GOP Cost-Cutting Takes Aim at Medicaid

According to reports, the House GOP is considering plans to reduce spending on Medicaid rather than the more politically intractable Medicare or Social Security. While the GOP has taken a lot of heat for the Ryan plan’s Medicare proposals, switching their focus to Medicaid isn’t the right response.

The Hill notes that:

The leaders of two leading advocacy organizations [said] that they expect the House Energy and Commerce Committee to move quickly on a bill that would let states set new Medicaid eligibility rules. The bill, introduced last week, would repeal ‘maintenance of effort’ requirements (MOE) in the healthcare reform law, which block states from cutting their Medicaid rolls ahead of the program’s expansion in 2014.

Medicaid is shared between the states and the federal government with the latter paying about two-thirds of the cost of the program. The federal government sets criteria for Medicaid eligibility. Governors would like a block grant program which would allow them the greatest flexibility for program implementation.

Medicaid is the insurer of last resort. To cut the rolls could put too much pressure on the social safety net. It’s well known that Medicaid is the insurer of the very poor but it’s also a key insurer for children, the disabled, and even the elderly poor who also are eligible for Medicare. Furthermore, it’s the only public insurance that pays for long-term care.

Furthermore, is there the same potential for savings as with Medicare reform?  Can Medicaid be made amenable to substantial cuts from the federal government? True, there’s some room for such cuts: Since the formula for Medicaid spending by the federal government is based on the level of state spending, it is attractive for many states to spend as much as possible to attract the highest contribution from the federal level.

On the other hand, most of the tumult seen in Wisconsin, Ohio, and other states is as much the result of Medicaid's effect on state budgets as any other issue. Governors have had strong incentives to control Medicaid spending: Medicaid payments to physicians and hospitals are typically substantially below the costs of the services provided, somewhere less than 85% of cost. Beside underpayments, over 70% of individuals in Medicaid are in managed care plans, another major cost saving effort.

But let’s grant that there’s an opportunity to approach Medicaid in an innovative method that puts responsibility on recipients to be more responsible and accountable and that focuses on preventive care. Let’s even throw in a form of health savings account so that individual patients have “skin in the game”. Wouldn’t such approaches save real money and allow lower federal payments for Medicaid? Well no.

All of these components have been incorporated into a plan called HIP or the Healthy Indiana Plan and while it is successful in accomplishing its goal of patient responsibility and incentives for patients to be concerned about the cost of care, it has not led to reductions in costs at the state or federal level.

It’s a very fine Medicaid program with 99% patient satisfaction ratings but it’s also been a very expensive plan, requiring a cigarette tax to help defray its costs. Gov. Mitch Daniels has taken heat from conservatives over the costs of the program, to the delight of some commentators.

Medicaid pays 15% less than the cost of care, highly utilizes managed care, and even when utilizing innovative approaches still requires at least current payment levels. Cutting Medicaid further is unlikely to be feasible. Cut the rolls now and this goes beyond cutting fat from the system, it gets into muscle and bone.  In the end: Improving the economy and reducing poverty is the best approach to reducing Medicaid.

Contrast all this with Medicare: Minimal managed care, supporting affluent, middle class, and poor, predominantly fee for service, lacking health savings accounts, and (while only paying at a rate equal to the costs of care) still substantially higher than the Medicaid payment schedule.

Medicare is where savings can be found -- particularly with a prospective payment methodology – and should be the initial target for reformers, not Medicaid. The Ryan plan has been demagogued in an astonishing fashion, even leading to an extraordinarily ignorant statement from Secretary Sibelius that patients would “die sooner.” But for the GOP to redirect their efforts from Medicare reform to further chopping at Medicaid isn’t the right response.

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