Medicare and Medicaid: When Two Is Not Better Than One

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The complexities that arise when programs overlap make it harder to control costs.

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Experts all agree that controlling Medicare and Medicaid spending is crucial to slowing rising health care costs. However, under the current system, the most expensive subset of Medicare and Medicaid beneficiaries are lost in a complicated web of multiple payers and programs that lack both the incentive and the ability to curb risings costs. These beneficiaries are "dual eligibles"--people who are eligible for both Medicare and Medicaid at the same time--and they are among the poorest and sickest individuals in our society.

Providing care for these individuals under two entitlement programs proves that two is truly not always better than one. Instead of working together to coordinate care, Medicare and Medicaid split responsibility, dividing up who pays for what based on which service is provided and in which setting. This bifurcated payment structure leaves dual eligibles in a black hole between Medicare and Medicaid, resulting in poorer care and increased costs for taxpayers. 

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Congress should do away with the dual eligible model and instead place responsibility for this population in one federal program that can ensure quality of care and cost control.

Who Are "Dual Eligibles?"

Dual eligibles include approximately nine million people who are among the most vulnerable in our society. To be eligible for both programs, they must be low-income, to qualify for Medicaid, and either over age 65 or disabled, to qualify for Medicare (they are often both). More than half of dual eligibles live below the poverty line. They are more likely to suffer from chronic conditions--particularly diabetes, cardiovascular disease, and Alzheimer's--than are the Medicare or Medicaid beneficiaries who qualify for only one program. 

Unsurprisingly, dual eligibles are an extremely expensive population to insure, and represent a disproportionate percentage of both Medicaid and Medicare expenditures: approximately 40 percent of total Medicaid expenditures, despite their making up only 15 percent of Medicaid enrollment. One study calculated that a dual eligible costs Medicare almost twice as much as the average Medicare beneficiary.

The current payment system for dual eligibles is set up in a way that denies both programs the ability to control overall costs. Rather than being covered by two programs, dual eligibles are more accurately a part of neither, as neither program has clear responsibility, and both programs have incentives to shift costs onto the other.

Conflicting Incentives

Under the current system, a dual eligible is caught in a complicated division of financing between the two programs. For many dual eligibles, Medicaid pays for nursing home services or supports and services at home. In fact, more than two-thirds of Medicaid funding for dual eligibles goes to long-term care. Meanwhile, Medicare pays for hospital care, outpatient physician care, and prescription drugs--but Medicaid must pick up a dual eligible's premiums, deductibles, and copays. Medicaid also pays for many support services that are not covered by Medicare, such as transportation, dental, and vision.

In reality, this fragmented payment structure creates a system whereby neither Medicare nor Medicaid has an incentive to control costs, because the cost-controlling program is unlikely to reap the rewards. For example, because Medicare will cover the entirety of a beneficiary's hospital stay, Medicaid has no incentive to invest in services, technologies, or staff that will prevent hospital stays for long-term care recipients. Indeed, the Centers for Medicare and Medicaid Services estimated that approximately 40 percent of hospitalizations for dual eligibles in 2005 were potentially avoidable, costing the government more than $3 billion.   

Meanwhile, providers must bear the additional costs of having to deal with complex reimbursement provisions for not just one insurer but two. Often, providers are required to first bill Medicare, then to bill Medicaid to cover the beneficiary's Medicare deductible or co-insurance. Then, if Medicaid reimbursement rates are less than Medicare, as they often are, providers are instructed to claim a portion of the unreimbursed amounts as "bad debt," a portion of which can be reimbursed by Medicare. Confused yet?

Symptomatic of a Larger Problem

While the financial cost and administrative burden of dividing the responsibility for providing health care to dual eligibles are particularly acute, they are symptomatic of a larger problem: multiple government programs--each with its own bureaucracy, regulations, budget, and oversight--that fail to coordinate in any meaningful way and sometimes undercut each other. The decisions of the Supplemental Nutrition Assistance Program on what food purchases to support, the Department of Housing and Urban Development on low-income housing, and the Social Security Administration on disability assistance all affect each other. In addition, the decisions of these seemingly disparate agencies often affect the level of medical services needed by someone who is served by them--medical services that will likely be the responsibility of Medicare or Medicaid or, as in the case of dual eligibles, both. Yet no single program absorbs all of the costs of those decisions or undertakes the responsibility to make sure that the needs they are trying to address are met in a rational, coordinated way.

A Step in the Right Direction

The Affordable Care Act takes a number of positive steps to correct the disconnect in care for dual eligibles, including the creation of the Medicare-Medicaid Coordination Office, which works with Medicare and Medicaid to help manage care. Currently, 15 states are participating in a demonstration program to design new approaches to better coordinate care for dual eligibles and to share savings between the programs. While these demonstration programs are laudable, more wholesale reform is needed. For needy Americans who are likely to require aid from a variety of assistance programs, Congress should consider a holistic approach that would let states assign full responsibility for these people to a single program. Such an approach would not only better serve taxpayers but the beneficiaries themselves.

(Dena Feldman provided invaluable research assistance for this essay)

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Presented by

Caroline Brown & Anna Kraus

Caroline Brown is co-chair of Covington & Burling's Health Care Industry practice and chair of its Federal-State Programs practice. Anna D. Kraus is co-chair of Covington & Burling's Health Care Industry practice. Prior to joining Covington & Burling, Kraus served as deputy general counsel to the U.S. Department of Health and Human Services.

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