Heritage Foundation Leadership for America

Medicaid is in dire need of change. Medicaid is a welfare program, enacted in 1965 as a safety net for the poor and the indigent. But the program has grown to care for over 46 million Americans at an estimated cost over $338 billion, for FY 2006, in combined federal and state expenditures.[1] In reforming the welfare system in 1996, Congress established a process to move people out of dependency and into work, enabling them to participate in the mainstream economy. Medicaid reform should track the success of welfare reform, mainstreaming beneficiaries, wherever possible, into the private health care system that covers their fellow citizens. The result: a modernized and improved Medicaid program to better care for those it is intended to serve.

There are many reasons why the Medicaid program needs change. Consider the top ten:

• Medicaid’s mission to the poor has been compromised. The Medicaid program has grown to cover an extremely broad and very diverse group of individuals. It provides care to over 46 million children, parents, pregnant women, disabled, seniors, and even some childless adults. It also increasingly provides long-term care services to middle-class Americans. Such a diverse group makes the program’s one-size-fits-all design inadequate to meet the needs of very different enrollees. Policymakers should reevaluate the purpose of Medicaid and consider ways to better address the needs of these various populations.
   
• Medicaid’s benefit-setting process is outdated. Under Medicaid, states must provide certain benefits to all enrollees. States may also provide additional benefits above this mandatory level.[2] The line dividing mandatory and optional benefits, however, is no longer realistic. For example, prescription drugs are considered an optional benefit, though few would consider prescription drugs optional. Policymakers should remove these distinctions and allow flexibility in creating benefit packages that meet the specific needs of groups of enrollees.
   
• Medicaid limits access to quality care. Due in part to Medicaid’s low reimbursement rates and burdensome bureaucracy, fewer physicians are agreeing to accept Medicaid patients. A 2002 Medicare Payment Advisory Commission (MedPac) survey found that “approximately 40 percent of physicians restricted access for Medicaid patients…”[3] Policymakers should consider integrating market-based solutions, such as modified Health Savings Accounts for enrollees, into Medicaid so that participating physicians can receive full payment at the time of care. This would encourage better physician participation.
   
• Medicaid rations treatments and services. In order to control spiraling costs, many Medicaid programs restrict access to treatments and services. This is particularly visible in how states ration access to prescription drugs within Medicaid. States have devised a variety of approaches, such as restricted formularies and monthly limits, to impede enrollees’ access to prescription drugs.[4] This can be especially problematic for enrollees with multiple health problems. Those with mental illnesses, for example, may find that the limited formulary restricts their ability to find the best choice for them within a class of similar drugs. Policymakers should find ways to give enrollees, and their physicians, greater control over treatments and services.
   
• Medicaid is less desirable than private coverage. The vast majority of Americans take advantage of private health care coverage. It is not surprising that most Americans would prefer private health care coverage to Medicaid. A Commonwealth survey found that 65 percent of Americans, whether insured or not, would prefer private coverage, where only 10 percent would want Medicaid or Medicare.[5] Policymakers should help Americans get the private coverage they want instead of tinkering with inferior government programs; and they should promote ways, such as premium assistance, to allow those eligible for Medicaid to purchase the private health insurance of their choice.
   
• Medicaid discourages long-term care planning among the middle class. Medicaid is quickly becoming a welfare program for middle-income families. With cleaver estate planning and asset protection schemes, individuals can qualify for Medicaid and receive long-term care services at taxpayer expense. Research has shown that Medicaid dramatically undercuts the demand for private long-term care insurance.[6] Policymakers should strictly enforce current laws on asset transfers and close loopholes that make it too easy to qualify for Medicaid. In conjunction, policymakers should create incentives to encourage individuals to plan and save for their long-term care needs. Moving away from long-term care for the middle class would allow Medicaid to return to its proper mission: providing a safety net only for those who truly need it.
   
• Medicaid encourages improper state financing gimmicks. The open-ended federal match states receive for their Medicaid spending encourages them to game the federal government. States use a variety of tactics to leverage federal matching dollars, many of which have been found to be inappropriate or deceitful.[7] Policymakers should clamp down on these gimmicks to bring accountability and credibility to Medicaid.
   
• Medicaid is quickly draining state budgets. Most states must maintain a balanced budget, and many are facing serious and worsening fiscal problems. Medicaid consumes an increasing portion of state budgets and is squeezing out other priorities. For the first time ever, Medicaid surpassed education as the largest part of state budgets in 2003, according to the National Governor’s Association.[8] That year, Medicaid consumed 22 percent of state budgets.[9] Policymakers should consider slowing Medicaid’s growth by giving states the flexibility to make changes to their programs beyond what is currently allowed.
   
• Medicaid is contributing to federal budget problems. Entitlement programs, including Medicaid, consume a growing portion of federal spending. As the Medicaid program grows, the cost to the federal budget increases. In FY 2006, Medicaid will cost the federal government $193 billion, according to projections, and from 2006 to 2014, Medicaid is expected to grow at an annual rate of between 7 to 9 percent.[10] Policymakers should take steps to bring these spending trends under control, starting with eliminating fraud, waste, and abuse in the system.
   
• Medicaid is creating huge, long-term budgetary problems. Without reform, Medicaid will consume an even larger share of GDP. The Congressional Budget Office reports that the major entitlement programs—Medicaid, Medicare, and Social Security—account for approximately 42 percent of federal spending.[11] By 2050, Medicaid and Medicare alone could account for between 11.5 to 21.3 percent of GDP.[12] Policymaker must take serious steps today to regain control of these looming fiscal problems. The longer policymakers wait, the harder the decisions policymakers will have to make.

Conclusion

It is time for policymakers to address the Medicaid crisis. Policymakers should make reform a priority and take serious action this year. Specifically, Congress should work with state officials to create consumer-driven options within Medicaid and to mainstream low-income Americans into private health care coverage. This could be accomplished with refundable health care tax credits and by bringing consumer-directed and innovative care management to the populations that depend on Medicaid. In this way, Medicaid could be made to better care for those it is intended to serve, while improving its overall performance.

Nina Owcharenko is Senior Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.