The Heritage Foundation

Executive Summary #2169 on Health Care

September 16, 2008

September 16, 2008 | Executive Summary on Health Care

Executive Summary: State Health Reform: Converting Medicaid Dollarsinto Premium Assistance

States can increase the value of Medicaid dollars for recipients and taxpayers through premium assistance. Linking public dollars to private cover­age would increase access to needed services for recipients and reduce costs for taxpayers. Medicaid coverage for a family of three (one adult and two children) will cost $9,830 next year in combined federal and state dollars. Using Medicaid dollars to pay the employee share of employer-sponsored insurance would also stretch public funds.

State policymakers can improve Medicaid by using the flexibilities of the Deficit Reduction Act of 2005 (DRA) to redesign coverage of low-income working families into a system of premium assis­tance-a government contribution to health insur­ance-that would reconnect much of the Medicaid population to the private health insurance markets that serve the majority of Americans. Such reform would provide a number of significant benefits for the Medicaid population:

  1. Continuity of coverage and care. Medicaid is an unstable platform for continuous care as eligi­bility changes; continuity of care serves to main­tain and improve the health of individuals and families. Premium assistance creates stability.

  2. Increased access to doctors. Private insurance is a better alternative for individuals and families who seek better access to doctors than typical "fee-for-service" Medicaid offers.

  3. Stabilized private health insurance and re­versal of the detrimental effects of "crowd-out," the displacement or loss of individuals' and fam­ilies' private health coverage due to public ex­pansion that results in increased cost for those who are privately covered.

  4. Escape from the stigma of dependence on welfare. Policy should promote personal responsibility.

The Biggest Program. Medicaid serves more people than Medicare and is estimated to spend nearly $350 billion on behalf of 64 million people. It is projected that federal, state, and local govern­ment spending on Medicaid will reach $5.1 trillion over the next 10 years.

The traditional "moms and kids" generally rely on Medicaid for coverage of acute care-the same type of care purchased through private health insur­ance. They represent about 75 percent of the Med­icaid population and account for $117 billion, or 34 percent, of Medicaid expenditures. The State Chil­dren's Health Insurance Program (SCHIP) and the Disproportionate Share Hospital (DSH) program are also part of public assistance to low-income working families. Adding spending on SCHIP ($9 billion) and DSH ($16 billion), more than $142 bil­lion will be spent on low-income individuals in FY 2009. The 10-year cost associated with these popu­lations is approximately $2 trillion.

Working Families. Medicaid no longer serves only a welfare population. More than 70 percent of children on Medicaid and 90 percent of children on SCHIP have at least one parent in the workforce. In some cases, government funding could follow working families and flow into employer-sponsored insurance (ESI).

Using a Health Insurance Exchange. Where ESI is not available, these persons should purchase private health plans, using Medicaid and SCHIP subsidies. State officials could set up a statewide health insurance exchange wherein health plans would compete directly for consumer dollars. The exchange could serve all employers and employees of a state and those enrolled in public programs. An exchange would help individuals form a group that can then receive discounts on health insur­ance plans.

Premium assistance would simplify family options. Rather than having a parent covered by one plan through her employer, one child through SCHIP, and another child through Medicaid, the entire family could be served through one plan and a streamlined system of financing. Being connected to the private market means that when families enter or leave Medicaid, they can have a seamless transition in their insurance coverage.

How States Can Overcome Barriers to Private Coverage. Premium assistance has been more a mirage than a reality because of federal conditions that previously discouraged state adoption. The DRA provides the states with tools they need to establish benchmark benefit packages, employ new methods for meeting cost-effectiveness tests, and apply new flexibility in applying cost-sharing re­quirements for coverage.

To date, only a handful of states are using the "benchmark" plans to increase premium assistance. Much of this inaction is rooted in political or bureaucratic inertia.

Conclusion. For state lawmakers who want to lower costs and improve the quality of health care coverage for low-income workersand children, there is ample opportunity to establish a premium assistance program.

For state health insurance pools, the infusion of a large cohort of relatively young and healthy people would spread the risk and lower per-person costs. For the populations currently covered under Med­icaid and SCHIP, it would provide such benefits as continuity of care and coverage and better access to doctors, stabilize private health insurance, reduce the stigma that usually accompanies dependence on public assistance, and bring low-income people into the private health insurance markets, just as far-reaching welfare reform initiatives are integrat­ing low-income people into the economy.

There are many options that state officials can use in pursuing a premium assistance strategy for Medicaid and SCHIP. A combination of zeal for innovation and the political will to improve the financing and delivery of care for low-income Americans could bring about a transformation.

When Congress turns to broad entitlement reform, as it eventually must, Medicaid must be part of that reform. Integrating the $2 trillion spent on low-income working families over the next 10 years with tax credits and state pooling mechanisms would strengthen and stabilize our health insurance system and address the issues of the "uninsured."

Dennis G. Smith is Senior Fellow in the Center for Health Policy Studies at The Heritage Foundation and formerly Director of Medicaid and State Operations at the U.S. Department of Health and Human Services.

About the Author

Dennis G. Smith Visiting Fellow
Center for Health Policy Studies

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