The December 2014 State Medicaid Directors Letter (SMDL) on "Free Care"


The December 2014 SMDL is just another round in the five decade long battle between the Medicaid program and the nation’s public schools. The more detailed discussion below hopefully provides a little more background so the reader can better understand the forces at work. The more conservative shift in Washington means we should expect the opportunity presented by this removal of this bar to full Medicaid coverage of health services provided by public schools to be relatively short lived. Changes in administrations, and future budget battles, will undoubtable lead to more efforts to curtail Medicaid payments and, with that, payments for public education health services. It is therefore imperative that states implement this expanded coverage now covering such things as services to children covered under the Rehabilitation Act of 1973 (504’s), drug counseling, vision test, hearing test, etc. States delaying to long will likely find in that changes in the future will block them from doing so.

Detailed Discussion

Warning most will find this boring unless they are interested in some of the how’s and why’s we got here.

In December 2014 federal Medicaid formally recognized that it had no legal support for its free care principle. This was almost 10 years from the date its Department of Health and Human Services’ (HHS) administrative law court, the Departmental Appeals Board (DAB), issued its decision telling HHS’s Center for Medicare and Medicaid Services (CMS) exactly that. During the 10 years since the decision CMS has continued to enforce its "free care" principle denying funding for essential child health services provided by public schools. While CMS has given no explanation for the sudden change it does provide a way for additional federal funding to flow to public education without the need for any congressional action.

To understand why there was such a "free care principle" we must look at the history of the Medicaid program and the financial pressures it places on federal and state program managers. Throughout this explanation you will find historical references to the annual cost of the national Medicaid program. Keep in mind with each increase in cost there were, and are, increasing demands on program managers to get the programs cost under control. Equally important is over the last 50 years the nation has faced one crisis after another including the near bankruptcy of states and major cities, repeated recessions, rapid inflation, and wars. All created pressure on program managers to get cost under control. Yet the structure of the Medicaid program leaves very little to be controlled directly by federal managers. Over 65% of its cost pays for services to the elderly and disabled. Much of that is spent on institutional care. Another 20% is for child health services and much of that is spent on children with severe impairments. So schools are one of the few high cost areas where federal managers could have a direct impact on the growth of program cost.

The Chronology of the Conflict

The Medicaid program was signed into law by President Johnson on July 1, 1965. It is 50 years old this year. In 1966 Medicaid cost $.09 billion. From its start it included coverage of health services for eligible children. In 1967 congress the requirement mandating it provide to children early and periodic screening, diagnosis and treatment. This Medicaid sub-program became known as EPSDT. Its goal is to provide children with preventive health care that identifies and treats health problems before they become severe. Early treatment correcting childhood conditions often prevents a person living a life with severe impairments or disabilities that prevent them from becoming productive adults. By 1970 annual Medicaid cost had grown to $5 billion and federal and state manager were scampering to keep up with the growth. Not the ideal time to kickoff EPSDT.

From EPSDT’s inception federal and state finance officials had grave concerns about its cost. EPSDT feared as potentially adding an uncontrollable demand for services stretching the capacity of the health care system beyond its capacity and driving the program cost uncontrollably higher. This would add to the budgetary issues states and the federal government. As a result virtually every imaginable administrative tool was used by all program managers to hold growth in check. This included simply not implementing EPSDT. The delays in setting up the program became so obvious that in 1976 congress initiated an investigation. While it found a number of reasons why EPSDT was not being implemented its report states the Secretary of the Department of Health, Education and Welfare (the responsible department) said the delays were caused "…mainly by a concern over the impact on federal and state budgets and on states' medical resources…."

By 1975 annual Medicaid cost had more than doubled to $13.1 billion, and EPSDT had yet to be implemented. Managers were now facing a program widely thought to be out of control with no end to its growth in site. Also, there were now many reports of widespread program fraud costing tens of millions of dollars a year. This ongoing financial battle over the cost of Medicaid health services was further complicated by the passage of the Rehabilitation Act of 1973 and The Education for All Handicapped Children Act of 1975. This promised to place even more demands on the program. However, for child health services these laws resulted in the primary burden necessary daily health service to on the local education agencies. A very pleasing event for our Medicaid program managers as parents now could demand those services directly from their public school. For Medicaid it meant services could be denied or withheld and the child would still get them through the local public school. After all the public schools were first in line, had the children, and were required to provide the services. Medicaid had its perfect escape route away from the EPSDT cost as public schools were responsible for health services and they were not recognized health care providers, they were just educators. Everyone knows educators don’t provide health services like health care providers do. They don’t follow the "medical model". This remained the established reason for Medicaid not paying public schools until the late 1970’s. Even with this successful diversion of its financial responsibility by 1980 the annual cost of Medicaid virtually doubled again reaching over $25 billion.

In the late 1970’s at least two states realized they were missing out on federal Medicaid funding for cost of care provided in intermediate care facilities for the mentally retarded (ICF/MRs). So they began claiming Medicaid reimbursement for some ICF/MRs cost. The earliest references found were for claims filed by the states of Oklahoma and Massachusetts for services dating back to at least 1978. This marks the start of the break between states and federal Medicaid on the coverage of cost associated with education related health activities. Federal Medicaid took disallowance actions against both states. These actions were based on a number of issues including the impact of the "free" requirement placed on educational agencies who received federal education money. In it disallowance the federal Medicaid agency took the position that "…Medicaid reimbursement was prohibited for any service provided to the handicapped as part of a "free appropriate public education….".

While this was going on federal Medicaid agency issued its 1980 "EPSDT guide for Education Agencies". This guide contains the earliest written federal statement defining "free care" and explaining how the free care principle applies to schools. The guide stated:

"An important requirement related to billing for Medicaid covered school-based services is the issue of "free care." From the outset of the Medicaid program, a principle basic to public assistance has applied to Title XIX, in that Medicaid funds may not be used to pay for services that are available without charge to everyone in the community. Free care, or services provided without charge, are services for which there is no beneficiary liability and for which there is no Medicaid liability. In applying the free care principle to determine whether medical services are provided free of charge and, thus, there is no payment liability to Medicaid, a determination must be made whether both Medicaid and non-Medicaid beneficiaries are charged for the service. Providers of Medicaid services must have the authority to charge for their services and utilize this authority, before Medicaid will make payment. If only Medicaid recipients or their third parties are charged for the service, the care is free and Medicaid will not reimburse for the service."

In 1985, with annual Medicaid cost now running at over $41 billion, a federal district court overturned the Massachusetts disallowance. The litigation of this disallowance continued through the federal court system until 1988 when the Supreme Court issued a final decision in favor of Massachusetts. Also in 1988 congress, because of this disallowance action, clarified HHS could not refuse to pay for services just because they were included in a child’s IEP. It is important to note the federal Medicaid statutes did not, and does not, prohibited coverage of public school health services. That prohibition was solely the creation of federal Medicaid. If fact one would think the EPSDT coverage mandated in the Medicaid statute required it required Medicaid to pay schools. However, by 1990 we were another five years into the program and the annual costs were up to $72 billion. There was no way federal Medicaid would allow such program growth.

Unfortunately, in spite of all of their efforts federal, managers were about to see the growth in the programs cost explode. States faced with ever increasing demands on their budgets began looking for ways to reduce their cost. Soon they discovered something often called "federal revenue maximization". States found they could get federal matching money on any local or state money used to fund health services. This included provider taxes, provider donations, intergovernmental transfers, etc. They even discovered there needed to be no actual services, just a Medicaid provider they could pay. The money only needed to pass through the Medicaid program to draw in federal matching funds. At a minimum every dollar a state could pass through brought with it a matching federal dollar that they could use for any purpose they wanted. In short order billions moved from the federal government through Medicaid and into state treasuries. Federal managers saw no demonstrable Medicaid program benefit but massive cost increases. Every state, whether fiscally conservative or not, seized on the opportunity to maximize their Medicaid federal revenue. Instantly "paying" public schools was a great idea as it represented a vast untapped pools of state and local tax dollars that if, to the extent it could be, passed though the Medicaid program it would bring in an equivalent amount of federal dollars. Soon Medicaid was a state money machine. The five year period from 1990 to 1995 annual Medicaid cost more than doubled to $159 billion. A substantial portion of this growth was due to revenue maximization activities by states. During this period is when the most states enrolled their public school systems as Medicaid providers. The universe of potential new Medicaid providers suddenly grew to over 13,000 public school districts serving approximately 50 million students which, in the poorest of districts, were over 80% Medicaid eligible. Obviously the school based services program threatened a major increase in federal Medicaid cost and a major increase in revenue for states.

The sides were now set in this ongoing conflict with states, often with the help of consultants, working to maximize federal revenue while federal Medicaid desperately tries to minimize their impact. By the mid 1990’s the activities of states in the school based service program were so apparent it caught the attention of the Senate Finance Committee. As a result several reviews/investigations of the school based services program were conducted by the General Accounting Office (GAO). GAO found federal Medicaid was not properly managing, improper claims were being filed, and approximately 60% of the federal money being paid for school based services was ending up in the pockets of the states and consultants. GAO recommended federal Medicaid increase its control over the school based service. Of course the "free care" principle was part of the guidance aimed at keeping the program growth in check.

However, in spite of the efforts made by federal officials, by 2005 annual cost doubled again to $315 billion. At the same time Oklahoma secured the final free care decision from the HHS DAB. This should have ended the federal "free care" policy, but it didn’t. Over the last 10 years federal Medicaid simply ignored the 2005 DAB decision and continued to force states to only cover school services included in child’s IEP. It even caused some states to remove from Medicaid any service not specifically included in a child’s IEP, specifically barring coverage of services to children required by the Rehabilitation Act of 1973. As of this writing federal Medicaid has issued no guidance indicating that an IEP is no longer required for a school based service to be covered in Medicaid. Without such guidance it is unlikely most states will do anything to expand the coverage to all school services.

At last tally the Medicaid program is now costing over $500 billion a year. There is no doubt that pressure will increase on federal Medicaid to hold the line on cost. Its admission that it is responsible to pay for all of the eligible health care services provided by public schools can only be viewed as a time limited opportunity. Government always changes and over the next few years so will this part of the Medicaid program. Schools in states reacting quickly to expand coverage will benefit greatly. Those in states delaying may find that when they try the opportunity will no longer exist. By 2022, or perhaps sooner, annual Medicaid cost are expected to exceed $850 billion. There is no doubt ongoing changes will be made to the program. If the services are in the program they will be incorporated into the change, if they are not it likely will be too late to get them covered.

So this leaves the next move in the hands of the states. They should move to allow immediate coverage of all eligible school based services. Public schools need to bring this issue up with their state representative. There is no doubt there are millions of additional health services provided by local public schools now coverable by Medicaid. How long this last no one knows but keep in mind like the "free care" principle any day a new "policy" issued ending coverage.