FOR IMMEDIATE RELEASE
NOVEMBER 10, 2004

STATE MOVES TOWARD MEDICAID
‘PERSISTENT LAWSUITS’ BLOCK TENNCARE REFORM EFFORT

NASHVILLE — Governor Phil Bredesen today announced the State of Tennessee has set in motion a process to dissolve TennCare, the state’s financially troubled $7.8 billion healthcare plan, pending final discussions with public-interest attorneys. The process will replace TennCare with a traditional Medicaid program similar to what’s currently offered in more than 40 other states.

“TennCare is a noble and worthwhile initiative that has made significant contributions to public health in Tennessee,” Bredesen said. “Over the past year, we’ve made every possible effort to preserve the program. But persistent lawsuits have tied our hands. The sad reality is, we can’t afford TennCare in its current form. It pains me to set this process in motion, but I won’t let TennCare bankrupt our State. This is the option of last resort.”

This morning, Bredesen instructed the Bureau of TennCare and the Department of Human Services, which provides customer service to TennCare enrollees, to prepare a plan for orderly transition to Medicaid. “No enrollee will lose coverage overnight,” the Governor said. “We will give as much advance notice as possible.” The process of notifying TennCare enrollees of changes will begin in early January and the conversion to Medicaid is expected to be completed in mid-2005. As many as 430,000 enrollees, out of a total of 1.3 million enrolled, could lose health coverage.

While the process to dissolve TennCare is underway, the Governor noted the decision could be reversed if the Tennessee Justice Center, a nonprofit public-interest law firm based in Nashville, will provide the State with immediate relief from longstanding “consent decrees” that are blocking reform efforts. The consent decrees, which were agreed upon by the State in the 1990s, now prevent the State from implementing Bredesen’s TennCare reform strategy and obligate TennCare to provide extraordinary benefits well beyond federal requirements.

Late yesterday, Gordon Bonnyman, executive director of the Justice Center, sent Bredesen a letter asking for an additional seven days to consider the State’s request for wholesale modification of the decrees. Unless a modification agreement is reached within one week, Bredesen said, the transition to Medicaid will proceed. “At this point, the process to return to Medicaid is not irreversible,” the Governor said. “But TennCare reform cannot work unless we get the program out of the courts immediately. Nothing short of sweeping change in the consent decrees can save TennCare.”

The Governor added imminent action is required in part due to continually rising use of medical services and pharmacy benefits, and a recent change in the formula for federal funding that will result in fewer dollars from Washington. New fiscal projections indicate TennCare “as is” will require $650 million in additional state revenue in order to sustain it in the 2005-2006 fiscal year — approximately $200 million more than the State anticipates collecting in total new revenue.

Critics argue that TennCare’s cost overruns can be reduced through administrative changes and new taxes. Bredesen disagrees. “Throwing new money at TennCare is not an option,” the Governor said. “Nothing short of fundamental change will solve the problem.”

Bredesen, as a candidate in 2002 and as governor since January 2003, has consistently warned there are two main options for controlling costs in TennCare: Protect enrollment by implementing broad structural reform to control pharmaceutical and medical costs; or make broad cuts to enrollment. With the State unable to gain relief from the Tennessee Justice Center from consent decrees to implement the Governor’s reform strategy, the only remaining option for bringing the program in line is to reduce enrollment and return it to traditional Medicaid.

TennCare began in January 1994 as an innovative experiment to expand Tennessee’s Medicaid program by using managed care principles to deliver health care to a larger number of people for the same amount of money. But from its inception, the program was beset by problems and cost overruns. Consequently, the promise of managed care never was met. Over the course of a decade, TennCare’s costs grew at an unexpected and exponential rate. The program now consumes roughly one in three dollars in the state budget.

Earlier this year, Bredesen characterized the unchecked growth of TennCare as “the clear danger” to the State’s fiscal situation and to its ability to maintain other vital commitments. “Scrambling to keep up with the TennCare bills means we starve to death other things that in the end are equally important, like education,” the Governor said in a February speech to the General Assembly.

To cope with TennCare’s costs, the Governor outlined a broad strategy — including controls on pharmacy spending, cost-sharing with enrollees and benefit limits — in a “last chance” effort to salvage the program. The strategy, which would have preserved full enrollment, was widely viewed as a sensible approach by stakeholders including TennCare enrollees, the General Assembly, the Tennessee Medical Association, the Tennessee Hospital Association, the Tennessee Pharmacists Association and the Children’s Hospital Alliance of Tennessee. However, the Tennessee Justice Center has not agreed to modifying consent decrees, which are roadblocks to reform.

The most burdensome of these legal agreements, the Grier Consent Decree, has fueled hundreds of millions of dollars in rising pharmacy expenditures — the single-largest cost driver in TennCare. The Grier Consent Decree, which prohibits the State from placing reasonable limits on the use of prescription drugs, is a key factor driving 26% annual growth in TennCare drug costs versus average growth of 17% in neighboring states’ healthcare plans.

To put the fiscal challenge in perspective: The total cost of TennCare’s pharmacy benefit in the wake of Grier ($2.11 billion) is greater than the cost of Tennessee’s higher education system ($1.89 billion). The bottom line: Costs within TennCare cannot be controlled without broad reform, which cannot be implemented without relief from Grier and other decrees.

Bredesen reiterated TennCare’s decade-long contribution to public health in Tennessee, saying the concept was and is “a wonderful dream.” But he added unchecked growth must be brought under control or else the State risks jeopardizing all its other priorities. “All great enterprises are powered by the heart, but steered by the head,” the Governor said. “It’s time to do some steering.”

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