The Case for Medicaid Modernization

Published September 1, 2005

Since Congress committed to cutting Medicaid expenditures in April, states have been working to reform their individual Medicaid programs and curb soaring costs. Several states already have offered bold reform proposals that may serve as blueprints for other struggling states. One of those proposals was submitted by Florida Governor Jeb Bush (R) to the Centers for Medicare and Medicaid Services in January.

The following excerpt consists of approximately two-thirds of Bush’s reform proposal. The full proposal is available online at

The multi-faceted growth of Medicaid has produced a nearly incomprehensible maze of multiple, even conflicting components. Management of these increasing complexities is nearly impossible. Despite Florida’s aggressive efforts to curb spending, costs are still rising at double-digit rates and expenditures have exceeded budgeted amounts in each of the last four consecutive years requiring additional appropriations of $428 million in state funds and $616 million in federal funds.

Each well-intentioned programmatic improvement or cost management strategy contributes to the piling-on effect. Participants are confused by the mandates and complexity; providers drop out due to red tape and payment restrictions; and, still, the state’s financial obligation grows.

The spending increases exceed growth in the rest of the economy and overwhelm any increases in tax revenue. Between 1998 and 2004, growth in the economy allowed state tax revenues to increase by 24 percent, but the state’s share of cost for the Medicaid program jumped by 88 percent. Total spending for Medicaid increased by 112 percent since 1999.

If Medicaid continues to grow at its current rate (13% average per year over the last six years) while the overall budget maintains its 4% per year average growth rate, the program will consume more than half of all state spending in just 10 years.

Principles of Modernization

To accomplish the transformation of Florida’s Medicaid program, the Governor proposes a new structure–one that empowers participants, creates flexibility for providers, and facilitates program management for government. In this model, the people receiving Medicaid coverage will gain control over the use of the resources allocated on their behalf. Medicaid participants will choose the types of plans and the methods of accessing services. The choices available to them will be meaningful because the system will offer new flexibility in determining the programs and services that can be purchased using the contribution from the Medicaid program. This added flexibility will permit diversification of products and services offered to participants and will generate a dynamic competitive environment. When patients are empowered with choice and providers are encouraged to innovate, the Medicaid program will be capable of improving services, outcomes, and delivery of better value for Florida’s Medicaid participants and taxpayers. In moving from today’s Medicaid to Florida’s new Medicaid, this transformation will put people first.

Patients as Participants

Floridians in today’s Medicaid program have little control over their health care. By the time an individual enrolls in Medicaid, government decisions have already determined the type and amount of services that are available as well as the sources of that care.

In Florida’s new Medicaid, the people served by the program will be active participants in the Medicaid marketplace. Persons insured through Medicaid will direct the use of the Medicaid resources allocated on their behalf. They will select the type of coverage or the method of accessing services from options offered by managed care organizations (MCOs), insurers, providers, and community-based systems. Additionally, they will have the opportunity to earn enhanced benefits by demonstrating healthy practices and personal responsibility. These enhancements will be provided through flexible spending accounts which can be used in a variety of ways to purchase additional services or coverage.

Marketplace Decisions

The current Medicaid program functions without the benefit of a viable market and many of the program’s cost-control strategies further erode the potential for competition. Today’s Medicaid program is one in which centralized government decisions determine which products and services are purchased, which plans and providers supply the services, what prerequisites limit access, and what prices are paid.

The vision for the future of Florida’s Medicaid relies on competition among vendors of coverage and services to inspire innovation and efficiency. Creating this competitive environment depends upon minimizing government regulation and encouraging diversification and distinctiveness among the products and services that can be purchased with Medicaid dollars.

Competing to produce value will place new emphasis on prevention, early diagnosis and effective treatment of illness and injury. New information technologies will provide transparency for both plan selection and accountability, supplying participants with added tools for effective decision-making. In this competitive environment, plans and provider based systems will succeed only by serving satisfied participants and demonstrating their expertise through improving patients’ outcomes.

Sustainable Growth Rate

The costs of today’s Medicaid program are spiraling out of control. Double-digit increases in expenditures persist in spite of many years of aggressive cost control efforts. These trends are found not only in Medicaid, but in private insurance and Medicare. Controlling costs while maintaining access requires a broad and bold change in the economic foundation of health care.

The bold proposal for Florida’s Medicaid program is to transform the system into a premium-based plan. In this model, the state will set aside a specific amount of money for each person enrolled in Medicaid. The amount of the assistance will be risk-adjusted to reflect the medical needs of each participant. Additionally, Florida will establish a maximum benefit limit similar to private insurance.

Additional flexibility and choice is offered in Florida’s new Medicaid program by an “opt-out” provision. Participants should be able to use their Medicaid premium to purchase employer-based coverage. … Alternatively, Medicaid premiums deposited into flexible spending accounts may be saved and used in the future to assist the participant to purchase employment-based coverage.

Creating a Medicaid Marketplace

Competitive markets are the most efficient means for achieving optimal allocation of resources. The current Medicaid program functions without the benefit of these market forces. With no choice, participants lack incentives to use resources wisely. Providers lack incentives to control costs. Participating plans lack incentives or even the freedom to modify benefits to entice participants. The transformation of Medicaid is built on the introduction of competitive forces and choice.


… The new Florida Medicaid seeks to mobilize the power of participants and avoid concentration of the market in the hands of a few vendors. … Florida’s new Medicaid involves participants in several ways and offers them opportunities for wise choices.

The aim of Florida’s transformed Medicaid program is to give participants enough options for using their Medicaid premium to purchase the types of services they need and want the most. Therefore, the new Medicaid provides only minimal guidance on the scope, amount, and duration of benefits offered by vendors of insurance coverage or provider-based systems of care. Each vendor will determine the package of services they offer for the state’s risk-adjusted premium.

Participants’ choice is also enhanced by designating the available premium in three distinct categories and allowing participants to select their coverage from vendors offering plans and services in one, two, or all three categories. In this way, participants can mix and match the plans or care systems they select in order to obtain the type of coverage they most need and want.


The transformed Medicaid program will allow a new level of flexibility that is not found in the current system. Most importantly, this flexibility will provide a new platform for competition based on the forms of coverage as well as the methods of service delivery. MCOs, insurers, and providers will be encouraged to specialize and diversify in ways that effectively manage how participants access and use services. Three key strategies are intended to promote innovation and manage risk:

1) Vendors offering coverage and services in return for the Medicaid premium will be allowed to define the amount and scope of benefits they will offer;

2) The redesigned benefit structure will provide for further flexibility allowing participants to direct different portions of their Medicaid premium to different vendors; and

3) An upper limit will be established on Medicaid benefits, similar to the maximum benefit limits found in private insurance.

… The competition among … various types of coverage and access systems will spur innovation in the methods of interacting with patients and managing methods for meeting their health needs.

Role of Government

One of the factors limiting competition in the current Medicaid program is the extent of government intervention and control. Today’s Medicaid program is driven by a broad array of centralized decision-making in which elected officials and federal and state bureaucrats debate and decide everything from provider payment levels to clinical therapies. The transformed Medicaid program focuses government’s role in just three areas.

Consumer Protection. Government oversight and regulation is essential to promote quality of care and assure the integrity of the options offered to Medicaid participants. The scope of the regulations should avoid restricting choice, but still be sufficient to certify that each choice is presented by a reliable company or network with the ability to deliver the services offered.

Creation of a rating system is a related function, which may be performed by government or by private firms. … The more of the premium dollar spent on services for the patients, the higher the rating. In this way, participants would be encouraged to select the most patient-centered choice with the lowest administrative overhead.

Information Infrastructure. Government actions are needed to establish an information infrastructure and choice counseling system that educates and empowers participants to select the plan or system most suited to their individual medical needs. Information available to participants should include profiles of each company or sponsoring organization. Additionally, participants should be able to access information on practitioner and plan credentials, disease-specific outcomes, and customer satisfaction data.

Special personalized assistance must also be provided …

Budget. In the transformed Medicaid program, setting the spending level is the primary governmental function. From this aggregate budget, funding is earmarked for the three components of the benefit structure–basic care, catastrophic coverage, and enhanced benefits. Each Medicaid participant is entitled to a specific share of the budgeted amount–a monthly premium that varies according to medical need. These risk adjusted premiums are used to purchase coverage or services. Through these selections, budgeted funds follow the patients and the choices they make.

Benefit Framework

In the private sector, consumer-driven health care generally refers to a high-deductible plan accompanied by a funded personal account. Florida’s proposal adapts that model in order to respond to the characteristics of the Medicaid population. … [T]he creation of a personal stake in their healthcare spending is an essential component of the transformed Medicaid model. For this reason, the new Medicaid program establishes a category of enhanced benefits that eligible participants will earn, own, and use or save as they see fit.

The benefit framework consists of three distinct components.

Basic Care. This category is not a minimal level of service, but includes most of the services most people need most of the time. … Basic services will include professional services, diagnostic services, hospitalization, and transportation–all of the mandatory services required under federal law and such other services as may be offered by the vendor. However, the amount, duration and scope of services will be determined by each plan or provider-based system, with government oversight to assure that the amount of coverage offered is sufficient to meet patients’ medical needs.

All Medicaid participants will receive a risk-adjusted premium to purchase basic care from a certified vendor. Vendors will be obligated to deliver the amount and scope of services detailed in their offering. Government-authorized rating systems will compare their offering to an expected standard or level of care and the results will be used to advise participants of the “value” of the proposed coverage in each option.

Catastrophic Coverage. All Medicaid participants will receive catastrophic coverage. When participants have not selected a plan or provider-based system offering full or comprehensive coverage, the portion of their premium allocated for catastrophic care will be held in a fund to be used by the state in reimbursing their care up to the established maximum limit.

Enhanced Benefits. A portion of the Medicaid premium for each participant is allocated to a flexible spending account. Persons must earn eligibility for these enhanced benefits by exercising personal responsibility and participation with established healthy practices. Examples of how the accounts may be used by consumers include:

  • Purchase of specific types of services not available through the basic coverage; for example, various rehabilitative therapies or a variety of home and community based services;
  • Upgrading of basic plans in order to purchase more services than originally offered;
  • Purchase of specialty service plans such as dental or vision care; and,
  • Saving the account for use in purchasing employment-based insurance after Medicaid eligibility expires.