Michigan Snubs Innovative Way to Rein in Health Costs

Accounts give Medicaid patients an incentive to spend tax dollars wisely

Dick DeVos, the Republican gubernatorial candidate, has promised to provide Michigan voters this November with a clear alternative to Gov. Jennifer Granholm’s big government policies. One way he might accomplish this is by promising to try his best to enroll Michigan in the federal Health Opportunity Account initiative so it can reduce soaring health care costs.

Written by Michigan’s own Congressman Mike Rogers, R-Brighton, the initiative offers a bold way of reining in double-digit cost increases in Medicaid – the joint federal-state health insurance program for the poor – while still delivering better care and more choice to users.

Many states have already approached the U.S. Department of Health and Human Services to become part of this demonstration project. The 10 states that are eventually selected will automatically get a waiver from federal regulations to adopt market-friendly Medicaid reform.

State rejects Rogers’ plan

But Granholm has responded to Rogers’ letter alerting her to the program with a barely repressed yawn. In her reply, she ignores his initiative, exhorting him instead to line-up behind her Michigan First Health Care Plan.

Patterned after the recent universal health care plan enacted in Massachusetts, Granholm’s plan proposes to cover all of Michigan’s million or so uninsured by expanding government programs and offering a slew of subsidies and incentives to private parties – insurers, employers – to cover more people.

But an administration that can’t ensure cost-effective coverage for those already in its care has no business tackling the health care needs of additional populations.

Even before Michigan’s tottering economy began dumping unemployed workers onto the Medicaid rolls, the program’s costs were spiraling out of control. Four years ago, Medicaid consumed 20 percent of the general fund budget; now it gobbles close to 25 percent, according to the House Fiscal Agency. Medicaid spending has risen by more than 40 percent since 2000.

Medicaid spending soars

While spending on nearly every other service from higher education to human services has declined as a share of general fund revenues, it has increased by 5.6 percent for the Department of Community Health – a bulk of whose budget is devoted to Medicaid.

In fact, Medicaid is continuing to crowd out other government services despite the fact that Michigan has already implemented all the obvious remedies to squeeze out inefficiencies. It has, for instance, herded Medicaid beneficiaries into managed care plans, cut provider payments and slashed benefits.

Rogers’ Health Opportunity Act offers Michigan an approach that would deliver quality care for Medicaid users without busting the budget: voluntary health care savings accounts.

These accounts would give Medicaid participants a lump sum of money to purchase health coverage that best suits their needs. Participants would be allowed to roll any unused funds into the next year. What’s more they could keep any accumulated funds when they leave Medicaid.

Accounts help patient needs

The accounts would effectively turn Medicaid from a defined benefit to a defined contribution plan, capping the state’s Medicaid liabilities. They would also offer participants a powerful financial incentive to spend wisely, bringing down the overall cost of the program. But best of all, notes Rogers, for the first time a segment of a population not in the habit of saving will be able to stash away something toward its future.

South Carolina, which recently implemented health savings accounts, expects to save upwards of $300 million over five years through them. Michigan’s savings are likely to be twice as much because its Medicaid population is nearly twice as large as South Carolina’s. Florida too has implemented Medicaid savings accounts, and Oklahoma is finalizing its plan to do so.

Two distinct approaches to health care reform are emerging around the country with blue states like Massachusetts expanding the role of government and red states like South Carolina empowering consumers. Granholm is embracing the first. In the interest of the health of the state budget and Medicaid users, DeVos ought to pick the second.

Shikha Dalmia is a Metro Detroit-based senior analyst with Reason Foundation. An archive of her work is here and Reason’s government reform and privatization research and commentary is here.