Medicaid and Health Choice

State and federal expansions of Medicaid since 1989 have helped make North Carolina's Department of Health and Human Services one of the state's fastest growing institutions. With one of the most expensive Medicaid programs in the region, North Carolina desperately needs to inject large doses of market competition and common sense into its medical assistance efforts.

The Medicaid Explosion

Congress created Medicaid in 1965 to pay for the health care of poor Americans. Four decades later, Medicaid is now four welfare programs in one. Today Medicaid covers:

1. poor adults and children,

2. nonpoor children and pregnant women,

3. disabled adults and children,

4. elderly users of long-term care.

Also, Medicaid pays for nearly half of all births and three-quarters of all nursing home bills.

In the past, the state has focused on ways to maximize federal Medicaid matching dollars. The federal agency that administers Medicaid has signaled that it will resist future efforts to do this. There have also been suggestions that federal Medicaid money should become a fixed amount that grows at a set rate rather than supplementing new state spending.

Even without federal limits, the future affordability of North Carolina's Medicaid program is in serious doubt. Total spending on Medicaid in North Carolina has nearly tripled in the past decade to $11.3 billion in FY2007-08, including $2.9 billion in state funds, $500 million in county funds, and $7.9 billion in federal funds.

Worse, this increased spending has done little to help the uninsured. Instead, Medicaid eligibility expansions largely "crowded out" private insurance as workers of modest means chose to cancel family plans for which they previously paid in order to get free Medicaid coverage. The Congressional Budget Office estimates that for every ten children added to SCHIP, six will lose private insurance. Unfortunately, many efforts to counter this have little effect, and some actually increase crowd-out.

Incentives that Move People from Private Insurance to Public Assistance

North Carolina Health Choice, created under the State Child Health Insurance Program (SCHIP), has similar problems. 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 allowed lower- to middle-income families to shift the cost of their children's health care to taxpayers. The percentage of children without insurance in the state has actually grown since 1999, despite a large increase in coverage by Medicaid and Health Choice.

Neither Medicaid nor Health Choice provides recipients with incentives they need to leave the public assistance rolls. The benefits packages are nominally more generous than those that most North Carolinians purchase individually or at the workplace, and are free or virtually free to recipients. No time limits, work requirements, or payback provisions are imposed on able-bodied recipients. As a result, recipients are rewarded if they stay enrolled and consume high levels of care. In addition, recipients are also penalized with extremely high effective marginal tax rates when they earn enough to no longer qualify for the program. Benefit phaseouts merely extend the range of the tax penalty but leave high effective marginal tax rates for recipients. This violates every principle of sound public policy.

The other fiscal time bomb in Medicaid, besides expanding eligibility rules, is increasing use of long-term care. Because most families expect that their elderly members will be able to tap Medicaid funds should they need long-term care, few are purchasing long-term care insurance, building their savings, or using reverse mortgages to pay for care. The federal 2006 Deficit Reduction Act included provisions to tighten eligibility rules for long-term care, which could help make this more rational, but North Carolina has yet to take advantage of the opportunity.

Medicaid and Health Choice all too often moved people from private insurance to government-paid care. The General Assembly has intermittently offered tax credits for individuals who purchase health insurance for their children or long-term care insurance for themselves. Although research indicates that subsidies such as tax credits do not produce large increases in private insurance enrollment, removing these subsidies while expanding Medicaid and Health Choice eligibility provided an incentive for many to move from private insurance to these government programs.


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 in HSAs. The Health Choice program should be significantly curtailed or eliminated, with the savings used to offer tax credits to families for private health care.