Using Medicaid to Support Working Age Adults with Serious Mental Illnesses in the Community: A Handbook. A Brief History of Medicaid


Medicaid (Title XIX of the Social Security Act) was created in 1965 in tandem with the Medicare program (Title XVIII).3 The Medicare program is a federally funded and administered health insurance program for retirees, disabled workers, and their spouses and dependents. In contrast, Medicaid is a joint federal-state program through which states, the District of Columbia and the territories receive federal financial participation in their costs of furnishing health and long-term services to federally recognized groups of low-income families and individuals.

Before Medicaid was enacted, limited federal payments were made to states for health care services they purchased on behalf of public assistance recipients. In 1960, Congress authorized open-ended federal matching payments to states for health care provided to indigent older persons.4 Still, in the early 1960s, states varied widely in the scope of the health care services they funded for low-income individuals and families.

Medicaid was designed to expand access to “mainstream” health care for low-income individuals and families. The federal government would make payments to states to pay for half or more of their costs in furnishing services to beneficiaries. At the same time, the program was framed to give states considerable latitude in fashioning their medical assistance programs. States that elected to participate in the program were required to furnish a core set of basic health services to public assistance recipients. They were also allowed to offer additional services at their option and could elect to serve “medically needy” individuals who did not receive public assistance. Then, as now, the Medicaid program combined federal mandates and state-selected options with respect to who receives services and what services are offered.

The past four decades have seen many changes in federal Medicaid law, including significant modifications in eligibility, benefits, payment arrangements, and other administrative details. The cumulative effect of these changes -- combined with state decisions regarding the scope of their programs -- has been to expand Medicaid well beyond its original focus on furnishing principally acute care services to public assistance recipients. In addition, Medicaid has become the dominant funder of long-term services for people with disabilities. Despite the myriad changes in federal law, the fundamental nature of the program’s federal-state relationship has not changed appreciably.

From 1965 to 1980, federal Medicaid law changed in a variety of ways. In 1972, the Supplemental Security Income (SSI) program was created. This federally-funded income assistance program for people with disabilities replaced the preceding federal-state “aged, blind and disabled” cash assistance programs. Medicaid eligibility was linked to SSI eligibility.5 Other changes during this period included adding the 1967 requirement6 that states operate Early and Periodic Screening, Diagnosis and Treatment (EPSDT) programs for children and giving states the option to cover Intermediate Care Facilities for the Mentally Retarded (ICFs/MR).7

The 1980s saw many expansions in both mandatory and optional eligibility groups, especially focused on extending Medicaid benefits to low-income pregnant women and children who do not receive public assistance payments.8 The Omnibus Budget Reconciliation Act of 1981 (OBRA-81)9 required that states make additional Disproportionate Share Hospital (DSH) payments to hospitals that serve especially large numbers of Medicaid and other low-income individuals. OBRA-81 also added two new important waiver authorities. In particular, Section 1915(b) of the Social Security Act gave states greater latitude to employ managed care and other care management approaches in their programs. The addition of §1915(c) allowed states to launch home and community-based services (HCBS) waiver programs to provide a wide range of services -- including those not covered under the Medicaid state plan -- to assist individuals with disabilities who otherwise require institutionalization to remain in the community.

The Omnibus Budget Reconciliation Act of 198710 included “nursing home reform” provisions to bolster protections for nursing facility residents, including requirements for additional screening and treatment of individuals with mental illnesses. In 1989, Congress revised and strengthened the EPSDT program to mandate that states furnish all medically necessary services to eligible children.11

The 1990s saw more changes in the program. The Personal Responsibility and Work Opportunities Act (PRWOA) of 199612 (otherwise known as “welfare reform”) severed the historical link between Medicaid eligibility and the Aid to Families with Dependent Children (AFDC) cash assistance program. The AFDC program was replaced by the Temporary Assistance to Needy Families (TANF) block grant program. A new mandatory Medicaid eligibility group was established for low-income households; eligibility for Medicaid was no longer automatically tied to receipt of public assistance cash payments.13 The passage of PRWORA also included major changes in eligibility for legal immigrants.14

In 1997, the State Children’s Health Insurance Program (SCHIP) was created to offer states additional funding to extend Medicaid services to children in low-income households or provide them an alternative package of benefits.15 The 1990s also saw limits imposed on DSH payments as well as state’s use of “provider taxes” and donations to capture additional federal dollars.16 Also in 1997 and 1999, Congress changed Medicaid law to permit states to continue Medicaid benefits for workers with disabilities who are no longer eligible for SSI (these provisions are discussed in more detail in Chapter 3).17

An especially noteworthy development during the 1990s was the expanded use of managed care arrangements in Medicaid. In 1996, about 40 percent of Medicaid beneficiaries nationwide were enrolled in managed care; by 2003, the figure had climbed to more than 59 percent.18 This shift to managed care delivery systems also significantly affected Medicaid mental health services in many states. Chapter 6 discusses Medicaid managed care service delivery arrangements in more depth.

In the Balanced Budget Act of 1997, Congress gave states new options to implement managed care approaches without having to seek special waivers. The 1990s also saw expanded state use of the Social Security Act’s Section 1115 Research and Demonstration waiver authority in conjunction with state initiatives to extend health care to uninsured individuals previously ineligible for Medicaid.

Most recently, states have been allowed to employ the Section 1115 waiver authority to extend services on a targeted basis to low-income uninsured individuals and families who would otherwise not qualify for Medicaid. Also, states are encouraged to employ the waiver authority to test alternative service delivery approaches. Finally, through the President’s New Freedom Initiative, federal policies are being clarified to encourage states to promote community living for people with disabilities of all ages, including the expanded use of “consumer-directed” approaches in long-term services and supports (discussed in Chapter 7).

Since its enactment, federal Medicaid law has been modified many times. Federal mandates have increased, especially in the area of services for low-income children. However, the effect of most changes has been to expand the options available to states in designing and administering their Medicaid program. Today, states may offer a wider range of Medicaid services to a broader range of low-income children and adults. States retain considerable flexibility in crafting their Medicaid programs, a principle inherent in Medicaid from its beginning.

The combination of Medicaid mandates and options has resulted in the emergence of 51 highly distinctive Medicaid programs that operate under broad national guidelines but have been shaped by state decisions about who is eligible and what they are eligible to receive.

Changes in federal Medicaid law and policy have been beneficial for people with disabilities, including working-age adults with serious mental illnesses. They have permitted states to employ Medicaid to support people with disabilities in the community. However, as emphasized in Chapter 1, Medicaid cannot meet all the needs of people with serious mental illnesses across all dimensions of community living.

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