also recommend aligning provider incentives to encourage care coordination by allowing states to implement value-based payment methods with financial and performance accountability measures
• Improving care coordination: The Upton-Hatch plan would increase access to coordinated care by allowing states to passively enroll high-cost and high-need beneficiaries in managed care plans. It would encourage managed care through budget-neutral waivers, evaluate best practices in managed care payment determination and quality measurements, and exempt state contracts with managed care plans from federal medical loss ratio (MLR) requirements.
• Requiring CMS to give a final decision on Section 1115 Medicaid waivers within 120 days and approving any waiver similar to one approved for another state. 
•  Repealing maintenance of effort (MOE) requirements that restrict states from changing eligibility and giving states greater flexibility in verifying eligibility.
• Building on successful outcomes from demonstrations currently in place that improve quality care and reduce costs for the dual-eligible population.
• Allowing states to choose a defined funding allotment with enhanced flexibility to build on successful long-term care reforms.
• Guaranteeing current law benefits for individuals with disabilities.
• Requiring states to report on achievement measures on access to care, patient outcomes, patient experience and health care costs. Bonus payments could be tied to achieving certain benchmarks.
• Implementing program integrity measures such as reducing the provider tax threshold from 6 percent to 5.5 percent to limit a common state gimmick used to draw down more federal Medicaid dollars.

The policies in the Upton-Hatch blueprint represent some of the many options available to lawmakers to reform the Medicaid program, such as those we highlighted in our Health Care and Revenue Savings Options report. Several of the policies in the plan overlap with those in other health spending reform proposals. For example, the Simpson-Bowles Bipartisan Path Forward also promotes waiver flexibility, reducing the provider tax threshold, increasing price transparency, and encouraging care coordination for dual eligibles. More importantly, many of the ideas presented in this plan, particularly those on benefit design and state flexibility, can be included in alternative approaches to reforming the financing of the Medicaid program. Upton and Hatch deserve credit for reintroducing Medicaid back into the debate and putting together a thoughtful and comprehensive package of policies to put future Medicaid spending on a sustainable path.

The entire blueprint can be found here.