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Congress is stalling real Medicaid reform.
Let the states lead the way.

David Gratzer
Medical Progress Today
April 29, 2005

On April 28, House and Senate budget negotiators agreed to follow a recommendation from the National Governor’s Association and cut about $8.6 billion in Medicaid spending next year. They also agreed to create a bipartisan panel to study Medicaid reforms and their effects on the states.

The bottom line, however, is that Senate Republicans took a good look at the President’s proposal to trim a meager 1% from Medicaid and blinked. The Bush White House’s modest plans for reform of the Great Society program have suffered a serious setback, and are now on life support.

But if Washington tinkers while Medicaid costs explode, promising ideas are being considered at the state level. South Carolina Governor Mark Sanford, for example, sees most Medicaid recipients receiving a debit card for health services -- and the choice and empowerment that go with it. The Bush White House should ensure that the federal government doesn’t stand in the way.

While much attention on Capitol Hill focuses on other entitlements, Medicaid spending today bests $300 billion a year, up more than 50 percent in the past five years. Medicaid’s total budget is now larger than Medicare’s, and it affects more Americans – some 50 million. The cost continues to climb. Unless Medicaid is changed, the Congressional Budget Office projects a doubling of spending by 2012.

Medicaid, in other words, is a 40-year old program in need of a re-thinking. Today, it provides benefits to millions of Americans – and does nothing to encourage restraint or consideration by the individual recipient. Thus, ERs function as family physician offices and ambulances serve as elaborate taxis. Medicaid is, in a very real sense, the “single-payer” system within American health care that liberals have fantasized about for all of us.

Faced with rising costs, most states have done exactly what governments do in a single-payer system: employ command-and-control strategies. States have cut reimbursement rates to doctors and hospitals (effectively shifting the cost of Medicaid patients to insured patients), centralized decision making, and dabbled with managed care programs. As an NBER study by University of Maryland economist Mark Duggan shows, the latter actually increases costs.

South Carolina now considers an alternative – and no wonder, since costs are spiraling upward. Between 1999 and 2004, South Carolina’s Medicaid program grew annually by about 11%; in the 2005 budget, health services will eat up about 34% of all revenue. Governor Sanford summarizes the problems well: “You give the consumer -- once qualified -- unlimited purchasing power for a product that someone else is paying for.” His solution: empowering Medicaid recipients with health dollars.

Under the Governor’s proposal, if a managed care plan costs $2,000 for a typical family, the money could be converted into a modified health savings account-type plan. That would mean purchasing a high-deductible catastrophic policy for the family (say, at about $1,200) and then depositing the remaining money into a personal health account. Recipients would be given a debit card for health services to access their account.

Because of the special needs of the Medicaid population, the accounts wouldn’t quite function like private health savings accounts. The accounts might cover, say, a $10 co-pay for a family doctor visit or part of the cost of a diagnostic test. Preventive medicine -- immunizations, blood pressure screening, diabetes tests – would continue to be free. To the frugal health consumer, the program would offer two advantages. First, money from the accounts could be used to purchase additional services, like eye care. Second, a portion of the unused money would belong to the beneficiary when leaving Medicaid, by rolling it over to a private-sector health savings account.

Reforming Medicaid is no easy task. A disproportionately small number of recipients use a large share of the budget. Nationally, the commonly quoted figure is 20 – 80, that is 20% of users cost 80% of Medicaid dollars. South Carolina officials suggest their usage is even more lopsided, at 5-55. As a result, Gov. Sanford is unlikely to solve all of Medicaid’s woes in one proposal.

But he is on the right track. He’s moving away from Medicaid’s command-and-control structure and toward competition and greater individual responsibility.

He isn’t alone. In Florida, Gov. Jeb Bush proposes getting his state out of the business of micro-managing the program by giving recipients a menu of private insurance choices.

To encourage reform, the Bush White House initially proposed an old Reagan administration idea: fund states with block grants in exchange for greater freedom in administering the program. The idea won limited support even amongst Republican governors. For the last several months, the White House has been more modest, hoping to simply restrain future spending. In light of Senatorial opposition, that seems unlikely.

Just as Wisconsin led the nation with welfare reform, South Carolina and Florida could provide the needed example of what to do about Medicaid. But Washington can serve an important role. To experiment, individual states must apply for waivers from the complex and numerous regulations of Medicaid. The process itself is long and cumbersome. The Bush White House can ease the regulatory burden: offer any state with a decent proposal a blanket waiver. Such a move wouldn’t even require a vote by the Senate.

Washington seems unlikely to be at the forefront of Medicaid reform. But by cutting red tape, the federal government would free states to innovate.

Dr. David Gratzer, a physician, is a senior fellow at the Manhattan Institute’s Center for Medical Progress.

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