How Do Blue States Expand Medicaid? By Paying Doctors Less

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The biggest health-policy debate in America right now is whether or not states should opt in to Obamacare's dramatic expansion of Medicaid, our government-run health care program for the poor. Governors from both parties are concerned that the costs of the expansion will be higher than projected, and that the federal government will back out of its funding commitments. But if you want to see the future of Medicaid, all you have to do is look at the blue states where progressives hold sway, where governments have expanded Medicaid by paying doctors less.

Medicaid suffers from the developed world's worst health outcomes. The main reason is that the program pays doctors and hospitals so little that many doctors lose money treating Medicaid patients. As a result, many doctors don't take Medicaid, and people on Medicaid die sooner from cancers that could have been adequately treated at an earlier stage.

Given that Medicaid is jointly run by the states and the federal government, I thought it would be a useful exercise to look at how much Medicaid pays doctors on a state-by-state basis. The best data we have comes from a 2009 Urban Institute study by Stephen Zuckerman, Aimee Williams, and Karen Stockley, showing how state Medicaid fees vary from state to state, relative to Medicare's fees. Medicare, in turn, pays doctors approximately 80 percent of what private insurers pay. I combined these data, and then created a map that illustrates the distribution of reimbursement rates.

What's notable is that, of the ten Medicaid states (including D.C.) that pay doctors the least, relative to private insurers, nine are reliably blue: New York (29 percent), Rhode Island (29%), New Jersey (32%), California (38%), D.C. (38%), Maine (42%), Florida (44%), Illinois (46%), Minnesota (46%), and Michigan (47%).

By contrast, of the ten states that pay doctors the most, nine usually vote red: Alaska (113%), Wyoming (94%), Idaho (82%), North Dakota (81%), Delaware (80%), Oklahoma (80%), New Mexico (79%), Arizona (78%), Montana (77%), and North Carolina (76%). Tennessee doesn't use a fee-for-service formula for its Medicaid programs, so its fees couldn't be compared to those of the other states.

The point of this analysis isn't partisan. Some blue states, like Delaware, pay doctors reasonably well, and some red states, like Texas, don't. But there is a rough correlation of states with extensive Medicaid programs to those with poor physician reimbursement.

Due to the way in which the federal government provides matching funds for state Medicaid programs, states have an incentive to game the system by increasing Medicaid spending. For every dollar that a state spends on Medicaid, the federal government spends an additional $1.33. Fiscally irresponsible governors love that they can take political credit for expanding Medicaid, knowing that taxpayers in other states are picking up the majority of the tab.

But because Medicaid spending grows at a much faster rate than other types of spending, drunken Medicaid expansions result in a fiscal hangover. Today, in a recessionary environment, states are facing expanded Medicaid rolls, with less tax revenue to fund them. On top of that, Obamacare bars states from rolling back their Medicaid eligibility criteria--a provision that may face legal challenges, in the aftermath of the recent Supreme Court ruling. Even before Obamacare, the mandarins at the U.S. Department of Health and Human Services would routinely block states from reducing their Medicaid populations.

So, if states need to reduce Medicaid spending, but can't make less people eligible for Medicaid, what do they do? Pay doctors less. "As in previous years, provider rate restrictions were the most commonly reported cost containment strategy," concludes an extensive Kaiser review of state-based changes to Medicaid in 2012. "A total of 39 states restricted provider rates in [fiscal year] 2011, and 46 states reported plans to do so in FY 2012." Note that the Medicaid rates I supplied above are from 2008, and therefore four years out of date.

Obamacare includes a temporary, two-year bump in Medicaid fees for primary care, expiring in 2014. Progressives hope that this bump will become permanent, in the way that the Medicare "doc fix" has. But our $1.4 trillion budget deficit makes that outcome unlikely. States that go forward with Obamacare's Medicaid expansion are almost certain to compensate for it by reducing their provider payments. Don't say you weren't warned.

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