Opportunities for State Medicaid Reform

Studies | Health

No. 288
Thursday, September 28, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, 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.

The Growth of Medicaid.  Although Medicaid is commonly assumed to be a health program for welfare recipients, there are 10 times as many people on Medicaid as there are receiving welfare checks.  Medicaid costs American taxpayers more than $1,000 per year for every man, woman and child in the country, or $4,000 a year for a family of four.  Including Medicare and other public health care spending, the average family of four is spending more than $11,000 on other people's health care - more than the cost of health insurance for such a family in almost all states. 

The program has grown far beyond the scope originally envisioned.  Nationally, Medicaid 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.

What Difference Does Medicaid Make?  It is commonly assumed that Medicaid enrollment is preferable to being uninsured, but little thought has been given to the actual effects of Medicaid on the people it serves.

  • One study found that Medicaid's strict eligibility requirements induce enrollees to consume more and save less, reducing their average household wealth by $1,600 to $2,000.
  • Another study found that Medicaid expansions have been substantially offset by reductions in the number of people with private coverage, as people drop private health insurance to take advantage of "free" health insurance.
  • A recent RAND Corporation study found that there was very little difference in the quality of health care received by Medicaid enrollees and uninsured individuals, once they saw a doctor.

Unequal State Spending.  Medicaid programs consume more than one-fifth of the average state budget, more than the average state spends on public schools.  However, spending per Medicaid enrollee varies widely.  For example:

  • New Hampshire spends about $12,093 per Medicaid enrollee, the most of any other state, compared to the nationwide average annual cost of about $6,834.
  • In contrast, Arkansas spends only $4,410 per enrollee.

Higher living costs or health care costs do not explain this wide disparity in state spending. 

Waste, Fraud and Abuse.  Both high- and low-spending states waste funds in some obvious ways.  For example:

  • New York pays for millions of trips by ambulatory patients in specially-equipped vans when low-cost public transportation is available.
  • Ohio pays for 12,000 empty nursing home beds each year.
  • In Colorado, Michigan and many other states Medicaid has paid for services to beneficiaries who are no longer living, due to a lack of controls on provider reimbursements.

Some Medicaid abuse is fraud, but it is difficult to determine the extent in states that do not make aggressive efforts to discover it.  Fraud and abuse may consume as much as $1 of every $10 nationwide, according to the Government Accountability Office, and more than $1 of every $5 in New York Medicaid, according to one estimate.  A New York Times investigation found massive provider fraud in New York City, including a dentist who claimed to have performed nearly 1,000 procedures in a single day and 9,500 procedures in one month.

Costly State Policies.  There are widespread practices that raise state Medicaid costs:

  • Many states cover far more of the population than the poor and provide more generous benefits than the private sector, encouraging individuals to drop private health insurance.
  • Many states underpay physicians and overpay hospitals, encouraging hospital-based treatment instead of less expensive care in doctors' offices.
  • Many states pay premium prices for brand-name drugs even though lower-cost generic and over-the-counter medications may be just as effective.
  • Many states encourage nursing home care over lower-cost community-based care or home care.
  • Many states also pay the long-term care expenses of middle- and upper-income seniors - but make little effort to recover costs from their estates or their children.

Common-Sense Reforms.  There are a number of reforms states can implement without bureaucratic federal hassles.  These include such common-sense changes as:

  • Substituting less-expensive for more-expensive therapies and providers wherever possible;
  • Selective contracting with hospitals and other health care facilities;
  • Instituting pay-for-performance programs where possible, reimbursing providers based on outcomes, not services rendered.
  • Expanding efforts to detect fraud and abuse to recapture inappropriate provider payments.
  • Exploiting less expensive alternatives to nursing home care and recapturing the assets of deceased nursing home residents to defray the cost of their care.

Fundamental Reform: Consumer-Driven Health Care.  America is on the leading-edge of a consumer-driven health care (CDHC) revolution that will transform private health insurance and care delivery.  A number of states are undertaking initiatives that inject CDHC principles of competition, choice and control into Medicaid.  Among the ways this can be done:

  • Give patients control of some of the Medicaid dollars spent on their health care by establishing Health Opportunity Accounts that enrollees can use to pay for some health services, providing them financial incentives to consume health care wisely.
  • Allow enrollees to enroll in employer-sponsored plans where they work using Medicaid funds to pay the employee's share of premiums and/or allow them to purchase private health insurance directly.
  • Create financial incentives for people to purchase long-term care insurance instead of relying on Medicaid.

The new Deficit Reduction Act gives states a wide range of options to reform their Medicaid programs, although in some cases states must still apply for waivers from the federal government. 

More Radical Reform: Block Grants to the States.  More fundamental reform will require federal legislative changes.  One might assume that the federal contribution to state Medicaid programs is based on each state's poverty population.  Yet, this is not the case.  For example:

  • New York has 8 percent of the nation's poverty population, but gets 12.9 percent of all federal Medicaid dollars.
  • By contrast, Texas has 10.3 percent of the nation's poor, but receives only 6 percent of federal Medicaid dollars.

Ideally, Congress should distribute federal funds in block grants based on each state's poverty distribution and allow the states full discretion over their use, provided they are spent on indigent health care.  The block grant could include federal Medicaid funds and State Children's Health Insurance Programs (SCHIP), along with other federal health dollars. 

States would have the flexibility to design their own systems, and would realize the full benefit of every dollar saved through more efficiently-delivered care and pay the full cost of every dollar of unwise spending.


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