The Source of the Medicaid Cost Problem

by Reihan Salam

Having drawn on Megan McArdle’s thoughts on some of the things Obamacare’s champions might have gotten wrong with regards to the nature of the uninsured problem, I should also highlight Harold Pollack’s thoughts on aspects of the Medicaid cost problem that conservatives (in his view) get wrong. His central contention is that conservatives aim to encourage cost-consciousness to contain the Medicaid cost problem, and that this is highly unlikely to make much of a difference, as the Medicaid cost problem stems from the high costs associated with the most expensive patients:

The bottom 72 percent of Illinois Medicaid recipients account for 10 percent of total program spending. Average annual expenditures in this group were about $564, virtually invisible on the chart. We can’t save much money through any incentive system aimed at the typical Medicaid recipient. We spend too little on the bottom 80 percent to get much back from that. We probably spend too little on most of these people, anyway. For the bulk of Medicaid beneficiaries, cost control is less important than improved prevention, health maintenance and access to basic medical and dental services.

The real financial action unfolds on the right side of the graph, where expenditures are concentrated within a small and incredibly complicated patient group. The top 3.2 percent of recipients account for half of total Medicaid spending, with average expenditures exceeding $30,000 annually.

Many of these men and women face life-ending or life-threatening illnesses, as well as cognitive or psychiatric limitations. These patients cannot cover co-payments or assume financial risk. In theory, one might impose patient cost-sharing with some complicated risk-adjustment system. In practice, that is far beyond current technologies and administrative capabilities. Even if such a system were available, we couldn’t push the burden of medical case management onto these patients or their families.

My sense is that conservative reformers, like Thomas Miller, emphasize the importance of containing the expansion of the Medicaid-eligible population in order to better serve low-income beneficiaries, e.g.:

Medicaid will continue to have a vital role to play, provided that it is substantially reformed and rededicated to its core mission of providing coverage to the lowest-income Americans. Instead of overwhelming the program’s limited resources with the large expansion into higher income populations envisioned by the ACA, we need to streamline the Medicaid program. State officials should gain more flexibility in administering it in return for achieving measurable policy objectives that are pre-negotiated with the federal government.

The goal of more generous support of health care access for low-income and other vulnerable Americans in the non-elderly population still must recognize federal and state budget constraints, set realistic priorities, and hit sustainable targets. Additional budgetary contributions should not be expected from the Medicare program, which faces deep problems of its own. Any future savings from Medicare reforms like premium-support financing and gradual means testing will be needed just to maintain Medicare’s sustainability.

This is all very non-specific, and more detailed proposals, like per capita caps in exchange for flexibility, are likely to meet with resistance. My basic sense is that Pollack’s fundamental point is sound — the Medicaid cost problem is driven in large part by people with complex, interrelated problems, and federalizing the dual-eligible population ought to be a high priority. (Federalizing the program completely, an idea I’ve floated in the past, has virtues as well, the problem being that state governments seem to be better placed to integrate the health safety net with other low-income assistance programs administered at the state and local level.) Yet per capita caps still strike me as a reasonable and attractive idea, particularly if the burden of the dual-eligibles is lifted from the states.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.