Disability Studies Quarterly
Fall 2005, Volume 25, No. 4
Copyright 2005 by the Society
for Disability Studies

Reforming Medicaid Incentives that Institutionalize People with Disabilities and Destroy Families: A Policy Note

Mary Giliberti, J.D.
Minority disability counsel for the Senate Health, Education, Labor and Pensions Committee (March, 2003-May, 2005).

As the national deficit has increased, federal policymakers have had renewed interest in Medicaid, the federal health insurance program for the poor and individuals with disabilities. Since the driving force behind this interest is deficit reduction, attention has focused on cutting funding for this healthcare entitlement program. Recent Congressional budget proposals have sought billions of dollars in cuts to the program without a clear policy analysis of what is to be cut (Editorial, 2005).

Given the importance of Medicaid, there are ongoing efforts to set forth policy recommendations by interest groups, Congressional committees, and the U.S. Department of Health and Human Services (HHS). In addition, a new Medicaid commission, established as a federal advisory committee to HHS, will issue its first report in September 2005 followed by a detailed analysis in 2006 (Medicaid Program, 2005). This policy note contends that such analyses should go beyond fiscal issues and include review of program effectiveness.

Review should include analysis of counterproductive incentives in the current Medicaid program and set forth a blueprint for future reforms that further the development of community-based services. Issues to be addressed, for instance, include reforms so that parents are not forced to give up custody of their minor children to get access to Medicaid mental health benefits. Likewise, individuals with disabilities and older Americans must not be forced to relinquish family and community ties and live in a nursing facility because it is the only living option funded by Medicaid. Such policies may be traced to inadequacies in private insurance, and the combination of these inadequacies with outmoded Medicaid rules.

If Medicaid legislation goes forward, federal policymakers may have a unique opportunity to address these fundamental problems with Medicaid. If reforms are not made when Congress is considering broad new legislation, it will be difficult to bring these ideas to fruition after legislation is enacted.

Part I of this policy note sets forth the structure of the Medicaid program, its history, and the scope of coverage. Part II discusses inadequacies in private health plans. Parts III and IV describe the consequences of these inadequacies and current Medicaid policy for families, children, and individuals with disabilities using two examples: custody relinquishment and institutionalization for long-term care. For each example, policy recommendations and suggestions for further research are provided.

I. Federal Medicaid Program

Medicaid has been described as "the cornerstone of the nation's health care safety net" (Schneider, A., Elias, R., Garfield, R., et al., 2002, p. i). It began in 1965 as a program providing health insurance to those who qualified for cash assistance through the welfare program. Today, Medicaid has expanded to cover over 53 million individuals, including low income families, older Americans, and individuals with disabilities. (Rowland, 2005; Rowland & Garfield, 2000).

Medicaid is a federal-state program, with both entities contributing some of the cost of beneficiary services. Each state has a federal match rate, calculated by a formula. This rate statutorily ranges from 50—83%, with the federal government paying between .50—.83 per dollar of expenditures (Government Accountability Office, 2003b). This shared fiscal responsibility has led to tension between the states and the federal government regarding control and requirements of the program. It has also, however, assisted state economies by infusing additional funds for each state Medicaid dollar expended.

Medicaid has elaborate federal rules and regulations, which are beyond the scope of this article. While there are nuances and exceptions to the basic tenets, Medicaid is a program with optional and mandatory beneficiaries and benefits. As expected, the mandatory beneficiaries and services must be covered by any state that chooses to participate in Medicaid (at this time, all states participate in Medicaid). The optional benefits are by a state's choice. Despite the optional nature of some categories of beneficiaries and benefits, states make significant use of these categories. Sixty percent of Medicaid expenditures are "optional." (Kaiser Commission on Medicaid and the Uninsured, 2005).

To generalize, states are required to cover poor, pregnant women, children, parents of minor children, individuals with disabilities, and older Americans on Social Security Income (Kaiser Commission on Medicaid and the Uninsured, 2005). States may choose to cover several optional populations including the "medically needy," who spend down their resources on expensive health care services and thus become eligible for Medicaid (Kaiser Commission on Medicaid and the Uninsured; for detailed categories of Medicaid eligibility, see Schneider, A., Elias, R., Garfield, R., et al., 2002, ch. 1). Children in the child welfare system are generally covered by Medicaid either through mandatory or optional categories (Schneider, et al.).

States that accept federal Medicaid assistance must cover a set of mandatory services, which include, among others, physician's services, inpatient and outpatient hospital services, laboratory and x-ray services, nurse midwife services, pediatric and nurse practitioner services, home health care services (for individuals entitled to nursing facility care), and nursing facility services. For children under age twenty-one, the early, periodic screening, diagnosis and treatment program requires that medically-necessary Medicaid services are provided, so even the optional services (below) are required for children (Kaiser Commission on Medicaid and the Uninsured, 2005).

A state may elect to cover optional services for adults in its state plan. Examples of these services include prescription drugs, rehabilitation, clinic services, dental services, prosthetic devices, eyeglasses, durable medical equipment, primary care case management, intermediate care facilities for the mentally retarded, inpatient nursing facility services for individuals 65 and older in an institution for mental disease, targeted case management, and personal care services (Kaiser Commission on Medicaid and the Uninsured, 2005).

States can also use "home and community-based waivers" to provide more extensive community-based services and supports to a targeted population at risk of institutionalization. States apply for a specific number of client slots and submit data on the cost of institutional care for individuals at the specified level of care. States provide assurances that the average cost of a waiver recipient will not exceed the institutional cost (Bazelon Center for Mental Health Law, 2002). In addition to expanded services, these waivers allow states to apply special rules expanding coverage to those whose income normally would exceed Medicaid's limits. (See Schneider, A., Elias, R., Garfield, R., et al., 2002 for a detailed explanation of these rules).

II. The Relationship to Private Insurance

Medicaid provides a wider array of services than private health insurance plans. This disparity is stark in two areas: mental health and long-term care. In response to market failures, individuals have sought Medicaid coverage and received services under the program. Unfortunately, the program imposes onerous requirements before stepping in to offer assistance.

Health insurance plans overwhelmingly limit payment for mental health services. A Government Accountability Office (GAO) survey of employers found that 87% of employer plans contain at least one design feature that was more restrictive of mental health benefits than other medical conditions (2000a). For example, two-thirds (66%) of employer plans had lower outpatient office visit limits and 65% had lower hospital day limits. The GAO cited an example of an employer plan with thirty hospital days and twenty outpatient visits per year. In stark contrast, only 10% of the plans had any limit on hospital days for other medical conditions and 8% had a limit on outpatient visits per year (Government Accountability Office).

Long-term care is further complicated. Most employer-provided health insurance plans do not offer long-term care services. There are, however, supplemental long-term care insurance policies available for purchase. Recent studies of these policies show that they are underused. There are several contributing factors to their failure to gain market share, including concerns about affordability and the value of the coverage relative to the premiums (Government Accountability Office, 2005). While private long-term care insurance plans are expected to expand over time, it is not a viable option for older Americans with low incomes (Feder, 2005). In addition, they are not designed for younger individuals with disabilities who cannot afford or qualify for long-term care insurance (Page, 2005).

III. Addressing the Lack of Coverage for Children's Mental Health Services

A. The Policy Problem

The problem of parents being forced to give up custody of their children to access mental health care is not new. It was first raised twenty-five years ago in Jane Knitzer's (1978) groundbreaking study, Children Without Homes: An Examination of Public Responsibility to Children in Out of Home Care. Families are not able to access mental health treatment through their private health plans and are turned down by the public mental health system as well.

Typically, a social worker or school personnel will suggest that the parents file a petition to cede custody of their child to the state in order to receive intensive services, such as a residential program. Medicaid often pays for these services. Medicaid-eligible families are advised to work with child welfare services to avoid waiting lists and access providers who will only serve children who are court ordered into their program. Families whose incomes exceed Medicaid's limits are advised that this process is the only way for their child to qualify for Medicaid-funded treatment because individuals in the child welfare system are generally covered by Medicaid (Giliberti & Schulzinger, 2000). Some researchers have attempted to quantify the problem, which is difficult because many parents are afraid to acknowledge that they are giving up their children for mental health reasons, and so they allege other grounds for relinquishment (see studies infra). Parents are concerned that a court would not grant their petition if they were candid about the reason.

The Research and Training Center on Family Support and Children's Mental Health surveyed parents of children with mental health needs and found that 25% reported that they were told to give up custody if they wanted to access care, and 35% of those parents did so (McManus & Friesen, 1989). A decade later, the picture had not changed significantly. The National Alliance for the Mentally Ill surveyed parents and found that 23% had been told to give up custody of their child to get help, and 20% had done so (1999). In 2000, the Bazelon Center for Mental Health Law surveyed members of the Federation of Families for Children's Mental Health and other advocates. Families and advocates reported custody relinquishment was a problem in over half of the states (Giliberti & Schulzinger, 2000).

In a 2003 study, the GAO noted that news articles in over 30 states described the difficulty that parents have when trying to access mental health services for children with severe mental health needs, and many of these parents gave up custody of their child to the child welfare or juvenile justice system (2003a). GAO further noted that no jurisdiction was maintaining data on the incidence of this practice. GAO's survey of child welfare directors and juvenile justice officials found that in fiscal year 2001, in the nineteen states and thirty counties responding to the survey, parents placed over 12,700 children into child welfare and juvenile justice systems to access mental health services. The GAO report acknowledged that this prevalence is likely to be higher nationwide because some states and counties did not respond to the survey, and no agency systematically tracks these children or maintains data on their characteristics.

Both family advocates and the media document the consequences of these trends for families (Giliberti & Schulzinger, 2000). One recent article in the Washington Post, entitled "A Family's Painful Journey," documented the negative effects on the children, siblings, and parents when a child is unable to access adequate mental health services (Otto, 2005). The child received intensive support services and professional counseling at home and in school when the family lived in Pennsylvania. When the family was relocated to Maryland by the military, these services were unavailable and the child's condition deteriorated until she required hospitalization. The child's mother was threatened with a charge of abandonment when she refused to take her daughter home from the hospital, as a means of protecting her other children and herself. The child was then placed in a residential facility. When private insurance ran out after 120 days, the mother considered sharing custody with the state to get her child additional help. In the meantime, her marriage broke up, and she moved her children out of her husband's military housing (Otto).

This story is common. Parents lose jobs, homes, and most importantly, their child's trust when they cannot access needed mental health care. When custody is relinquished, they lose the ability to make decisions about their child's education, physical health and mental health. Children are often denied the ability to be a part of family traditions, religious practice, and culture. This is a costly policy for the states because the child's mental health condition typically deteriorates to a serious level before parents have cause to explore custody relinquishment. The state must then pay for more expensive treatment and room and board for the child (Giliberti & Schulzinger, 2000).

B. Policy Recommendations

One seeming fix for the problem is to call for mental health parity in private plans and ignore the role of Medicaid. However, this approach is shortsighted. Mental health parity reforms have been stalled in Congress for years, and show little sign of moving soon. Even if parity legislation were to pass, it would be inadequate to care for those with serious conditions-- who are the subjects of custody relinquishment. The services that they need often have no physical counterpart and are not provided by private health plans. Numerous studies show the effectiveness of a comprehensive approach to children's mental health services, which include in-home and after school behavioral intervention by a trained therapist (National Mental Health Council Workgroup on Child and Adolescent Mental Health Development & Deployment, 2001). Medicaid is the only funding source for this package of services because of its requirement that children receive all necessary services to ameliorate or treat their conditions (Government Accountability Office, 2000b).

State Medicaid programs that have provided a comprehensive package of mental health services have been successful. The Kansas Medicaid waiver program allows children who would otherwise reside in an institution to access Medicaid coverage for an array of intensive home and community-based services. These include family training and support, wraparound facilitation and community support, independent living skills, and respite care. Mental health providers, advocates, families, and others in Kansas reported the program significantly decreased the incidence of custody relinquishment in Kansas. Families of children with severe mental health needs can use local mental health centers to receive services without turning to child welfare (Giliberti & Schulzinger, 2000).

One major policy recommendation is to expand the Kansas approach to other states. Thus, a key Medicaid reform is to modify the existing waiver requirements for children with serious emotional disturbance. Currently, states are permitted to apply for a waiver only for children who would meet a hospital level of care. Those children become eligible for Medicaid even though their parents' income exceeds Medicaid guidelines. Still, many children are served in residential treatment centers, not hospitals. HHS has interpreted current law such that only those who are hospitalized, and not those in residential treatment, are eligible for a waiver. Thus, Medicaid law may be amended to allow a waiver for those who meet the level of care in a residential treatment facility. This is not a minor technical point and has far reaching consequences for children. The modification would allow Medicaid to meet the realities of current mental health care, where residential treatment has become a common mental health service. According to a recent survey, officials from approximately 60% of the states that do not have a waiver for children with mental health needs report they primarily serve children in residential treatment facilities and would need this change of law to benefit from the waiver in their states (Bazelon Center for Mental Health Law, 2003).

In addition, state legislators are often more willing to consider waivers than other proposals because they can limit the number of recipients and cost. Thus, expanding the waiver program may be the most effective way of addressing the underlying lack of mental health services in a state. Maryland, for example, applied for a waiver for children residing in their residential treatment facilities and was rejected on the ground that current law allows waivers for those in a hospital or at risk of entry into a hospital. Because Maryland's mental health system provides less hospital services than residential treatment, it has been unable to use the waiver process effectively. As a result, the practice of custody relinquishment continues in the state. (Giliberti & Schulzinger, 2000; Otto, 2005).

This proposed change to Medicaid has been set forth in two ways: (i) as a demonstration project allowing a set number of states to apply for a waiver for children meeting a residential treatment level of care, and (ii) as a change in law applicable to states. The demonstration project is included in the President's FY 2006 budget under the New Freedom Initiative (U.S. Department of Health & Human Services, 2005) and in Section 4 of the latest version of the Family Opportunity Act (FOA), known as the Dylan Lee James Act (S. 183, 2005; H.R. 1443, 2005). However, given that only a few states likely will try this approach at the outset, the difference between a demonstration and a change of law is probably negligible. It will be critical, however, to gather data on the demonstration projects so the law may be changed at a later date, giving all states the opportunity to move forward.

A second recommendation is to enact the other provisions of FOA. FOA creates a Medicaid state option that allows families with incomes above current Medicaid limits, but below 300% of poverty, to "buy into" Medicaid and receive coverage. This would help the group of parents whose incomes are low, but not low enough to qualify for Medicaid coverage. This bill has bipartisan support in Congress, but has not been enacted thus far.

A third recommendation is to increase incentives to states to implement a waiver for children with mental health needs. A few states operate such a waiver. A study by the Bazelon Center for Mental Health Law (2003) found that the vast majority (65%) of states without this type of waiver cited the lack of state funds for the match as a critical barrier to providing these services. Enhancing the federal match would address this concern.

A current bill introduced in the Senate, The Money Follows the Person Act (MFP), would provide a one-year enhanced federal match for community-based services for previously institutionalized individuals, including children who resided in a hospital or institution for mental diseases (S. 528, 2005). If states were allowed to include children in residential treatment facilities, this would encourage states to move children out of these settings. One limitation of MFP is the requirement that a recipient initially reside in an institution. But, a recommendation could be proposed providing an enhanced federal match for a child who participates in the demonstration waiver projects of the FAO regardless of whether s/he resides in a facility or with family. This would allow children who are living in the community to avoid custody relinquishment and help prevent the problem, instead of addressing its consequences.

Finally, there is a bill pending before Congress — The Keeping Families Together Act — specifically designed to address custody relinquishment (H.R. 823, 2005; S. 380, 2005). The bill authorizes a family support grant program for assisting states in enacting reforms that lessen the incidence of custody relinquishment. It provides money to states to develop systems of care that avoid interagency conflict and provide funding for mental health treatment without requiring custody relinquishment. The same Congressional committees who have jurisdiction over Medicaid would not consider this bill because it creates a grant program, rather than a Medicaid entitlement. However, because the state Medicaid agency would be affected by and participate in these grants, this program should be added to any final Medicaid legislation.

None of these recommendations entirely eliminates custody relinquishment. But they would be a significant improvement over the current situation, where parents in over half the states are advised to give up their children because of a medical condition. Medicaid waivers have the ability to change this outcome significantly by allowing parents to access health care for their children, instead of foster care.

Some may argue that Medicaid should not be used in this way because it was designed as a poverty program and this benefits middle class families. But the fact that parents give up custody of their children is the clearest evidence that there is no other realistic alternative to Medicaid. It is the only program that currently has the capacity to serve this population (Government Accountability Office, 2000b). Few families can afford the full cost of treatment, which can exceed $100,000 per year if provided in a residential facility (Fitz-Gibbon, Rae & Shawn, 2002). To argue this is a problem solved by private insurance is to ignore legislative and practical reality, and consign thousands of children to foster care because of their mental health condition.

C. Further Research

If a demonstration project is enacted, it will be important to gather meaningful data on the number of children served, the costs, and the outcomes of the projects. Based on the experience of Kansas and other states with the waiver, it may be that the projects will lead to improved educational outcomes, decreased contact with law enforcement and greater ability to remain in a permanent home (Giliberti & Schulzinger, 2000). These data are critical to expanding the program beyond a few demonstration projects. In addition, it would be useful to have further research on the factors that contribute to a family's decision to give up custody of their child. By following a sample of families, policymakers may gain insight into additional solutions to this systemic problem.

IV. Addressing the Institutional Bias in Medicaid

A. The Policy Problem

Despite the addition of home and community-based waivers, the Medicaid program continues to evidence significant institutional bias. In 2004, approximately 65% of long-term care expenditures under Medicaid supported institutional services, and 35% supported community-based programs (Burwell, Sredl & Eiken, 2005). As noted, Medicaid covers optional and mandatory services. The institutional bias is caused largely by this distinction. Nursing home services are mandatory and community-based services and supports are optional under current Medicaid law (Kaiser Commission on Medicaid and the Uninsured, 2005).

There is also considerable variation across states regarding the availability of personal care, an optional service that provides assistance with activities of daily living such as grooming, toileting, cooking, and other tasks. Only twenty-eight states and the District of Columbia provide personal care services under their Medicaid plans (Kaiser Commission on Medicaid and the Uninsured, 2003). The federal statute provides little guidance to states regarding the level of need or impairment that should qualify for the service. Benefits range from a cap of 3.5 hours per day to no limits (Kaiser Commission on Medicaid and the Uninsured).

As a result there is disparity between states on the overall funding for community-based services. For example, states such as New Mexico, Oregon, and Alaska spend over 60% of their Medicaid long-term care resources in the community. In contrast, Mississippi, Arkansas, and Tennessee are spending over 75% of their long-term care resources on institutional care, and little on community-based services (Burwell, Sredl & Eiken, 2005). The lack of balance in expenditures forces individuals to leave their families and communities and move to institutional settings. The financial repercussions are such that they do not have a choice. This results in a wholesale change in their routines and ability to self-direct their schedules and care. Meals are at scheduled hours; bedtime, wake-up time, bath time, and other activities are set by staff, and not residents (Vladeck, 1980).

A significant number of nursing home residents express a preference for receiving services in the community. The Centers for Medicare and Medicaid Services (CMS) collects data on nursing home residents' attitudes. In the first quarter of 2005, 20.5% of the 1.4 million residents surveyed answered affirmatively that they wanted to return to the community (Centers for Medicare and Medicaid Services, 2005).

The fundamental issue is the lack of choice for individuals who need long-term services. Studies conducted by AARP (2003) indicate that their members would overwhelmingly choose home and community-based settings for long-term services rather than nursing homes. Among the general population of individuals age 50 and older, 58% would prefer home and community-based services, 23% assisted living and only 12% nursing homes. The disparity is greater for persons with disabilities, with 73% preferring to receive services at home, 17% in assisted living facilities and only 6% in nursing homes (AARP).

Comparing these choices with Medicaid expenditures on long-term care is a clear indication that Medicaid policy needs to be changed. Even though 73% of people with disabilities want to be served in the community, 65% of the resources are going to institutional care. Consumer choice is not driving this policy result. Medicaid financing incentives are causing the disparity.

B. Recommendations

There has been discussion of a "block grant" proposal for Medicaid, which would include long-term care, with states receiving a set amount and additional freedom from federal control. This is tempting to states who do not want to apply for waivers or seek federal approval for changes to their Medicaid program. However, such a recommendation may be short-sighted. Over the long term, states would incur little increase to that fund, but are likely to see additional demand for services as their population ages and new technologies and medicines become available (Center on Budget & Policy Priorities and Georgetown University Institute for Health Care Research & Policy, 2003).

If experience with other block grants holds true, the overall spending per person on long-term care will decline as numbers of recipients and other factors increase costs. If insufficient funds are available, nursing homes will be the likely recipients because there has been no discussion of changing the mandatory nature of that service, and because the state lobbying efforts of these homes exceeds the resources of community-based providers and consumers.

A more useful recommendation is to provide incentives to states to rebalance their long-term care systems. The Money Follows the Person Act (MFP) accomplishes that goal and has bipartisan support (S. 528, 2005). MFP would provide 100% federal match for the cost of community-based services and supports incurred in the first year as someone transitions from a nursing home or other facility to the community. After the first year, the state would receive its normal state match for continuing services.

Individuals are eligible for the MFP benefits if they reside in a nursing home or other institution for at least 6 months. This requirement ensures that the MFP program could save states considerable amounts over time because they are substituting expensive institutional care for less costly community-based services. This avoids the concern raised with new long-term care services that some of the beneficiaries of the service would never have entered nursing homes or other facilities and, thus, the additional service may not save money.

Another proposal that has grass roots support from disability activists is the Medicaid Community-based Attendant Services and Supports Act, also known as MiCASSA (S. 401, 2005; H.R. 910, 2005). This bill would add attendant services and supports to the list of mandatory Medicaid services. Only those who meet the level of care of a nursing facility or institution would qualify to receive services, but individuals would not have to enter a facility for an extended period to be eligible. Thus, MiCASSA compliments the MFP legislation because it takes a preventative approach and does not require institutionalization for eligibility. But, the primary barrier to this recommendation has been its cost. In 1997, the Congressional Budget Office scored the bill at $10—20 billion per year. More recent research of unmet need has placed the additional cost to the federal government closer to $1.5—4 billion per year (LaPlante, Kaye & Harrington, n.d.; see also LaPlante, Kaye, Kang, & Harrington, 2004). These estimates do not include the cost savings from moving individuals out of nursing homes into the community, which could be considerable. It would be prudent for the governors and others to factor in the potential for savings, but they have been reluctant to support this legislation because of a fear of the "woodwork effect" – people requesting services who would not otherwise seek institutional care – and the corresponding potential for increased costs at a time of state deficits.

C. Further Research

The MFP legislation includes an evaluation of the program. Extensive data should be collected on overall costs to the long-term care system before and after the demonstration, controlling for increases in enrollment due to an aging population and for inflation. This research should provide an analysis of a more comprehensive solution, which would include MiCASSA. Encouraging data may spur states that have not participated in the demonstration project to move forward with long-term care reform and increase the availability of home and community-based services.

V. Conclusion

Medicaid is the most important funding source for services needed by people with disabilities. The program includes many services that private health insurance plans do not cover. But, Medicaid has perverse incentives. Its current structure encourages outcomes that include parents being forced to give up their children to the state, and adults leaving families and communities to live in a nursing home though preferring to receive services at home and retain more control over their life. This policy note has set out several recommendations to address these practices. But, there will need to be political will to enact them into law.


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Otto, M. (2005, March 30). A family's painful journey: Quest for help for mentally iIl Md. child seemingly has no end. Washington Post, B1.

Page, L. (2005, April 27). Hearing on Long-term care and Medicaid: Spiraling costs and the need for reform. Before the Subcommittee on Health, Committee on Energy & Commerce, 109th Cong. (statement of Mr. Lee Page, Paralyzed Veterans of America). Retrieved July 13, 2005 from: http://energycommerce.house.gov/108/Hearings/04272005hearing1487/Page2436.htm

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Copyright (c) 2005 Mary Giliberti

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