AMY PAULY: Our Medicaid has been reduced. Some of my medications that I am required to take I can no longer receive.
SUSAN DENTZER: Twenty-year-old Amy Pauly of Missouri has serious mental illness that has left her jobless, and she would not have health insurance if it were not for Medicaid. This joint federal and state program is the nation's single largest health insurance plan, covering 47 million people. That includes one in five of the nation's children, low-income pregnant women, many of the elderly in nursing homes, and disabled adults like Pauly.
AMY PAULY: Medicaid matters to me because without it I couldn't see the specialists and doctors that I need to. I wouldn't be able to afford the medications that ease the pain that makes it bearable for me to live and function, to try to have a normal life for me.
SUSAN DENTZER: But with many of the 50 states now in fiscal crisis, at least 26 states have announced plans to cut back Medicaid coverage this year.
That's why governors meeting in Washington this week were eager to hear from Health and Human Services Sec. Tommy Thompson. Thompson laid out a Bush administration proposal termed one of the most far-reaching plans for overhauling Medicaid in the program's 37-year history. Understanding what the administration is proposing requires a quick lesson in the structure of Medicaid. For that, we turned to Diane Rowland, executive director of the Kaiser Commission on the Future of Medicaid and the Uninsured.
DIANE ROWLAND: It really is the gap filler in the cracks in our health care system. What private insurance doesn't cover, Medicaid fills in for some of the very sickest in our society.
SUSAN DENTZER: Rowland says Medicaid enrollees fall into two groups, so-called "mandatory" and "optional" populations. Mandatory means that states participating in the program must cover these groups, while the rest can be enrolled at a state's option.
In the mandatory column are poor children, children in foster care, poor pregnant women, and about 12 million low-income elderly and disabled people, including poor older people who are also on Medicare. Among groups in the optional column are children and parents in slightly better off, but still low-income families. And a critical optional population is disabled and elderly people in nursing homes.
DIANE ROWLAND: Today Medicaid is really the only source of assistance with long-term nursing home bills. It pays for 50 percent of all the nursing home care, and covers nearly 60 percent of all nursing home residents.
SUSAN DENTZER: For both its mandatory populations of Medicaid beneficiaries and the optional groups they decides to cover, states are entitled to receive matching dollars from the federal government.
DIANE ROWLAND: There is no cap on the federal spending. It's an open-ended deal where the states spend the dollars they need to meet the needs of their population, and the federal government agrees to match whatever they spend by at least a one-to-one match.
SUSAN DENTZER: This year, that state share of Medicaid will be about $121 billion, making it the second biggest line item on most state budgets after education spending. The federal government will kick in another $159 billion, for a total program cost of $280 billion. Now the Bush administration proposes a major restructuring.
DIANE ROWLAND: This proposal could really be construed as a carrot and a stick. The carrot is giving states increased flexibility and some up-front financial assistance during this fiscal crisis in exchange in return for a stick, which is a limit on future federal financing for the program.
SUSAN DENTZER: As Secretary Thompson explained the proposal this week to the National Governors Association, it would work something like this: Federal Medicaid payments to the states would be divided up into two pots. The first would cover acute-care needs, mostly for the mandatory populations, such as hospital care and doctors visits for low-income parents and kids. The second pot would be for long-term care, mostly for the optional populations, such as nursing home stays for the elderly or care delivered to the homebound.
The federal money going into those pots would grow over time, but no longer on the same open-ended basis as before. The government would pump in billions of dollars in more money over the next seven years, in effect increasing federal contributions to the program. But it would then sharply scale back the growth of those funds thereafter. Thompson told the governors this week that the program was voluntary, and that states that wanted to stay with the current Medicaid program could do so. But states that elected to participate would have more money to allow them to devise innovative ways of covering beneficiaries.
TOMMY THOMPSON: In the way of long term care we could ask you to take a look at some of the more exciting programs about keeping senior citizens in their own homes without going to institutions and give you flexibility to do that.
SUSAN DENTZER: Some governors said they liked the idea of more flexibility, and of getting financial relief up front. Mark Sanford is South Carolina's Republican governor.
GOV. MARK SANFORD: I would just give the administration a whole lot of credit because the ox is in the ditch right now. What I think a lot of us are looking for is simply two things, I would ask you to take this to respective peers back in the House and the Senate. We need flexibility now, and we need money now.
SUSAN DENTZER: But governors raised concerns about the longer-term funding constraints. Ed Rendell is Pennsylvania's Democratic governor.
GOV. ED RENDELL: In the first seven years, with more dollars and the flexibility to do things on the optional side to actually expand coverage, we might be covering more widows and orphans, so to speak. But the problems in years eight, nine, and ten are daunting, and as a governor who's trying to do things in a reasonable fashion, you've got to really worry about what's going to happen down the road.
SUSAN DENTZER: Medicaid experts and advocates said the combination of more flexibility for states and constrained federal funding could spell huge cutbacks in the future.
CINDY MANN: You'd be able to keep out certain drugs that were too expensive for the state even though people needed them. You, the state, would be able to keep costs down in that way. You'd be able to charge adults, children for their parents' nursing home care, which has been a proposal that has floated around at the federal level and at states from time to time.
SUSAN DENTZER: The administration has not yet put its plan down on paper, and some members of Congress warned this week that governors should wait to see all the details. Congressman John Dingell of Michigan is ranking member of the House Energy and Commerce Committee, which will have to approve any Medicaid reforms.
REP. JOHN DINGELL: The administration has proposed the beginnings of a fundamental and significant change in that relationship. I would urge you to take the same steps, I would urge a client if I were practicing law or an associate in a law firm. Read the fine print. Know what it is they have in mind for you.
SUSAN DENTZER: The governors have now agreed to appoint a task force to examine the administration's plan and to spell out principles that they think should be the basis for Medicaid reform.