Solving the Medicaid Puzzle

Ideas and Strategies for State Entitlement Reform

Executive Summary

Medicaid, one of the costliest and fastest-growing of America's entitlement programs, is also the largest one that falls under the supervision of state governments. As Congress continues to debate entitlement reforms at the federal level, states should demand the authority to address the many problems that face the Medicaid problem. These include:

Problem #1: Cost

For the average state today, Medicaid expenditures are nearly as large a share of total state spending as K-12 education and surpasses spending for higher education, transportation, and corrections. Whether paid for by federal funds or state funds, this expansion in Medicaid has resulted in less money available for family needs or other government expenditures.

Problem #2: Mismatch of Means and Ends

Most Medicaid recipients are eligible for the program because they are enrolled in a cash welfare program. But since Medicaid is provided in the form of health insurance, rather than cash, recipients can benefit only by consuming health care. This “use it or lose it” feature inflates medical costs while preventing recipients from using public assistance to develop the occupational skills, literacy, savings, or assets they require to become self-sufficient.

Problem #3: Quality of Care

Because of low reimbursement rates and other problems, many physicians do not accept Medicaid patients. Nor do those patients have much of a “say” in the care they receive, because they aren't paying for it. Neither of these conditions promotes good quality care.

Problem #4: Personal Responsibility

Medicaid is the primary funder of long-term care for the elderly. One important reason why people don't plan ahead for predictable future medical needs such as nursing home care is that they know those needs, if serious enough, will be paid for by the government. This promise of free or subsidized long-term care not only discourages personal responsibility but leads to an immoral transfer of money from current taxpayers, many young and of extremely modest means, to older Medicaid recipients who are solidly middle-class in background and family assets.

Medicaid and Managed Care

Some states have attempted to solve Medicaid's problems by contracting out portions of the Medicaid population to managed care organizations. Their experiences can be summed up in three points: 1) Medicaid managed care affects mostly the non-disabled, non-elderly portion of the caseload and thus excludes most Medicaid spending; 2) managed care does appear to save program costs initially, but higher administrative costs eat up some of these savings; and 3) quality of services under Medicaid managed care has remained about the same overall, improving in some states but seeming to deteriorate in others.

Arizona's Medicaid system is often viewed as the most successful in using managed care to reduce cost. It awards contracts to competing health plans to provide medical services in particular regions or counties of the state. Arizona did see its Medicaid costs drop substantially after the competitive contracting system was established in the early 1980s. But its program costs for the non-disabled, non-elderly Medicaid population have since grown at about the same rate as would have occurred under fee-for-service medicine. Arizona is also one of the few states to use managed care contracts to deliver long-term care services, and has saved significant sums—but mostly by tightly controlling eligibility rather than by the contracting process itself.

A Four-Part Medicaid Reform Strategy

A key element of a successful Medicaid reform strategy will be recognizing that Medicaid is not a program but a set of programs, with different goals and different problems. Reformers will have to divide Medicaid into its four constituent parts, and then use the appropriate policy to address each part's unique needs. These parts include:

1. Poor Children and Adults

For this population of families on public assistance, states should continue to reform cash welfare programs (which serve as a gateway to Medicaid eligibility) while converting Medicaid dollars into vouchers for 1) the purchase of private health insurance, 2) enrollment in managed care either through a state purchasing pool or some other means, or 3) deposit in medical or other savings accounts. Like other forms of public assistance, these Medicaid vouchers should be subject to time limits, work requirements, and other rules.

2. The Near-Poor Uninsured

Many women and children whose incomes do not fall below the income thresholds required to receive cash welfare assistance are nevertheless eligible for Medicaid. A better way to promote access to health care services would be to reduce state mandates that raise the cost of health insurance and to treat any Medicaid subsidy for those above the poverty line as a loan rather than a grant.

3. The Disabled

States should continue the process, begun by Congress in its 1996 welfare legislation, to target programs for the disabled only to those whose medical conditions truly make them permanent “wards of the state.” They should also experiment with competitive contracting and managed care to deliver services to these disabled recipients more efficiency and effectively.

4. The Elderly

States should more rigorously enforce asset-transfer, asset-recovery, and spousal-support requirements, while ending all disincentives for adults to plan for their future medical needs through medical savings or long-term care insurance. In the long run, states and the federal government should consider setting an age requirement for Medicaid coverage to further encourage personal planning and responsibility.

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