Ten Steps to Reforming Medicaid

Published July 1, 2008

Excerpt from Handbook on State Health Care Reform, co-authored by John C. Goodman, Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal, and Joe Barnett.

Typically, Medicaid enrollees face restricted treatment options and limited access to health care. At the same time, they are sheltered from health care costs because they pay nothing out of their own pockets when they receive care.

This disconnection between patients and costs has led to a dramatic increase in public health care spending. All this could change, however, if the government were to implement the 10 Medicaid reforms discussed below.

Step 1: Free Patients.

One idea for improving Medicaid is to empower consumers in the medical marketplace by allowing them to control some of their own health care dollars.

A step in the right direction is the Deficit Reduction Act of 2005, which allows 10 state Medicaid programs to provide Medicaid recipients with Health Opportunity Accounts (HOAs) similar to Health Savings Accounts (HSAs) used in the private sector.

States that choose to participate receive federal matching funds of up to $1,000 per child and $2,500 per adult to be deposited into the HOAs. These funds can be used to purchase a variety of medical goods and services, and unused funds will be available for future use by the participants. Moreover, if patients become ineligible for Medicaid, they have three years to use up to 75 percent of their HOA balances to purchase private health insurance.

Step 2: Free Providers.

Doctors participating in Medicaid must practice medicine under an outmoded, wasteful payment system. Typically, they receive no financial reward for communicating with patients by telephone and email, teaching patients how to manage their own care, or helping them be better consumers in the market for drugs. Medicaid pays by task, and these are not reimbursable activities. Doctors who help patients in these ways are taking away from billable uses of their time.

Instead of letting Medicaid’s payment rules get in the way, doctors and other health care providers should be rewarded for raising quality and lowering costs. Accordingly, providers should be able to propose and obtain a different reimbursement arrangement, provided the total cost to government does not increase, patient quality of care does not decrease, and there is a mechanism for accountability.

Step 3: Use Less-Expensive Therapies

Treatment in outpatient settings, such as doctors’ offices, is generally less expensive than treatment in a hospital. However, Medicaid patients have limited access to physicians other than in public health clinics or hospital emergency rooms.

Increasing physician fees for examinations, tests, and procedures that can be performed in a doctor’s office would increase patients’ access to health care and reduce unnecessary reliance on hospital emergency rooms.

Performing more procedures in outpatient settings that were formerly performed in hospitals (such as minor surgeries that don’t require an overnight stay) is a common way of reducing costs. A Pennsylvania study found about 10 percent of all hospitalizations for patients under age 65 are potentially avoidable. Caring for these patients in lower-cost, more appropriate settings could have saved the state about $2.8 billion in 2003.

Step 4: Use Less-Expensive Providers

Private-sector health plans routinely contract selectively, directing enrollees to providers who charge less for the same level of quality. Medicaid could selectively contract with hospitals that perform a high volume of specific procedures and demonstrate a strong relationship between volume and quality.

In some cases, this means reducing procedures performed in hospitals that could have been done in outpatient clinics. In others, it entails limiting inpatient care that could have been avoided by timely physician care.

Walk-in health clinics are a good example of a cost-saving alternative. By creating their own service bundles and setting their own prices, they have been able to lower prices significantly and provide better quality. Some third parties are now reimbursing walk-in clinic fees because they have concluded the services are cheaper than the alternatives.

Yet Medicaid programs typically do not. This is a no-brainer for Medicaid: It should immediately cover the services of walk-in clinics, encouraging enrollees to get this convenient, high-quality, and often preventive primary care.

Step 5: Use Less-Expensive Drugs

Pharmacy benefit managers (PBMs) working for private-sector plans use a variety of techniques to control drug costs, including preferred-drug lists, formularies, negotiated-prices companies, and single-source drug distributors. Medicaid managed care plans generally use PBMs as well, but some states have rules and regulations that limit their ability to control drug costs–including discouragement of less-expensive drug alternatives (such as generic and over-the-counter substitutes).

Medicaid patients who prefer brand-name drugs should be able to choose them if they pay more, or select substitutes at a lower cost, as those in private insurance plans do. A way to give Medicaid patients this option is to let them control some of their own health care dollars. Additionally, doctors should be given incentives to teach patients how to lower drug costs by shopping in a national online marketplace.

Step 6: Use the Private Sector

Medicaid should let specialists compete for patients, by rewarding providers able to provide higher-quality services for less cost. For example, a group providing psychiatric patients with outpatient therapy and drug treatment instead of more costly institutional care to achieve the same therapeutic outcomes should be rewarded for doing so.

If payments to providers are not adjusted for the cost of caring for these patients, there is an incentive to avoid enrolling them or to skimp on care. Medicaid should pay risk-adjusted premiums based on the cost of care and let specialists compete for these patients. Medicaid should also be ready to reward providers who are able to provide higher quality services for less cost.

Step 7: Pay More for Better Results

Quality matters when it comes to improving health outcomes during treatment. According to a National Bureau of Economic Research study, moving from a low-quality hospital to a high-quality one significantly reduces a patient’s risk-adjusted mortality rate. In addition, the study found good publicity matters: Patient admissions increased at hospitals with low mortality rates the first year following a favorable report on their cardiac treatment record.

Medicaid should contract only with providers that institute quality control programs. Payments to hospitals should be adjusted to reward facilities that achieve high quality standards. And hospitals should be allowed to design new payment methods that help raise quality and reduce overall costs (and should bear the burden of proving the cost and quality objectives have been met).

Step 8: Pursue Fraud Aggressively

In many states, most Medicaid abuse is identified through tips and other unreliable means. Some states, however, have established Medicaid provider information exchange databases to identify fraud, abuse, overuse, and unnecessary care.

In New York, for example, a state database of billing information on Medicaid providers allows caseworkers to quickly identify and investigate aberrations in billing practices. Also useful are provisions in “whistleblower” laws that allow private citizens who identify fraudulent providers to receive some of the recovered funds.

Naturally, states that have been more aggressive than others in pursuing and prosecuting fraud have benefited most. For example, in 2003 Texas established an inspector general’s office with responsibility for detecting Medicaid fraud. As a result, Texas recovered $441 million in 2005 in erroneous or fraudulent charges.

Step 9: Encourage Private Insurance

Private-sector plans have incentives to control costs and improve quality when they compete for customers in the marketplace. As a result, when Medicaid beneficiaries enroll in private-sector plans, including employer plans and individually owned insurance, both the state and the beneficiary benefit from the competition.

Enrollees in a Florida pilot program, for example, can opt out of government coverage and use their Medicaid funds to pay some of their premiums for employer-sponsored insurance, or choose coverage from among competing private insurers. The payments Florida’s Medicaid beneficiaries receive apply toward the purchase of health plans from among competing plans with different benefit packages.

Step 10: Obtain a Block Grant

Under the current system, every time a state wastes a dollar, at least half of that waste is paid for by the federal government. Every time a state eliminates a dollar of waste, at least half the savings stays in the state, while the remainder is realized in Washington, DC. In 2003 the Bush administration proposed converting Medicaid’s federal match to a fixed block grant to the states.

A block grant converts a defined benefit into a defined contribution. Under the former, payments are based on the state’s willingness to spend. Under the latter, spending is based on the federal government’s willingness to pay. This is similar to how Congress allocates federal funds for state welfare programs.

One of the advantages of a block grant is predictability. It would limit the federal government’s financial exposure while allowing states maximum flexibility in designing programs to meet their unique needs.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. His health care blog is at http://www.john-goodman-blog.com/.

For more information …

Summary: Handbook on State Health Care Reform: http://www.ncpa.org/pub/special/20071112-sp.html

Handbook on State Health Care Reform: http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf