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

Consumer-Driven Health Care

“When patients have fi nancial incentives, they are better consumers.”

In the private sector, patients are increasingly required to directly share in the cost of health care.  They also have increasing opportunities to make their own choices and manage their own health care dollars.166  This is the consumer-driven health care (CHDC) revolution.  CDHC usually involves health plans in which a person pays some medical expenses directly, usually from a personal account established for that purpose.  Evidence has shown that when individuals have the proper financial incentives, they will be better consumers of health care.  A decade-long RAND study from the 1970s examined the effect of cost-sharing on the use of health care services.  It found that individuals required to make a copayment for their care reduced their use of medical services, compared to those who received free care.  After a decade, there were no significant differences in health among the two groups.167

Consumer-driven health accounts can also be used in Medicaid. 

Health Opportunity Accounts.  The Deficit Reduction Act allows 10 state Medicaid programs to set up five-year demonstration projects to provide Medicaid recipients with Health Opportunity Accounts (HOAs), similar to Health Savings Accounts (HSAs) used in the private sector.168  Proponents hope these accounts will create an awareness of health care costs and inject an element of consumerism into the purchase of medical services.  The states that choose to participate will receive federal matching funds to contribute up to $1,000 per child and $2,500 per adult into the HOAs.  HOAs can be used to purchase a variety of medical goods and services, and unused funds will be available for future use by participants.  Moreover, if patients become ineligible for Medicaid, they have up to three years to use up to 75 percent of their HOA balances to purchase private health insurance.169  South Carolina, which had already applied for a HIFA waiver to restructure its Medicaid program, has applied to become one of the 10 states.  [See the sidebar "Florida's Consumer-Driven Medicaid Reforms."]

A traditional objection to cash-balance accounts is the belief that the poor will forgo needed health care to accrue more cash; but unlike private-sector HSAs, the uses of personal health accounts could be limited.  Through a debit card, a state could ensure that a recipient completed certain medical procedures such as child immunizations or prenatal care before accessing any of his or her HOA balance. The recipient could then use the remaining funds for specified health, social, child education or job training needs.

“Patients could use personal health accounts to purchase services.”

Enhanced Benefit Accounts.  A new pilot program in Florida aims to improve outcomes by providing Medicaid enrollees with incentives to become actively involved in their care and treatment.  Deposits will be made to personal accounts for enrollees who practice healthy lifestyles.  They can use the funds to purchase health care goods and services not covered by their plan.  A panel will ultimately decide which activities qualify for this "enhanced benefit credit," but they will likely include such things as participating in wellness programs, obtaining annual immunizations, or partaking in disease management, smoking cessation and weight loss programs. Similar to HOAs, participants who leave Medicaid will have access to the funds for up to three years and can use them to pay premiums for private insurance.170

However, restricting HOAs and other benefit accounts to health care services may not be optimal.  Those who find that their balances are greater than required for their health care needs would have an incentive to simply consume more health care services in order to fully utilize their accounts.  Individuals should instead be able to convert health care services into credits that would go toward purchasing private health insurance.

Another objection to allowing Medicaid beneficiaries to exercise choice in health care providers is that the poor, elderly, blind and disabled either lack the ability to choose between plans or may be hoodwinked by unethical sales people.  Although this may be true of certain populations, it isn't true for most Medicaid recipients.  Evidence shows that for certain services, the poor have just as much ability to choose as the middle class.171   Even individuals with mild cognitive disabilities can participate in decision-making regarding their own care if given the opportunity to do so, according to research by the San Francisco-based Family Caregiver Alliance.  This might improve their satisfaction, since their preferences often differ from those of family caregivers.172

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