Opportunities for State Medicaid Reform

Policy Reports | Health

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

Private-Sector Alternatives to Medicaid

“Ultimately, Medicaid reform should move patients to private health plans.”

The ultimate goal of Medicaid reform should be to move patients to the same type of private health plans most Americans have. Medicaid enrollees should have the same opportunities to benefit from the innovations and greater access to care found in the private sector.  In order to move in that direction, states should encourage private insurance, remove barriers to competition and allow Medicaid recipients to participate in private plans. 

Encouraging Private Insurance.  In many states, taxpayers foot the bill for Medicaid benefits that are more generous than the coverage provided by private health insurance plans.  This is unfair and unwise.  It is unfair because taxpayers should not be forced to provide others with better health benefits than they purchase for themselves and their families.  It is unwise because Medicaid recipients are largely insulated from many of the cost-controlling, quality-improving innovations used by private-sector plans.  For example, Medicaid enrollees are not subject to copays and deductibles, and they are provided benefits such as free transportation to appointments and virtually free prescription drugs - perks that are almost unheard of in private health plans.156

“Private-sector competition would benefit Medicaid Patients.”

Private-sector plans may appear less generous on paper than the current Medicaid program, but they usually allow enrollees access to a greater range of providers and facilities.  For example, enrollees in a Florida pilot program will be allowed to use their Medicaid funds to pay premiums for employer-sponsored plans where they work or choose coverage from among competing private insurers.  For some patients, this will essentially move Florida Medicaid from a defined benefit entitlement to a defined contribution plan.157  Beneficiaries will receive risk-adjusted credits that reflect their health status with which to purchase managed care plans from providers.158  They will be able to choose among competing plans with different benefit packages.159

Private-sector plans have incentives to control costs and improve quality when they compete for customers in the marketplace.  Other states should allow Medicaid patients to enroll in private-sector plans, including employer plans and individually owned insurance.  They should also be allowed to enroll in the same plans that cover state employees.  Medicaid patients should be allowed to benefit from such competition. 

Competition to Insure Medicaid Enrollees.  One way a state can provide an incentive for insurers to compete for Medicaid enrollees is by creating a marketplace where providers offer health insurance to beneficiaries.  The role of the state would change from being the buyer of health care to facilitating a real marketplace in Medicaid.160  The state could underwrite actuarially fair credits for enrollees to purchase services from providers.  Properly designed risk-adjusted payments could avoid the problem of "cherry picking" healthier (that is, cheap-to-treat) enrollees.  Software is being developed for risk-adjustment.  The Centers for Medicare and Medicaid Services has implemented a new plan to rate-adjust Medicare managed care payments based on more than 70 variables.  Medicaid managed care programs could use a similar system.161

An additional method to avoid "cherry picking" is to require an actuarial payment from one provider to another when enrollees switch plans.162  If a chronically ill enrollee leaves one plan for another, the provider would be required to make a payment to the new health plan.  This would make firms less afraid to enroll chronically ill people since a payment would accompany the enrollee.  It would also induce providers to cover chronic disease management to prevent enrollees from leaving.163

To further encourage participation in disease management and healthy behaviors, a state could provide a reverse health savings account, a type of flexible spending account that allows enrollees to earn credits in return for participating in programs that improve health.164  These noncash credits could be used to pay out-of-pocket costs.  Florida is currently experimenting with this idea in its Medicaid reform plan. 

Reducing the Cost of Private Insurance.  As states continue to reform the ways in which they provide Medicaid services, they should also consider reform of private insurance regulations, since the rising cost of private insurance has affected both the number of Medicaid enrollees and the costs of health services across the board.

Direct state subsidies are a better way than community rating and guaranteed issue to cover patients who are uninsurable due to chronic health conditions.  Thirty-two states have some type of high-risk pool for medically uninsurable residents.  Those allowed to join generally have preexisting conditions that make insurance prohibitively expensive or impossible to obtain on their own, but they are not necessarily indigent or low-income.  Each state program differs slightly and maximum lifetime benefits vary.  Most have waiting lists to join or waiting periods before covering preexisting conditions.  The pools are state-subsidized and are expected to lose money.165

Massachusetts Gov. Mitt Romney recently signed into law an innovative plan to insure at least 90 percent of the state's residents.  While the plan has its flaws, it also contains features to change the state's Medicaid program and make private insurance more affordable.  Massachusetts' plan partially deregulates the small-group and individual health insurance markets in the state.  Individuals between the ages of 19 and 26 will be able to purchase mandate-free insurance coverage with fewer benefits at a lower cost.  The new law is based on the assumption that limited-benefit insurance is better than no insurance - especially for young people.

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