To fix Medicaid, we need to spend less money on it

Sep 20 2013 - 3:08pm

With each new day comes news of yet another state opting to expand its Medicaid program as a result of the Affordable Care Act. This week alone, Gov. Tom Corbett in Pennsylvania announced his support for the move, and Gov. Rick Snyder signed into law Michigan's Medicaid expansion.

More than half of the states have committed to put more of their residents into the flawed and expensive program. Reform is desperately needed -- particularly in light of the Congressional Budget Office's finding this week that health care is the most significant driver of increasing federal spending.

Much of that growth comes from Medicaid. Federal spending on the program is expected to more than double over the next 10 years, to $554 billion. This reflects increases in not only the number of beneficiaries but also the cost per beneficiary: The CBO estimates that federal spending for each adult on Medicaid will increase by 9 percent a year over the next decade.

Medicaid is a program designed primarily to help the poor, but conservatives have long argued that it is a poor way to do so. Aside from being expensive for taxpayers, Medicaid may not produce the health outcomes that we want, particularly given how much we're spending on the program.

Yet Obamacare doubles down on Medicaid by expanding eligibility for the program. That risks limiting access to care for those already covered, places more pressure on already-tight state budgets, and could "crowd out" millions of Americans from higher-quality private health insurance. Obamacare also does nothing to address the quality of care being provided through the program.

Thus, the Supreme Court did Americans a favor in July 2012 when it ruled that states couldn't be forced to expand their Medicaid programs. But states that do so may be tying themselves to a rapidly sinking ship. First, while the federal government picks up most of the benefit costs associated with the Medicaid expansion for the first three years (and phases down to 90 percent thereafter), states will be responsible for all of the administrative costs.

Second, there is no guarantee that the enhanced matching rate that Obamacare puts in place will remain in law as fiscal pressures mount. States, however, will have difficulty dropping people from Medicaid once they've been put into it.

Finally, the CBO has concluded that rising Medicaid costs will probably cause state governments to make choices that will ultimately hurt beneficiaries: paying providers less, limiting services covered under the program or tightening eligibility to reduce the number of people in the program.

Medicaid also constrains states' ability to innovate or tailor benefits to the needs of their individual populations. This is because of a basic design flaw that goes back to its creation in the 1960s. Although the program is jointly funded by states and the federal government, Washington has the lion's share of control over the benefits Medicaid must provide, how those benefits are provided and the way the program is administered.

States, therefore, bear significant financial exposure but are hamstrung in their ability to change the program. This is the case despite the fact that states are in the best position to understand the economics, demands and limitations of providing health care to their citizens.

Policymakers should make fundamental reforms to Medicaid to make it fiscally sustainable, while giving states flexibility to tailor their programs to the needs of their residents. The first step is to repeal Obamacare, along with its costly Medicaid expansion, and replace it with reforms that lower health-care costs and give states both the responsibility and resources to help care for their low-income uninsured.

Republicans, and Republican governors in particular, have advocated for giving states significantly greater responsibility over Medicaid. One such reform is the block-granting of federal Medicaid dollars to states -- a fixed federal payment that would increase each year at a predetermined rate of growth, such as inflation plus population growth.

These block grants would not only provide greater predictability for the federal budget but also more state flexibility to administer Medicaid, giving them the chance to improve quality. Under this model, states would be given maximum control over the delivery of health-care services, benefits provided, financing mechanisms and program eligibility.

This flexibility would allow them to pursue innovations such as the one put in place by former Indiana Gov. Mitch Daniels, who created a program that covers almost 40,000 working poor in the state. The Healthy Indiana plan provides coverage for preventive care and couples high-deductible health insurance with a health savings account jointly funded by the state and individual beneficiaries.

Although block grants would jump-start state innovation in Medicaid and reduce the growth in federal spending on the program, critics worry that they place too much fiscal pressure on states, which would result in reduced eligibility, benefit cuts or reduced provider payments.

To meet those concerns, the federal government could use a variation on the traditional block grant approach, implementing a per-beneficiary cap on Medicaid spending. In exchange for a limited federal contribution, states would get greater flexibility to manage their Medicaid programs. Because states under this approach would bear responsibility for any per- beneficiary expenses above the cap, they would still have an incentive to deliver more cost-effective care.

Caps can also be set for different patient populations, to reflect differences in the cost of care. For example, legislation recently introduced by Republican Sen. Orrin Hatch of Utah and Rep. Fred Upton of Michigan proposes caps for four distinct Medicaid populations: adults, children, elderly, and blind and disabled.

Like block grants, Medicaid per-person caps would allow for state-based innovation and reduce the rate of growth in federal spending on the program. That caps can vary based on the beneficiary population eases some of the fiscal pressure that might be created by block grants. Perhaps the biggest weakness in the proposal is that it doesn't give states incentive to reduce enrollment in or eligibility for Medicaid -- in fact, it may do just the opposite because states earn payments for each person in the program.

Finally, there are "blended" solutions that would keep the most vulnerable Medicaid beneficiaries in the current funding system while moving healthy adults and children to one of the reformed payment systems discussed above. Legislation introduced last year by a group of Republicans, led by Oklahoma Sen. Tom Coburn, would take this approach.

Reforming Medicaid is crucial to our nation's fiscal future. Unfortunately, Obamacare only makes matters worse by drastically increasing the number of people dependent on the flawed program. Fundamental reform of the program is long overdue, and policymakers should seize this opportunity to truly improve Medicaid for taxpayers and beneficiaries alike.

Lanhee Chen is a Bloomberg View columnist and a research fellow at the Hoover Institution at Stanford University. He was the policy director of Mitt Romney's 2012 presidential campaign.

 

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