Pressure for Market-Based Medicaid Reform Rises

Published June 1, 2006

Medicaid’s skyrocketing expenditures are reaching a breaking point in state budgets, experts say, and state legislatures are responding with sweeping new reform bills that fundamentally change the way states finance and deliver the federally mandated program.

“Medicaid spending consumes, on average, roughly 25 percent of states’ budgets. This figure continues to grow, and will grow unabated unless states reform their Medicaid programs,” said Michael Keegan, director of the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council, the nation’s largest nonpartisan membership association of state legislators.

“Because this rate of growth cannot be sustained, the question is no longer whether states will implement structural reforms, but rather when and how they will do so,” Keegan added.

‘Perverse Incentives’ Cited

Some legislators say Medicaid’s budget woes stem from “perverse incentives” that encourage state governments, doctors, and patients to overspend and overutilize medical care.

“The dollar-for-dollar federal match on Medicaid wrongly encourages states to milk the Medicaid system, and low reimbursement rates mean that doctors might have the incentive to add unnecessary medical tests just to stay profitable,” said Indiana state Rep. David Frizzell (R-Indianapolis), who is working with his state’s Medicaid officials to develop a “cash and counseling” waiver for certain Medicaid beneficiaries.

“Perhaps the most important element of Medicaid reform is that beneficiaries have a stake in their own health care spending. It makes sense from a budgetary standpoint, and it also empowers individuals,” Frizzell said.

Budgets, Patient Health Linked

Health policy experts agree Medicaid’s budget and patient health outcomes are inextricably linked.

“We tend to think about money. And states have gone down this road before, with cutting Medicaid reimbursements and limiting access to prescription drugs,” said Nina Owcharenko, senior health policy analyst for The Heritage Foundation. “States should recognize that Medicaid reform should not just be about budgetary concerns. They need to focus on how an unsustainable program will affect the health of their citizens. It’s not about slashing and burning. It’s about preserving the program for the most vulnerable citizens.”

Trying Consumer-Directed Approaches

Several states are experimenting with a consumer-directed approach–allowing Medicaid beneficiaries to own a fixed amount to pay for a benefit plan of their choice, or to opt out of Medicaid and purchase health insurance through an employer.

Florida will be the first state to implement such reforms in two test counties in June, as its “Empowered Care” waiver was approved by the federal Centers for Medicare & Medicaid Services (CMS) and the Florida legislature last fall.

Under the plan, insurance companies will compete in a “Medicaid marketplace” and offer varying benefit packages that specialize in certain health needs. The plan also will allow beneficiaries to opt out of Medicaid and purchase health insurance through their employer, and to earn extra money in “enhanced benefit accounts” by participating in healthy practices.

Lawmakers are hopeful the program will serve both Medicaid beneficiaries and taxpayers well.

“Patient empowerment, marketplace competition, access to quality care, and cost stability are worthy goals that Florida and every state should strive for in reforming Medicaid,” said Florida state Rep. Gayle Harrell (R-Port St. Lucie), a key legislative player in her state’s Medicaid reform effort.

SC Starts ‘Healthy Connections’

South Carolina is moving forward with its “Healthy Connections” Medicaid reform plan, but without prior CMS approval. In February, Gov. Mark Sanford (R) announced his plan could proceed due to a provision in the federal Deficit Reduction Act (DRA).

The Healthy Connections plan allows Medicaid beneficiaries to own a “personal health account” to directly pay for medical expenses, join a managed care plan, or buy employer-sponsored insurance.

South Carolina also is applying to be part of a 10-state pilot program to test the use of health savings accounts by Medicaid beneficiaries, under another DRA provision.

“Policymakers and the people of South Carolina should be encouraged that Governor Sanford is trying new things with reforming Medicaid,” said Owcharenko. “With [the new provisions] in the Deficit Reduction Act, he’s looking at any opportunity he has to move reform forward.”

Oklahoma Considers Competition

At press time, the Oklahoma Senate was considering House Bill 2842, which would authorize the Oklahoma Health Care Authority–the state agency charged with administering Medicaid–to submit a CMS waiver allowing personal health accounts for Medicaid beneficiaries and eliminating costly mandated benefits from the Medicaid program.

Oklahoma state Rep. Kris Steele (R-Shawnee), the bill’s sponsor, said he’s “cautiously optimistic” the bill will pass the Senate and survive Gov. Brad Henry’s (D) veto pen.

“This reform plan is the future of Medicaid,” Steele said. “Introducing competition into the system will change the bureaucracy of Medicaid and, in the process, change lives,” added Steele.

Idaho OKs Health Accounts

Idaho’s Medicaid reform bill–House Bill 663–was signed by Gov. Dirk Kempthorne (R) in March. The plan authorizes a CMS waiver to establish personal health accounts for all Medicaid beneficiaries, with differing beneficiary groups receiving different care packages based on their health needs. Supporters say the bill will encourage healthy lifestyles and the responsible use of medical care.

“There are [Medicaid beneficiaries] who use the emergency room as a health clinic because it’s more convenient. This is costly, and it wastes precious resources that need to be used for real emergencies,” said Idaho state Rep. Robert Ring (R-Caldwell), a retired physician and supporter of the bill. “But with personal health accounts, you eliminate the one-size-fits-all mandate from the federal government and instill personal responsibility.”

Ring said Idaho has received informal assurances from CMS that the state’s waiver would be approved.

“I’m proud of what we’ve done: preserving the Medicaid safety net and changing the way we do business,” Ring said.

Reforms ‘Overdue’

J. P. Wieske, director of state affairs for the Council for Affordable Health Insurance, a research and advocacy organization of insurance carriers, said Medicaid reform is overdue.

“We are in a doom and gloom situation. Costs are rising, patients are not getting healthier, and the government is creating a dependency and paternalism that doesn’t help the Medicaid population,” Wieske said. “They deserve to have quality health care. They deserve to make their own choices. They don’t deserve getting squeezed out of the system.”

Christie Raniszewski Herrera ([email protected]) is director of the Health and Human Services Task Force at the American Legislative Exchange Council in Washington, DC.