Reforming Medicaid

MEDICAID IS THE LARGEST single expenditure state governments face today. The country as a whole spends more on Medicaid than on primary and secondary education. We also spend more on Medicaid (for the poor) than on Medicare (for the elderly--and at the rate the program is growing; it is on a course to consume the entire budgets of state governments in just a few decades.

The Bush Administration's budget proposes to reduce projected spending by $10,000,000,000 over the next five years, and some members of Congress want a commission to recommend additional reforms. The nation's governors are preparing their own proposal.

Medicaid is a complex system of Federal matching funds with special pots of money limited to specific uses. This often results in wasteful spending. Currently, states are required to cover certain populations, such as the disabled and pregnant mothers. States can receive additional matching funds to cover other segments as well--for example, children in families who earn too much to qualify for Medicaid. Although coverage for some services is mandated, others, including prescription drags, are optional. Yet, about two-thirds of Medicaid spending is on optional populations and benefits

The biggest problem is that, for every 40 cents spent by the states, the Federal government chips in 60 cents. Thus, states are tempted to go for the matching funds even when they know the spending is wasteful. The matching scheme also is a bad deal for taxpayers. The average cost per Medicaid beneficiary nationwide is about $7,500. However, since New York offers almost all optional benefits to all optional enrollees, it spends almost double the national average. Mississippi, which has a less generous benefit package and confines coverage mostly to the "mandatory" poor, spends just about half the national average. The result is that New York receives about twice as much Federal money per enrollee as Mississippi, where the need is much greater.

The practice of matching grants coupled with wasteful regulations has to end. States instead should request block grants covering all Medicaid costs, State Children's Health Insurance Program expenses, and disproportionate share hospital funds. States should have complete discretion, provided they spend the funds on indigent care.

Private health plans are a much more efficient way to provide care than traditional Medicaid. Yet, Federal payment schemes can discourage their use. For example, Texas has announced plans to place 2,800,000 urban Medicaid recipients into managed care health plans at an estimated savings of $109,000,000 over two years. However, the proposal is being opposed by public hospitals that stand to lose $75,000,000 worth of Federally-funded disproportionate share payments relating to indigent care.

Medicaid is an alternative to private insurance, and when the public sector expands, the private sector contracts. After all, why pay for insurance when it is available for free? Studies show that, for every extra one dollar spent on Medicaid, spending on private insurance contracts by 50-75 cents. During the 1990s, for instance, despite a large expansion in Medicaid spending, the uninsured rate went up, not down. That process must be reversed. States need to use Medicaid funds to enroll beneficiaries in private insurance--individually-owned and employer-provided. There are enormous potential savings if, for example, the state could pay the employee's portion of employer-provided insurance premiums, letting the employer pay the bulk of the costs. Current regulations, however, make this reform difficult, if not impossible.

Health savings accounts would help as well. Studies show that patients with diabetes, asthma, heart disease, and other chronic conditions can reduce costs and improve quality by managing their own care. Yet. self-managed care will be successful only if patients also manage some of their own health care dollars.

At least 25 states are experimenting with Cash and Counsel programs that allow disabled patients to manage their own money. Bureaucratic rules, however, work mostly in the opposite direction. For instance, Medicaid regulations limit cost-sharing by patients to nominal amounts, and forbid it outright for selected populations. States that have copayments are allowed to charge enrollees only three dollars or less for prescription drags.

Nearly half of Medicaid spending is for long-term care. Nationally, more than two-thirds of nursing home costs are paid for by Medicaid--about double the rate a decade ago. Legal loopholes allow individuals to meet Medicaid's asset test by transferring money and property to off-spring prior to entering a nursing home. Many couples have disguised what they own by divorcing, assigning joint property to the "well spouse" while the "ill spouse" receives none. An entire "elder law" industry has sprang up in recent years to assist the elderly in hiding assets so Medicaid will cover their long-term care costs.