A Specific Waiver Proposal

A HIFA waiver alone, without any cost-control efforts, would be unwise. But an HIFA waiver could be coupled with market incentives to improve quality and reduce costs and with other appropriate cost-control activities. Furthermore, phasing in parts of the HIFA waiver and limiting eligibility expansions until each phase has been evaluated can limit unanticipated financial risks.51 What follows is a specific proposal.

1. Medicaid Benefit Changes. Medicaid has a very rich benefit package. Consistently, Medicaid benefits exceed most private insurance benefits in most states. As a result, taxpayers generally have lower benefits in their own health insurance plans than those provided to Medicaid enrollees at taxpayer expense.

This is unfair and unwise. It is unfair because taxpayers should not be forced to provide others with health benefits more generous than they can afford to purchase for themselves and their families. It is unwise because the Medicaid population is largely insulated from many of the cost-controlling, quality-improving innovations that are available to private sector plans.

"Medicaid enrollees should be allowed to join private plans, including employer plans and individually owned insurance."

Medicaid enrollees should be allowed to enroll in private sector plans, including employer plans and individually owned insurance plans. To qualify to accept Medicaid enrollees, a health plan should have to offer benefits at least as generous as any of the plans currently offered to state employees. In addition, the state should authorize a new type of plan that incorporates a health care savings account.

Although the private sector plans may appear less generous on paper than the current Medicaid program, they usually would allow enrollees access to a greater range of providers and facilities. Put differently, this proposal would allow Medicaid enrollees to participate in the same kinds of health plans as other citizens.

2. Eligibility Changes: As noted above, the benefits provided to a new group of eligibles under a federal waiver do not have to be identical to the benefits provided to the currently eligible. Nor does the state subsidy have to be the same. One option is to follow Utah's example and provide primary care only to the newly eligible population. [See the sidebar on "The Utah Experience.] Another option is to allow the new eligibles access to an insurance exchange (see below) but subsidize the insurance on a sliding scale, with additional income reducing the premium subsidy.

To discourage crowding out of private coverage, the state could impose a waiting period between the time individuals lose private coverage and the time they are eligible for Medicaid. In a more extreme manner, the state could deny Medicaid coverage to any individual whose employer offered private insurance. Since Medicaid payments often are made on behalf of individuals who have private health insurance, workmen's compensation and/or liability insurance, the state should vigorously attempt to recover these funds from the appropriate carriers.

3. Marked-Based Cost Control Devices. In order to take full advantage of cost-controlling, quality-improving innovations in the private sector, Medicaid enrollees need access to health plans that compete for customers in the marketplace. One way to provide that access is to allow Medicaid beneficiaries to enroll in employer plans for which they qualify at Medicaid's expense. Provided the plan satisfies the benefit requirements described above, Medicaid should be willing to pay the standard employee contribution or 50 percent of the premium, whichever is less.

[Note: To enable employers to offer the same type of insurance to their employees that is available to state employees, such employer plans must be free from state mandates and other cost-increasing regulations.]

Those beneficiaries who do not have access to employer plans should be able to participate in a state-operated insurance exchange, or health mart, to directly enroll in individually owned health insurance plans. [See the sidebar on "Making Health Marts Work."] The carriers participating in the insurance exchange would offer a host of competing health plans. Participants could purchase an HMO type plan, a preferred provider plan or a plan combining significant patient cost-sharing with a Medicaid Benefit Account (see below).52

"Structured properly, competition can help meet patient needs."

The insurance exchange would have the following features. The role of the state would be to organize the exchange, solicit information from a host of health plans and make information available to the beneficiaries. This would make the plan similar to the federal government employee health insurance system.53 Health plans would be required to accept enrollees at risk-adjusted premiums based on age and sex. Those failing to make a plan choice would automatically be enrolled in the "no frills" plan with limited choices (probably a closed-panel HMO). The exchange could be contracted privately, with Medicaid overhead reductions financing the operation. Health plans offered through the exchange would be exempt from state small-group market reforms and laws mandating health benefits. This could significantly lower the cost of coverage.

The introduction of an insurance exchange would put the marketplace to work to reduce costs and encourage innovation, allowing beneficiaries to choose among private sector plans. This would also make it easier for those leaving public assistance to keep medical coverage, since they or their employer could simply substitute private premium payments for the state subsidy. Other advantages of this plan: reasonably priced coverage for the poor and near poor, continuity that permits the poor to keep their coverage when they leave public assistance, an entry point for Medicaid beneficiaries into the private insurance system, and the publication and distribution of easy-to-understand information about each plan.54

The state would move from being a health insurer to a health financier. Its role would be to set the ground rules, determine what minimum benefits private insurers would have to offer, solicit insurers to join, collect information about plan benefits and costs, and provide the information to prospective enrollees through the state insurance exchange.

"Patients should be able to control some of their own health care dollars through Medicaid Benefit Accounts."

4. Patient Power Cost-Control Devices. When patients have first-dollar coverage for health care services, they have no incentive to avoid waste or insure that they get a dollar's worth of value for each dollar they spend. To the contrary, if the out-of-pocket costs are zero, patients have an incentive to utilize health care services until their value approaches zero, at the margin. Similarly, doctors treating patients with first-dollar insurance coverage have an incentive to provide services as long as those services offer any positive medical benefit (or probability of benefit), even if the value of the benefit is well below its cost.

Managed care arose to try and counteract these perverse incentives. But all too often managed care consisted of an impersonal bureaucracy that put cost control ahead of patient welfare. As an alternative, many employers across the country are empowering employees by letting them manage some of their own health care dollars and experience the costs and benefits of prudent health care consumption.55

State Medicaid programs need to follow this example. Beneficiaries should have access to plans that combine patient cost sharing with a health care saving account called a Medicaid Benefit Account (MBA).

Since these accounts would be wholly or partly funded with taxpayer dollars, they should probably by restricted to the payment of medical bills and insurance premiums. Beneficiaries who consumed health care wisely and saw their MBA balances grow through time would not be able to withdraw these balances for non-health care spending. However, they would be able to use the funds for medical services not covered by their health plan. And in the future, they would be able to use unspent balances to pay insurance premiums and buy medical care directly after they left the Medicaid rolls. [See the sidebar on "Medicaid Benefit Accounts."]

Expected Benefits from the HIFA Waiver. The HIFA waiver recommendation is based on the twin principles of free markets and personal responsibility.56 A number of significant benefits can result from this approach:

• First, moving to a market-based system can provide greater freedom and efficiency than the present system allows.
• Second, individual recipients and providers can be given incentives to improve quality and lower costs, to benefit them and other taxpayers.
• Third, the effects of these improvements and resulting savings can continue to accrue over time.
• Fourth, Medicaid can begin moving from Washington to the states, which better know their own needs.
• Finally, draconian cost increases can be reduced or avoided during a period when available revenue is limited.