NCPA - National Center for Policy Analysis

Medicaid: Broken, In Need of Reform

April 25, 2013

The implications of the creation of the Medicaid system were not clear to its creators when it was tacked on to the Social Security Act Amendments of 1965. However, today there are essentially 50 different Medicaid programs whose total spending accounts for 2.8 percent of gross domestic product (GDP), or $400 billion a year. Medicaid is unsustainable and its structure and incentives must be reformed, says Paul Howard, a senior fellow at the Manhattan Institute.

  • Between 2002 and 2011, spending on Medicaid rose 64 percent and enrollment is expected to increase by 24 percent by 2020.
  • Medicaid is financed through a complex hybrid funding structure that shares responsibility between the federal government and the states, which each independently administer their own program and decide funding levels.
  • The disparate funding levels between state Medicaid programs creates a system full of funding gimmicks and low payments that drive many health care providers to reject Medicaid patients.
  • Low payments also reduce the quality of care Medicaid recipients receive and restrict access as many doctors refuse to accept new Medicaid patients.

Medicaid costs and expenditures are expected to rise as fraud and overpayment within the system are rampant -- estimated at $98 billion a year. With the system already broken, ObamaCare provides for the expansion of the program to an additional 12 million new enrollees by 2023 while restricting states' ability to manage or alter the programs.

  • Reforms to the system must address the lack of accountability by capping federal Medicaid spending, granting states more flexibility and responsibility, or funding state Medicaid programs through block granting.
  • Block granting -- a once-yearly, fixed transfer -- has been successful in constraining costs within the Temporary Assistance to Needy Families program that supports low-income families and children.
  • States should also be required to help able-bodied Medicaid enrollees transition to private medical care, which would give patients more access to doctors while ensuring that Medicaid does not become a poverty trap by cutting off benefits when income rises too high.

Regardless of whether states expand Medicaid under ObamaCare, the system must be reformed. Several states, including Rhode Island, Indiana and New York, have pursued patient-focused reforms that are lowering costs and improving health care efficiency.

Source: Paul Howard, "A Prescription for Medicaid," National Affairs, Spring 2013.


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