Editor’s Note: This is the final post in a five-part Health Affairs Blog series, produced in conjunction with the Bipartisan Policy Center, examining current issues and care models in the delivery system reform effort. Each post is jointly authored by Democratic and Republican leaders in health policy. Read all of the posts here.

Medicaid is the primary source of health insurance for families and children that meet the income and program eligibility requirements. It is also the largest single source of financing for long-term services and supports (LTSS), which help individuals who need it engage in the activities of daily living, such as getting dressed in the morning. Despite Medicaid’s prominent role in the U.S. health system—or maybe because of its role—bipartisan agreement is rarely achieved. Republicans and Democrats often disagree over the size and financing of the program, and without question, they have differing visions of the role of Medicaid over the long term.

There is consensus, however, on the need and the opportunity to contain spending growth and improve care delivery for the nearly 11 million Medicare beneficiaries who are also eligible for Medicaid, a group often referred to as “dual eligibles.” This would be no small feat, as this population is responsible for about a third of all Medicaid costs, though they only represent 15 percent of the population of beneficiaries.

The dual-eligible population consists predominately of low-income older adults and people with disabilities. They have health and LTSS needs that greatly surpass that of the average Medicare beneficiary. Medicare spending for full-benefit dual-eligible beneficiaries is more than twice as high as average annual Medicare spending for all other Medicare beneficiaries. Full-benefit dual-eligible beneficiaries, as opposed to those who receive assistance for premiums and cost-sharing only, have higher rates of hospitalizations and re-hospitalizations for medical conditions such as hypertension, congestive heart failure, and chronic obstructive pulmonary disease, for which comprehensive care can often prevent the need for a hospital inpatient admission for treatment.

Solving The Fragmentation Problem

Generally, Medicare covers most acute care for dual eligibles, while Medicaid covers the Medicare premiums, co-pays, and deductibles that would otherwise be paid by enrollees out of pocket. Medicaid also pays for acute-care services not covered by Medicare, and virtually all long-term services and supports. This can be confusing to beneficiaries and their families. Fragmentation in financing and lack of coordination in the delivery of Medicare and Medicaid services can also result in inefficiency and poorer health outcomes.

Consider the following: if a state Medicaid program invests in intensive care management at the primary care level for a dual-eligible enrollee that helps avoid hospital admissions, the Medicare program, not the Medicaid program, realizes those savings. This is hardly a recipe for rationally tackling care and costs.

State and federal policymakers have taken a variety of approaches to improve care and lower costs for dual-eligible individuals. An early care model, which continues today, is the Program of All-Inclusive Care for the Elderly (PACE). Under PACE, a provider organization receives payment under both Medicare and Medicaid to provide a broad range of services for dual-eligible individuals requiring an institutional level of care. In addition to the full range of Medicare benefits covered by the federal government and Medicaid benefits services covered by the states, PACE also provides adult daycare. While this program has been found to reduce hospitalizations, nursing home use, and mortality, PACE care is facility-based, which requires significant start-up investment.

State and federal policymakers have looked to other models, including managed care plans. Since 2003, Medicare Advantage Special Needs Plans serving dual-eligible individuals (D-SNPs) have provided acute-care services and long-term services and supports under separate Medicare and Medicaid contracts. While early on some policymakers questioned whether these plans were doing enough to coordinate care for their enrollees, fully-integrated plans have proven successful in decreasing hospital readmissions and emergency department visits.

States that have more mature managed care markets have had greater success in improving quality and lowering costs for dual-eligible enrolled in D-SNPs. Massachusetts has had success with its Senior Care Options program, which integrates Medicare and Medicaid services through private plans that are responsible for coordinating and managing care for approximately 40,000 dual-eligible seniors. A recent evaluation of the Minnesota Senior Health Options program, which coordinates care for dual-eligible beneficiaries, showed a 48 percent reduction in inpatient hospitalizations and a 26 percent reduction in the total number of hospital stays for patients who were hospitalized during the year.

To better integrate Medicare and Medicaid services for dual-eligible individuals, states have also taken advantage of opportunities to test new delivery and payment models under an initiative of the Center for Medicare and Medicaid Innovation (CMMI). Thirteen states have, or are currently participating in the Financial Alignment Initiative (FAI) demonstrations that aim to better coordinate Medicare and Medicaid services by integrating medical, behavioral health, and LTSS for dual-eligible beneficiaries. In developing the demonstration, the Centers for Medicare and Medicaid Services permitted states to choose a prospective capitated blended payment offered through a Medicare D-SNP to coordinate Medicare and Medicaid-covered services to dual-eligible beneficiaries using the traditional managed care model, in other words, a per member per month amount from each program. Two states chose a combination of capitation in larger metropolitan areas, and “managed fee-for-service” models, under which providers receive an add-on payment for managing care, and using managed fee-for-service in non-urban areas. Under both approaches, states can share in savings by improving quality and reducing costs for both Medicare and Medicaid services.

Looking Forward

While implementation and evaluation of these demonstrations has moved slowly, perhaps with good reason given the significant needs of this population, CMS reported in January that the demonstrations have shown “early signs of progress” in improving quality and lowering costs for participating Medicare-Medicaid dual-eligible beneficiaries. Recent results from demonstrations in Massachusetts, Minnesota, and Washington show trends suggesting lower rates of hospital admissions, high rates of beneficiary satisfaction, and Medicare savings for Washington’s managed fee-for-service demonstration. CMS announced in January that these three states will be extending their demonstrations for two additional years.

Improving quality and lowering costs for dual-eligible beneficiaries is a significant undertaking. Medicaid reform discussions rarely center around these high-need, high-cost individuals, even though they account for one out of three dollars spent in the Medicaid program.

While greater integration of Medicare and Medicaid services and alignment of financing incentives has the potential to improve quality and lower the total cost of care for dual-eligible beneficiaries, success depends on the structure of the care delivery models, and states’ ability to invest in promising care models. As Congress debates the scope of state flexibility in the Medicaid program, as well as the level of federal spending, policymakers should carefully consider how changes to Medicaid will impact care and costs for these individuals.