Experts Discuss Medicaid Reform

Published June 1, 2007

The need for Medicaid reform was the subject of a session in March at the 23rd Annual Washington Economic Policy Conference sponsored by the National Association for Business Economics. Panelists included senior fellows Devon Herrick of the National Center for Policy Analysis and Judy Solomon of the Center for Budget and Policy Priorities. Session moderator was Robert Graboyes, senior fellow at the National Center for Policy Analysis and University of Richmond visiting lecturer.

“This was a great event where various sides of the Medicaid debate were considered,” said Herrick.

There was little dispute among panelists at the 23rd Annual Washington Economic Policy Conference over the following statements regarding Medicaid:

  • Some 50 million people are enrolled in Medicaid or the State Children’s Health Insurance Program (SCHIP), which, like Medicaid, uses federal and state funds to provide eligible persons health care services.
  • More than one-quarter of all children in the United States receive coverage through Medicaid or SCHIP.
  • The cost of delivering half of all babies in the United States is paid for by Medicaid. In addition, about half of all nursing home residents receive Medicaid benefits.
  • The proportion of state budgets spent on Medicaid is about equal to state spending on K-12 education. In addition, annual Medicaid spending ($329 billion in 2005) is nearly as much as the $389 billion spent on Medicare.

Disagree on Remedies

How to respond, though, drew decidedly different answers from the panelists and moderator.

Devon Herrick said Medicaid experiences fundamental delivery problems, including a limited choice of doctors, excess waiting and rationing of services, and a phenomenon known as crowd-out.

He cited research by MIT economist Jonathan Gruber showing 50 to 75 cents of every dollar of new Medicaid spending actually goes for people who have dropped private coverage, crowding out private insurance. Thus, he observed, it is entirely possible to expand public health coverage without a corresponding drop in the uninsured.

Medicaid Incentives Criticized

Moderator Robert Graboyes said in some ways Medicaid combines the worst features of both American and Canadian health care.

“Americans have incentives to bounce between public and private insurance, and some get caught with neither,” Graboyes said. “Canadians endure limited choice, rationing, and long waits. Medicaid delivers both problems in one package.”

Because two-thirds of Medicaid spending falls into the category of optional spending, conventional Medicaid reform proposals often recommend reducing optional services and services to optional populations. Yet cutting optional services is not feasible, according to Graboyes, because “much optional spending is on populations, such as the disabled and the elderly, who have nowhere else to turn.”

Though Herrick argued for dramatic reform while Judy Solomon was more disposed to accept smaller changes, they largely agreed on a variety of reforms designed to discourage waste.

‘Cost Plus’ Waste Identified

One wasteful practice the panelists identified is “Cost Plus” reimbursement. Under Cost Plus, the government agrees to reimburse a health care provider’s service costs plus a small profit. This not only guarantees a profit to poorly run operations, but it also means some providers receive more payment than others for the same service.

As a result, no matter how mismanaged a hospital or other Medicaid service provider is, it makes as much profit as a well-run operation … and sometimes more.

One proposed solution is selective contracting, in which business is steered only to efficient providers (ones that will perform the service for a lower cost), panelists said. They also said another solution is for states to substitute low-cost services (such as office visits) for high-cost services (such as hospital emergency room visits) whenever they can.

However, Herrick and Solomon said such improvements would have only a small impact on Medicaid costs.

Waivers Draw Debate

Herrick supported and Solomon opposed a proposal for all states to request waivers from the federal government to block-grant all Medicaid funds. A block grant would allow greater state flexibility in designing Medicaid plans, such as using federal funds to subsidize employer coverage and tailoring benefits to meet the diverse needs of Medicaid enrollees.

Florida has already received federal permission to offer tailored benefits in several counties. South Carolina is preparing a similar waiver application. Massachusetts has received permission to subsidize private coverage using federal funds that had been subsidizing indigent-care hospitals.

Solomon said many Medicaid advocates do not support tailored Medicaid plans because most of them reduce traditional benefit packages offered to vulnerable populations. According to Solomon, “poor adults on Medicaid already spend more of their income on out-of-pocket medical expenses than higher-income, privately insured people.”

She said many Medicaid enrollees have greater health care needs than average and suffer from chronic conditions and therefore need access to the full range of Medicaid benefits.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow of The Heartland Institute.

For more information …

Presentation from the Medicaid Reform session at the NABE’s 23rd Washington Economic Policy Conference,