Cost sharing is an established part of health insurance in this country, but it is imperative to use it judiciously in Medicaid and SCHIP to avoid deterring low-income children and families from using needed health care services.  While some families served by these programs are able to pay premiums or make copayments, others, especially those at lower-income levels or with extensive health care needs, may find that such fees make it difficult for them to access needed care. 

Some proposals to expand health insurance coverage for people with low incomes are based on expansions of public programs, such as Medicaid or the State Children’s Health Insurance Program (SCHIP), while others rely on the use of tax subsidies for individuals to purchase private insurance. Analyses of data from the 2005 Medical Expenditure Panel Survey indicate that total medical spending is much lower when coverage is provided by Medicaid or SCHIP than it is when coverage is provided by private insurance. Public insurance is particularly advantageous from the consumer’s perspective because associated out-of-pocket spending is far lower.

The purpose of this letter is to provide additional information about certain sections of the Deficit Reduction Act (DRA) of 2005 and to provide guidance on changes enacted by the Tax Relief and Health Care Act (TRHC) of 2006. The letter also provides specific guidance on “Emergency Room Co-payments for Non-Emergency Care.”  This provision provides a State option to impose higher cost sharing for non-emergency care furnished in a hospital emergency department without a waiver, and also added a new subsection providing Federal grant funds for States to use for the establishment of alternate non-emergency service providers, or networks of such providers.

The Deficit Reduction Act of 2005 (DRA) added a new provision to the Medicaid statute that gives states the option to impose cost-sharing charges and premiums on Medicaid beneficiaries in certain circumstances. Aspects of the Medicaid rules on cost-sharing were then clarified in the Tax Relief and Health Care Act of 2006 (TRHCA). The result is a confusing array of rules that provide for different treatment based on a beneficiary’s income, Medicaid coverage category, and the type of services being provided. This paper attempts to unravel these rules by summarizing how all the rules on cost-sharing and premiums apply to children and adults.

Under traditional Medicaid, states may require certain beneficiaries to share in the cost of Medicaid services, although there are limits on the amounts that states can impose, the beneficiary groups that can be required to pay, and the services for which cost-sharing can be charged.  Prior to the DRA, changes to these rules required a waiver. The DRA provides states with new options for benefit packages and cost-sharing that may be implemented through Medicaid state plan amendments (SPAs). This report describes the new cost-sharing options and recent state actions to implement these provisions.

This letter is one of a series that provides guidance on the implementation of the Deficit Reduction Act of 2005 (DRA), specifically focusing on the new State option to impose premiums and cost sharing upon certain Medicaid recipients.  These sections of the DRA include cost sharing for non-preferred prescription drugs, and cost sharing for non-emergency use of a hospital emergency room. States have a new option to impose premiums upon any group of non-exempt individuals (with family incomes over 150 percent of the FPL) and cost sharing upon any group of non-exempt individuals (with family income over 100 percent of the FPL) and for any non-exempt service.

The Deficit Reduction Act, signed into law by President Bush on February 8, 2006, includes significant changes to Medicaid coverage rules affecting children and families that are designed to reduce federal spending. This issue brief reviews changes in Medicaid’s benefit, cost-sharing, and premium standards. It also examines a citizenship documentation requirement and a “health opportunity account” demonstration program including in the legislation.

This analysis highlights key research about the impact of cost-sharing on low-income families and individuals, including recent studies about how cost-sharing has affected low-income Medicaid beneficiaries in states that have increased their cost-sharing levels. The research indicates that higher copayments can make it harder for people covered by Medicaid to afford medical services they need, while premiums can make it more difficult for low-income
people to enroll and maintain coverage. 

Over the past few years, a number of states have implemented new or increased existing out-of-pocket requirements for beneficiaries in their Medicaid, SCHIP, or other public coverage programs.  This brief reviews the key findings from this recent activity, showing that charging premiums and cost sharing can have a significant and immediate impact on low-income individuals’ coverage and access to care. Increasing financial obligations on low-income families may provide short-term state savings but these savings may accrue more from reduced coverage and utilization rather than increased revenue.

GAO’s survey found that children were more likely to be subject to beneficiary contributions, specifically premiums and cost sharing, in SCHIP than in Medicaid. As of August 2003, 26 states reported charging premiums for a portion of children—“some,” “most,” or “all”—in SCHIP, compared to 9 states in Medicaid.  Twenty-five states charged cost sharing for some portion of children in SCHIP, compared to 6 states for Medicaid.  States used copayments as the primary form of cost sharing for children. Most states that reported charging cost sharing applied copayment requirements to the six selected health care services.

This brief reviews the studies that have investigated the impact of premiums and cost-sharing, particularly on low-income populations and finds generally that premiums depressed participation in public programs and cost-sharing affected health care utilization, access and outcomes. It begins with a review of who is covered by publicly financed health programs and then highlights the findings from the research that has been conducted over the past several decades on the impact of premiums and cost-sharing policies on low-income populations.