NCPA - National Center for Policy Analysis


August 27, 2004

State Medicaid programs are in financial crisis, and Medicaid spending will continue to grow faster than the economy if major changes aren't made, says the American Legislative Exchange Council.

According to their report, Medicaid offers patients and providers perverse incentives that boost costs without improving care:

  • Doctors who accept Medicaid patients are reimbursed at rates that are 30 to 50 percent lower than what even Medicare pays.
  • The low reimbursements encourage doctors to over-treat, over-service, and over-medicate Medicaid patients just to make ends meet.
  • Medicaid encourages patients to use high-cost emergency rooms for minor ailments, because the ambulance rides and immediate attention cost the patient nothing.
  • From 1999-2002, the percentage of practices open to "all new Medicaid patients" dropped by 23 percent, yet overall Medicaid spending jumped from $189 billion to $258 billion.

There are, however, ways to align incentives so that providers, patients, and state governments benefit, notes the report.

For example, a demonstration project called Cash and Counseling lets Medicaid patients use a cash allowance to buy personal care services. The patient controls the dollars and chooses which providers he wants to see, when, and at what price. Patient satisfaction rates with the program are very high, and the potential for long-term savings with such an approach is significant.

Source: James Frogue, "Medicaid's Perverse Incentives," The State Factor, American Legislative Exchange Council, July 2004.


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