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The state should curb the cost of the most expensive people on Medicaid by paying flat fees for more elderly and disabled patients and those with diabetes and mental illness, the head of the health department said.

To trim $500 million from the state's health care services for the poor over the next two years, Wisconsin should also require more people on Medicaid to pay co-payments and premiums and increase the fees for those who already do, said Dennis Smith, secretary of the Department of Health Services.

"You have a responsibility to pay for part of the cost if you can, and many can," Smith said.

In an interview this week, Smith suggested he might reconsider at least one controversial aspect of Gov. Scott Walker's budget proposal for $500 million in cuts to Medicaid: requiring people on SeniorCare, a state drug plan, to sign up next year for the federal Medicare Part D.

"There could be other ways," he said, to save a targeted $15 million in SeniorCare, which covers 91,000 elderly people. "SeniorCare obviously is very politically popular."

As Smith prepared to hold the first of several "town hall meetings" around the state on the Medicaid budget, Wednesday in Green Bay, he said Wisconsin's version of the state-federal health program for the poor must be reined in to remain sustainable.

Medicaid, which includes BadgerCare Plus, Family Care and other services, costs $6.7 billion a year, roughly 60 percent coming from federal dollars. The state's program covers 1.2 million people, or one in five residents, including many with incomes higher than those the federal government requires be covered.

"It was never designed for the middle class," Smith said.

A former director of the federal government's Center for Medicaid and State Operations who became leader of Wisconsin's health department in January, Smith outlined several steps he wants to take:

• Costly patients: Encourage elderly and disabled people to switch to "self-directed" personal care. The state would give them a fixed payment to find help with bathing, dressing, preparing meals and other services instead of providing the services through agencies, which can be more costly.

Lisa Pugh, public policy coordinator for Disability Rights Wisconsin, said self-directed care is welcome as long as enrollees get proper training on how to do it.

"It has great potential for helping people assert control over their quality of life," she said.

Smith said he wants many of the same patients, who now see a wide variety of providers for medical care, to have that care managed by doctors or others.

The state should also give fixed "bundled payments" to providers to oversee all aspects of care for people with chronic diseases such as diabetes and mental illness, he said. Payments for diabetics could be given to pharmacists who work with nurse practitioners, Smith said.

The efforts would reduce expenses for the 5 percent of Medicaid patients who account for 58 percent of the spending, he said.

Cost-sharing: Require more patients in BadgerCare Plus to make co-payments or pay monthly premiums, making the coverage more like private insurance.

Patients might pay fees to go to the emergency room or for brand-name drugs when generics are available. Smith wouldn't provide other details.

The federal government would have to approve the changes, but co-pays and premiums can't exceed 5 percent of household income.

"Even if you go to the maximum 5 percent, BadgerCare Plus is still a very good deal when you compare it ... to the private sector," Smith said.

SeniorCare: Under Walker's proposed biennial budget, enrollees would have to sign up by Jan. 1 for Medicare Part D, the federal drug plan. The federal plan would become the primary drug coverage. Those staying in SeniorCare would use it to cover gaps in the federal plan.

SeniorCare costs $30 a year, plus co-pays and other expenses depending on income level. Medicare Part D plans cost an average of $44 a month in Wisconsin, with subsidies available for people with the lowest incomes.

Sen. Herb Kohl, D-Wisconsin, said in a statement that "it would be a mistake to dismantle" SeniorCare. Leon Burzynski, president of the Wisconsin Alliance for Retired Americans, said Walker's "cold-hearted plan turns its back on those most in need."

As an alternative, Smith said, the state could increase the enrollment fee for SeniorCare or charge monthly premiums. But "I don't think those things are as good as what we've proposed," he said.

Hospitals and nursing homes: Pay them based on patient outcomes, known as "pay for performance." This could involve paying hospitals less when patients have to return to the hospital shortly after being discharged, for example.

The previous administration of Gov. Jim Doyle started similar efforts, but "I think they tip-toed into it," Smith said. "There's going to be a greater emphasis on that."

Medicaid eligibility: Ask the federal government to let the state review people's income levels more frequently, check if they can get private insurance and stop paying right away for people no longer eligible for Medicaid.

If the state can't make such changes, which Walker's budget says would save $100 million over two years, more than 50,000 adults who make more than a third above the federal poverty level and aren't pregnant or disabled would be dropped from BadgerCare Plus next year.

"That's what we want to avoid doing," Smith said.

Health reform: Set up an exchange, or marketplace to buy insurance, that focuses on free-market options. An exchange is required by 2014 under the federal health law passed a year ago.

Smith said the law's requirement that health plans cover "essential benefits" could impede the marketplace. He wants Wisconsin's exchange to be able to offer low-cost plans with only catastrophic coverage, for example, which would require a federal waiver.

"I want to give people many choices, for them to pick what's best for them," he said.

Capital W: Plug in to Wisconsin politics

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