Reform Medicaid to give taxpayers, needy better deal

John Garen is the Gatton Endowed Professor of Economics at the University of Kentucky and an adjunct scholar at the Bluegrass Institute, a free-market think tank.
John Garen is the Gatton Endowed Professor of Economics at the University of Kentucky and an adjunct scholar at the Bluegrass Institute, a free-market think tank.

Medicaid spending has risen so dramatically over the past two-and-a-half decades that the program has become part of the entitlement spending crisis threatening both state and federal budgets.

From 1999 to 2009, total federal and state spending on Kentucky's Medicaid program rose from $3.3 billion to $5.1 billion — a 54 percent increase. Kentucky's General Fund spending on Medicaid increased by 37 percent, from $802 million to $1.1 billion. Enrollment expanded by 39 percent, from about 664,000 to roughly 824,000.

These increases occurred during a time where Kentucky's real GDP grew only 8 percent and followed a decade of even more dramatic increases in the Medicaid program. Without significant changes, Kentucky's General Fund spending on Medicaid could easily be 70 percent higher in 2020 than in 2009, even without the expansions built into the recent federal health care reform bill. With reform bill provisions, Medicaid spending is projected to be 80 percent higher.

The numbers alone, however, fail to express the depth of the problem.

Medicaid is rife with incentives that thwart budgetary control and good health-care practices by consumers and providers. These include: underreimbursement that penalizes providers for accepting Medicaid patients; insufficient co-pays and deductibles that lead to misuse of services; one-size-fits-all coverage that does not allow shopping for insurance; matching federal funds that reward states for growing their programs; incentives to limit work to avoid crossing the income threshold where benefits are lost; and poorly targeting the population of the truly needy by making the middle class eligible for benefits.

The problem of underreimbursement of providers is perhaps especially misguided. With low reimbursement rates, providers are reluctant to take on Medicaid patients. This problem is highlighted by a recent study indicating appointment requests for those who claimed Medicaid coverage were denied 66 percent of the time, compared to 11 percent for those stating they had private insurance.

Thus, Medicaid simultaneously encourages enrollees to visit providers and discourages providers from accepting them as patients.

While this is not to say that no one has been helped by Medicaid, it does speak to the flawed design and implementation of the program that leads to more taxpayer dollars being spent while failing to target assistance to the truly needy.

While some piecemeal reforms of Medicaid may be useful, such as more use of managed care and co-pays, fundamental reform is superior. It would integrate the low-income into the mainstream of health insurance and medical care. This is done with three steps:

■ Medicaid can be transitioned to a health-insurance voucher program, with the voucher amount determined by income and health condition. Recipients purchase the health insurance of their choice with the aid of the voucher.

■ The state should seek to remove any impediments that may exist to competition among insurers and providers. Competitive health insurance and health care markets work hand-in-glove with vouchers to bring the benefits of choice and competition to Kentucky's poorest.

Recipients have incentives to shop for their care and health insurance while providers are rewarded, not penalized, for accepting them as patients.

■ The program should be converted to one where federal funding is in the form of a block grant and flexibility is allowed for each state. This removes incentives for states to game the system to receive more federal matching money as well as enabling states to design programs that suit them best.

The growth of Medicaid has contributed heavily to the fiscal crisis that threatens the solvency of the federal and state governments while failing to fulfill the goal of improved health for a large share of its recipients.

This is clearly seen in the effects of the large expansions of the program from the late 1980s through the 2000s. Careful studies indicate that for every 10 new enrollees on Medicaid during this time, five to six would otherwise have had private insurance. Other studies find minimal improvement in access to care and in health status for new enrollees, with the exception of those who are very poor.

Kentucky and the nation deserve a program that better serves taxpayers and the truly needy.

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