Medicaid: Three States' Experiences in Buying Employer-Based Health Insurance

Published by the Government Accountability Office on 1997-07-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  Commerce, House of Representatives

July 1997
                  Three States’
                  Experiences in Buying
                  Health Insurance

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division


      July 25, 1997

      The Honorable Thomas J. Bliley, Jr.
      Chairman, Committee on Commerce
      House of Representatives

      Dear Mr. Chairman:

      More and more members of low-income families now qualify for Medicaid1
      as a result of federal and state eligibility expansions in recent years. In
      fiscal year 1996, Medicaid expenditures totaled about $160 billion for
      about 37 million people who received services. Certain Medicaid
      beneficiaries also have access to employer-based group health
      insurance—for example, as an employee or through a working
      parent—which in some cases is more economical than Medicaid.

      In 1990, in an effort to achieve Medicaid cost savings, the Congress added
      section 1906 to the Social Security Act, requiring states to pay premiums,
      deductibles, and coinsurance on behalf of Medicaid beneficiaries eligible
      for enrollment in employer-based group health plans when it is
      cost-effective to do so. The states must also pay the insurance premiums,
      but not deductibles and coinsurance, for non-Medicaid-eligible family
      members if it is cost-effective and necessary to obtain private coverage for
      eligible individuals.

      Currently, little is known about the extent and effectiveness of the states’
      efforts to implement this law, which became effective January 1, 1991.
      Comprehensive, reliable national data are not readily available because
      states have been inconsistent in reporting their section 1906 expenditures
      to the Department of Health and Human Services’ (HHS) Health Care
      Financing Administration (HCFA), the federal agency responsible for
      overseeing the Medicaid program. In 1992, the HHS Office of Inspector
      General surveyed the states and found that at that time only 18 states had
      purchased employer-based insurance for Medicaid-eligible individuals.2

      You asked us to build upon the Inspector General’s study and further
      examine states’ implementation of section 1906. In discussions with your
      staff, we agreed to focus our work on selected states considered to be

       Medicaid is a joint federal-state health financing program established under title XIX of the Social
      Security Act to provide health care coverage for the poor, disabled, and medically needy.
      The HHS Office of Inspector General mailed a questionnaire to the 50 states and the District of
      Columbia in 1992. Two states did not respond.

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                   successful in implementing section 1906 to determine (1) the extent to
                   which these states are purchasing employer-based health insurance for
                   Medicaid-eligible individuals and achieving budgetary savings, as well as
                   the potential for greater savings; (2) the cost-effectiveness criteria these
                   states use and the populations and services covered; (3) the outreach
                   efforts used and barriers hindering states’ implementation of section 1906;
                   and (4) legislative proposals suggested by others to improve states’ efforts.

                   To conduct our work, we collected and analyzed information reported for
                   Health Insurance Premium Payment (HIPP) programs in Iowa,
                   Pennsylvania, and Texas, which state Medicaid officials, HCFA officials, and
                   other experts consider to be aggressive and successful programs in
                   implementing section 1906 and achieving cost savings. We also contacted
                   HCFA headquarters officials and three HCFA regional offices to obtain
                   information regarding states’ implementation of section 1906, and we
                   reviewed studies and other literature discussing state section 1906 efforts.
                   For more detailed information on our scope and methodology, see the

                   Although Iowa, Pennsylvania, and Texas are recognized as operating
Results in Brief   aggressive HIPP programs, the number of people enrolled in their programs
                   and their reported cost savings are relatively small. The three programs
                   are trying to identify and enroll more Medicaid eligibles, and state officials
                   anticipate enrollment increases in the future. Even with the expected
                   increases, however, the programs are expected to remain small when
                   compared with the total Medicaid populations in the three states. Texas,
                   for example, purchased employer-based health insurance for 5,507
                   Medicaid eligibles enrolled in its HIPP program as of August 1996 and
                   reported savings of $4.6 million (0.1 percent of its Medicaid expenditures)
                   for state fiscal year 1996.3 Texas officials said they would like their HIPP
                   program to grow to about 10,000 enrollees, which would represent about
                   0.4 percent of Texas’ total Medicaid population.

                   In assessing the cost-effectiveness of purchasing employer-based
                   insurance for Medicaid eligibles, Iowa, Pennsylvania, and Texas use
                   criteria designed to enroll anyone whose expected Medicaid costs exceed
                   the total of the premiums, deductibles, expected coinsurance, and
                   program administrative costs. The three states do not target their
                   programs to only those populations with high-cost medical conditions,

                    Each time we refer to a year in conjunction with state-reported data, we are referring to the states’
                   fiscal years. Iowa’s and Pennsylvania’s fiscal year is July 1 through June 30, and Texas’ fiscal year is
                   September 1 through August 31.

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             such as acquired immunodeficiency syndrome (AIDS) patients, because
             program officials believe this would limit potential cost savings. For
             example, Iowa officials reported a HIPP program caseload composed
             primarily of families with children.

             HIPP program outreach and enrollment efforts in the three states rely
             primarily on Medicaid eligibility workers to identify those potential
             enrollees with access to employer-based insurance. The enrollment
             process, including the assessment of cost-effectiveness, also relies on the
             cooperation of Medicaid eligibles and their employers to provide needed
             information, such as health plan costs and benefits. A variety of barriers,
             however, limit the states’ effectiveness in identifying and enrolling
             Medicaid eligibles. For example, Medicaid eligibles do not always disclose
             their access to insurance coverage, and employers do not always respond
             to states’ requests for information on health plans.

             State Medicaid officials and health policy analysts have proposed
             legislative changes to address some of these barriers and improve HIPP
             program implementation throughout the country. For example, proposals
             have been made to require greater employer cooperation in enrolling
             Medicaid eligibles and parents of Medicaid-eligible dependents. Another
             proposal is to require that employers and insurers allow HIPP applicants to
             join employers’ health plans at the time Medicaid eligibility is established
             rather than having to wait for an open enrollment period limited to a
             certain time of the year.

             Section 1906 of the Social Security Act, enacted in the Omnibus Budget
Background   Reconciliation Act of 1990, requires that states use Medicaid funds to
             purchase employer-based group health insurance on behalf of
             Medicaid-eligible individuals if such insurance is available and it is
             cost-effective to do so. States must also purchase employer-based health
             insurance for non-Medicaid-eligible family members if this is necessary for
             Medicaid-eligible individuals to receive coverage and the insurance is still

             As defined by section 1906, an individual’s enrollment in an
             employer-based plan is cost-effective if paying the premiums, deductibles,
             and coinsurance is likely to be lower than a state’s expected cost of
             directly providing Medicaid-covered services. HCFA, which oversees the

              The states pay the premiums, deductibles, and coinsurance for Medicaid eligibles. For
             non-Medicaid-eligible family members, the states pay the insurance premiums but not the deductibles
             and coinsurance.

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Medicaid program, has provided the states with guidelines for calculating
cost-effectiveness, including a suggested formula for determining expected
deductible and coinsurance costs. States may use an alternative method
for determining cost-effectiveness after obtaining HCFA’s approval.

If an employer-based health plan is determined likely to be cost-effective,
individuals are required to enroll as a condition of their Medicaid
eligibility. However, a child cannot be denied Medicaid eligibility or
services because a parent does not enroll in an employer’s plan.

Medicaid eligibles enrolled in employer-based health plans are entitled to
receive full Medicaid benefits. The health plans become the primary
payers for the services they cover. The states must provide coverage for
those Medicaid services not included in the private plans. In addition,
according to HCFA, states are required to reimburse providers for enrollee
deductibles and coinsurance according to the employer-based plans’ fee
schedules rather than the state Medicaid fee schedules.

Federal Medicaid matching funds are available, at each state’s regular
matching rate,5 for premium, deductible, and coinsurance payments made
by the states for Medicaid eligibles. Federal matching funds are also
available for the premium payments made by states for noneligible family
members, but not for their deductibles, coinsurance, or other cost-sharing

The administration’s budget proposal for fiscal year 1998 would eliminate
section 1906 of the Social Security Act as part of an effort to “eliminate
unnecessary administrative requirements.” According to the
administration, section 1906 is not necessary because states have an
“inherent incentive” to move Medicaid beneficiaries into private health
insurance when it is cost-effective. Moreover, current, detailed,
“one-size-fits-all” federal rules hinder the states from designing programs
that most effectively suit local circumstances, according to the

 The federal government pays a percentage of each state’s cost of Medicaid benefits. The federal
matching rate for each state is determined by the state’s average per capita income and ranges from 50
to 83 percent.
 The administration’s fiscal year 1998 budget proposal included per capita spending limits for
Medicaid. The administration cited these spending limits as an increased incentive for states to
purchase cost-effective private health insurance for Medicaid beneficiaries. However, the per capita
spending limits were not included in the subsequent agreement between the Congress and the
administration to balance the federal budget by 2002.

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                                       Although Iowa, Pennsylvania, and Texas have implemented HIPP programs
HIPP Programs’                         to enroll Medicaid eligibles and achieve budgetary savings, to date only
Enrollment, Savings,                   small portions of the Medicaid populations in these states are signed up.
and Growth Potential                   And, as expected, the Medicaid budgetary savings achieved in the three
                                       states have also been relatively small. None of the state officials we talked
                                       with expect their HIPP programs to enroll large numbers of Medicaid
                                       eligibles in the future.

Enrollment Levels and                  As a percentage of the total state Medicaid population, Iowa’s HIPP
Savings Achieved                       program enrollment was the largest of the three states. In June 1996, Iowa
                                       had 2,504 Medicaid eligibles enrolled in its HIPP program, representing 0.8
                                       percent of the approximately 333,500 Medicaid eligibles in the state. For
                                       1996, Iowa’s HIPP program reported an estimated savings of $2.4 million
                                       (0.2 percent of Medicaid expenditures). Table 1 shows HIPP program
                                       enrollment and estimated Medicaid savings reported to us by each of the
                                       three states included in our evaluation.

Table 1: HIPP Program Enrollment and
Estimated Budgetary Savings in Three                                                                                          Estimated
States, 1996                                                                                              Estimated        savings as a
                                                                                  Percentage of           budgetary       percentage of
                                                                  Number of      state Medicaid          savings (in           Medicaid
                                                                  enrolleesa        populationa            millions)       expenditures
                                       Iowa                             2,504                  0.8%              $2.4               0.2%
                                       Pennsylvania                     4,700                  0.3                 9.7              0.2
                                       Texas                            5,507                  0.2                 4.6              0.1
                                       Note: The estimated budgetary savings were reported for each state’s fiscal year 1996.
                                        The program enrollment data were provided as of a specific month, which differed for each
                                       state: Iowa as of June 1996, Pennsylvania as of January 1997, and Texas as of August 1996.

Some Program Growth                    Because Iowa, Pennsylvania, and Texas are trying to identify and enroll
Expected                               more people in their HIPP programs, state officials expect enrollment levels
                                       to increase. The anticipated increases and potential budgetary savings,
                                       however, would remain modest.

                                       Iowa officials expect their HIPP program enrollment to rise because the
                                       Iowa Department of Human Services’ request for an increase in its 1998
                                       appropriation for additional staff was approved by the state legislature.
                                       The officials said the appropriation increase, effective July 1, 1997, will
                                       allow the size of the department’s HIPP unit to grow from 7 to 14 staff, and

                                       Page 5                                    GAO/HEHS-97-159 Employer-Based Health Insurance

2 computer specialists will be added to enhance the unit’s automation
capabilities. The officials predicted HIPP program enrollment will increase
by as much as 30 percent, as the additional staff will likely process more
HIPP applications and help eliminate the backlog that has existed. With a
30 percent increase, program enrollment would constitute 1 percent of
Iowa’s total Medicaid population.

Pennsylvania’s HIPP program, which started in 1995, has grown steadily.
Pennsylvania officials said they are not sure when enrollment will level off
but believed the program has considerable room for growth. Texas
officials said they would like to reach an enrollment level of about 10,000.
This goal would almost double the August 1996 enrollment, representing
less than 0.4 percent of Texas’ total Medicaid population.

Iowa and Texas officials, as well as a HCFA official, noted that some states
may be unlikely to start or expand HIPP programs as they focus their
Medicaid programs on managed care. Such states may believe it is cheaper
and administratively easier to include Medicaid eligibles in contracted
managed care plans rather than operate a separate HIPP program at the
same time. One official noted that when the cost of employer-based
insurance is compared with that of paying a Medicaid managed care plan,
it does not appear as cost-effective as it does when it is compared with
Medicaid fee-for-service program costs. Other officials said some states
have simply ignored employer-based insurance because of their increased
attention and emphasis on Medicaid managed care.

Contrary to what some other state officials may believe about the
practicality of HIPP programs coexisting with managed care, Iowa and
Texas HIPP officials expect their HIPP programs to remain viable and
cost-effective as managed care expands in those states. The officials said
that buying employer-based insurance in their HIPP programs can be less
costly than paying monthly payments to Medicaid managed care plans in
Iowa and Texas. According to the officials, this is primarily because
employer-based insurance plans sometimes can provide coverage for any
size family for the same premium, while state payments to Medicaid
managed care plans are made for each family member covered. They also
noted that because employers typically contribute to the cost of the
insurance premiums for HIPP enrollees, the state does not have to pay the
entire amount.

A Texas official said another reason the Texas HIPP program will remain
viable as Medicaid managed care expands is that the state plans to place

Page 6                          GAO/HEHS-97-159 Employer-Based Health Insurance

                              all new Medicaid eligibles who have access to employer-based insurance
                              in the Medicaid fee-for-service program, at least initially. Starting in the
                              spring of 1998, such potential HIPP enrollees will not be allowed to join a
                              Medicaid managed care plan unless their employer-based health insurance
                              is determined not to be cost-effective. Texas’ intent is to prevent
                              enrollment in Medicaid managed care plans, and thus the accompanying
                              monthly payments to such plans, when the state can achieve greater cost
                              savings by enrolling Medicaid eligibles in the HIPP program.

                              Iowa, Pennsylvania, and Texas include any Medicaid eligibles in their HIPP
Cost-Effectiveness            programs who have access to employer-based health insurance and whose
Criteria, Services            expected Medicaid costs exceed the costs associated with purchasing the
Provided, and                 insurance. The programs do not focus on only those with high-cost
                              medical conditions because program officials believe this would limit
Populations Covered           potential cost savings. Each of the three states provide their HIPP enrollees
                              with coverage for all Medicaid services not included in the employer-based
                              insurance plans.

States Use Own                The three HIPP programs essentially consider an insurance plan to be
Cost-Effectiveness Criteria   cost-effective if the expected Medicaid costs7 of a Medicaid eligible exceed
                              HIPP insurance costs, including premiums, deductibles, any expected
                              coinsurance, and HIPP program administrative costs. The programs use
                              their own criteria for assessing cost-effectiveness, rather than following
                              HCFA’s suggested guidelines. A major difference is that the programs base
                              estimates of coinsurance costs on their Medicaid fee schedules. This
                              produces lower estimates of coinsurance payments and results in more
                              insurance plans determined to be cost-effective and more people enrolled.

                              The cost-effectiveness criteria that the three states use do not restrict or
                              target HIPP program enrollment to only those Medicaid eligibles expected
                              to incur high medical costs. The Iowa program requires a minimum
                              projected savings of only $5 per month per household. The Pennsylvania
                              and Texas programs do not require any minimum monthly savings for a
                              plan to be considered cost-effective. Officials from the three programs said
                              that Medicaid savings are increased by enrolling more than just high-cost
                              Medicaid eligibles. A Pennsylvania official noted, however, that the state’s
                              program gives priority to enrolling those with “special conditions” (for
                              example, pregnant women, AIDS patients, people needing an organ

                               The three programs estimate each HIPP applicant’s likely Medicaid costs on the basis of the
                              applicant’s past medical bills and/or the Medicaid costs of beneficiaries with similar demographic
                              characteristics and medical conditions.

                              Page 7                                      GAO/HEHS-97-159 Employer-Based Health Insurance

transplant), and this has resulted in increased Medicaid cost savings as
reflected in the program’s estimated $9.7 million savings for 1996.

The Iowa program considers an employer-based health plan that provides
comprehensive medical coverage8 to automatically be determined
cost-effective when the plan provides coverage to a Medicaid-eligible
pregnant woman; the employee’s share of the premium cost is $50 or less
per month for a one-person Medicaid-eligible household; or the employee’s
share of the premium cost is $100 or less per month for households of two
or more Medicaid eligibles. An Iowa HIPP official explained that the $50
and $100 criteria were established for an automatic determination of
cost-effectiveness because the program wanted to reduce the
administrative work load involved in processing its backlog of HIPP
applications. The official said the actual cost-effectiveness of plans with
these premium amounts has been analyzed and such plans are virtually
always cost-effective, primarily because the plans provide comprehensive
medical coverage. On the very few occasions when such plans were found
not to be cost-effective, the Medicaid eligibles were enrolled anyway
because of the program’s established criteria.

The three programs have devised cost-effectiveness assessment formulas
that result in lower estimates of HIPP enrollees’ coinsurance costs than if
HCFA’s suggested guidelines were used. HCFA’s cost-effectiveness guidelines
take into account the requirement that HIPP programs pay coinsurance and
deductible costs for covered services according to the employer-based
plans’ fee schedules. However, the three HIPP programs pay coinsurance
based on their Medicaid fee schedules, which are generally lower and may
allow the programs to avoid paying coinsurance.9 If the HIPP programs
used HCFA’s guidelines, their cost-effectiveness assessments would
overstate the expected coinsurance payments, and fewer insurance plans
would be determined to be cost-effective. Iowa, for example, does not
factor in any coinsurance costs in its cost-effectiveness analysis because
its actual coinsurance obligation for HIPP enrollees is negligible, according
to an Iowa HIPP program official.

 The Iowa HIPP program does not have a strict definition of comprehensive medical coverage.
However, program officials said they generally consider such coverage to be for services such as
inpatient hospital care, outpatient hospital care, physician services, laboratory services, and X rays.
 For example, if a provider billed an employer-based insurance plan $100 for a covered medical
service, and the plan allowed $100 for the service and paid 80 percent of the cost, or $80, the HIPP
program would be responsible for paying $20 in coinsurance if it used the employer-based plan’s fee
schedule. However, if the HIPP program used the Medicaid fee schedule and that schedule allowed $80
for the service, the program would not pay the $20 coinsurance.

Page 8                                       GAO/HEHS-97-159 Employer-Based Health Insurance

All Medicaid Services Are   In assessing the cost-effectiveness of employer-based health insurance
Covered                     plans, the three HIPP programs consider which services the plans cover.
                            HIPP program enrollees are entitled to all of the states’ Medicaid benefits,
                            including those not included in the employer-based insurance plans. The
                            Texas program, for example, will not enroll a HIPP applicant unless the
                            insurance plan covers certain Medicaid services, including inpatient
                            hospital care, physician services, and prescription drugs.

                            The state Medicaid programs provide “wrap-around” coverage for services
                            that the insurance plans do not cover by paying claims submitted by
                            providers. Iowa and Pennsylvania HIPP officials, for example, said every
                            HIPP enrollee has a Medicaid card he or she must present to providers to
                            receive medical services. The cards indicate if a Medicaid eligible has
                            coverage by a private insurance plan and which services are covered. In
                            reading the cards, the providers can tell whom to bill, either a private plan
                            or the Medicaid program. In Pennsylvania, the HIPP enrollee must also
                            present a private insurance plan card.

                            As the three states receive provider claims for HIPP enrollees, they pay
                            deductibles and coinsurance costs as appropriate. The Iowa and
                            Pennsylvania HIPP officials noted that their Medicaid payment systems will
                            reject any provider claims that should have been submitted to a private
                            insurance plan.

More Than High-Cost         The HIPP program officials in the three states we reviewed reported having
Populations Enrolled        relatively few enrollees with high-cost medical conditions. The Texas HIPP
                            program, for example, reported that in 1996 only 11 percent of HIPP
                            enrollees were blind or disabled, and 10 percent were pregnant women or
                            newborns. Texas HIPP officials said they consider people in these groups to
                            be high cost. In contrast, 69 percent of the HIPP enrollees in Texas were
                            children, a group that typically incurs low medical costs, according to the
                            Texas officials.

                            Pennsylvania program officials told us that as of January 1997, about
                            22 percent of the HIPP enrollees were considered to have “special
                            conditions.” These included pregnant women, AIDS patients, and the
                            severely disabled. The officials said they could not provide a more detailed
                            breakdown, and their program does not maintain data on the enrollees by
                            other characteristics.

                            Page 9                           GAO/HEHS-97-159 Employer-Based Health Insurance

                          The Iowa HIPP program also did not have data available on the population
                          characteristics of its caseload. An Iowa official said the program was
                          mostly composed of families with children.

                          HIPP program outreach and enrollment efforts in the three states face a
Barriers to HIPP          variety of barriers. The programs are not able to identify all potential
Program Outreach          enrollees who have access to employer-based health insurance. When
and Enrollment            potential enrollees are identified, the programs often face additional
                          barriers in attempting to collect needed information from employers and
                          the potential enrollees themselves.

Processes to Identify     The three HIPP programs rely primarily on Medicaid eligibility workers in
Potential Enrollees Are   the field to identify potential HIPP enrollees. The eligibility workers
Limited                   communicate with potential enrollees when they first apply for Medicaid
                          eligibility, when their eligibility is periodically redetermined, and if they
                          later report new employment. In two of the states we contacted, HIPP
                          program officials said Medicaid eligibility workers are sometimes not
                          sufficiently knowledgeable about the states’ HIPP programs.

                          Medicaid eligibility workers in Pennsylvania and Texas refer identified
                          potential HIPP enrollees (for example, those who indicate they are
                          employed and have access to health insurance through their employer) to
                          their state’s HIPP program, which then contacts the employers and requests
                          information about health plan premium costs and benefits. In Iowa, the
                          eligibility workers send a form directly to employers requesting
                          information about earnings and health plan benefits and costs, collect the
                          completed forms, and forward copies to the HIPP program when employers
                          indicate health insurance is available. The HIPP programs need information
                          about each insurance plan’s premium costs and benefits package to
                          determine the cost-effectiveness of purchasing insurance.

                          Texas officials said there is a high turnover of eligibility workers in their
                          state. Consequently, many of them do not understand the HIPP program
                          and cannot adequately explain it to Medicaid eligibles. The officials
                          consider this a major barrier to program enrollment.

                          Pennsylvania HIPP officials also told us that eligibility workers need to be
                          more knowledgeable about the program so the workers can better identify
                          potential enrollees and explain the program to them. The officials believe
                          training eligibility workers about the HIPP program will increase Medicaid

                          Page 10                           GAO/HEHS-97-159 Employer-Based Health Insurance

                            eligibles’ awareness of it and result in greater enrollment. In April 1997, the
                            eligibility workers in Pennsylvania started automatically referring
                            potential enrollees to the HIPP program when they reapply for Medicaid
                            eligibility and report new employment, in addition to making referrals at
                            their initial application for Medicaid benefits. Program officials had
                            discovered that the eligibility workers were missing these opportunities to
                            identify potential enrollees. Two weeks after the eligibility workers started
                            referring potential HIPP program enrollees upon their reapplication and
                            reporting of employment, the number of referrals jumped from 470 in a
                            week to over 1,300.

                            In Iowa and Texas, potential HIPP enrollees may also be identified as a
                            result of computerized data matches of state employment information and
                            Medicaid eligibility information, which can help identify employed
                            Medicaid eligibles.10 However, according to HIPP officials, the employment
                            information is not always current. Frequently, identified Medicaid eligibles
                            are no longer working, have changed jobs, or no longer have access to
                            insurance. Iowa officials said this information has not been productive and
                            has not resulted in many enrollments. In Texas, only about 7 percent of the
                            active HIPP caseload in August 1996 had been identified through the use of
                            the computerized state employment data.

Some Potential HIPP         Some potential HIPP enrollees do not disclose their access to
Enrollees Do Not Disclose   employer-based health insurance even when they know about the HIPP
Insurance or Provide        program. In addition, potential enrollees who have been identified often
                            do not respond to the states’ requests for information. For example, an
Needed Information          individual may fail to provide the program with a requested insurance card
                            or paycheck stub showing a deduction for health insurance premiums.
                            Texas HIPP program officials cited “client non-responsiveness” as the
                            biggest barrier limiting the number of enrollees in their program. Iowa
                            officials also noted problems with potential enrollees not providing

                            According to the Texas officials, there are many reasons people do not
                            comply with requests for information and enroll in the HIPP program, and
                            convincing people to participate can be very difficult. Sometimes Medicaid
                            eligibles are afraid to disclose the necessary health plan information
                            because of an unfounded fear of losing their Medicaid benefits if they have

                              The Iowa data matches use computerized information from the Iowa Department of Employment
                            Services, which receives wage information from employers for all employees. The Texas HIPP
                            program obtains information from the Texas Work Force Commission database, which contains
                            information on all workers for whom an employer pays unemployment insurance.

                            Page 11                                 GAO/HEHS-97-159 Employer-Based Health Insurance

                          access to, or are already covered by, private insurance. Iowa officials said
                          apathy may be the primary reason Medicaid eligibles fail to provide
                          information regarding their health insurance. A 1996 report on Medicaid
                          and employer-financed health insurance coverage by the Institute for
                          Health Policy Solutions noted that Medicaid eligibles may not be eager to
                          disclose their insurance because to do so results in extra work for
                          themselves (that is, obtaining information on their employer’s health plan),
                          reveals their potential Medicaid status to their employer, and generates an
                          administrative burden for their employer.11

Employers Do Not Always   Another barrier to enrollment is that some employers do not respond to
Cooperate                 the states’ requests for information on health plan costs and benefits. This
                          information is needed to assess the cost-effectiveness of purchasing an
                          employer’s insurance.

                          The Institute for Health Policy Solutions report points out that there are
                          varying degrees of financial disincentives for employers to participate in a
                          Medicaid HIPP program. For example, an employer with mostly
                          minimum-wage employees may offer health insurance but have few
                          participating employees because many of them cannot afford the
                          insurance. If Medicaid is available to pay the employees’ costs, the
                          employer will have a larger number of employees for whom it must pay
                          the employer’s share of costs. Employers with fewer minimum-wage
                          employees are less affected. Small employers in certain states may also
                          face the possibility that their insurance premiums will increase if HIPP
                          enrollees added to the health plans are considered to be high risk (for
                          example, because of health status, where they live, or demographic
                          category such as age or gender). For self-insured employers, adding HIPP
                          enrollees to plans means there is a greater potential for having to pay more
                          claims. The Institute’s report noted that an additional disincentive to
                          employer cooperation is the administrative burden of providing the state
                          with copies of benefit plans and premium costs.

                          Iowa HIPP program officials told us it is difficult for them to get
                          information from employers, particularly self-insured employers covered
                          under the Employee Retirement Income Security Act of 1974 (ERISA). The
                          majority of employers contacted in Iowa failed to respond when first
                          asked to submit a copy of their health benefits plan or policy. In contrast,
                          Pennsylvania and Texas officials said that employers in their states

                            Institute for Health Policy Solutions, Improving Health Care Coverage for Low-Income Children and
                          Pregnant Women: Optimizing Medicaid and Employer-Financed Coverage Relations (Washington, D.C.:
                          Institute for Health Policy Solutions, Nov. 21, 1996).

                          Page 12                                   GAO/HEHS-97-159 Employer-Based Health Insurance

                           generally respond to HIPP program requests for health plan coverage and
                           contribution information. The officials in Iowa and Texas also noted,
                           however, that the states have no legal authority to require that employers
                           provide the needed health plan information.

Health Plan Enrollment     HIPP officials in the three states also cited limited health plan enrollment
Periods Are a Barrier to   periods as a barrier to enrolling Medicaid eligibles in HIPP programs. Many
HIPP Enrollment            employers allow employees to enroll in their health plans only at the start
                           of employment; during an annual open enrollment period; or at the time of
                           certain events, such as a marriage, divorce, or birth of a child. These
                           enrollment periods often do not coincide with application for Medicaid
                           eligibility or eligibility redetermination. As a result, many months can
                           elapse between the time someone applies for Medicaid and the next
                           opportunity to enroll in an employer’s health plan.

                           Iowa officials said health plan enrollment periods are sometimes an
                           impediment to enrolling Medicaid eligibles in the HIPP program. The
                           officials said that if the establishment of an individual’s Medicaid eligibility
                           was considered to be one of the events permitting enrollment in employer
                           health plans, their HIPP program could enroll more people. Pennsylvania
                           officials said they need to obtain the employer’s cooperation to enroll a
                           Medicaid eligible in an employer-based plan outside of an open enrollment
                           period, and employers have allowed such enrollments roughly 50 percent
                           of the time the situation has come up. While open enrollment periods are
                           not considered a significant problem for the Pennsylvania HIPP program,
                           the officials believe there would be more enrollments if establishing
                           Medicaid eligibility was considered to be an event that permits employees
                           to enroll in employer health plans. Texas officials believe that such a
                           change would significantly increase enrollment in their program.

                           States and others have proposed legislative changes to address some of
Legislative Remedies       the HIPP program implementation barriers. These proposals seek to
Proposed to Improve        increase program enrollment and Medicaid cost savings.
HIPP Program
Require Greater            An Iowa Department of Human Services official suggested that the
Cooperation From           Congress require greater cooperation from employers, including
Potential Enrollees and    employers with self-insured plans under ERISA, to prevent noncooperating
                           parents from failing to enroll Medicaid-eligible dependents in available

                           Page 13                           GAO/HEHS-97-159 Employer-Based Health Insurance

                           employer health plans. Another Iowa HIPP official suggested that such
                           legislation could require employers to (1) provide the state with
                           information about the health benefits they offer their employees and
                           (2) enroll Medicaid-eligible employees, or parents of Medicaid-eligible
                           dependents, in available health insurance plans when requested to do so
                           by the state, even without the employees’ cooperation.

                           The Institute for Health Policy Solutions’ report contains another proposal
                           to require greater employer cooperation. According to the Institute, under
                           ERISA, it is not clear that self-insured employers have any obligation to
                           furnish health plan benefit and cost information to employees who are not
                           enrolled in an employer-based plan, except during open enrollment
                           periods. The states are not authorized to obtain this information on their
                           own. Without plan benefit and cost information, state Medicaid agencies
                           cannot determine if it is cost-effective to purchase employer-based
                           insurance coverage in a HIPP program. The Institute’s report suggests it be
                           clarified12 that under ERISA, eligible employees have the right to obtain
                           information about health plan benefit coverage and premium amounts,
                           even if they are not participating in the plan. The Institute concluded that
                           federal action could clear the way for states to obtain this information.
                           Without federal action, state efforts to require greater employer
                           cooperation would not significantly affect self-insured plans.

Allow Enrollment in        Another proposal is that employers and insurers be required to treat the
Employer Health Plans at   establishment of Medicaid eligibility as an event permitting enrollment in
Any Time                   employers’ health plans. This would eliminate the problem of established
                           health plan enrollment periods not coinciding with Medicaid eligibility

                           The Institute for Health Policy Solutions proposed amending ERISA to make
                           the establishment of Medicaid eligibility a “qualifying event” for enrolling
                           in an employer’s insurance plan outside the open enrollment period, which
                           normally occurs once a year. In a similar proposal, an Iowa official
                           suggested that a provision be added to section 1906 allowing states to
                           enroll Medicaid recipients in an insurance plan at any time. The Texas HIPP
                           program officials we met with said there are no laws establishing which
                           events permit enrollment in employer-based health insurance plans.
                           Instead, these events are agreed upon by employers and their health plans.

                            According to the report, this clarification may not require a legislative change but may be able to be
                           accomplished by revising ERISA regulations.

                           Page 14                                      GAO/HEHS-97-159 Employer-Based Health Insurance

                            Federal or state law could be enacted to permit enrollment in a health plan
                            whenever an individual becomes qualified for Medicaid (if the individual is
                            otherwise qualified to enroll in the employer-based plan). In the case of
                            self-insured plans under ERISA, federal legislation would be needed to
                            require that employer-based plans comply with this requirement. To obtain
                            cooperation from those employers who do not self-insure and depend on
                            health insurance policies regulated by the states, states could—under their
                            own legislative or regulatory authority—require that insurers consider
                            Medicaid eligibility a qualifying event for enrollment in an employer’s
                            health insurance plan outside the open enrollment period.

States May Have Authority   In its May 1994 report,13 the Inspector General recommended that HCFA
to Use Medicaid Fee         propose legislation allowing the states to pay employer-based health
Schedules                   insurance plan deductibles and coinsurance using Medicaid fee schedules
                            instead of the individual plans’ fee schedules as currently required.14 In
                            making this recommendation, the Inspector General relied on HCFA’s
                            interpretation of section 1906 requirements that states must use
                            employer-based health plan fee schedules. Our analysis of section 1906,
                            however, suggests that another reasonable interpretation is that states
                            already have the authority to use their Medicaid fee schedules when
                            paying deductibles and copayments.

                            In its 1994 report, the Inspector General said that 17 of the 18 states
                            reporting the purchase of employer-based insurance for Medicaid eligibles
                            reimbursed providers according to their state Medicaid fee schedules.
                            They did so because using the individual plans’ fee schedules is more
                            costly to Medicaid and requires increased administrative expenses.

                            All three state HIPP programs included in our review use Medicaid fee
                            schedules for reimbursing providers. HIPP officials we contacted
                            commented on the difficulty that would be involved in trying to use
                            employer-based health plans’ fee schedules. According to the officials,
                            there are many health plans and each has its own fee schedule, resulting in
                            a wide variety of cost-sharing arrangements. Some officials called the
                            requirement to use the employer-based plans’ fee schedules “unworkable,”
                            “administratively impossible,” and “the largest stumbling block for states

                              HHS, Office of Inspector General, Medicaid Payments of Premiums for Employer Group Health
                            Insurance, OEI-04-91-01050 (Washington, D.C.: HHS, May 1994).
                              In commenting on the Inspector General’s draft report, HCFA deferred comment on this
                            recommendation and noted that the requirements of section 1906 could change under proposed major
                            health reform plans the Congress was then considering. More recently, the administration’s budget
                            proposal for fiscal year 1998 would eliminate section 1906 altogether.

                            Page 15                                   GAO/HEHS-97-159 Employer-Based Health Insurance

               trying to implement these [section 1906] provisions.” The Institute for
               Health Policy Solutions report also noted that the current cost-sharing
               requirement can be cumbersome and costly to administer.

               According to HCFA, section 1906 requires states to reimburse providers for
               enrollee deductibles and coinsurance according to the employer-based
               plans’ fee schedules, rather than state Medicaid fee schedules. However, it
               is not clear to us that this is the only reasonable conclusion to be reached
               under section 1906, and it is one that may undermine states’ efforts to
               achieve Medicaid cost-savings.

               In establishing the requirement for states to enroll Medicaid beneficiaries
               in employer-based plans and pay deductibles and coinsurance, section
               1906 refers to another provision of Medicaid law that establishes
               requirements for Medicaid payments when a beneficiary is already
               enrolled in an employer-based (or other) health plan. That law allows
               states to use their Medicaid fee schedules when paying deductibles and
               coinsurance after a private insurance plan has paid for Medicaid-covered
               services.15 In addition, language related to section 1906 in the 1990
               congressional Conference Report suggests to us that the use of Medicaid
               fee schedules is authorized. Specifically, the report states that the House
               bill “[r]equires a provider treating beneficiaries enrolled under a plan to
               accept the greater of the plan’s reimbursement rate or the Medicaid rate as
               payment in full, and prohibits a provider from charging the beneficiary or
               Medicaid an amount that would result in aggregate payment greater than
               the Medicaid rate.”16 The language in the final version was slightly
               different than that in the House bill, but we interpret the quoted
               description as being equally applicable to the final language. It appears to
               us that existing law may provide adequate statutory authority for the
               states to continue to use their Medicaid fee schedules without the need for
               congressional action.

               Iowa, Pennsylvania, and Texas HIPP programs to enroll Medicaid eligibles
Concluding     and achieve Medicaid cost savings have encountered barriers that have
Observations   limited their size. Although enrollment in these programs is expected to

                 Under section 1902(a)(25) of the Social Security Act, private insurance coverage for Medicaid
               recipients is treated as a third-party liability. According to this law, when employer-based health
               insurance plans are liable to pay for care or services covered by Medicaid, the employer-based plans
               provide the primary coverage, and states then pay deductibles and coinsurance using their Medicaid
               fee schedules.
                 H.R. Conf. Rep. No. 101-964, at 833 (Oct. 27, 1990).

               Page 16                                       GAO/HEHS-97-159 Employer-Based Health Insurance

                     increase, the likely increases will remain modest when compared with the
                     total Medicaid populations and expenditures in these states.

                     Moreover, some state and HCFA officials believe the spread of Medicaid
                     managed care may dissuade some states from starting new HIPP programs
                     or expanding existing ones. Such states may decide it is less costly or
                     administratively easier to include Medicaid eligibles in managed care plans
                     rather than operate a separate HIPP program. In contrast, Iowa and Texas
                     officials said they expect their HIPP programs to remain cost-effective and
                     viable as managed care expands in their states.

                     The states’ implementation of federal welfare reform legislation may also
                     have an impact on HIPP programs. Over time, increased numbers of
                     formerly unemployed welfare recipients may leave the welfare rolls and be
                     hired into jobs, including people who are currently enrolled in Medicaid
                     programs or parents of children who are covered by Medicaid. Many of
                     these newly employed people may gain access to employer-based health
                     insurance and become eligible for enrollment in a state HIPP program. This
                     could increase the potential for states to establish or expand HIPP
                     programs and realize associated Medicaid cost savings. However, the
                     extent to which states will do so is uncertain given the existing barriers to
                     such a program and the increasing role of managed care in state Medicaid

                     Because of these uncertainties and the administration’s proposal that
                     section 1906 requirements be eliminated, it is not clear that legislative
                     changes by the Congress to improve HIPP program implementation are
                     warranted at this time. States could, however, decide to take action on
                     their own to remove some of the barriers that HIPP programs face in their
                     efforts to identify and enroll Medicaid eligibles. Such actions could include
                     establishing laws or regulations similar to the federal legislative changes
                     that have been proposed. For example, states may be able to use
                     legislation or regulation, whichever is most appropriate, to obtain greater
                     employer cooperation in providing health plan information to the state and
                     in helping to enroll employees who are parents of Medicaid-eligible
                     children. Without federal action to address ERISA preemption, however,
                     any such state initiatives would have no significant impact on self-insured

                     We provided a draft of this report to the HCFA Administrator; HIPP program
Agency Comments      officials in Iowa and Texas; and an official of Pennsylvania’s Department
and Our Evaluation

                     Page 17                          GAO/HEHS-97-159 Employer-Based Health Insurance

of Public Welfare, Office of Administration. We discussed the draft with
officials of the Office of Beneficiary Services within HCFA’s Medicaid
Bureau and officials from the three states. With one exception, these
officials generally agreed with our findings.

While the HCFA officials agreed that it would be beneficial for states to
have the authority to pay deductibles and coinsurance using their
Medicaid fee schedules, they did not agree with our conclusion that
section 1906 may be interpreted to provide such authority and believed
that legislative action would be required to permit this. We continue to
believe, however, that section 1906 can be interpreted to authorize states
to pay deductibles and coinsurance using their Medicaid fee schedules,
based on the reference in section 1906(a)(3) to section 1902(a)(25),
which—in a related context—permits states to pay deductibles and
coinsurance using their Medicaid fee schedules. The legislative history
also supports this view. At HCFA’s request, we agreed to provide additional
information regarding our legal interpretation, and the officials indicated a
willingness to reexamine their position at a later date.

HCFA and state officials also provided technical comments that we
incorporated as appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after the
date of this letter. At that time, we will send copies of this report to the
Secretary of HHS; the Administrator, HCFA; and other interested parties. We
will make copies available to others on request.

If you or your staff have any questions, please call me or Kathryn Allen,
Acting Associate Director, at (202) 512-7114. Other major contributors to
this report were Ron Viereck, Howard Cott, and Craig Winslow.

Sincerely yours,

William J. Scanlon
Director, Health Financing
  and Systems Issues

Page 18                           GAO/HEHS-97-159 Employer-Based Health Insurance
Page 19   GAO/HEHS-97-159 Employer-Based Health Insurance

Scope and Methodology

             We focused our work on the HIPP programs implemented in three states:
             Iowa, Pennsylvania, and Texas. We selected these programs because our
             preliminary work showed that they are considered by state Medicaid
             officials, HCFA officials, and other experts as aggressive and successful
             programs achieving cost savings. Our findings from these three HIPP
             programs cannot be generalized to other states’ HIPP programs.

             We conducted structured interviews to obtain information from HIPP
             program officials in the three states. In addition, we collected and
             analyzed documentation on HIPP program operations from the time
             enrollment started in each state (Iowa, 1992; Pennsylvania, 1995; and
             Texas, 1995). All of the information we obtained was reported to us by the
             program officials, and we did not verify its accuracy.

             We contacted HCFA headquarters in Baltimore, Maryland, to obtain
             information regarding HCFA’s section 1906 requirements for states, total
             section 1906 expenditures reported to HCFA by all states, and other
             information on how the states generally are implementing section 1906.
             We also contacted HCFA regional offices in Dallas, Texas; Kansas City,
             Missouri; and Philadelphia, Pennsylvania, to obtain Medicaid state plan
             amendments filed with HCFA by the three states for implementation of their
             HIPP programs. In addition, we reviewed relevant studies discussing states’
             section 1906 efforts.

             We conducted our review between November 1996 and June 1997 in
             accordance with generally accepted government auditing standards.

(101526)     Page 20                         GAO/HEHS-97-159 Employer-Based Health Insurance
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