Sebelius Gives States Guidance on How to Lower Medicaid Costs

Kathleen Sebelius on Medicaid Cost

Arizona is not alone in its struggle to Medicaid costs while struggling with budget issues. Many state governors have sought to limit the growing number of new enrollees.

HHS Secretary Kathleen Sebelius sent a letter to governors yesterday giving guidance on how to lower Medicaid cost. The letter focused on how to make Medicaid programs more efficient rather than limiting new enrollees.

Budgets push for lowering Medicaid cost

“In light of difficult budget circumstances, we are stepping up our efforts to help you identify cost drivers in the Medicaid program and provide you with new tools and resources to achieve both short-term savings and longer-term sustainability while providing high-quality care to the citizens of your states,” Sebelius wrote in the letter. “We are committed to responsiveness and flexibility, and will expedite review of state ideas.”

Medicaid is a voluntary federal-state health care program established in 1965 when Congress enacted Title XIX of the Social Security Act. Medicaid is the largest program providing medical and health-related services to America's poorest people.

According to the Kaiser Commission Report, Medicaid enrollment increased by nearly 6 million people between the start of the recession in December 2007 and December 2009. In December 2009, 48.6 million people were enrolled in state Medicaid programs, an increase of 1.6 million over June 2009 and 3.8 million over December 2008, an annual growth rate of 8.4%.


Federal funding is available to state Medicaid programs for both the provision of health care services and various administrative functions. The amount of federal funding available to a state is referred to as federal financial participation (FFP) and is determined by comparing a state's per capita income to the national average. The FFP for any state will range from 50 - 83%, depending on this per capita income formula. Each state then must make up the difference which has been difficult in this tough economic time especially as the number of eligible Medicaid recipients has increased.

Sebelius notes in her letter, “In 2008, roughly 40 percent of Medicaid benefits spending, $100 billion, was spent on optional benefits for all enrollees, with nearly 60 percent of this spending for long-term care services.”

Optional Medicaid services include in part: Podiatrists' services, physical therapy, speech therapy, prescription drugs, prosthetics, and rehabilitative services.

Some of the key areas of potential cost savings noted by Sebelius include:

  1. Changing Benefits. States can generally change optional benefits or limit their amount, duration or scope through an amendment to their state plan. In addition, states may add or increase cost sharing for services within limits.
  2. Managing Care for High-Cost Enrollees More Effectively. Just 5 percent of Medicaid beneficiaries account for more than half of all of Medicaid’s costs. These individuals often have fragmented care that contributes to higher costs. A new option to provide “health homes” to people with chronic illnesses, and initiatives to reduce unnecessary hospital readmissions, are just some of the strategies that can help improve care and lower costs.
  3. Purchasing Drugs More Efficiently. States have broad flexibility to set their pharmacy pricing. HHS will create a first-ever national database of actual acquisition costs that states can use to determine state-specific rates. HHS will also share proven approaches that states have used to drive down costs.
  4. Assuring Program Integrity. States will be able to use federal audit contractors to save funds and consolidate auditing efforts and will benefit from new, cutting-edge analytics, like predictive modeling, being developed to prevent fraud in the Medicare program. HHS’ Medicaid Integrity Institute is preparing a series of webinars for states to share best practices for assuring program integrity.

Related Story
Arizona Cuts Transplants to Low-Income to Balance Budget

Source press release, February 3, 2011
Medicaid Enrollment: December 2009 Data Snapshot



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