July 29, 2014

Click here to view and here to listen to Katherine Restrepo discussing this Spotlight report.

RALEIGH — Converting the federal portion of North Carolina’s Medicaid program into an annual block grant would go a long way toward limiting Medicaid’s unpredictable annual cost overruns. A new John Locke Foundation Spotlight report recommends block-grant funding, along with new tax credits for healthier Medicaid patients.

“Medicaid’s fundamental flaws and ultimate cost drivers stem from the way it is funded,” said report author Katherine Restrepo, JLF health and human services policy analyst. “If Medicaid’s federal share came to the state as an annual block grant, this injection of fiscal responsibility would sever many federal strings and allow for lawmakers to exercise more control over their programs, implement more efficient management practices, and have a stronger incentive to sort out waste and abuse.”

Restrepo is issuing her report as N.C. legislators and Gov. Pat McCrory’s administration continue to haggle over the best way to proceed with Medicaid reform. The joint federal-state health program costs $14 billion a year in North Carolina, with state taxpayers picking up a tap of about $3 billion.

“Reforming Medicaid’s broken system remains a high priority,” Restrepo said. “North Carolina continues to struggle with managing its Medicaid budget. Within the past four years, cost overruns have amounted to $2 billion. The House, Senate, governor, and affected interest groups agree that it is paramount to rein in unnecessary Medicaid costs and improve patient health outcomes.”

Much of the problem stems from a “broken funding system,” Restrepo said. The federal portion of Medicaid funding is based on a match rate officially known as the federal medical assistance percentage, or FMAP. The feds pick up at least 50 percent and can cover as much as 83 percent of Medicaid costs. The rate depends on a formula based on each state’s per-capita income.

“North Carolina currently pulls down a 65 percent federal match for the cost of medical services delivered to Medicaid beneficiaries, but federal shares vary for other aspects of Medicaid funding,” Restrepo said. “That match ranges from 50 percent for administrative services to as much as 90 percent, until 2016, for design and implementation of the state’s Medicaid billing system.”

North Carolina’s federal Medicaid share gets renewed every year based on state and federal income data from the previous three years, Restrepo said. “The system leads to a heavy reliance on federal money, followed by spendthrift habits at the state level,” she said. “This federal tie also creates a strong disincentive for states to flush out waste in the system, since a hefty portion of any savings would revert back to the feds.”

At a 60 percent match rate, every additional dollar the state spends brings in another $1.50 from the federal government, Restrepo said. “That’s an enticing proposition for a politician, who can spend a single dollar of his constituent’s money, while gaining credit for nearly $2.50 in return,” she said. “But the same system makes spending cuts difficult. If North Carolina eliminated optional Medicaid funding for its medically needy population, the General Fund budget would see $7.1 million in savings, but the total amount of spending would decrease by $20.8 million.”

The federal government complicated these spending concerns when Congress authorized “enhanced federal aid” during economic downturns in 2002 and 2008, Restrepo said. Once the additional federal match phased out in 2011, states across the country faced program cuts for optional services and increased cost-sharing for patients.

“Medicaid’s fluctuating federal funding makes budgeting less predictable and, therefore, more difficult,” Restrepo said. “With periods of enhanced federal match rates, the funding formula inadvertently entices states to provide generous Medicaid benefit packages — in some cases, more comprehensive packages than private coverage.”

States also have used the federal funding formula to “game the system,” easing the use of state taxpayers’ funds while maximizing the use of federal money, Restrepo said. The report details strategies states have used to increase federal funding.

Restrepo also highlights state taxes linked to Medicaid, including an equity tax and provider taxes levied on hospitals, intermediate-care facilities for the intellectually disabled, and nursing facilities.

“If you spend time studying this system — its financing schemes, the assessment game, and the shifting federal match rate — it becomes clear that a block grant would simplify the Medicaid program substantially,” she said.

Even with block-grant funding, no Medicaid reform can be complete without some way to increase patient responsibility, Restrepo said. “For starters, it would make sense to distribute a universal, refundable tax credit to healthier, able-bodied Medicaid patients,” she said. “This is called a premium-support model. It could cover the cost of private insurance premiums. Other ideas such as health savings accounts, work requirements, and health care education counseling can help people climb the economic ladder and step out of the state’s safety net.”

These reforms would free up Medicaid funds, Restrepo said. “More Medicaid funds would be available to coordinate care more effectively for the most vulnerable medical assistance populations — the elderly, the blind, and disabled, and those in need of mental and physical long-term care.”

“The potential for Medicaid reform is within reach,” Restrepo said.

Katherine Restrepo’s Spotlight report, “The Mechanics of Medicaid: How Medicaid’s flawed financial design drives program costs,” is available at the JLF website. For more information, please contact Restrepo at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].