States Can Avert Medicaid Cost Crisis

Commentary by Pete du Pont

The nation's governors were in Washington, DC this week looking for Congress and the White House to bail them out of their own budget crisis. One of the prime reasons that most states are struggling with balancing their budgets, is the ever escalating cost of maintaining Medicaid - the joint federal-state health care program for the poor.

Medicaid costs rose 13 percent last year and by an average of 9 percent a year since 1997. Further, states now spend approximately $30 billion more on Medicaid than they do on Medicare each year -- $280 billion versus $250 billion. That's almost $1,000 for every man, woman and child in the country - or $4,000 for a family of four. Indeed, it is likely that many taxpayers are paying more in taxes to fund health insurance for the poor than they pay for private health insurance for themselves and their own families.

Left unreformed, Medicaid will bankrupt every state in as little as 20 years, possibly absorbing 80 to nearly 100 percent of all state revenues. Delay or inaction is not an option.

To help alleviate some of those problems, the administration has proposed a reform plan that promises more flexibility and the potential to control costs. Giving states flexibility to become smarter buyers of health care could potentially save millions of budget dollars.

The first step to saving money is fairly simple, and involves little in the way of structural changes. For example, states should train parents of asthmatic children to recognize symptoms and take appropriate action in their homes. Patients should also be encouraged to get telephone consultations before going to hospital emergency rooms. In other words, states could save by using and encouraging a little common sense.

Secondly, as a recent study by my colleagues at the National Center for Policy Analysis (NCPA) shows, state governments waste a lot of money by paying providers based on costs incurred, rather than services rendered. For example, Ohio's Medicaid program reimburses nursing homes for the number of beds they have, rather than the number of patients. Thus, Ohio is paying for about 13,000 empty beds. In Texas, Medicaid pays some hospitals three times as much as others for delivery of the same services. This form of reimbursement arrangement is a wasteful way to pay for health care. The private market quit paying that way years ago.

The Bush Administration's proposal is a good first step, which recognizes that much of the problem is that the government program hasn't changed much since it was created in the '60s. But in order to take full advantage of private sector techniques and private sector opportunities, states need to apply for a federal waiver, called a HIFA waiver. By doing so, states could have real flexibility to provide Medicaid patients with more choices.

Arkansas, New Jersey and Florida have already obtained federal waivers under which disabled Medicaid beneficiaries manage some of their own health care dollars. These experiments have been highly successful.

Ideally, a state receiving a waiver would establish a program where all "mandated" Medicaid enrollees would have the opportunity to enroll in employer plans or other private sector plans with premium subsidies from the state. To qualify, the private insurance would have to be similar to the plans currently offered to state employees.

Those beneficiaries who do not qualify for an employer plan would have the opportunity to enroll annually in a plan of their choice through an insurance exchange, organized and operated by the state. At least one of the plans offered would make use of a Medicaid Benefit Account (MBA), similar to a Medical Savings Account, except that the funds could be used only to pay health care expenses or health insurance premiums, now and in the future.

This would be the beginning of a new "pro-patient" approach to government provided health benefits, following in a similar trend as is occurring among private sector employers. It would increase choice and control costs by having states determine how much they are willing to spend, and patients, along with their doctors, choosing how to spend it.

The HIFA waiver, combined with other common sense reforms, could allow states to take advantage of the full range of techniques employed by the private sector. It also would allow states to move large numbers of people from state-funded insurance to insurance largely paid by employers and - since employer-provided benefits are earned by working - by the beneficiaries themselves.