How Avikcare Would Fix Medicaid

by Callie Gable

Medicaid is a mess, and a very expensive one at that — the health-insurance program for low-income Americans is administered by states but has dozens of federal mandates and rules that drive up Medicaid costs. In response, the states cook up creative financing techniques to shift more costs back to the feds. The end result, among other things, is higher taxes for everyone and poorer care for Medicaid patients.

In his new health-care plan, Avik Roy, a fellow at the Manhattan Institute, proposes changes to the Medicaid system that would end the state-federal finance battle, give each entity clear cut responsibilities, and improve Medicaid patients’ access to quality care.

So how did Medicaid become a mess in the first place? In large part, state-federal Medicaid cost sharing.

The federal government pays around 60 percent of states’ traditional Medicaid costs (richer states get a bit less, poorer states a bit more). This creates all kinds of problems, but here’s just one example Avik provides of how this can be distortionary: If a state levies a new tax on Medicaid premiums or providers, which is then passed on in Medicaid payments, the federal government pays 60 percent of the amount of the tax to the state, which pays just 40 percent, essentially to itself. Roy lays out an example of how states can profit from these taxes in his plan:

A $15,000 Medicaid plan, thereby subject to $1,200 in sales and premium taxes, might be 60 percent subsidized by the federal government, leading to $720 in additional federal spending. The state government, by contrast, makes money on this deal: $1,200 in additional tax revenue, and $480 in additional Medicaid spending, for a net gain of $720. BL

Today, the federal government pays about $33 billion dollars more for pre-expansion Medicaid each year than it would if states weren’t using creative financing to shift the costs to the feds:

The tax game is, of course, just one example of how Medicaid is a mess. And states and the federal government are going to a lot of trouble to run and spend an incredible of money on a system that doesn’t work very well. Medicaid’s outcomes are significantly poorer than those of private insurance, and there is some evidence to suggest that uninsured patients even fare better than those with Medicaid.

To improve outcomes, Roy’s plan would give the low-income adults and children who use Medicaid for doctor and hospital visits generous subsidies to purchase private insurance plans on the Obamacare exchanges (which his plan would otherwise deregulate). The subsidies would be fully paid for by the federal government, absolving states of any fiscal responsibility for this part of Medicaid (called “acute care”).

In return, states would eventually take full fiscal responsibility for Medicaid’s long-term care population, the elderly and disabled who receive nursing-home and home-health-care benefits. Because aged and disabled beneficiaries are much more expensive to care for than children and adults, states would be still be responsible for financing much of this program. While long-term-care individuals make up less than a quarter of total Medicaid beneficiaries, they account for about 64 percent of Medicaid spending:

Splitting Medicaid into clear federal and state responsibilities is obviously appealing. But is this the right way to do it? American Enterprise Institute health-policy expert Joe Antos likes Roy’s proposal overall, but isn’t convinced that states are willing to fund long-term care on their own, as it’s an even riskier and more expensive proposition than funding health insurance.

“Long term care is a rapidly growing cost that states already fear,” he tells the Agenda, “and this does not deal with the fiscal consequences to the states. This plan will collapse because states lose.”

The Avikcare arrangement would be fiscally neutral or positive for most states, but some would be big losers in terms of federal Medicaid funding. The Urban Institute estimated that some states like Ohio and Louisiana, which would have to spend $788 million and $452 million more each year respectively, would need to increase Medicaid spending under this arrangement. The chart below (click to enlarge) is an estimate of how a plan like Roy’s would affect each state:

Avik’s proposal would address this specific problem by providing grants to the states that are “losers” to smooth their transition into the program (the total losses to the losers in 2011 would have been $4.5 billion). “In sum, the Medicaid swap and related offsets below would be designed in such a way so as to be modestly fiscally advantageous to every state government, rela- tive to the federal government, in order to encourage states’ participation,” his plan explains.

Another expert, Tevi Troy from the American Health Policy Institute, sees making long-term care a state responsibility as an opportunity for cost savings and efficiency gains (as Roy does), which means that, in theory, everyone could be a winner even after the transitional grants are phased out. While Troy is wary of the government’s ability to adequately deliver long-term care in the first place, he said states are in the best position to do it:

“Changing the paradigm is good,” he says. “This way there is little incentive for fraud or cost shifting. My general predisposition is to give states more flexibility and let them find the answer.”

Moreover, Troy is enthusiastic about the prospect of moving adults and children currently on Medicaid into private insurance via the exchanges. Troy and a colleague recently published a study finding that private insurance is less expensive per capita than governmentally run programs like Medicaid.

Roy’s approach could be a good deal all around: It gives acute-care patients access to a wider range of providers and care, which should result in better outcomes, while leaving states to coordinate care for the elderly and disabled, whose specific needs can best be met with smaller, state-level programs. It gives states and the federal government autonomy over their own programs, which should cut administrative costs and reduce incentives to game the system. However, as with any division of the system, some states will be winners and some states will be losers, so the politics of it won’t necessarily be simple.

The Agenda

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