New federal legislation would make it easier for states to deny Medicaid health and long-term care benefits to the frail elderly and younger adults with disabilities.  The new rules would also apply to low-income women and kids who rely on Medicaid for their medical care.  

The proposal, introduced yesterday by Representative Fred Upton (R-MI) and Senator Orrin Hatch (R-UT), would repeal an obscure piece of federal law known as maintenance of effort (MOE in Washington-ese). That law allowed states to take extra federal Medicaid funds but only in exchange for their promise to not toughen eligibility rules. The Upton-Hatch bill would allow states to bar new enrollees or even deny coverage to some people who already get Medicaid.

This could be especially difficult for seniors who are enrolled in Medicaid home care programs, which often allow participants to keep a few more dollars in assets or retain a bit more monthly income than usual. If the new law passes, states could save money by tightening financial standards or requirements for minimum levels of care.  

Medicaid, which is funded jointly by the states and the federal government, is the nation’s biggest single payer of long-term care costs. It covers more than 40 percent of all expenses, both in nursing facilities and in the community, at a cost to the federal government of more than $100 billion a year.

Currrently, cash-strapped states can reduce Medicaid costs by cutting payments to doctors, nursing homes, and other providers. But they can’t cut benefits or reduce eligibility.

In recent weeks, Hill Republicans and some governors have been pushing to cap the federal contribution to Medicaid or turn it onto a block grant  in exchange for giving states broad flexibility in the way they run the program. The House budget plan adopted in April would cut the federal share of Medicaid by nearly $800 billion over the next decade. 

No sensible governor would turn his back on a share of $800 billion. But I suspect that, all along, the real target for governors was the MOE rules. In other words, they still want the money, but without the strings.

In some respects, states should have more flexibility, especially if they are going to use the opportunity to design creative new ways to deliver quality, cost-effective care.  But cutting off benefits to the sickest and poorest in society is not productive.

Sponsors of the bill say it will save Medicaid dollars.  No doubt. But it will likely increase the costs of Medicare since people getting poor long-term care (or losing it entirely) are likely to end up in the hospital, where Medicare foots the bill.  Repealing the MOE would also increase the number of uninsured, shifting costs to providers that, eventually, will be passed on to other consumers.

There is not much chance that Congress will turn Medicaid into a block grant–at least not before the 2012 elections. But I would not be a bit surprised to see something like this MOE law pass.