New Medicaid Reform Empowers States

Published September 1, 2001

President George W. Bush has a plan to extend Medicaid coverage to more people . . . without spending more money. He aims to provide health insurance to more low-income Americans by doing what employers do in the private sector: Reducing the scope of rich benefit options, or charging more for them.

Under the Bush plan, the states—not Washington, DC—would determine how to spend the savings they achieve through benefits reduction: on currently under-funded benefits, perhaps, or to cover some prescription drug costs or subsidize other health outreach programs for the needy.

But some observers have complained the plan does not guarantee the states will use their savings to insure more people. Persons who already have government-funded insurance might be shortchanged, they fear, by states seeking funds for budget items other than health care.

A Simple Plan

The Bush administration unveiled the plan over a hot July weekend, touting it as a way to bring health insurance to some of the nation’s 40 million uninsured without spending any new money. Under the plan, states would be permitted to trim services or increase premiums for some Medicaid participants. The savings they achieve could be used to offer basic insurance packages to the uninsured.

But officials at Health and Human Services (HHS) explained states will not be required to spend their savings on the uninsured, causing some to worry that states facing tight budgets would simply pocket the savings.

“Contrary to the way this is advertised, states could reduce benefits and offer either no or a very small coverage expansion so they save state dollars,” warned Leighton Ku, a Medicaid expert at the liberal Center for Budget and Policy Priorities.

HHS spokesman Bill Pierce responded by saying he doubts states would want to cut benefits without providing new coverage. “The proposal is a response to state interest in covering more people,” Pierce said. “We’re just trying to give them the ability to be as creative as they possibly can.”

Pierce also pointed out the potential for political backlash against state officials who pocket the money and shortchange health care. Because they’re confident state officials will do the right thing, HHS will consider applications from states even if they don’t reinvest the savings into health insurance.

An Opportunity to Innovate

Medicaid typically consumes about 15 percent of a state’s annual budget. Finding ways to address rising Medicaid costs consistently appears at the top of governors’ policy agendas, suggesting they might be open to the Bush plan. At the same time, because increased state Medicaid spending attracts increased federal spending, states have been reluctant to trim the program.

State health departments have long been allowed to ask HHS for permission to experiment with their Medicaid programs, as long as the changes are not at federal government expense. The administration’s announcement made it clear HHS will encourage and quickly approve applications for this sort of experiment.

Medicaid serves almost 40 million Americans, including about 12 million who could be offered fewer benefits or asked to pay higher co-payments. Under one possible response to the Bush plan, persons currently not eligible for Medicaid—such as adults without children—could be offered participation in the health plan currently in place for state workers.

There is some concern among policy experts that opening state employee benefit plans may not be the best choice. Typically, low-income people have above-average health care claims, and their presence in a healthier employee risk pool could have a negative impact on the claims experience for that group.

Tom Miller, health policy director for the Cato Institute, explains:

“This approach confuses the role of state government as an employer with its role as an administrator of public health care programs.

“As employers, state governments should provide the most attractive, yet efficient, health benefits packages that will attract and retain skilled workers at the lowest cost to taxpayers. In theory, they’re getting something of equivalent value in return.

“Public programs operate with other objectives in mind. Ideally, they should target shorter-term assistance to those most in need. Combining funding for two different purposes will hurt one or the other, or both.”

The Bush plan does not require a change in law and is currently being implemented.