Medicaid: The Basics

Notes on Medicaid compiled from the Illinois Policy Institute, the Illinois Republican Senate Caucus, and news reports.

From the Illinois Policy Institute:

When individuals purchase health insurance or choose employee benefits, they make decisions based on the cost and need of services. Medicaid enrollees have a different method: they use whatever services they want without any regard to prices.

Even when seeking treatment for something as routine as a cold, a Medicaid enrollee can enter an emergency room and seek treatment on demand rather than making an appointment to see a doctor like everyone else. The result is that the taxpayers are stuck paying for an expensive emergency room treatment, instead of a reasonable doctor’s visit … and the difference is enormous.

Illinois’ Medicaid program costs taxpayers $7 billion per year. More than $6 billion comes from the state’s general fund (nearly a quarter of the $25.6 billion General Revenue Fund appropriation in 2005). Because of exploding costs, the state is often late paying the bills and when it does, it only pays $.69 on the dollar. But not to worry, the Medicaid providers don’t get stiffed; they just raise prices to make up for the other 31 cents. Ultimately, taxpayers and non-Medicaid patients are getting bilked by this inefficient program.

In fact, Medicaid costs each Illinois resident $570 annually. In many instances, individuals and families pay more for Medicaid than they would for standard health insurance. A state employee supporting a family of four, for example, pays approximately $2,000 per year for health care coverage while a Medicaid family pays $2,300.

The program covers one in seven Illinoisans, two out of every three nursing home residents, and one out of every three children. Even though Gov. Blagojevich has called the current budget situation the worst financial crisis in the state’s history, eligibility to join Medicaid has been expanded in five of the last seven fiscal years. In this year’s budget address, the governor vowed to expand the program even more. He intends to provide health care for families up to 185 percent of the federal poverty line (Illinois already funds up to 133 percent). This massive expansion could not come at a worse time.

Furthermore, in 2004 as much as 24.2 percent of Medicaid’s funds went to pay for administrative costs. Earlier this year, the Lewin Group issued a report on the state’s Medicaid system showing that the ratio of administrative to medical expenditures in Illinois far exceeds those of other states. For instance, Texas spent 14 percent on administration in 2004 and Pennsylvania less than 8 percent. The Lewin report found that “[c]ollectively, the Illinois health plans have used an unusually small proportion of the State’s payments to pay for their enrollees’ health care and a disturbingly high proportion for administration and profit.”

The report goes on to recommend that the state begin using managed care programs to increase efficiency in its health care delivery. Illinois is one of a few states that have yet to move to managed care which would allow the state to accept competitive bids from established large scale managed care providers. This competition would work to increase efficiency and streamline the bureaucracies involved. If the state were to follow the Lewin recommendation, the managed care program could save nearly $200 million in the first year alone and about $460 million in the fifth year of operation.

As currently configured, Medicaid is unsustainable. Since 1999, the program has grown at 8 percent per annum and, if present trends continue, the program will double in costs every nine years. It does not take an expert to determine that the current trend ends with bankruptcy. At some point, Illinois will be forced to reform; it’s not a question of if but of when.

– Excerpts from an Illinois Policy Institute article that ran as an Op-Ed in the August 11, 2005 print edition of the State Journal-Register:

Medicaid is welfare and the press’ derision showed remarkable ignorance. A quick check of Webster’s dictionary confirms as much. The relevant entry defines welfare as, “a: Aid in the form of money or necessities for those in need b: an agency or program through which such aid is distributed.”

As configured today Medicaid creates dependency, discourages work, and is financially unsustainable much as welfare was prior to reforms. A multitude of academic studies provide evidence on both dependency and the disincentives to work. A recent report by the Robert Wood Johnson Foundation found more than 20 major studies concluding that Medicaid crowds out private insurance. Why should a Medicaid enrollee find marginally better work when any raise will be eaten up by insurance costs? Why should insurance companies provide low cost basic insurance and compete with “free” Medicaid benefits?

The over-utilization of health services, the cost shifting, and the drug rationing that are rampant in Medicaid all drive up health care costs and taxes for you and me. Since 1999, Medicaid spending has grown at 8 percent per annum and if present trends continue, costs will double every 9 years. Bankruptcy is the inevitable result.

In light of this gathering storm, Governor Blagojevich has recklessly expanded the KidCare and FamilyCare Programs. Other than Illinois, only the chronically mismanaged Washington, DC is still expanding Medicaid; every other state is facing the grim reality that Medicaid is fiscal Armageddon. “I think it ‘s the right thing to do,” the Governor says with Neville Chamberlain like nonchalance, “and I ‘m proud of the fact that we ‘ve been able to provide more health care to people, and I think that ‘s the proper role of government.” He blithely states this despite the fact that he cut services to the elderly and raided pension funds in order to expand KidCare and FamilyCare.

In the 2006 budget, Illinois cut $110 million in benefits for over the counter medications, cut payments to nursing homes by $30 million and froze $40 million in payments for complex medical procedures to hospitals. In other words, just because you are enrolled in Medicaid doesn’t necessarily mean you get the treatment you need. His raid of the downstate teachers’ pension fund means that a new teacher is actually paying — through reduced pension benefits — to expand Medicaid for families earning more money than he or she is!

What’s appalling about this state of affairs is that others around the country are choosing to fix Medicaid rather than appease the beast and pass the problem on to the next generation. Florida and South Carolina are examples where reforms based on the principles of accountability, responsibility and choice are being implemented.

By adhering to these principles, we can design a consumer directed system that puts patients and doctors in charge of decision making instead of bureaucrats. Medicaid could assist enrollees in purchasing private insurance coverage rather than punishing enrollees for trying to climb the economic ladder. Finally, we can create a system that is more economically efficient where the patient is the focus not “the system.”

Polling indicates that 6 out of 10 Americans support Medicaid, but polling also shows 6 out of 10 supporting Medicaid reforms. But before we can address the challenge, we have to acknowledge the gathering fiscal storm that Medicaid has become.

From the State Journal Register:

Illinois Comptroller Dan Hynes on Wednesday said the state should borrow $1.1 billion to pay off a growing backlog of bills from health-care providers to the poor In a written statement, Hynes, a Democrat, said the state should borrow the money to ease the pressure on hospitals, doctors, pharmacies and others who provide health-care services to the poor under the state’s Medicaid program.

Hynes spokeswoman Carol Knowles said the office believes there is a backlog of $2 billion in unpaid state government bills of all kinds. Hynes’ office has $1.14 billion in bills on hand waiting to be paid, and the rest are being held in state agencies, she said. It takes the comptroller’s office about 22 days to pay bills.

Blagojevich’s budget office maintains that the state can save money by borrowing money to pay the backlog of bills because the interest on a short-term loan is expected to be lower than the cost of penalties run up for late payment.

From the Illinois Republican Senate Caucus:

Special Report on Medicaid

Illinois’ Medicaid program now costs over $7 billion per year and is growing at a rate that threatens to double in cost every nine years. The Medicaid program’s growth rate in Illinois is nearly triple that of the rest of the state budget and is absorbing more new dollars each year than elementary and secondary education funding.

If left unchecked, Medicaid costs will crowd out other areas of the budget and threaten the ability of the state to fund basic services, including education and public safety.

Medicaid – A Flawed Program: The Case for Change, a special report prepared for the Senate Republican Caucus is now available for download.

The report details how the state’s Medicaid system swallows up ½ billion in new state dollars each year before the General Assembly even begins to debate budget priorities.

Medicaid growth consistently outpaces the rest of the state budget, typically growing at a rate that is 4% to 6% above that of the rest of state government.

Yet, despite the high cost, Medicaid:

  • Fails the patients because it does not foster on-going doctor-patient relationships, denying participants the opportunity and advantage of having a medical “home”;
  • Pays low rates to providers in an embarrassingly untimely fashion;
  • Uses medical services inefficiently and ineffectively, allowing patients to visit any provider, at any time, with any level of frequency, with few restrictions and no requirements for physician referrals;
  • Provides financial incentives for the state to “chase” federal dollars, all the while creating a greater burden on taxpayers;
  • Lacks the controls commonly found in health care programs utilized by most private and public sector employees.

From the Economist magazine:

For low-paid workers, Medicaid’s very generosity creates perverse incentives. If they earn too much, they can lose their benefits. Since these average more than $6,000 per beneficiary, a pay rise can make a single mother simultaneously much worse off and more worried about her children’s health. In some states, Medicaid recipients are similarly discouraged from saving or accumulating assets, such as a car that might get them to work. This keeps many trapped in poverty they might otherwise have escaped.

Medicaid programmes are run by the states, but the federal government pays most of the costs. For every dollar a state spends on Medicaid, Washington, DC, has to contribute on average $1.30 (the rate varies between rich and poor states). This gives states an incentive to spend more on health care than on other equally desirable goals.

Medicaid’s expansion, in turn, tends to “crowd out” the cheaper types of private health insurance. No private insurer can offer its services free, which is mostly how Medicaid appears to its recipients. Small firms are stopping providing health insurance partly because they know the taxpayer will pick up the slack.

Some attempts have been made to restrain spending. In the past three years, all 50 states have tried to squeeze the prices they pay for drugs and doctors. In addition, 38 have tried to tighten the criteria for eligibility and 34 have reduced the range of benefits. Tennessee has made the most controversial efforts, with Governor Phil Bredesen seeking to remove 323,000 beneficiaries from his state’s Medicaid rolls.

The perils of reform

But Medicaid is popular, so most politicians try not to cut it much. The only brutal cost-curbing measure applied nationwide is impenetrable bureaucracy, of the sort that so flummoxed Ms Jordan, though this was probably not designed as a cost-curbing measure.

Medicaid’s defenders point out that without it, “the vast majority of its beneficiaries would join the ranks of the 45m uninsured Americans,” as the Kaiser Commission on Medicaid and the Uninsured puts it. And though it may be inefficient, it is no more so than the other parts of America’s higgledy-piggledy health-care system. Medicaid costs are increasing more slowly than those of private health insurance, despite the fact that private insurers often exclude those with expensive chronic conditions, whereas Medicaid embraces them.

So no one is suggesting axing Medicaid. But some say it could be reshaped as thoroughly as welfare was in the 1990s. Michael Cannon of the Cato Institute, a libertarian think-tank, recommends targeting benefits to the truly needy (by, for example, getting prosperous elderly folk to pay their own nursing-home bills), eliminating perverse incentives and promoting more competition between medical providers. He reckons that such tough reforms could save $941 billion by 2015, wiping out 96% of the cumulative ten-year federal deficit. Instead of which, Congress is offering golden sticking plasters.