Elements of State Reform

A reformed Medicaid system must be based on a new philosophy. The following are the central elements of that philosophy.

Choice. All insurance programs have three essential elements: eligibility, benefits (coverage) and cost (reimbursement). How they are organized will determine the ultimate structure of the plan.

In a defined benefits entitlement plan, eligibility and benefits are fixed and costs are the variable. In other words, if you are eligible then you are "entitled" to all the benefits regardless of cost to the government or taxpayers (hence the term "entitlement program"). Supporters of defined benefit welfare entitlements have always stressed the ethical need to cover the needy and uninsured, regardless of cost.

This is why cost containment has failed in Medicaid. The problem is structural rather than administrative. In the last 37 years, both political parties have exacerbated this defect by increasing benefits and broadening eligibility. As a result, Medicaid has grown from $1 billion and 10 million enrollees in the 1960s to $280 billion and 40 million enrollees during four decades of almost uninterrupted prosperity. And it kept right on growing through the 1990s, even though the welfare rolls were cut by more than half.

The alternative is a defined contribution program. Under this approach, eligibility and costs are fixed and it is the benefit package that is variable. Enrollees choose between a variety of competing private health benefit plans that fit their individual needs. For example, nursing home residents don't usually need maternity benefits and infants rarely need bypass surgery.

"The government should fix the cost of Medicaid, then let enrollees choose thier benefits."

Usually, the amount spent by the government or an employer is the same, regardless of the choice of plan. But plans differ in how they allocate the funds among alternative benefits. If a plan costs more than the defined contribution amount, enrollees usually must make up the difference with their own funds.

An example of a defined contribution approach is the Federal Employees Health Benefits Program (FEHBP), a plan almost a half-century old. Even though the federal workforce is not necessarily a good risk pool - it is generally older and has more health problems - the premiums have been comparable to other, private sector insurance and federal employees have an annual choice of a dozen or so health plans.

One objection to allowing Medicaid beneficiaries to exercise choice is that the poor, elderly, blind and disabled either lack the ability to choose between plans or may be hood-winked by unethical sales people. Although this may be true of certain populations, it isn't true for the vast majority of Medicaid recipients. Evidence shows that for certain services, the poor have just as much ability to choose as the middle class.33

In a Medicaid program, a counselor/independent broker can be responsible for enrollment and education to assure proper access to the health care system. As an intermediary between the state and insurers, the counselor/broker can give independent advice and education. Also, they can continually screen the eligibility roles and make certain the potential enrollee is in the proper program.

Competition. One of the problems in both Medicaid and Medicare is the absence of a variety of private sector alternatives. This is the principal reason why both programs have failed to keep pace with developments in private health insurance.

For example, when Medicaid and Medicare were created in 1965, most private insurance plans (including the most common Blue Cross/Blue Shield plans) did not include coverage for prescription drugs. Since the government programs largely copied the design of private insurance, they also excluded prescription drugs. After a third of a century of developments in medical science, private insurance today is quite different. Virtually all major medical plans in the private sector cover drugs and, for reasons given above, most see drugs as an inexpensive alternative to hospital and physician therapies. But because the government programs were creatures of politics, insulated from competitive pressures, they have not changed. Medicare still does not cover most prescription drugs, and drugs are still an option under Medicaid.

In order for Medicaid enrollees to participate in, and benefit from, insurance that meets the market test and evolves as medical science evolves, beneficiaries need access to the same options that are routinely available to other citizens. How can they gain that access?

"Founded in 1965, Medicaid has not adapted to changes in medical science."

On entering office, President Bush and Health and Human Services (HHS) Secretary Tommy Thompson announced a streamlined section 1115 waiver process named the Health Insurance Flexibility and Accountability (HIFA) initiative. The section 1115 waiver, granted by the Centers for Medicare and Medicaid Services (CMS), has traditionally been the chief research and demonstration process to test innovative comprehensive Medicaid reform. The idea is to enable states to perform as "laboratories for democracy." Since August of 2001, states have had the opportunity through waivers:34

• To reduce some benefits in return for increases in other benefits;
• To reduce benefits in return for increases in the number of people eligible for those benefits; or
• To reduce benefits for some people in order to create a new set of benefits for others.

Suppose a state wants to expand eligibility to a new population (and qualify for federal matching funds for its spending on that group) without increasing the total amount of federal spending on health care. Under a HIFA waiver the state can have access to three sources of funds to pay its share of costs for the newly eligible:

• Disproportionate Share Hospital (DSH) funds, which are federal and state funds available to hospitals treating a disproportionate share of Medicaid and charity care patients.
• Unspent State Children's Health Insurance Program (S-CHIP) funds.
• Savings from the reduction of Medicaid benefits for currently eligible populations or the reduction in eligible populations.

Furthermore, the benefits created for the newly eligible group can be more limited than the benefits that were available to the previously eligible group.

There are certain restrictions on the waivers.35 Usually, they are valid for three years (although they can be renewed). They must be budget neutral (the federal government must not expect to expend any additional funds). The state must be trying to "research an idea" (not just cutting costs). Certain populations must be "held harmless" (usually pregnant mothers and children). Certain benefits must be protected.

"States can attain flexibility through waivers."

Essentially, however, states can adjust almost all the benefits, eligibility and reimbursement standards. They need only CMS approval, not any congressional or judicial approval. If the waiver proves unsuccessful at any time, the state can unilaterally cancel after not adding any new enrollees for six months.

The intention of the 1115/HIFA waivers is to find ways to expand eligibility while not spending any more money. Tried as a defined contribution approach, it can be successful and provide quality care and patient satisfaction. For example, a reformed system under a wavier might work like this:

• Compare the present Medicaid program (benefits and cost) to some other health plan, such as a private plan routinely made available to state employees.
• Calculate what Medicaid would save if it paid only for the benefits of the private program (assuming no change of behavior); say the savings is 10 percent.
• Then for every 10 Medicaid enrollees that choose to join the private plan, the state could afford to extend coverage to one more potential Medicaid enrollee and stay budget neutral.
• If savings were greater than 10 percent (say, because of actual behavioral changes), the state could return the surplus to the taxpayers, support "safety net providers," or spend it on something else.
• If the Medicaid enrollee is able to obtain the same type of plan from an employer, the state could significantly reduce expenses by paying only the employee's share of the premium.

Any governor or legislature considering these waivers should note two caveats. First, these programs must be monitored carefully to see that projected savings appear. Otherwise, all the waiver will do is increase enrollment and costs.36 Second, a bureaucracy can kill any new initiative.37 It is usually not in the interest of an agency to admit that a better way exists or to implement it. The waiver should be administered directly from the governor's office or some new independent agency/board. For example, the Federal Employees Health Benefits Program is not administered at CMS. It is administered in the White House Office of Personnel Management by an appointee reporting directly to the President. If a new Medicaid program is structured using private insurance, perhaps it should be administered by the State Commissioner of Insurance rather than the present Medicaid bureau.

Portability. There are serious quality and continuity of care problems in the present Medicaid program. At least a quarter of all Medicaid eligibles are in and out of the program each year.38 As a result, patients can be tossed from physician to physician multiple times a year. Many find using a hospital emergency room more convenient than having a primary care physician. Lack of portability also is a disincentive to find work and leave the Medicaid rolls.

"Ideal health insurance is portable insurance."

Of course, the easiest way to obtain portability is to allow Medicaid beneficiaries to enroll in plans their employers offer. The key to good health care is continuity of care: keeping one's physician, knowing one's hospital and understanding how best to access the system for oneself and one's children. Quality also depends on providers wanting to provide that care, which is more likely if patients are exercising choice. It is even more likely if patients are managing some of their own health care dollars.

Empowerment. Arkansas, New Jersey and Florida were the first states to receive Section 1115/ HIFA waivers (described above) that provided disabled Medicaid recipients direct cash payments to purchase needed services. This program, "Cash and Counseling," encompasses the essential elements of a defined contribution approach. The patient is given a set dollar contribution and is free to choose his or her providers.

The program also involves counseling to assure that the patient is well-informed. Previously, the states selected the providers without patient input. Now the patient can choose his or her own provider. Unbelievably, patient satisfaction is almost 100 percent.39

"Ideal health insurance empowers patients."

Another promising idea is the use of a Medical Benefit Account (MBA), an idea similar to Medical Savings Accounts (MSAs), except that funds in an MBA would be restricted to health care and health insurance premiums and could not be withdrawn as cash.40 Through this account, beneficiaries would manage some of their own health care dollars and thus would have incentives to make prudent health care choices. Opponents believe that the poor will forgo needed health care to accrue more cash. However, through a debit card, the state could ensure that the recipient completed certain medical procedures such as child immunizations or prenatal care before accessing any cash. The recipient could then use his or her remaining MBA funds for other health, social, child education or job training needs.

Paying for Results. The cost control methods the private sector plans use will be those that survive the market test. However, even for those who remain in traditional Medicaid, more can be done to insure that taxpayers get their money's worth.

The first and most important goal is to pay for services rendered rather than paying for the cost of producing those services. Only a few decades ago, our entire health care system was based on cost-plus finance.41 Blue Cross and most other private insurers paid hospitals based on their costs. So did Medicare. So did Medicaid.

Today, almost no private insurers pay hospitals based on their costs. And the federal government pays hospitals under Medicare on a DRG system - with fixed fees for treating different categories of illness, regardless of actual costs.42

The exception is Medicaid. All too often state Medicaid programs pay hospitals, nursing homes and other facilities based on some version of cost-plus finance. For example, Table A-I shows the basic rate Medicaid pays hospitals in Dallas County. As the table shows, the state pays different hospitals very different amounts for what are essentially the same services. Private insurers, by contrast, tend to contract with hospitals selectively, steering patients to facilities that charge the lowest prices, other things equal.

Nursing home care reimbursement also is in urgent need of reform. Under Ohio's cost-based method of payment, for example, the state is paying for 13,000 empty beds. To make matters worse, Ohio's method of reimbursement encourages churning (wherein operators sell nursing homes back and forth to each other) and even encourages bankruptcy. [See the sidebar on "Paying for Long-Term Care in Ohio."]

"Medicaid should pay for results, rather than reimbursing for costs."

The second goal is to take advantage of evidence-based disease management and care coordination43 to assure that services provided are necessary and appropriate.44 Where treatment protocols do not exist, the state should foster their development in conjunction with academic institutions and practi-tioners. Doctors still would retain the right to make treatment decisions for their patients, but when they chose to prescribe treatments other than those in the protocols, they would know they have a higher burden of justification. [See the sidebar on "Smart Buying in Texas."] Protection from liability, or at least limited liability, could be the reward for following protocols.

A third goal is to eliminate errors. Some of the more costly problems include drug misuse, antibiotic overuse, preventable hospital-acquired infections, and the under-diagnosis and mistreatment of chronic conditions.45 Medical errors are dangerous and costly. Elimination of errors in diagnosis and care provides better treatment at lower cost. Everyone wins.

A fourth goal is to create evaluation and payment systems with incentives to lower cost and achieve desired outcomes. If the state paid only for outcomes it deemed worthwhile,46 it could reap significant savings in such areas as mental health care, substance abuse treatment and purchases of durable medical equipment.47

Some might argue that the achievement of these goals was supposed to be the purpose of managed care. Yet during the 1980s, all too often managed care consisted of little more than negotiating price discounts, even though the managed care organizations (MCOs) claimed they were instituting efficiencies and eliminating waste. Actually, a lot of dollars can be saved without a large managed care bureaucracy by simply using common sense. [See the sidebar on "Smart Buying in the Texas S-CHIP Program."] [Full disclosure: One of our authors, Ronald Lindsay, is involved with this project.]

"Our primary goal should be to place people in private health plans."

Devolution. For those who remain in traditional Medicaid, another useful idea is to give local communities more control, say through a block grant of funds. An example of a community that could benefit from more flexibility is El Paso, Texas.48 As Table A-I shows, El Paso (the Upper Rio Grande area) has a low utilization of Medicaid, but a high level of spending for uncompensated care. Moreover, under Texas reimbursement formulas, El Paso hospitals are paid at rates that are above the state average, while primary care clinics are starved for resources. A typical primary care clinic, for example, lacks an X-ray machine or even a lab and must send patients to a local hospital for simple diagnostic tests.

As a result of these factors, El Paso's low-income population overutilizes hospital care and underutilizes outpatient care. The city and its people would be better off it were free to reallocate funds from inpatient to outpatient care. But restrictions on the use of funds apparently make this difficult, if not impossible.

More Radical Devolution. How far can devolution go? In searching for an answer to that question, consider first one of the most perplexing questions about Medicaid. An estimated 3 million adults in the United States are eligible for Medicaid but do not bother to enroll. An estimated 6.8 million children who are eligible for S-CHIP or Medicaid are not enrolled.49 Yet if these health insurance programs are valuable, and given the amount of money they spend, they must be, why do people choose not to enroll?

"For those who remain in the public sector, we need block grants to local communities."

A visit to the emergency room of Parkland Hospital in Dallas suggests an answer. This is the primary portal into the health care system for Dallas area residents who are on Medicaid and also for those who are uninsured. However, Parkland often fails to achieve its enrollment goals for the uninsured. The question for public policy is this: If the patients and the doctors do not care who is enrolled in which program, why should policy-makers care? Why not just give Parkland hospital a sum of money each year and let it deliver indigent health care?

Most communities receive health care funding from both the state and the federal government. These funds flow through such programs as Medicaid, S-CHIP, DSH, etc. Each program has its own set of rules, narrowly prescribing how the funds may be spent. Local communities have no power to allocate resources in ways that would maximize their impact.

For example, in one community the greatest return on health care spending may come from fluoridating the water supply. In another, the greatest return may come from improving sanitation. Yet local communities have no authority to use their diverse health care funding to achieve these goals. Ideally, cities should be able to combine all their public health care dollars and freely allocate them so as to achieve maximum health impact.50 Our primary goal should be to enroll people in private sector plans. But to the degree that we cannot, we should make access to care as easy as possible.