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Health and Human Services
Medicaid & Health Choice

North Carolina’s Department of Health and Human Services has long been one of the state’s fastest growing institutions. This growth has been fueled in large part by increases in state and federal spending on Medicaid. With one of the most expensive Medicaid programs in the nation, North Carolina desperately needs to inject doses of market competition and common sense into its medical assistance efforts.

The Medicaid Explosion

Medicaid was created in 1965 as a health insurance program for poor Americans. Since then, it has become an amalgam of at least four separate social welfare programs: 1) poor adults and children, 2) non-poor children and pregnant women, 3) disabled adults and children, and 4) elderly users of long-term care. Medicaid pays for nearly half of all births and three-quarters of all nursing home bills, the latter often benefitting middle-income North Carolinians who exploit porous eligibility rules to shield their assets while consuming long-term care.

The future solvency and affordability of North Carolina’s Medicaid program is in serious doubt. During the past 10 years, Medicaid spending in North Carolina tripled — reaching $6 billion in FY 2001-02 (of which $2 billion consisted of state funds). Significant increases in eligibility and cost explained the rapidity of the increase. Unfortunately, state and federal decisions extending eligibility for households above the poverty line appear not to have resulted primarily in shrinking the ranks of the uninsured. Instead, Medicaid expansion largely “crowded out” private insurance as workers of modest means chose to cancel family plans for which they previously paid (directly or in the form of workplace withholding) in order to get free Medicaid coverage.

As the pie charts on the next page reveal, a similar pattern emerged after North Carolina created its “Health Choice” program in 1999 under the federal government’s Child Health Insurance Program (CHIP). The main effect of the free or low-cost insurance, offered to non-poor families, was to induce some either to drop their private coverage or avoid buying coverage after leaving Medicaid. Health Choice, in other words, has mainly allowed lower- to middle-income families to shift the cost of their children’s health care to taxpayers. Meanwhile, a parallel system of tax credits for families who refuse handouts was eliminated by the legislature in 2001.

Neither Medicaid nor Health Choice are structured to provide recipients with the incentives they need to leave the public assistance rolls. The benefits packages are more generous than what most North Carolinians purchase individually or at the workplace, and are free or virtually free to recipients. No time limits, work requirements, or pay-back provisions are imposed on able-bodied recipients. As a result, recipients are rewarded if they stay enrolled and consume high levels of care. This violates every principle of sound public policy.

The other fiscal time bomb in Medicaid is the aging of the population. Because most families expect that their elderly members will be able to tap Medicaid funds should they need long-term care, few are purchasing longterm care insurance or building their savings. These trends will make the promise of Medicaid coverage increasingly difficult to fulfill in the future without massive tax increases or drastic reductions in other state services.

Recommendation

State policymakers should significantly restructure Medicaid. The benefits package should more closely resemble private plans and be limited to services mandated by Washington. Poor families should be offered vouchers or refundable tax credits with which to purchase private insurance, enroll in managed care, or deposit into savings accounts. The Health Choice program should be significantly curtailed or eliminated, with the savings used to offer tax credits to families for private health care. Finally, the state should encourage families to plan for their long-term care needs by expanding tax relief for private long-term care insurance and medical savings.

To view higher quality graphs, download Agenda 2002 [560KB Acrobat].