Medicaid Empire: Why New York Spends so much on Health Care for the Poor and Near Poor and How the System Can Be Reformed

Studies | Health

No. 284
Monday, March 20, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, Joe Barnett, and Pamela Villarreal


Executive Summary

Medicaid, the joint federal-state health care program for the poor and near poor, is the largest single expenditure by state governments today. At the rate the program is growing, it is on a course to consume the entire budgets of state governments in just a few decades.

Although Medicaid is commonly assumed to be a health program for welfare recipients, there are ten times as many people on Medicaid as there are receiving welfare checks. Medicaid now costs American taxpayers more than Medicare, or more than $1,000 per year for every man, woman and child in the country. The tax burden for both programs combined is more than $8,000 a year for the average family of four. Nationally, Medicaid now covers:

  • One in every six people.
  • One in every three children.
  • One in every two births.

More than one of every two nursing home residents.

New York's Medicaid program is especially costly. New York has less than 7 percent of the U.S. population, but spends about 14 percent of the nation's Medicaid dollars. In 2004, the latest year for which complete data is available:

  • New York spent $10,349 per enrollee, compared to the nationwide average of $6,834. Only New Hampshire spent more.
  • New York Medicaid spent about $2,165 for each state resident (more than any other state) and almost two-and-one-half times the national average.

Why Is New York's Medicaid Program so Costly? Higher living costs do not account for the high Medicaid spending in New York. The state spends more because of policies that encourage higher spending and discourage cost control. Other states share some of these same problems, but none have such a wide array of perverse incentives. Specifically:

  • Unlike most other states, New York offers coverage to virtually all optional populations, and covers almost all optional services.
  • New York pays physicians less than almost any other state, even though physician therapies are often more cost effective than hospital therapies.
  • In contrast to its treatment of physicians, New York pays hospitals generously; whereas in most states Medicaid pays the lowest hospital fees of any payer, in New York Medicaid pays the highest fees of any payer — including private insurers.
  • New York does not use smart buying techniques, such as selective contracting with providers, to reduce costs.
  • New York spends more than any other state on drugs and pays some of the highest drug prices of any state; the state imposes few restrictions on doctors who prescribe the most expensive drugs, when lower-cost alternatives are often just as effective.
  • The political incentives to spend are greater since the New York legislature bears only a fraction of the cost (less than almost any other state); for every dollar the state spends, it can confer $4 of benefits.
  • New York does not aggressively pursue fraud — even failing to spend a substantial portion of the federal funding available for antifraud efforts; in 2004, only 37 cases of suspected fraud were uncovered.
  • New York's insurance regulations raise the cost of private insurance, and make (free) Medicaid coverage more attractive.
  • While personal and home care substitute for institutional care in other states, New York spends more than most states for all three, and a fourth of all Medicaid dollars spent nationwide for personal care are spent in New York!

If New York Medicaid were as efficient as the average state program, it could spend billions of dollars less to achieve the same health outcomes, and would have billions of dollars each year to fund tax cuts or other spending programs.

What Can New York Do to Improve Medicaid and Control Costs? New York can control costs and improve services, by adopting common-sense reforms; by contracting with private sector providers for services; by fundamentally restructuring its program; and by moving patients out of Medicaid and into private sector plans. As part of this reform effort, the state also needs to completely overhaul long-term care and home health services. The common-sense reforms include:

  • Negotiating discounts for most medical services through selective contracting.
  • Treating patients in outpatient settings, such as doctors' offices, where medically appropriate.
  • Paying higher fees to physicians to increase patients' access to health care and reduce expensive emergency room visits.
  • Controlling drug costs using private-sector techniques, including pharmacy benefit managers (PBMs).
  • Setting up cash accounts that disabled Medicaid recipients can use to manage their own health care dollars and take direct control over the purchase of needed services.
  • Adjusting payments to hospitals to reward facilities that achieve low infection rates and reduce errors.
  • Coordinating care to improve its quality and reduce medical errors, such as drug interactions, and instituting disease management, which involves developing treatment plans based on current protocols and training patients how to the follow them.
  • Pursing fraud aggressively by giving local governments the authority to prosecute fraud and financial incentives to recover payments.

Structural reforms are also needed. Local governments, including counties, pay about 25 percent of the cost of Medicaid, and the federal government pays more than half. Since Medicaid spending is determined by the state government, the way the program is financed violates the principle that those who spend the money should bear the responsibility of paying for it. One solution is to block grant the funds to local governments, and let them locally manage their own Medicaid dollars.

Insurance market reforms are also needed. One reason so many people turn to Medicaid is that they have been priced out of the market for private health insurance by cost-increasing regulations. New York insurance laws allow people to obtain insurance once they become ill (guaranteed issue) and require insurers to charge the same price regardless of age and health status (community rating). This encourages people to remain uninsured until they get sick and causes the cost for those who need insurance to be way too high. A better way is to establish high-risk pools like those now available in 32 states.

New York is one of four states with a pilot project that provides financial incentives for people to purchase long-term care insurance. When the insurance is exhausted, special eligibility rules allow them to receive Medicaid benefits while retaining assets equal to the value of the policy. This is a good program with a worthy goal. But compared to other states, New York's rules are too restrictive. Also, the state needs to give people financial incentives to choose (less-costly) home care over nursing home care. Other financing mechanisms also should be encouraged, including reverse mortgages, home sales contracts and viatical settlements.

How Can We Empower Medicaid Enrollees? A more fundamental reform is the creation of cash accounts that enrollees use to pay out-of-pocket costs. About half the states have cash and counseling pilot programs under way, allowing disabled Medicaid enrollees to manage some of their own health care dollars. (Patient satisfaction is near 100 percent!) Florida and South Carolina are about to integrate such accounts into their regular Medicaid programs.

What Is the Alternative to Medicaid? The ultimate goal of Medicaid reform should be to move patients to the same type of private health plans most Americans have. Private-sector plans may appear less generous on paper than the current Medicaid program, but they usually allow enrollees to access a greater range of providers and facilities. Enrollees in a Florida pilot program, for example, will be allowed to use their Medicaid funds to pay premiums for employer-sponsored plans where they work. New York Medicaid patients should also be allowed to enroll in the same plans that cover state employees.

Some of these changes the state can make itself; others require waivers from the federal government. In either case, the state should move forward with reform. Without change, patient care will likely deteriorate, and the Medicaid Empire will sink the taxpayers of the Empire State.


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