South Carolina Medicaid Choice

Published October 1, 2005

As Congress considers recommendations on Medicaid reform from the federal Medicaid Advisory Commission, National Governors Association, and National Conference of State Legislatures, individual states have been working to reform their Medicaid programs and curb soaring costs.
Several states already have offered bold reform proposals that may serve as blueprints for other states struggling with rising Medicaid expenses. One of those proposals was submitted by South Carolina Gov. Mark Sanford (R) to the Centers for Medicare and Medicaid Services in June.
What follows is an excerpt of the governor’s eight-page proposal explaining the plan. The full 46-page plan document is available online at

Since its inception, the South Carolina Medicaid program has been providing health care coverage to poor, elderly, and disabled South Carolinians. This care has been delivered in a “fee-for-service” manner where a provider delivers a service to a beneficiary and subsequently bills Medicaid for payment.

Under this traditional method, beneficiaries and providers are isolated from the basic economic forces that drive most markets. The Medicaid beneficiary’s incentive is just the reverse of a normal economic incentive. They have unlimited buying power and only benefit from the program when they are using (or when the government buys) health services. The incentives for providers, due to low reimbursement rates, are to either reduce quality or maximize the number of services charged to each recipient.


We believe this structure contributes to a significant disconnect between recipients and those delivering and paying for their care. And, while not the only factor, it is certainly a major contributor to the rise in Medicaid costs.

It is desirable to bring market place principles to the Medicaid program. It is essential to both enable and require that the Medicaid beneficiary participate as a prudent buyer of health care services. The Medicaid beneficiary, just like other Americans, needs to be vested as a purchaser of health care.

The Private Market Place

Individuals in the private market place with health insurance often have a menu of plans from which they can choose. The plans vary in both cost and benefits usually including indemnity and managed care offerings. Options range from low premiums with high deductibles to high premiums with full services. Relatively new options now available are medical savings accounts, where the individual either deposits their own money or some combination of their own money and an employer’s contribution. The beneficiary pays from this account to cover medical costs. Funds not expended on medical care inure to the benefit of the beneficiary. This may be combined with a catastrophic medical policy that covers medical cost after a high level of defined deductible.


In this environment, beneficiaries are able to make market place decisions regarding the plan that is most advantageous to them. In doing so, they have the incentive to control their medical costs, maintain their health and, thus, reduce their out of pocket expenses. The beneficiary has the incentive to consider the value in the use of the health care system, just as they do with all other purchases they make. The provider has an incentive to provide quality care in order to attract the customer. True Medicaid reform must free individuals and providers to operate in a more open market.

Bringing Medicaid into a Consumer Directed, Market Based Environment

The challenge is to bring the benefits of market place incentives to a publicly funded program like Medicaid. It is our intent to create a new Medicaid coverage plan that integrates personal health accounts, personal health incentives and true options for consumer choice. We hope to create the environment where providers and insurers are freed from unnecessary bureaucratic requirements and can compete for the consumer’s dollar. In this concept three general categories of care are addressed: acute or general medical care, community care for the disabled and frail elderly, and institutional long-term care.

Acute Medical Care Coverage Plan

Under this plan, each beneficiary will be given a Personal Health Account (PHA) to pay for part of his or her health care expenses. The account will be accessed using a debit or “swipe” card and will function under the same premises of existing flexible spending accounts. The beneficiary will not be restricted by current service limits and can use the card at any health care provider. The beneficiary is free to determine what is most important to them in relation to their health care. The account will be funded with an actuarially determined amount generally based on current fee for service average expenses less the actuarial equivalence of the catastrophic or major medical benefits described below. The amount will be risk adjusted for eligibility categories as well as age and gender.


It is expected that the account will be available on an individual basis as well as family groups. Unexpended annual funds will be allowed to roll over to the following year. Additional incentives could be implemented that might include retention of a percentage of unexpended funds into a personal Health Savings Account (HSA) should they leave the Medicaid program.

In addition to the PHA, each beneficiary will be provided catastrophic and preventive benefit coverage. This coverage will be a safety net of limited benefits for those individuals. These benefits include inpatient hospital coverage, physician visits, some drug coverage, limited lab and x-ray, and certain clinical and durable equipment coverage. This is a preliminary estimate of the duration and scope of catastrophic/preventive coverage and is, of course, subject to change during waiver development. Alteration of this coverage however, will change the amounts available for the PHA.

Important to this waiver concept will be the ability of beneficiaries to use the PHA to upgrade to more robust managed care plans or combine with pharmacy or dental plans. In these cases, the beneficiary could use funds in their account to purchase a full “coverage” plan from a managed care organization (MCO) in which case the Medicaid agency will also pay the MCO the actuarial equivalent value of the catastrophic/preventive coverage. The beneficiary is free to shop for plans that best meet their coverage needs.

The intent is that plans will now compete for the beneficiary’s business by creating an array of attractive coverage packages or pricing. For example, a drug store may offer set discounts to Medicaid recipients to attract their business. Another example is the need for the MCO to offer services in a way that the beneficiary can best utilize the care they need. MCOs may offer special assistance in transportation or more convenient hours for access to preventive services.

Critical to the success of this effort will be the agency utilizing enrollment counselors during the eligibility process. These counselors will help explain the menu of options that will be available to recipients. In fact, the agency’s role will evolve from primary claims processor to more education and coordination. The agency’s role will help the beneficiary become a wise shopper for health care, a real market place participant. The beneficiary will be able to define what quality health care means to him, and through his purchasing power, influence the kinds of services that are available to him.

Community Care Plan for Disabled and Frail Elderly

Most plans to reform Medicaid focus only on families and children. The most expensive Medicaid beneficiaries and the beneficiaries that most need to direct their own care are left out of acute care reform proposals. These are the disabled and frail elderly.

Medicaid covers many disabled and frail elderly individuals who could be cared for in an institution, but who choose to remain in the community. For these individuals, Medicaid provides a variety of services to enable them to remain in the community. Many have basic health care coverage through private insurance. Others could choose one of the options above for their acute care coverage.


Currently, individuals in this group can get the specific items or services for which Medicaid pays. These services are standard services that often are not tailored to the individual’s need. What they really need may not be on the list of services available. The patchwork of services may cost a lot while the quality of their care suffers. The disabled and frail elderly need to be able buy what they need, not use some set of predefined items and services. The services used by the disabled and frail elderly are expensive and account for most of the Medicaid budget.

Again, giving patients control over their health care dollars and allowing access to any available service will increase quality and reduce cost.

An alternative that would better meet the needs of the disabled is a payment into their Health Savings Account. Frequently, a disabled individual can spend less money and procure goods and services on the open market that would better meet their needs. The individuals will have an additional deposit into their Personal Health Account.

This Personal Health Account will be similar to the PHA under the Acute Care Plan, but will have broader purchasing power. The amount can be determined by the level of service that Medicaid would have provided. Both the beneficiary and Medicaid win.

  • The Disabled become full consumers in every sense of the word. They decide what goods and services best meet their needs. They shop for best prices and use their funds to best meet their needs. They can decide if supplies such as adult diapers can best be bought from Wal-Mart or from a traditional medical supplier. They decide whether an expensive piece of medical equipment for help in mobility best meets their needs or whether construction of something tailored from PVC pipe specifically designed around their home and their abilities best serves the purpose. They decide how to spend their dollars to best improve the quality of their lives.
  • The expensive bureaucracy of public funded programs is reduced.
  • Providers can offer their services in a true economic arena.

As in the Acute Care Plan, the agency’s role shifts to beneficiary education and guidance.

Institutional Long Term Care Plan

Long-term care services that are provided in an institutional setting (nursing facility or nursing home) offer a different opportunity for economic purchasing than community-based services.

For community-based services, many individual services or commodities are purchased to meet the care needs of the beneficiary. However, in the institutional setting, the common unit purchased is a day of care. Because the commodity being purchased is basically the same across the industry and the beneficiary market, this program lends itself to a low bid process to achieve the best buy for the taxpayer.

Changing to a bid approach would offer several advantages over the current system. The current system is flawed in the following ways.

  • In order to limit the cost of the nursing home program, SC has used an obtuse approach of combining certificate of need and administrative rules. This has eliminated new players in the market that could otherwise bring in an element of competition. In a sense it has resulted in a kind of monopoly represented by the set of providers who entered the Medicaid market prior to the time this system was adopted, more than a decade ago.
  • Because the market has been closed, new nursing homes willing to take Medicaid patients cannot enter the market. Thus when a patient who is in a facility that is excluded from the current Medicaid system and has been private-pay and has exhausted their resources, they must move to a different facility that has been authorized to participate in Medicaid. The absurdity of this rule is demonstrated when several nursing facilities have common ownership. Some are included in the Medicaid “monopoly” group; some are not. The owner is not allowed to shift a Medicaid sponsored bed from one of his facilities to accommodate a patient in another of his facilities across the state who needs to change from private pay status to Medicaid. He can require that the patient move across the state to the location of a facility where he does have Medicaid sponsored beds.
  • Payment is related to quality in only a limited way.

Medicaid beds can be bid on the open market. Allocating beds from the lowest bid until all of the Medicaid funding is allocated would still control total expenditures. Nursing facilities bidding the lowest price would be allocated all of the Medicaid beds they wanted. The next lowest would then receive beds, and so on until the funding cap is reached.

This system would need to be modified in order to avoid patient disruption. Actually distributing the beds to the lowest bid homes as vacancies occur can easily do this. The rate of patient turnover in nursing home beds is high enough to allow transition to a full bid system within five years.

The purchasing system for nursing home care would then look like this.

  • Distribute beds based on lowest bid.
  • Assure adequate quality by enforcing survey and certification standards.
  • Bid three years at a time to stabilize the system.
  • Promote improved quality by tying rate increases over the three year period for each nursing home to quality performance standards for each nursing home.

Additional advantages:

  • Providers would not be plagued by after-the-fact audits of cost and dependent on varying bureaucratic interpretations of definitions of rules and could offer a better buy to the state.
  • The state could procure the service based on lowest cost.
  • The consumer is not locked into an arbitrary and closed system of bed placement across the state.
  • All providers have an equal opportunity to participate.
  • The cost of state government to run the program would be reduced since post audits, reimbursement methodology development and cost report review would be eliminated.
  • State and federal resources could be focused on assuring and improving quality.