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Medicaid: Modest Steps on the Road to Reform

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Raymond C. Scheppach, Ph.D., Executive Director, National Governors Association

In its current form, Medicaid, the $330 billion federal–state program that provides health care services to 58 million Americans, is unsustainable from both a state and federal budget standpoint. Calls for reform have come from the White House, Capitol Hill, state houses, providers, and beneficiaries. But there are two drastically different, and sometimes competing, views of how to get the job done.

It's the Health Care System
The first view holds that there is nothing inherently wrong with Medicaid but rather that its problems are caused by broader dysfunction in the U.S. health care system. Indeed, as the country's only health care safety net, Medicaid suffers from two exogenous cost drivers.

First, Medicaid caseloads have grown 40 percent over the last five years because of changing demographics and cracks in the nation's employer-based health insurance system. The U.S. population over age 65, and particularly over 85, is growing rapidly. Moreover, employers continue to reduce their coverage, particularly for individuals below 200 percent of poverty. Some of this is due to structural changes in the economy. Today's marketplace includes many small businesses and service-oriented companies that traditionally do not provide health benefits. What's more, larger industrial firms are reducing their workforces as well as their health benefit contributions to stay competitive. Thus, the huge increase in the Medicaid caseload is due to the fact that we don't have very good coverage options for those left out of the job-based health care system.

The second cost driver is the 4.5 percent annual increase in the health care price index, which is two to three times the average consumer price index. This problem is endemic to the entire health care system, not just to Medicaid.

Given these two cost drivers, some argue that that most effective way to reform Medicaid is to reform the health care system as a whole by setting quality standards, creating price transparency, investing in technology, and developing additional policy solutions for the uninsured and long-term care populations. Under this strategy, Medicaid would benefit by being part of a more efficient health care system.

Medicaid Plus Reform
The other prevailing view of Medicaid reform focuses on the flaws of the program itself: its rigidity; the fact that eligibility is determined more by category (e.g., pregnant women, single men) than income; the lack of integration with the overall health system; the existence of mandatory and discretionary benefits and populations; the fact that the program covers nursing homes but not alternative, less-expensive forms of community-based care; and the inefficiency and lack of accountability created through existence of "dual eligibles," or those eligible for both Medicare and Medicaid.

While addressing such problems could generate savings as well as improve fairness, accountability, and quality of care, many argue that it is critical to define Medicaid reform more broadly. Specifically, policymakers must consider whether there are alternative and more effective ways to provide coverage to those low-income and long-term care populations that are increasingly becoming eligible for Medicaid. This vision can be described as "Medicaid plus reform," since it focuses on all spectrums of the low-income population as well as the underlying cost drivers in the overall health system.

Political Reality
So how do we choose between these two visions of Medicaid reform? In my view, the best approach, or at least the one more likely to succeed, is the approach that meets the test of political reality. Comprehensive health care reform is not on the congressional agenda. Therefore, the first vision is not likely to be achievable, even if it has the most potential for dramatically decreasing the rate of cost increases for Medicaid and health care. Nor is comprehensive Medicaid reform on the congressional agenda; the program is just too big to be overhauled at once. As with Medicare reform, Medicaid reform must follow an incremental approach, with modest reforms enacted over the next several years.

According to this vision, states could be given greater flexibility to administer their Medicaid programs—an approach that could generate savings for both the federal government and the states. Specifically, states would have flexibility in terms of:
  • Prescription Drugs. States are the largest purchaser of prescription drugs but do not pay the lowest prices. To achieve savings, states could be allowed to receive prices and rebates based on the average pharmaceutical manufacturer prices, with price transparency through monthly company reporting and federal auditing. Such a change would also allow states to adopt closed formularies and tiered copayments.
  • Asset Transfers. A growing number of individuals are utilizing estate planning to shelter their assets and thus qualify for Medicaid-funded long-term care services. To prevent this, adjustments could be made in the process to increase penalties for offenders and include the value of housing assets in the definition of "assets" to determine eligibility.
  • Cost-Sharing. Current law prohibits states from setting copayments for certain populations. To better manage utilization, states could be allowed to establish cost-sharing structures similar to those in the State Children's Health Insurance Program (CHIP). This would give states authority to charge copayments as long as the total was less than 5 percent of family income.
  • Benefit Package Flexibility. States also could be given the option to utilize a CHIP-like benefit package for the non-frail elderly and non-disabled populations, i.e., for healthy women and children. In many states, this benefit, which is often equal to that for state employees, is slightly smaller than the existing Medicaid benefit.

These reforms would move the Medicaid program closer to private health plans. Such reforms could be combined with policies aimed at slowing the growth in the number of individuals becoming eligible for Medicaid. These would include:
  • A Refundable Tax Credit. Such a tax credit could be similar to that proposed by President Bush, which would be $3,000 for a family of four with income of less than $25,000 and would phase out at incomes above $60,000. Individuals who are eligible for both Medicaid and the tax credits for general health care benefits would be able to choose between the two.
  • An Employer Tax Credit. Such a health care tax credit would be restricted to small firms, i.e., those with up to 100 workers who continue to provide health care to their employees. The credit could be restricted to workers below a given wage and states could specify the minimum benefit package.
  • State Purchasing Pools. Federal funding could be made available for states to establish purchasing pools to leverage their market position and lower health care costs. States could require state employees, the Medicaid non-disabled non-elderly population, and individuals who choose the refundable tax credit to buy health care through such pools. Individuals would have the ability to select among several competing health plans.
  • Long-Term Care Tax Credit. Providing services for the dual-eligible population creates problems in terms of efficiency and accountability. In the long run, Medicare should be largely responsible for dual eligibles and an alternative federal financing plan should be established. In the short run, federal tax credits for long-term care insurance should be enacted. This is one of the few tax credits for which the federal savings will likely be larger than the revenue loss.

Enacting these reforms would not solve all of Medicaid's problems, but it would create a fairer and somewhat more cost-effective system that would buy time in the hope that more comprehensive health reform could follow. And, most important, such a vision stands a good chance of becoming a reality.

Raymond C. Scheppach, Ph.D., is the executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.

The views presented in this commentary are those of the author and should not be attributed to The Commonwealth Fund or its directors, officers, or staff.

Publication Details



Medicaid: Modest Steps on the Road to Reform, Raymond C. Scheppach, Ph.D., The Commonwealth Fund, October 2005