But can state governments succeed where the federal government has failed? Many are already trying by experimenting in new and innovative ways. For example, the state of Texas is placing nearly 2 million poor children, pregnant women, blind, elderly and disabled Texans who receive Medicaid benefits into health maintenance organizations (HMOs) and other managed care plans.

Faced with a projected $2.2 billion shortfall in the state's Medicaid budget, both liberal and conservative legislators felt they had to act quickly. Many other states are doing the same. Let's see why.

Medicaid in Crisis.

The Medicaid program has become a primary target for federal and state legislators because Medicaid spending has been exploding - growing 21.8 percent annually between 1988 and 1992. Medicaid is the fastest growing component in most state budgets and, according to an estimate by the National Association of State Budget Officers, is expected to account for more than 25 percent of many states' budgets in 1995. As a result, the states have been looking for new and innovative ways to reduce Medicaid costs, and managed care has been promoted as a quick fix. Nearly all states have sought Medicaid waivers for demonstration projects that permit the states to experiment with new ways of delivering health care to the poor. Most of these demonstration projects are placing Medicaid recipients in established managed care programs.

The Growth of Medicaid Managed Care.

In fact, no one is predicting that the cost savings from managed care will be large. Although the Congressional Budget Office estimates overall savings of between 4 and 8 percent, a report on Medicaid reform in Texas predicts that even under the most optimistic projections managed care would save the state only 2 percent of its Medicaid budget. And HCFA administrator Bruce Vladeck, who oversees Medicaid and Medicare, says, "There are no big savings from increased managed care enrollment in either the Medicare or Medicaid programs."

The Quality of Medicaid Managed Care.

• In Minnesota, there has been documented evidence of Medicaid HMOs skimping on Pap smears and other cancer screening tests for poor women.
• Because of widespread abuses and serious quality problems, Florida has temporarily suspended Medicaid patient enrollment in managed care plans, although the federal government has just approved moving all 1.6 million Florida Medicaid beneficiaries into managed care.
• An audit by the Tennessee Employees Association found that of the physicians included in the Tennessee Preferred Network " who serve TennCare, the state's Medicaid managed care program " three were dead, 18 were unlicensed, 12 had retired and 14 practiced out of state.
• Another recent survey found that 93 percent of TennCare physicians were unable to prescribe at least one drug because it wasn't on the state's formulary.
• The executive director of the Hawaii Nurses Association recently complained that those in the state's Medicaid managed care program, "the at-risk people, the people who we're supposed to be treating " pregnant women and children " are not getting balanced, regular care."

Replacing traditional Medicaid delivery with managed care does nothing to change patient incentives. Since both systems make services free to the consumer, both encourage overuse of health care services. The big difference is that managed care gives providers incentives to provide less care.

Medical Savings Accounts.

• Under a 1994 Indiana proposal, which passed in the state's Senate but not the House, each member of a family on Medicaid would have received a $100 voucher for health care and would have been permitted to use 10 percent of what was not spent of the next $3,250 for in-kind services such as day-care and job training. Those spending more than $3,250 would still have had their medical bills covered by the state but would have received nothing at year's end.
• Legislation in Virginia that would create MSAs for "the working poor and individuals who are eligible to receive medical assistance services" has passed unopposed in committee in both chambers.
• Several other states, including Montana, Louisiana and Texas, are looking at MSAs for Medicaid recipients. MSAs would empower individuals rather than bureaucracies. They also would offer the poor opportunities to benefit from being prudent shoppers in the health care marketplace.

This Brief Analysis was prepared by Brant S. Mittler, M.D., a practicing physician in San Antonio and a Fellow of the National Center for Policy Analysis, and Merrill Matthews, Jr., Ph.D., health policy director of the NCPA.

For more information: Jeanette Nordstrom 972/386-6272

Note: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any legislation.