Reforming Medicaid
Medicaid Today
"The nation is now spending more on Medicaid (for the poor) than it spends on Medicare(for the elderly)."
The Office of Management and Budget estimates total Medicaid spending will be $280 billion in Fiscal Year 2003, serving about 40 million poor, elderly and disabled. Medicare, by comparison will serve 40 million at a cost of $230 billion.18 This means Medicaid will spend more than Medicare for the second time in history (FY2002 was the first).
Medicaid versus Medicare. Medicare is a single federal health care program with a single national eligibility, benefits and reimbursement structure. By contrast, Medicaid is actually 56 separate state and territorial welfare programs with distinct eligibility, benefit and reimbursement rules.19 A person eligible for Medicaid in one state will not necessarily be eligible in another. Since upward of 70 percent of services and people are optional, the mix of eligibles, benefits and costs are unique to each state.20
Another difference between Medicare and Medicaid is that Medicare pays almost exclusively for acute care. It has no long-term care or drug benefit and is insulated from many of the problems of an aging America. Medicaid, by contrast, pays for two-thirds of all nursing home residents and 50 percent of all long-term care costs nationally. Although most people tend to think of Medicaid as the health insurance plan for welfare mothers, most of the money is spent on others. For example, long-term care accounts for more than 43 percent of all Medicaid costs but is used by only 9 percent of all enrollees. The elderly, blind and disabled combined account for about one-fourth of enrollees and almost three-fourths of all costs. Any successful reform must address this massive imbalance.21 [See Figure I.]
"The aged, blind and disabled account for one-fourth of the beneficiaries, but almost three-fourths of the spending."
In theory, Medicare is supposed to be a federal program, paid for by the federal government. However, there is a class of Medicare recipients called dual eligibles. They initially qualify for Medicare, but because of their low incomes and few assets they can also receive Medicaid. Although Medicare is the primary payer, states must pay for any benefits Medicare doesn't cover if Medicaid does cover them.
The issue of dual eligibles sounds obscure, but recall that Medicare does not have a long-term care benefit and Medicaid does. Also, Medicare does not have a drug benefit, but Medicaid usually does. As a result, these huge costs are born by the states. The states have no control over Medicare eligibility, but they are automatically responsible for Medicaid payment. The National Governors Association estimates that more than one-third of all Medicaid costs are for dual eligibles and has made this their principal issue with the federal government.22
Medicaid's Federal Match. As stated above, Medicaid is designed as a joint federal/state program. Currently, the federal government pays about 57 percent of all Medicaid costs (or $159 billion in FY2003) with states paying the rest (about $121 billion). The percentage each state pays varies. A complex formula called FMAP (Federal Medicaid Assistance Percentage or the "federal match") is used to calculate each state's relative per capita income. In "rich" states like New York, state spending is evenly matched by the federal government (each pays 50 percent). In "poor" states like Mississippi, the match has been as high as 83-17 percent.23
The average cost per Medicaid beneficiary nationwide is about $7,000.24 But because New York offers almost all optional benefits to all levels of enrollees, it spends almost double the national average. Mississippi, which has a less generous benefit package and confines coverage mostly to the "mandatory" poor, spends just about half the national average.
"New York receives twice as much federal money per enrollee as Mississippi - even though Mississippi's need is much greater."
The result is that New York receives about twice as much federal money for each enrollee as Mississippi, even though the need is much greater in Mississippi. This is why "block granting" Medicaid funds to the states has proved difficult politically. Block granting federal funds now being spent would lock in place a system in which the federal government continues to send the most money to the places that least need it.25 It is also the reason the Government Accounting Office (GAO) in 1995 declared the FMAP a failure in reallocating resources from rich to poor states.26
Medicaid's Impact on Economic Behavior. Although Medicaid was designed to assist people who need assistance through no fault of their own, the program offers perverse incentives. For example:
- Because Medicaid benefits are conditioned on low income, the program penalizes those who succeed; individuals can lose eligibility and therefore health insurance for themselves and their families simply by getting a workplace promotion or a raise.
- Because Medicaid benefits are conditioned on having few assets, the program encourages people to spend rather than save their income.
- Because Medicaid is an alternative to private insurance, the program encourages people to drop coverage they or their employers buy and rely instead on "free" Medicaid.
Very little research documents the ways in which people have responded to these incentives. But that modest research confirms what common sense would predict. Medicaid beneficiaries have behaved in a rational manner. They have dropped private insurance coverage, saved less and consumed more.27 Any attempted reform of state Medicaid plans needs to understand the perverse effects of the program already in place.
There is also empirical documentation of a "crowding out" effect of Medicaid on private health insurance. Nationwide, the percentage of children who can receive Medicaid increased by more than 50 percent between 1987 to 1992 and the number of women eligible for Medicaid if pregnant more than doubled. Thus, Medicaid coverage increased by more than 2.3 million. However, this increase was accompanied by a significant drop in private insurance, offsetting from 50 to 75 percent of the increase in Medicaid coverage. The vast majority of this reduction came from workers deciding to drop private coverage (particularly for dependents) rather than because their employers stopped insurance coverage.28
Medicaid's Impact on Health Behavior. An oft-cited argument for Medicaid is that by making health care virtually free at the point of consumption the program encourages preventive care and potentially reduces overall health care costs. Unfortunately, there is little evidence that this occurs.
"From 50 to 75 percent of the increase in Medicaid coverage is offset by a reduction in private coverage."
Studies suggest explicit attempts to encourage Medicaid beneficiaries to use preventive care are generally unsuccessful. For example, outreach programs in North Carolina found a statistically significant but very small impact on utilization.29 Another study found that providing Medicaid benefits for a year increased the probability of children receiving checkups by only 17 percent. The researchers concluded that "factors other than insurance and income, such as the low educational attainment of low-income mothers, explain approximately 80 percent of the gap between low-income and other children in their well-child visits."30 Research from the University of Washington found no evidence that prenatal care pays for itself by reducing future health care costs.31
Additionally, no definitive evidence links infant mortality rates to Medicaid coverage, and no evidence shows that becoming eligible for Medicaid significantly improves immunization rates.32