Politics & Policy

Real Medicaid Reform

Health economists Thomas Grannemann and Mark Pauly offer a blueprint.

If Obamacare passes, Democrats will celebrate it as a monumental victory for the uninsured. The office of Richard Foster, chief actuary of the Centers for Medicare & Medicaid Services, estimates that the Senate bill — the bill that House members may soon be voting on — would reduce the number of people without health insurance by 34 million as of 2019. However, more than half (18 million) of those 34 million newly insured would be primary Medicaid beneficiaries. In other words, most of the gains would be achieved through a program that has consistently failed patients, health-care providers, and taxpayers. Meanwhile, the program’s deep structural flaws would remain uncorrected.

Putting Medicaid on steroids is not real reform. Unfortunately, efforts to tackle its core defects have repeatedly been postponed. In their new book, Medicaid Everyone Can Count On (AEI Press), health economists Thomas Grannemann and Mark Pauly offer a blueprint for fixing the program’s inequities and inefficiencies. They address their book to “the national health policy realist” and describe their proposed Medicaid overhaul as “an intermediate step” in the broader process of revamping America’s health-care system.

Medicaid, which was enacted in 1965 as a federal-state initiative to serve the health needs of the poor, is staggeringly complex, but the Grannemann-Pauly proposals concentrate on two clear objectives: to change how the program is funded and to change how providers are compensated. The current system is littered with perverse incentives that have distorted state benefit levels, made it increasingly hard for Medicaid patients to get the care they need, and produced an ocean of waste.

As it stands now, the more a state spends on Medicaid, the more Medicaid dollars it receives from the federal government. The precise matching rate, known as the federal medical assistance percentage (FMAP), differs from state to state, based on per capita income. If a state’s FMAP is 60 percent, then every $1 it spends on Medicaid is matched by $1.50 from Washington. Until recently, the average FMAP was typically about 57 percent, but it is significantly higher today, thanks to the 2009 economic-stimulus package.

The present framework for Medicaid funding has yielded a grossly unequal distribution of resources across states. Even after adjusting the data for variations in overall cost of living and in health-care costs specifically, Grannemann and Pauly still find yawning disparities. They calculate that in fiscal year 2007, real Medicaid payments per person living below 125 percent of the cost-of-living-adjusted federal poverty line were $3,120 in Nevada, $4,659 in Georgia, $4,697 in Montana, $4,769 in Mississippi, $5,270 in Arizona, $5,509 in South Carolina, $8,283 in Vermont, $8,342 in New Hampshire, $8,418 in Massachusetts, $8,500 in New York, $9,408 in Rhode Island, and $9,718 in Minnesota.

Medicaid spending fluctuates far more from state to state than does Medicare spending. But Grannemann and Pauly show that “there is no logical, cost-based explanation for the differences in spending among states.” Those differences are apparently related to taxpayer income, aggregate fiscal capacity (or revenue-raising ability), and poverty. The steepest Medicaid benefits per poor person can be found “in states (many in the Northeast) with higher-income taxpayers and relatively few poor persons.” These states are better equipped to provide generous benefits than are lower-income states with higher poverty levels and fewer rich taxpayers.

Regardless of what fuels the imbalance, is the higher spending in wealthier states delivering solid results? Put another way, is it making Medicaid patients appreciably healthier? According to Grannemann and Pauly, “the existing literature does not contain evidence of proven and substantial health or access benefits from higher Medicaid spending in higher-income states such as might reassure a skeptical taxpayer that his or her payments for the federal share are buying substantial value in terms of health outcomes. Higher spending by richer states seems not to buy substantial improvements in beneficiary health status.” The authors point to research by economists Jeffrey Brown and Amy Finkelstein, who have demonstrated that Medicaid has a major “crowd-out effect” on demand for private long-term-care insurance. (Indeed, Brown and Finkelstein reckon that “the bottom two-thirds of the wealth distribution would not want to purchase private insurance even if it were available at actuarially fair prices.”)

In short, the traditional FMAP formula has skewed the allocation of Medicaid money, created a raw deal for many taxpayers, and effectively discriminated against lower-income Americans in some states while favoring those in others. Grannemann and Pauly suggest a revised formula, which they call “equal burden for equal benefit” (EBEB). Under their plan, the matching rate for a given state would reflect taxpayer income, total fiscal capacity, the number of people living in poverty, and a medical-cost index. State Medicaid spending would be matched at the EBEB rate until it reached a threshold commensurate with a standard level of benefits. Beyond that threshold, states would receive matching funds “at a reduced rate, according to a tiered structure.” Above some still higher benefit level, federal assistance would disappear altogether. The program would no longer feature an open-ended commitment from Washington.

“Matching rates represent the most powerful and underutilized federal Medicaid policy tool,” Grannemann and Pauly argue. The EBEB formula “would be expected to lead over time to much greater equality in benefits across states, with cuts in higher-benefit states, unless resources were added, and expansions in lower-benefit states.” The new matching rates would be updated on a countercyclical basis, since Medicaid rolls tend to spike when the unemployment rate goes up. In addition, Grannemann and Pauly propose launching federal and state Medicaid trust funds to mitigate the impact of economic downturns.

Comprehensive Medicaid reform must also grapple with provider payment rates, which are “the key determinant of access.” Right now, many providers are woefully underpaid by Medicaid, and thus are reluctant to accept patients enrolled in the program. In a 2008 survey by the Center for Studying Health System Change, only 52.6 percent of physicians said they were accepting all or most of the new Medicaid patients who approached them, while 28.2 percent said they were not accepting any new Medicaid patients.

It can be even tougher for Medicaid enrollees to find dentists. In 2007, the Washington Post recounted the tragic story of Deamonte Driver, a twelve-year-old boy from Prince George’s County, Md., whose untreated tooth decay ultimately led to a fatal brain infection. The family’s Medicaid coverage had lapsed shortly before Deamonte’s death; but even while they were insured, his mother had trouble locating a dentist for him. Arthur Fridley, a former president of the Maryland State Dental Association, told the Post that only around 900 of Maryland’s 5,500 dentists (or roughly 16 percent) accept Medicaid recipients. Given the large demand for (and limited supply of) dentists, plus the fact that many operate independently, boosting access under Medicaid may require payment rates that are much closer to those of the private sector, Grannemann and Pauly note.

As for the broader question of how to raise physician payments under Medicaid, they advise strengthening the (currently weak) linkage between provider compensation and services performed. “If reforms include payment based on the service delivered rather than the type of provider or place of service, private physician practices would see increases in Medicaid payment rates relative to those of hospital outpatient departments,” Grannemann and Pauly write. “With evidence-based payment rates, providers would see enhanced payment for services of proven effectiveness and reduced payment for those failing to meet the criteria.”

The authors stress that when it comes to setting Medicaid provider rates, states should focus on (1) determining the payment level necessary to guarantee that beneficiaries have sufficient access to health-care services, and (2) ensuring that “all types of providers are treated in a way that protects that access in all areas.” Once again, the crucial factors are incentives, equity, and accountability. Grannemann and Pauly contend that states should be given more latitude to steer their fee-for-service Medicaid recipients toward cost-effective providers, perhaps via competitive bidding or preferred-provider deals.

These proposals, if seriously considered, would encounter vigorous pushback from both federal and state officials. Grannemann and Pauly are essentially urging a fundamental reorganization of Medicaid’s financial base and payment guidelines. They recognize that both liberals and conservatives will have qualms about some of their recommendations: “Too often, liberals are willing to support programs without proper accountability to provide funds where needs are perceived. Too often, conservatives are willing to overlook opportunities for program changes that would add value to recipients and taxpayers but at some additional cost.”

Many conservatives have pushed for replacing the FMAP structure with lump-sum federal block grants and highly flexible spending rules. This would encourage state governments to clamp down on waste and fraud, the thinking goes, and also help them tailor their Medicaid programs to meet the specific needs of their residents.

Over the long run, block-granting Medicaid might be good policy; but in the short term, it would be extremely thorny politics, even under a Republican administration. Grannemann and Pauly, who support boosting the Medicaid eligibility ceiling, predict that block grants would trigger a sharp drop in spending and benefits, unless the grants were massive or states were forced to provide a certain level of services. “A Medicaid financing system based entirely on block grants thus makes sense only if the federal government imposes specific requirements that states maintain higher spending levels than they otherwise would choose,” the authors write. That is why they prefer the EBEB solution. To ease the bumpy transition from FMAP to EBEB financing, they advocate “phasing in the matching rates over a period of (perhaps five) years.”

The Grannemann-Pauly reforms would not cure all of Medicaid’s woes, but they would indeed make the program more equitable and efficient. In a different political environment, they might form the basis of genuine bipartisan legislation. Alas, amid the sound and fury of the current debate, Medicaid Everyone Can Count On will probably be ignored. But it shouldn’t be.

– Duncan Currie is deputy managing editor of National Review Online.

 

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