Introduction1

Medicaid, the joint federal/state health care program for the poor, is in crisis. At a time when state revenues are frozen or declining, Medicaid costs per enrollee have almost doubled in the last five years - with projected spending increases rising even faster.2 Medicaid, unreformed, threatens to take every new state tax dollar. As a result, an out-of-control Medicaid program is a threat to education, agriculture, highways, the environment, parklands and every other program funded by state government. Medicaid reform is everyone's concern because it affects everyone and every issue.

"Medicaid is in crisis"

Problem: Escalating Costs. The National Governors Association claims that 49 states, faced with stagnant revenues and exploding Medicaid costs, are in a real fiscal emergency.3 Medicaid and other health expenses already account for about 20 percent of state spending nationally, and those costs rose 13 percent last year - quot;the largest increase in a decade,quot; according to a National Governors Association report.4 Left unreformed, Medicaid will bankrupt every state in as little as 20 years - absorbing 80 to 100 percent of all state revenues.5 Delay is not an option. States and the federal government must act now to avoid a real human and fiscal disaster. What can be done?

Traditional Solutions. The Kaiser Commission on Medicaid and the Uninsured has reported that 49 states plan to cut Medicaid benefits, restrict eligibility, increase copayments or reduce provider payments.6 Already, 37 states have cut a combined $12.6 billion from their Medicaid budgets.7 More cuts will follow. According to the Kaiser Commission:8

These traditional responses all seek to further restrict access to quality health care to save money. At best, they are stopgap measures. At worst, they will fail to halt what may be Medicaid cost increases as high as 15 percent this year. 9

States have considerable flexibility in determining the number of people and the types of services that are covered by Medicaid. Nationwide, about 70 percent of all Medicaid spending is "optional," covering either beneficiaries who do not have to be covered or services that do not have to be covered or both. 10 Since the average state currently spends 19.6 percent of its budget on Medicaid, 11 almost 14 percent of Medicaid spending could be saved in an average state by eliminating optional people and optional services. There is also an ever-present pressure to lower payments to providers. But are these options wise?

Traditional Option: Reduce the Number of People Who Are Covered by Medicaid. People who must be covered by Medicaid under federal law are "mandatory" populations. Those enrolled at each state's discretion are the aforementioned optional populations. For example, as of September 2002, states are required to grant eligibility to all children living in poverty, regardless of their age.12 Unfortunately, paring people from the Medicaid rolls may save less than the states expect. For example, among the 11 health regions of Texas spending per Medicaid recipient in 1998 varied from a high of $4,425 to a low of $2,101 - a difference of about $2,300. But the variation falls to about half that amount when per capita spending on free care for the uninsured is considered. [See Table A-1] It appears that non-Medicaid health care spending substitutes for Medicaid spending, as regions that spend less on Medicaid tend to spend more on free care and vice versa. Reducing the amount spent on one program just increases the amount spent by the other.

Traditional Option: Reduce the Services Covered by Medicaid. Each state must offer 14 mandatory benefits (e.g., hospitals, physicians, etc.) but can decide which of 34 optional benefits it wishes to cover, including prescribed drugs, diagnostic screening, preventive and rehabilitative services, clinic services, dental care, dentures, physical therapy and related care, prosthetic devices, TB-related care, and primary care case management.13

Trying to eliminate these expenditures, however, may prove penny-wise and pound-foolish. For example, drug therapy is often a less expensive and more effective alternative to doctor therapy and hospital therapy. A study by Columbia University professor Frank Lichtenberg found that in the health care system an increase of 100 prescriptions is generally associated with 1.48 fewer hospital admissions, 16.3 fewer hospital days and 3.36 fewer inpatient surgical procedures. Overall, a $1 increase in pharmaceutical expenditures is associated with a $3.65 reduction in hospital care expenditures.14 Mental health and physical health services are also often substitutes for each other. In one study, an employer who reduced spending on mental health saw more than offsetting cost increases in other health services.15

"Traditional responses try to reduce access to care and/or lower provider payments."

Traditional Option: Reducing Payments to Providers. As financially stressed as states and taxpayers are, the newspapers daily report on struggling hospitals, nursing homes and physicians who see Medicaid patients. Reducing their reimbursements will disproportionately hurt rural and inner city providers. It will also have an economic ripple effect, since Medicaid dependent providers are also the chief (and sometimes only) economic engine for growth in these same rural and inner city neighborhoods.

Traditionally, hospitals have covered losses that arise from people who can't pay for their care and less generous reimbursement from Medicaid and Medicare by overcharging other patients. But as the medical marketplace becomes more competitive, these overcharges are shrinking. Cost shifting is virtually impossible in so competitive a market. There is ample evidence that this problem is not trivial. For example, preliminary findings from a RAND study show that safety net spending by the nation's hospitals is not keeping pace with the overall increase in per capita spending.16 A National Academy of Sciences Institute of Medicine study found that the safety net of local clinics, hospitals and charities is "overburdened and threadbare," and "could collapse with disastrous consequences."17

A New Approach. What is needed is a new solution, one that does not seek to solve the states' Medicaid fiscal crisis on the backs of the poor, disabled and blind. What is needed is a "pro-patient" solution.