Midwest Economy Blog

Medicaid: In need of reform in Midwest states?

February 26, 2007

A Forum on Medicaid and State Budgets

The U.S. Medicaid program provides healthcare coverage and long-term assistance to over 41 million low-income families and 14 million elderly people and persons with disabilities, according to the Kaiser Foundation. Given the high and rising costs of medical care, it is not surprising that the Medicaid program typically represents the largest single budget item (roughly 20%) for most state governments, having surpassed K-12 education. As such, the rising expenditures of state Medicaid programs are often the biggest culprit in the imbalance in state budgets from year to year. The question is, given current trends, can states afford Medicaid in the future without structural changes in either the program or in funding?

Medicaid is now funded as a partnership between the federal government and the states. The federal government provides matching funds (FMAP) as determined by a formula with the matching rate varying from 50% to 77% on the dollar. Given this matching feature, states have long been motivated to take advantage of the federal match by expanding their programs. In response, the federal government has tightened up eligible services, leaving many states with sole funding responsibility for certain current program services. In turn, many states have enacted cost containment strategies.

These developments have slowed the growth of Medicaid expenditures of late, holding it to 2.8% in FY2006 from an annual average of roughly 7.7% from 1997 to 2005. States have also enjoyed some respite from Medicaid budgetary pressures with the shifting of many prescription drug expenses to the federal government under the new Medicare Part D program covering prescription drugs. Budgetary pressures also have been eased from the revenue side as widespread economic recovery in the U.S. has often yielded better than expected state revenue growth. However, the respite may prove to be short-lived; states are budgeting for Medicaid growth of 6% in FY2007. Unfavorable trends will continue to put pressure on Medicaid spending including a growing elderly population, rising general health costs and an increasing number of uninsured in the general population.

In addition to addressing funding pressures to sustain existing programs, many analysts believe that Medicaid programs should be refashioned. Recent studies to this effect have been issued by the Medicaid Commission’s report to the Secretary of Health and Human Services and a report from the Deloitte Center for Health Solutions. For example, the Medicaid Commission recommended changes in five critical policy areas. These are:

  • Long-term care—including providing incentives for individuals to plan for their own long-term care needs and shifting long-term care toward at-home rather than institutional care.
  • Benefit design—providing states with greater flexibility to custom design Medicaid coverage to meet the needs of their covered population. In addition, an incentive system should be considered to reward Medicaid recipients who make prudent purchasing, resource-utilization and life-style health related decisions.
  • Eligibility—permitting states to consolidate eligibility categories and increasing federal support for new options for the uninsured to obtain private insurance rather than falling into the Medicaid program. So too, the federal matching program should be scaled to provide a larger match for adding low-income recipients (the intended population for Medicaid) and a smaller match for adding higher income populations.
  • Health information technology—including broad support for expanding the use of information technology including having all Medicaid beneficiaries having an electronic record by 2012.
  • Quality and care coordination—further expansion of coordinated care programs as well as measuring the effectiveness of treatment by providers.

The Deloitte study suggests that fundamental reform is needed, particularly in the area of actively managing Medicaid programs. The study suggests that policymakers should be guided by six key choices in reforming their Medicaid programs.

  • Choice 1. What should be the core function of the state’s Medicaid program?
  • Choice 2. Should the program services be directly managed by the state or should it be contracted out?
  • Choice 3. Where should the state be on the continuum between “traditional” Medicaid benefits and coverage and free health care for all low-income residents?
  • Choice 4. Will the state go beyond simple program administration and use the Medicaid program to actively control the costs and quality of healthcare throughout the state?
  • Choice 5. Which cost savings and policy levers will the state use to reduce, or at a minimum contain, the costs of the state’s program?
  • Choice 6. To what extent will Medicaid recipients share in the state’s burden of cost reduction?

Clearly when it comes to Medicaid, there is no shortage of potential reforms.

To help investigate these issues, on March 15, the Federal Reserve Bank of Chicago and the Civic Federation are cosponsoring a program to look at the current status and features of Medicaid and how states are dealing with this sizable program responsibility. The conference attendees will hear from Medicaid policy researchers including representatives from the Kaiser Foundation and the University of Illinois, as well as the directors of the Medicaid programs in Illinois, Iowa, and Indiana. A keynote address will be delivered by former Wisconsin Governor and U.S. Health and Human Services Secretary Tommy Thompson.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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