View in your browser.

Today, Medicaid costs almost half a trillion dollars nationwide.  It is the largest health insurer in the United States, serving over 72 million patients.  The program is a behemoth.

Because Medicaid is a jointly funded program, the national tab increases at an excessive pace.  The program’s financial design has become problematic, as most state Medicaid expenditures trigger federal funding.  Sharing the total bill (The federal government historically matches two-thirds of North Carolina’s spending.) incentivizes states to offer broader benefits beyond minimum federal requirements.  At the same time, the federal matching funds attached result in a disincentive for states to flush out waste in the system, since a hefty portion of any savings would revert back to the feds.

Thus, it becomes appealing for state legislators to provide generous Medicaid programs that minimize the use of state funds and maximize the use of federal taxpayer dollars.  States also take advantage of this strategy because most must operate on a balanced budget.

For each state, federal match rates depend upon a renewable formula that factors in average per-capita income relative to the national average.  In recent history, Congress authorized enhanced federal aid during the severe economic slumps of 2002 and 2008.  The federal stimulus package passed in 2009 increased the FMAP from a minimum of 6 percentage points across the board to as much as 14 percentage points for some states.  

This temporary federal largesse helped states manage inevitable increases in caseloads and assisted those deciding to expand eligibility and services.  But once the heightened match phased out in 2011, program cuts resulted, with both conservative and liberal leaning states enforcing scale-backs.  Joseph Antos of the American Enterprise Institute explains:

The shift back to much lower match rates required most states to adopt aggressive cost-reducing policies.  Illinois limited Medicaid enrollees to no more than four prescriptions a month, imposed a copayment for prescriptions for adults who are not pregnant, eliminated nonemergency dental care for adults, and cut 25,000 adults from the rolls.  Other states cut pay for health care providers, eliminated coverage for optional services, imposed new fees for the routine use of hospital emergency rooms, and increased other payments made by Medicaid enrollees.   

Scenarios such as this again demonstrate that one of Medicaid’s ultimate cost drivers is its perverse financial design.  Fluctuating federal funds make Medicaid an unpredictable entitlement program for which to budget.  And fluctuating federal funds inevitably lead to cuts for certain reimbursements, services, and other benefits. 

Presently, North Carolina’s House and Senate are hashing out differences in how to go about managing its generous Medicaid program. 

In the Senate’s eyes, Medicaid reform means having provider-led organizations or contracted managed care entities bear full financial risk when delivering care to patients on medical assistance.  The hope is to achieve budget predictability.  The House does not include specifics for Medicaid reform, but it does call for $1 million to study reform plans. 

Only the Senate has proposed a rollback of optional services, but both chambers have included provider cuts.    

If Medicaid’s federal share transferred to states in some form of a block grant, states could exercise more control over their programs, implement more efficient management practices, and have stronger inclinations to sort out system waste and abuseRhode Island did just that in 2009, when the state was granted an 1115 global waiver.  With a 5-year budget of $12 billion dollars, savings were achieved and patient access to care improved.

Even with block grant funding, no Medicaid reform can be complete unless some type of patient responsibility is enforced.  Patients can gain a sense of empowerment by using their own health savings accounts, in which the government can initially deposit a defined contribution and able-bodied, working patients can add more at their own discretion.  Money is often spent more wisely when an individual has control over an allotted sum of resources that can be used to meet individual health needs.  This, along with health care education counseling, could potentially achieve cost containment, an increase in price transparency, and improved patient outcomes within each state’s medical assistance program.

Click here for the Health Care Update archive.

You can unsubscribe to this and all future e-mails from the John Locke Foundation by clicking the "Manage Subscriptions" button at the top of this newsletter.