Road to Reform: Medicaid Management Makeover

Published June 1, 2006

A recent study, “Medicaid Makeover: Six Tough (and Unavoidable) Choices on the Road to Reform,” contends Medicaid would best serve the nation if state lawmakers reformed how the program is managed rather than implementing new policies.

The study was co-published in February by the Deloitte Center for Health Solutions with Deloitte Research, a division of Deloitte & Touche, an international firm that provides audit, tax, consulting, and financial advisory services to private businesses and government agencies.

Medicaid accounts for 20 percent or more of total state expenditures in many states. When budgets are tight, policymakers often are forced to consider making changes to their Medicaid programs, ranging from possible cuts in services to changing eligibility standards to taking money from other state programs.

State Medicaid programs, many of which have budgets the size of Fortune 500 companies, should be run in a manner similar to their corporate counterparts, using the strict financial and managerial disciplines needed to operate a modern insurance or health care company, the study finds. Traditional reforms have not resulted in long-term cost savings, the study notes, and it is difficult to assert that increasing Medicaid costs have brought a superior health care program to its customers.

Active Management Needed

In short, the study finds, states must actively and aggressively manage their Medicaid programs. Too often states fail to contain costs or expand coverage because they tend to be reactive–forecasting numbers of eligible beneficiaries and costs, then loosely tracking the program’s progress and asking legislatures for more money when enrollments increase. In some instances, states trim back their programs, resulting in poorer long-term outcomes.

The Deloitte study recommends states acknowledge their Medicaid programs are not being efficiently managed, and then take steps to transform them. States should conduct a thorough assessment of their current Medicaid programs before undertaking fundamental management reform.

The study advises states to tackle the following six issues.

1. What should we be doing and not doing?
The study found many state Medicaid programs have an identity crisis. Some are primarily claims processors, while others are policy setters, contract managers, or financial stewards. Most are a confusing combination of all of the above.

States must identify what they want the core functions of their Medicaid program to be, to make sure they are operating as effectively and efficiently as possible.

2. Are we going to manage the services in our program directly, or will we contract for them?
States traditionally have operated all aspects of their Medicaid programs. However, the study found states are beginning to take a strategic view of their programs and how they administer them, considering whether some functions can be better performed by partnering with private organizations.

Texas, for example, outsources most of its Medicaid program operations, including claims processing, Medicaid Management Information Systems administration, provider and client relations, client enrollment, and client outreach and education. Accordingly, most Texas Medicaid staff work as contract managers to monitor contractor performance, rather than the traditional Medicaid roles in most states.

3. How much do we want to expand traditional Medicaid benefits to reduce the number of uninsured?
States are often tempted to use Medicaid to expand health coverage to a broader population, because many state programs already have established provider networks, technology infrastructure, and an established administrative foundation in place.

The Deloitte study cautioned that policymakers must explicitly decide how much to expand Medicaid. They must seriously consider whether their state’s climate is right for more aggressive and risky Medicaid-based program expansions. Broad-based support is critical, including from providers, member advocates, and the business community. Rigorous financial planning and control also are vital, to make sure an expanded Medicaid program doesn’t create an unsustainable entitlement.

4. How are we going to reduce or contain the costs of the Medicaid program?
The study recommends Medicaid policymakers take into account the following six factors in reducing or containing costs:

  • Choose the most cost-optimal program structure for the state.
  • Manage the optional populations served by the program.
  • Manage the optional benefits provided by the program.
  • Structure the reimbursement rates to provide cost-savings incentives and control provider costs.
  • Identify and implement administrative and technological efficiencies, such as a plan in Virginia to introduce electronic medical records.
  • Implement consumer choice and related mechanisms to secure quality and reduce unnecessary care.

5. Will we go beyond simple program administration and use our Medicaid program to actively control the costs and quality of health care in our state?
The study suggests states should decide whether to invest in innovative arrangements (such as purchasing pools) or more advanced contracting models to manage health care costs and outcomes more systematically. For example, Georgia and other states are trying to hold down one of Medicaid’s top cost drivers–rising prescription drug costs–by pooling their purchasing power to negotiate better deals with pharmaceutical companies.

6. To what degree will Medicaid recipients share the state’s Medicaid burden?
State Medicaid directors face a natural tension when it comes to cost sharing: If Medicaid bears the entire burden, state budgets will be held hostage to rising health care costs, and patients will have no concept of health care costs and will tend to overuse the system. At the same time, however, Medicaid recipients by definition cannot shoulder the costs of high deductibles.

South Carolina is taking steps toward resolving that dilemma with its new Medicaid choice initiative. By establishing personal health accounts for most of the state’s 850,000 Medicaid recipients, the proposal aims to sensitize beneficiaries to the costs of health care while removing the economic incentive for patients to overuse services. Under the proposal, the $4 billion spent annually in South Carolina on Medicaid disbursements to providers would be diverted to personal health accounts that would be used to buy private health insurance or pay for care directly.

Drew Beckley ([email protected]) is a principal for Deloitte Consulting LLP’s public sector practice and leads Deloitte’s efforts in working with states on Medicaid projects.

For more information …

The full text of “Medicaid Makeover: Six Tough (and Unavoidable) Choices on the Road to Reform” is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #18990. The report also can be found online at,1002,sid%253D2000%2526cid%253D107734,00.html.