Five Questions for John Holahan
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1. Why is Medicaid being targeted for reform? The administration has identified Medicaid's high costs as a serious problem necessitating more reform. States generally agree because costs are exceeding revenues and will continue to exceed revenues even in better economic times. But let's put the Medicaid cost problem in perspective. To begin with, Medicaid costs a lot because the Medicaid population is very poor and sick, and has high rates of disability. The Medicaid population is clearly one that is expensive to serve. But in work that we've done, when we control for health status using statistical methods, we find that Medicaid isn't high-cost considering the needs of this group. We've shown that most of the differences in cost between Medicaid and private insurance can be explained by the presence of chronic conditions, disability, and poor health. When simulations ask what would happen if we put a Medicaid population with their conditions in private plans, the answer is that private insurance would cost significantly more. So Medicaid really is not a high-cost program when adjusted for risk. 2. Why are Medicaid's costs rising? The costs have clearly soared in recent years. They were $205 billion in 2000, up to $275 billion in 2003. That growth continued in 2004, so we have had an almost 50 percent increase in about four years. This is huge. The reasons behind the surge are the growth in enrollment and increases in spending per enrollee. Medicaid's aged and disabled populations grew by about 3 percent a year between 2000 and 2003. Enrollment for parents and children grew at over 11 percent per year between 2000 and 2002 and, in 2003, another 7 percent. One of many reasons for this growth is the recession. The continued slow economic growth has meant job losses and income declines. As more people lose their jobs or fall into poverty, more qualify for Medicaid. Rising healthcare costs also force more people to turn to Medicaid. There are also increases in spending per enrollee—about 7 percent a year. This relatively high upswing is due primarily to increases in health care costs. But we found that the growth in spending per enrollee in Medicaid has actually been less than the growth in private sector medical spending. Medicaid acute care spending per enrollee grew at 6.9 percent. Acute care spending per person with private coverage grew by 9 percent, and monthly premiums per employer-sponsored insurance rose by 12.6 percent. So here's the bottom line: when you control for health status, Medicaid is not more expensive than private alternatives and it's really growing more slowly. Medicaid is expensive, but there are reasons for it. 3. What reform proposals are out there? The most prominent reform proposals include changes in the way we pay for prescription drugs, in controlling the transfer of assets for those who go into nursing homes, in cost sharing, and in targeting benefits. Drugs are a major driver of cost growth in Medicaid. No doubt, Medicaid has been overpaying for drugs. Few argue about that point and reform is badly needed. People have talked about such alternatives as setting payments based on average manufacturer's prices, getting larger rebates, and applying those rebates to drugs provided by managed care plans. All of these things make sense. Asset transfers are also getting the spotlight. The issue is turning over assets to one's future heirs and then entering nursing homes as a Medicaid patient. When this happens, taxpayers pay the nursing home costs rather than it coming from the patient's own resources. Most observers believe that relatively few nursing home residents on Medicaid ever had much to transfer. Both the administration and the Congressional Budget Office have estimated budget savings from further steps to omit these transfers to be fairly low. They are in the range of $1.5 billion over five years, or less than 1 percent of nursing home spending. Another issue is cost-sharing—the idea that people should pay more of their Medicaid costs so they'll use health care services more appropriately. Cost sharing may reduce some inappropriate care, but evidence shows some appropriate use of services would also be cut back. Most conversations about cost-sharing in Medicaid target people above the federal poverty line. For people below the poverty line, the fixed costs of living—food, housing and so forth—leaves little for health care. The problem is that if you're going to target cost sharing in a way that protects the poorest and sickest, the savings would be modest. Another target is what's called benefit package flexibility. Many states provide a wide range of acute care benefits—like vision, hearing, dental care, and so forth. Often, these aren't part of the benefit packages for low-income people that have private insurance, so why should they be in Medicaid? However, people on Medicaid are generally poorer than those with private coverage and would find these services unaffordable when needed. Moreover, these optional benefits are not very costly and cutting them would yield relatively little savings. 4. What should be done? Without question, there's a need to reform Medicaid. The program leaves many low-income people without coverage. There are tremendous inequalities among states in coverage and spending. For instance, those without any health insurance are in the 10 percent range for Minnesota and Wisconsin. But in states like Florida, California, and Texas, the uninsured rates are almost three times as great. States with higher uninsurance rates provide much more limited Medicaid coverage. State variations in employer-sponsored insurance also contribute, but Medicaid largely explains these gaps. Medicaid costs are also rising faster than state revenues and will do so for the foreseeable future, exacerbating state budget crises and affecting the ability to fund other priorities. So what do I think should be done? Well, the first thing is to mandate that states cover populations up to certain income levels—say up to the poverty level. Many people without Medicaid have incomes well below the poverty level. So you'd mandate that states cover populations up to the poverty level, or perhaps a bit above that and allow states the option of going further with federal matching funds. Another key step would be to shift all the costs of what policy analysts call dual eligibles—that is, those people who are both on Medicare and Medicaid—to the federal government. That would be really expensive but it's still worth doing. Besides giving states some fiscal relief, this tack would lead to more opportunities for managing high-cost cases better. A third step would be to increase federal matching payments for some populations or some services. Good examples are children or acute care services. Some responsibilities could then be shifted entirely to states. One way to do this would be to end what are called disproportionate share payments to hospitals that now serve uninsured people, leaving responsibility to states instead of the federal government. That way, states would have a strong incentive to bring people into Medicaid. 5. How would you control Medicaid costs? I wouldn't rule out what the administration is proposing, though careful design is important. That is, reform of drug pricing is badly needed and dealing with inappropriate asset transfers is good policy. But I think the real savings in Medicaid are going to come only with managing high-cost populations better. Right now, 4 percent of the Medicaid population accounts for 53 percent of Medicaid spending. Another 3 percent account for 12 percent of spending. So you have 7 percent of the Medicaid population, or about three million people, who get two thirds of all Medicaid dollars. There is a lot of potential for savings through better management of these cases. But having said that, my view is that those savings ought to be plowed back into the program to expand coverage. The number of uninsured in this country grew by another 800,000 in 2004. There really is a need to deal with this problem and Medicaid probably is the best way. |
John Holahan