© December, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts
Report of the e-Texas Commission

e-Texas Chapter 9 | ...in 2010 | Endnotes

Healthy Children,
Healthy Futures

One of the most important challenges facing state government is to provide high-quality, cost-effective health and human services (HHS) to a growing number of Texans who turn to the state for assistance. Texas’ spending on a wide array of health and human services accounted for over 40 percent of the entire state budget in fiscal year 1998. When health spending on state employees, university employees and criminal justice is included, HHS represents the single largest category of state spending, exceeding even education.

HHS spending has skyrocketed in recent years. Medicaid spending, driven by the eligible population, federal requirements, and health care costs is the fastest-growing element of these expenditures and has shot up by 248 percent over the last decade.[1] Yet despite enormous increases in state funding for these services, some key indicators of progress—such as the number of Texas residents without health insurance—demonstrate that we still have challenges to meet.

Given that HHS costs are expected to continue to rise for the foreseeable future, the state must inevitably face a fundamental choice: should we continue devoting an ever-greater share of the state budget to health and human services, at the expense of other vital needs such as education and transportation? Or can we transform the way we deliver health and human services in ways that will provide basic services without breaking the bank?

We believe the second option is a desirable and achievable goal.

Increased consumer awareness, “e-health” services, and emerging medical breakthroughs, such as genomics, are reshaping the health care industry and providing opportunities for both health care consumers and recipients of government services to take a more active role in determining the services they need. We are moving from a health care system that previously was controlled by doctors, and more recently by HMOs, to a patient-centered system.[2] For patients, increased choice and control, enhanced health care knowledge and a greater reliance on market signals will be the hallmarks of this new system.

For government, advanced information technologies will allow the state to provide families with a single point of entry for obtaining children’s health care, mental health care, long-term residential care, and adoption and foster care services. The same technologies will give Texans in rural areas access to previously unavailable health services, and help persons with chronic illnesses manage their conditions more effectively. And moving HHS administrative processes, such as claim processing, to Internet-based systems should help the state save millions of dollars.

Landmark changes such as these will pose a number of important policy questions for Texas lawmakers: How should government define its role in a vital and changing industry, to ensure that health care spending doesn’t break the state budget? How can individuals gain more control over their own health care? What changes are needed to reduce the number of uninsured? How can we protect privacy in a world of electronic networks and unprecedented interdependence? How can government encourage innovation and customer convenience in the delivery of health and human services? How should the state meet the HHS needs of its aging boomer population?

Solutions to such thorny issues will not be easy to achieve. The road to a market-based, consumer-friendly health and human service system is filled with both obstacles and opportunities.

Texas’ Health and Human Services System

Texas’ health and human service “system” is a loosely woven network of state and local providers and various public and private payers. In any given month, state-administered HHS programs serve some 4 million Texans.

Fourteen Texas HHS agencies with more than 52,700 employees administer hundreds of programs, often with duplicated effort. In addition, local communities also invest heavily in health and social services. The Texas health safety net that cares for the state’s uninsured population includes state teaching hospitals, public and private hospitals, locally supported community health centers, local health departments and school-based health clinics. Residential care for the low-income elderly and Texans with disabilities is provided in nursing homes, state schools and community facilities. However, many rural counties offer few or even no health services.

Many HHS services are partly paid for with federal dollars that come with numerous “strings” attached in the form of mandates about who must receive services and other highly complex requirements and directives. The state-federal Medicaid program, for example, must provide health care to all eligible Texans. The “entitlement” nature of the programs make it particularly hard to contain its costs or make significant changes to its structure. Yet major shock waves reverberating through the health care industry—vastly improved technologies and treatments, skyrocketing costs, and a growing number of people needing health care—will make changing the way the state purchases health care services not only desirable, but essential.

The State of Texas is a high-volume purchaser of health care services, buying care for its employees, low-income Medicaid recipients, children without health insurance, children with special health-care needs, the mentally ill, the mentally retarded, persons with disabilities, the uninsured, substance abusers, and prisoners. In addition, the state also regulates the health care industry and provides other services such as welfare assistance and foster care for abused children. Other major purchasers of health care in Texas include private health insurance plans; consumers, through out-of-pocket expenditures; federal Medicare; federal and state Medicaid; federal Veteran’s Affairs; local governments; hospitals and physicians, in the form of charity care; the military; and employers workers’ compensation (see Figure 9-1).

Private funds paid for 56 percent of all Texas health care in 1998, while public funding accounted for 44 percent.[3] The federal Medicare program for the elderly and disabled is Texas’ largest source of public health care spending, closely followed by the state-federal Medicaid program. In Texas, Medicaid has estimated expenditures of $23.5 billion for the 2000-01 biennium.[4]

Challenges to Texas’ Health and Human Services System

Rising Costs

Health care is a major component of the Texas economy, accounting for nearly 11 percent of the gross state product. In 1998, almost $70 billion was spent in the state’s health care industry.[5] It employed 692,300 Texans as of September 2000.[6] Since 1982, a combination of technological changes and higher demand for health care services have pushed the costs of health care upward more rapidly than food, clothing, housing, or even energy.

Health care for the average Texas consumer cost $3,514 in 1998.[7] The nationwide average was even higher, at $4,261.[8] Forecasters predict that health care expenditures will continue to climb, claiming an even greater percentage of the total economy over the next decade.

Texas spending for state health and human services, including workforce benefits, rose at an average annual rate of 13 percent throughout the 1990s. No other functional area of state spending grew faster.[9] The fastest growing area within the HHS arena is Texas’ Medicaid program, which provides medical care for pregnant women and children and long-term care for the low-income elderly and persons with disabilities. More than 70 percent of all nursing home expenditures, for instance, are billed to Medicaid. Medicaid expenditures more than tripled in the 1990s, rising from $3.3 billion in 1990 to $11.1 billion in 1999 (see Figure 9-2).[10]

Prescription drug costs have contributed to the rapid increase in Medicaid spending and in themselves constitute one of the fastest growing areas of public HHS spending (see Figure 9-3). Medicaid pharmacy costs rose by 15 percent in 1999 alone.[11] According to the Health Care Financing Administration (HCFA), the federal agency responsible for administering Medicaid, about eight percent of all dollars spent by Texas on the program in 1997 went to the Vendor Drug Program, which provides pharmacy services to Medicaid recipients.[12] The average cost per prescription issued through the Vendor Drug Program rose from $20.26 in fiscal 1990 to $42.69 in fiscal 2000.[13]

The Uninsured

Despite the considerable expansion of the state’s Medicaid program during the 1990s, 4.8 million Texas residents—nearly a quarter of the entire population—lacked any form of health insurance in 1998.[14] Of these, 1.4 million were children. 600,000 of them were eligible for Medicaid benefits, but not enrolled in the program.[15]

Census data show that Texans aged 18 to 24 are the group most likely to be uninsured. Most of the uninsured live in urban areas, and 68 percent of uninsured Texans under 65 are employed, generally in low-income jobs.[16] Nationally, persons working in firms with fewer than 10 employees are the most likely to be uninsured, as are persons working in agriculture, personal services, construction, and retail sales.[17] Foreign-born individuals in Texas are more likely to be without insurance (56 percent) than the native-born (24 percent). Non-citizens are twice as likely to lack coverage, and poor immigrants are the least likely to be insured.[18]

Rising Discontent with Managed Care

Texas’ most important reaction to the spiraling increase in Medicaid spending was to adopt managed care. Managed care, the umbrella term for a variety of approaches, including health maintenance organizations (HMOs), in which health service providers agree to provide care for a group of individuals for a flat or discounted rate per person. It has dramatically changed health care financing and delivery in Texas. The Texas Legislature has required the state to use managed care for Medicaid recipients. In 1999, state government became Texas’ largest single purchaser of private HMO services, using them to cover about 20 percent of the state’s Medicaid population.[19]

Today more than three-quarters of all US employees in the private sector are enrolled in some form of managed care.[20] Texas’ average monthly HMO premium was $153.02 in 1999, slightly above the national average.[21]

Managed care has been widely criticized by patients and advocacy groups concerned about the quality and availability of services it provides. “Managed care is like a toll booth. Two percent abuse the system,” contends Mark Leavitt, chief executive officer and founder of MedicaLogic Inc. “To solve that, they erect a toll booth and stop everybody 100 percent of the time so everyone is slowed down to half speed.”[22]

Meanwhile, many small businesses facing rising costs have dropped or restricted the health care coverage they offer employees. Despite criticism of managed care and consumer preference for greater choice among providers and treatments, ongoing inflation in health care costs may force many consumers into more restrictive forms of managed care.[23]

The rising costs that limit consumer choice, it should be noted, could increase even more with policies that provide consumers with the wrong incentives. Policies that transfer the responsibility for health care payments from the consumer to a third party—such as an insurance company or government agency—provide consumers with little incentive to be economical in their use of health care or shop around for less expensive providers. For example, the TexFlex medical benefit offered to state employees (which allows pretax dollars to be placed in a separate account for medical purposes) encourages them to spend unused medical funds allocated to them at the end of the year, since the funds are lost if they are not spent.

Growing Elderly Population

Texas is one of the fastest-growing states in the nation. Between 1995 and 2025, Texas is expected to gain nearly 8.5 million additional residents, reaching a total population of 27.2 million.[24] As Texas’ population grows, it also is becoming older and more ethnically diverse.[25]

Although Texans are younger on average than the residents of many other states, the number of elderly and soon-to-be elderly residents in Texas is rising rapidly. In 1980, almost 1.4 million Texans—9.6 percent of the population—were 65 or older. By 2000, the 65-and-over population had risen to 2.1 million, or 10.3 percent of the state population. By 2020, this population will grow to 3.6 million, a 14.2 percent share.[26] Moreover, health care advances are swelling the ranks of those 85 and older. The 85 and older age group, in fact, is the fastest-growing senior age group. Health care costs tend to rise with age, so an increase in the average age of the elderly is likely to increase health care costs. On the other hand, the aged tend to be wealthier than younger people, and this may help limit the state’s responsibilities in the future.

All-Inclusive Care for the Elderly—The PACE Project
The state-federal Program for All-Inclusive Care for the Elderly (PACE) project, as operated in 25 sites across the nation including El Paso, provides a complete spectrum of services for the frail elderly, including day care, home health care, doctor visits, hospital visits, and nursing home care, all through a single entity. The program provides a viable alternative to nursing home care by giving clients careful assessments and offering a wide variety of medical services during day visits. Medicaid savings due to the program have ranged from five percent in states like South Carolina and Wisconsin to 36 percent in Colorado.[27] Evaluators have found that the program not only reduces the cost of care for the frail elderly, but also reduces their number of trips to the hospital.[28]

Strategies for Ensuring Healthy Children and a Healthy Future

Strategies In Brief

• Reduce the Number of Uninsured Texans
• Use Modern Technology to Reduce the Cost of Services and Improve Access to Health Care and Human Services
• Make Better Use of the State’s Bargaining Power as a Major Purchaser of Health and Human Services

The challenges Texas faces in the HHS arena are relatively clear but not easily solved. Rapid advances in medical technologies will improve the length and quality of human life, but new techniques and new drugs generally will be more expensive. Consumer demand for access to these advances will place even more pressure on the state’s coffers.

State government should do what it can to support and encourage market-based health care and reduce the number of uninsured. The state should take advantage of its bargaining power as a high-volume purchaser of health care to reduce the cost of Medicaid and help senior citizens afford prescription drugs. Improved technology should be used to reduce consumer frustration with the fragmented HHS system and to increase the efficiency of Texas’ eligibility determination processes.

Reduce the Number of Uninsured Texans

Local, state, and federal governments spent $4.7 billion on health care for the uninsured in 1998 including $3.5 billion in local funds.[29] This amounts to a little less than $1,000 per uninsured. Already shouldering a large burden for the uninsured, local governments fear—and with reason—a continuing escalation in their costs.

The uninsured population is expected to continue growing. This escalation is at least partly due to personal choices. The young and healthy may believe the cost of insurance exceeds any expected benefit. Low-income individuals may be reluctant to spend limited money for health insurance when they believe they can receive free emergency care at a local hospital or clinic. Other families may never have had insurance. Since employers who provide health insurance benefits must pay lower wages, low-income workers may choose to defer insurance for higher wages, if they have the option.

Those without insurance need an alternative to expensive emergency room care. One approach is to allow the health care market to operate like most other markets in the United States. Free the existing market from needless constraints and inequities, ensure information is freely available, and allow consumers to make their own choices.


Change federal law to allow the health care market to work more efficiently.

Texas cannot substantially reduce its number of uninsured by itself. Changes in federal tax law are needed to eliminate tax discrimination against the unemployed and workers whose employers do not offer health insurance. Federal tax law excludes the cost of employer-provided health insurance from taxable wages. In effect, this difference in tax treatment doubles the cost of health insurance for people who must purchase it themselves.[30] Workers who must purchase their insurance with after-tax dollars are 24 times more likely to be uninsured than those who are eligible for tax-free, employer-provided coverage.[31] Tax credits could encourage individuals without health insurance to purchase it. Changing federal law to expand Medical Savings Accounts which allow individuals the choice of purchasing health care or retaining the funds for other purposes would help restore consumer choice. The federal government should also expand federal safety net community programs which serve people without insurance.


Change state law to allow the health care market to operate more efficiently.

Texas’ ability to change the fundamental economic incentives that motivate Texans to purchase health insurance are strictly limited, simply because the state cannot change federal tax law. However, the state can encourage the provision of more affordable insurance for small businesses and individuals by carefully monitoring the impact of health care mandates on health insurance premium costs and helping small businesses acquire low-cost insurance through reducing the impact of state mandates on the cost of insurance and providing state policymakers with a clearer understanding of the federal and state impediments to small business enrollment and small businesses with information on insuring their employees.


Remove state obstacles to Medicaid enrollment for uninsured Medicaid–eligible children.

Many uninsured Texans who are eligible, but not enrolled for Medicaid, receive health care through hospital emergency rooms and local health clinics. Much of the cost of this expensive form of care is absorbed by individual hospitals. Some hospitals have Texas Department of Human Services (DHS) staff members on site to help the uninsured apply for Medicaid benefits. If the hospital or health clinic does not have DHS staff on site, the individual must go to a DHS office for a face-to-face interview to determine their eligibility for Medicaid benefits. Many individuals cannot or will not make these visits, because of work obligations or other reasons. By eliminating the interview requirement, the eligibility process could be performed at a hospital, local health clinic, over the telephone, or through the Internet. Modifying the eligibility process in this way could produce significant savings for the state and ease the financial burden of indigent care on Texas’ hospitals.

Use Modern Technology to Reduce the Cost of Services and Improve Access to Health Care and Human Services

In an era of emerging “e-health” technologies, consumers will want a broad range of choice and control over treatment; high-quality customer service; easy interaction with their health care providers; and access to useful information about their conditions and care. Currently this does not exist. “Abundant information that is available for other sectors–data about prices, cost, quality, availability–is stunningly absent in health care,” explains Regina Herzlinger, author of Market Driven Health Care. “The system’s expenses recently broke a record trillion dollars. Yet the cost of a single episode of care remains unknown.”[32]

In response to this dearth of information, the nation’s larger health care players, such as Johns Hopkins University and Aetna US Health Care, are forming partnerships to develop advanced health-related Web sites and Internet search engines. In addition to general medical information, more sophisticated Web sites can offer features such as access to one’s own electronic medical records and interactive disease management programs that allow patients to interact with their health care providers and actively participate in monitoring their own care and treatment.

According to California’s Institute for the Future, Internet applications that are likely to supplement or replace traditional HHS functions include:

• Electronic claims processing transmitted via the Internet.

• Remote telemedicine consultations that use the Internet to transmit data, voice, video, and images.

• The transmission of clinical information in clinical trials.

• Online submission of Federal Drug Administration filings by pharmaceutical and medical equipment companies.

• Monitoring and disease management services for persons with chronic disease such as diabetes or asthma.[33]


Expand TexasOnline to provide a single point of entry for citizens seeking health and human services.

Both consumers and local service providers find it difficult to locate services and learn how to access them. The Department of Information (DIR) should expand its TexasOnline Web site, Texas’ first “portal” for government services, to provide a single point of entry for citizens seeking health and human services, workforce and child care information.


Use telemedicine to provide services to children with special health care needs.

Technology can be a lifesaver in small farming communities–for example, Hart, Texas, has no doctor, hospital or clinic. A pediatrician from the Texas Tech University Health Sciences Center in Lubbock visits children in the town every Wednesday, and another doctor sees patients through a telemedicine satellite link on Fridays. According to Retta Knox, a local school nurse, before these arrangements “the kids were always sick and missed lots of school.” Telemedicine and the arrangement with Texas Tech have helped provide rapid treatment for a third-grader’s ruptured appendix and diagnosed a teenager’s diabetes.[34] The expanded use of telemedicine could allow more disabled children and their families to receive expert medical consultations while staying in their home towns, thus reducing travel costs and avoiding the physical toll of traveling.

Home Diabetes Monitoring
The Columbia University College of Physicians and Surgeons at Columbia Presbyterian Medical Center and SUNY Upstate Medical University will use a $28 million government grant to place personal computers in rural homes and those of inner-city New Yorkers to monitor patients with diabetes. The program is intended to improve these patients’ conditions and to reduce hospitalization rates by helping the patients manage their illnesses more effectively.


Use automated drug dispensing systems in nursing homes.

In fiscal year 1999, Texas spent $178 million on prescription drugs for the Medicaid nursing home population.[35] Drug expenditures are projected to continue rising more rapidly than the overall inflation rate, while the number of elderly is increasing as well.

A recent article in Consultant Pharmacist notes that between four percent and 10 percent of all nursing home medications in long-term care facilities are destroyed after changes in patients’ conditions or medication regimens.[36] At present, such facilities must have a licensed pharmacist on site to oversee the dispensing of medications. To reduce prescription drug waste in the Medicaid program, Texas should authorize long-term care facilities to use automated drug dispensing systems that package and label single doses of drugs as needed. The use of such machines would reduce waste and allow nursing staff to spend more time taking care of residents.

Make Better Use of the State’s Bargaining Power as a Major Purchaser of Health and Human Services

As the payer of last resort for the Medicaid population and low-income Texans with major high-cost illnesses, the state should make every effort to be a prudent purchaser of health and human services. Texas should examine the practices of other states and the private sector to find more efficient and economical ways of purchasing medical goods and services.

Health services and prescription drugs are purchased separately by more than a dozen different Texas agencies. For example, the Texas Department of Health purchases health insurance for Medicaid recipients and participants in the Children’s Health Insurance Program (CHIP), which provides health insurance for uninsured children in indigent families that do not qualify for Medicaid. The Employees Retirement System (ERS), the University of Texas and Texas A&M all buy health insurance for state employees. Texas may be able to negotiate better prices by combining such purchases instead of allowing each agency to strike its own bargains.


Allow seniors to purchase drugs at Medicaid prices.

Seniors—those 65 and older—make up 12 percent of the US population but use 33 percent of all prescription drugs. More than a third of all Medicare beneficiaries have no prescription drug coverage.[37] Elderly men or women who lack drug insurance coverage pay retail prices for drugs that are 20 percent to 40 percent higher on average than those paid by insurers, HMOs, and Medicaid.[38]The state should use its bargaining power to reduce the cost of pharmaceutical drugs to seniors by requiring pharmacies who wish to participate in the Medicaid program to offer seniors drugs at discounted Medicaid prices, like California does.


Reduce costs of the Medicaid Vendor Drug program.

In 1999, Texas spent $945 million on prescription drugs for Medicaid recipients.[39] Prescription drug expenditures have risen rapidly and are expected to continue increasing, due both to higher prices for new drugs and increased usage.[40] Many payers, both public and private, are aggressively seeking ways to contain drug expenditures. The Texas Medicaid program should seek alternatives such as pharmacy benefit managers, prior authorization and supplemental rebates to enhance the cost-effectiveness of its Vendor Drug Program.


Refinance medical care for children with special health care needs.

Many children needing special, expensive care receive health services purchased entirely with state funds. Texas should refinance these services through CHIP to increase the use of federal dollars and reduce state costs.


Expand the use of the community-based Bienvivir Senior Health Services program.

A serious problem for frail, elderly persons, who often have multiple and complex health conditions, is the lack of coordinated health care in the community, which often forces them to enter nursing homes. The Texas Bienvivir program in El Paso provides a comprehensive array of services, including day care and health care, to the frail elderly at a reduced cost. Evaluations of the program indicate that it reduces state Medicaid nursing home costs, improves the quality of care delivered, and reduces days of hospitalization required for participants.

Protecting Medical Privacy in an e-Health World
A key issue in online health care is access to medical records. The web of hospitals, doctors, insurance companies, pharmacies, clinics, drug and medical suppliers, and consumers is held together by patient medical records. The confidentiality of such electronic patient records must be protected if online medicine is to expand. This is a hot-button issue on Capitol Hill. More than 20 online privacy bills currently are pending before Congress.[41]


Make state agencies responsible for their worker’s compensation claims by ensuring that they reimburse the State Office of Risk Management for 100 percent of worker’s claims.

Currently, many state agencies pay only part of the costs of their worker’s compensation insurance claims, while the state pays most of it through the State Office of Risk Management (SORM). The state agencies can pay all while providing enough in their budgets to cover expected claims. This change would free up appropriations now made to fund some of the agencies’ expected claims through SORM.


Apply the principles now used in the state’s health care coverage for state employees to the medical portions of state employees’ workers compensation claims.

The state employees’ healthcare system uses provider networks to improve the efficiency of health care services. Doing the same for state employees’ workers compensation claims would result in significant cost savings.

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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