Medicaid is in trouble. Budget shortfalls and the growing number of beneficiaries are forcing many states to reassess their Medicaid programs.

Congress and states should begin to look at ways to reform the Medicaid program in order to better service those in need -- whether a low-income family or individuals who are physically or mentally disabled.

Largest Health Care Program

Today, Medicaid is the largest government health care program costing close to $259 billion, in combined federal and state spending.[1] Medicaid spending has increased dramatically over the past 10 years. In 1993, for instance, the program was estimated to have spent $132 billion. As medical technology introduces better treatments and cures, these costs are going to continue to rise. By the year 2004, the program is projected to reach $304 billion.[2]

It seems clear that a government controlled program, such as Medicaid, will be forced to further ration the care available to these beneficiaries, unless policymakers pursue some innovative reforms that can deliver quality care more efficiently.

Furthermore, states have faced significant Medicaid funding shortfalls over past few years, forcing most to impose cost containment measures, such as:

• Reducing provider payments,
• Limiting prescription drugs,
• Restricting eligibility and benefits, and
• Imposing greater cost-sharing mechanisms.[3]

Congress acted to provide states with a one-time infusion of $10 billion to Federal Medicaid matching funds (FMAP) to help them through their fiscal crises.[4] However, this fiscal patch does little to improve the long-term health of the program.

The cost of the Medicaid program is partly due to the complex nature of the program. Medicaid serves a very diverse population with diverse needs. By far the largest populations Medicaid covers are adults and children. They also tend to be less expensive - costing the program an average between $1,500 and $2,000 per beneficiary.[5] The smaller, but much more costly populations, tend to be the elderly, blind and disabled. This population consumes over 70 percent of the program's expenditures.[6]

In its FY 2004 budget, the Administration outlined a Medicaid "modernization" proposal. The plan would offer states the option of combining their Medicaid and SCHIP funds and allocating the funds into two separate categories: acute care and long-term care. One of the key objectives of this approach is to give states greater flexibility in designing and implementing these programs.[7]

Immediate Steps for States

While it appears unlikely that fundamental reform of the Medicaid program will be addressed this congressional session, states can take steps now to improve the function of their Medicaid programs and better serve the beneficiaries. By utilizing the waivers offered through the Centers for Medicare and Medicaid, states should adopt the following:

• A premium support option. States should offer Medicaid beneficiaries the option of receiving a financial contribution from Medicaid to assist them in obtaining private health insurance. Some states are already providing this option for certain eligible beneficiaries to assist them in participation with their employer-sponsored plans. Furthermore, states should consider expanding this premium support option for individuals choosing to purchase their own coverage outside the place of work for themselves and their families.
• A consumer-directed approach. For those truly indigent and unable to work, states should consider adopting the highly successful "cash and counseling" model.[8] Under this model, certain disabled beneficiaries who receive home services are able to choose and manage the services they receive. States should consider further expanding this "consumer-directed" approach to other Medicaid populations, including those with chronic diseases.

Future Steps for Congress

Still, Members of Congress must address the structural and functional issues facing the Medicaid program. Similar to the fiscal problems facing Medicare and Social Security, Medicaid is in need of fundamental reform. A recent CBO analysis states, "As a result, spending on Medicare, Medicaid, and Social Security will rise sharply. In the absence of changes to federal programs, that rise could lead to unsustainable levels of debt."[9] Congress should consider changes to both the financing of the program as well as eligibility criteria and benefit structure. Transforming the Medicaid program from a strictly defined benefit program to a more consumer-oriented, defined contribution model will set the program on a glide path to real reform.   

A Better System

These changes, both short-term and long-term, must complement a larger health care vision. One that is focused on improving the quality of care by establishing greater continuity in an individual's health care and by empowering individual involvement in the care that's received. Other policy initiatives, such as tax credits, personal health accounts, and insurance reform, are also well suited to move us in this direction. Policymakers must resist attempts to simply remain with the status quo, but strive to transform the health care system piece by piece.

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