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February 1, 2012

Saving Medicaid: A Path to Comprehensive Medicaid Reform

By

Statement before
Committee on Finance
United States Senate

July 7, 2011

My name is Nina Owcharenko. I am the Director or Health Policy Studies at The Heritage Foundation. The views I express in this testimony are my own, and should not be construed as representing any official position of The Heritage Foundation.

The Medicaid program is failing. This joint federal–state health program for the poor is fueling the federal entitlement crisis, bankrupting state budgets, and delivering substandard care to enrollees while crowding out private health insurance options for many. Moreover, the enactment of the Patient Protection and Affordable Care Act (PPACA) only accelerates these problems.

The PPACA expands Medicaid eligibility to new populations without fundamentally addressing the program’s existing problems. The expansion is expected to add between 17 million and 25 million more people to the Medicaid rolls. Moreover, the PPACA is dependent on this massive Medicaid expansion to reduce the number of uninsured by half, reenforcing the argument that the new health care law is based on a government health care model.

Instead of making these problems worse, Congress needs to start over—beginning with repealing the new health care law. Then it must offer a path forward to fixing Medicaid. This long-term plan should include putting Medicaid on a federal budget, mainstreaming working families into private coverage, and preserving a true safety net for the most vulnerable in society.

Fueling the Federal Entitlement Crisis

In 1970, five years after the creation of Medicaid, 14 million Americans were enrolled in the program, and total (federal and state) spending was $4.7 billion.[1] Today, one in five (or approximately 60 million) Americans have been enrolled at some point in the program, and total (federal and state) expenditures were projected to reach $404 billion in 2010, according to the Chief Medicare and Medicaid Actuary.[2]

According the Chief Actuary, under PPACA, Medicaid spending will increase at a rate of 8.3 percent over the next 10 years. Total Medicaid expenditure is estimated to skyrocket to $840 billion by 2019—more than double what it spends today—and enrollment will reach close to 80 million by 2019.[3]

Combined with Medicare and the new health care subsidy in PPACA, these government programs will consume 9.2 percent of GDP by 2030.[4] This means that for every dollar generated, over 9 cents goes to government health care.

Bankrupting State Budgets

At the state level, the Medicaid program is straining already tight budgets. State Medicaid spending is growing faster than other key state priorities and is projected to consume 22 percent of total state spending in 2010, surpassing total state spending on primary and secondary education.[5]

Unlike the federal government, practically all states are required to balance their budgets. Therefore, states must find ways to meet their budgets. With limited flexibility, states typically resort to one of three choices: Reduce provider payments, cut or limit benefits, or readjust eligibility. However, Congress recently restricted the ability of states to make any eligibility changes in their program as a condition for receiving additional federal assistance through the stimulus packages.

Under PPACA, uncertainty remains for the states. Not only did Congress extend the restriction on making eligibility changes (even as a means for weeding out ineligible individuals), but the funding schemes claiming to “protect” states still shift costs to the states. The federal enhanced matching rates are only for “new” populations and decline over time from 100 percent to 90 percent.

Heritage Foundation analysts estimated that, when taking into account the added administrative costs, “the Medicaid expansion will increase state obligations by just under $33.5 billion for federal fiscal years 2014 through 2020.”[6] As noted, total Medicaid spending will skyrocket to $840 billion by 2019, of which the Chief Actuary estimates that the state share will reach $328 billion by 2019.[7]

More Government Dependence, Less Private Coverage

Yes, projections estimate that between 17 million (based on the Congressional Budget Office)[8] and 25 million (based on the Chief Actuary’s updated figures)[9] more people will be on the Medicaid program. However, an important question to keep in mind is the number that will join the Medicaid rolls due to the “woodwork” effect, by which individuals who are eligible but not enrolled will now join due to the individual mandate, and the “crowd out” effect, as a result of which, because of the expanded role of Medicaid, individuals previously with private coverage will instead be enrolled in Medicaid.

It is certain that PPACA will make more people dependent on government for their health care rather than the private sector.

Delivering Substandard Care

These fiscal issues facing Medicaid are compounded by the failure of the program to deliver quality care to those who are on the program. A major contributor to the quality issue is access. A recent New England Journal of Medicine study surveyed Medicaid patients’ access to specialists. It found that 66 percent of those who mentioned they were covered by Medicaid/CHIP were denied appointments, while only 11 percent with private coverage were denied.[10] This study follows similar studies that looked at access to dental and psychiatric care.[11]

A recent Government Accountability Office (GAO) study found similar access issues. In its recent report, GAO found that “more than three times as many participating physicians—84 percent—experience difficulty referring Medicaid and CHIP children to specialty care as experience difficulty referring privately insured children—26 percent.”[12]

Finally, while some studies show that Medicaid can improve care compared to not having any health care, there are others that show Medicaid’s shortcomings in delivering quality care, especially when compared to privately insured individuals. A recent University of Virginia study found that Medicaid patients were more likely to die in the hospital than were the uninsured and the privately insured.[13]

PPACA apparently acknowledges this access issue by requiring states to increase the payment rates for primary care physicians to Medicare levels. The federal government provides an increase in the federal matching rate to cover these higher payment rates. However, the enhanced federal match is only temporary. As Heritage analysts point out, this creates yet another dilemma for the states. When the enhanced federal funding goes away, states will have several unappealing choices: Either find the funding to keep payments at their higher rates, and also likely raise payments to other groups of physicians who were not provided special treatment, or reduce primary care payments back to their original levels and jeopardize already limited access.

Leading with the States

It is clear that designing a one-size-fits-all approach to health care reform is riddled with problems. No two states are alike: Each state has its own underlying coverage issues and challenges that go even beyond Medicaid. Therefore, states should take the lead in developing state reforms that meet their unique needs and will test the virtues of consumer, market-based solutions.

Within Medicaid today, states should maximize their existing authority and flexibility to engage in initiatives such as premium support for private coverage, meaningful cost-sharing based on income, and utilization of proven private-sector care management tools. Moreover, states should aggressively pursue existing (albeit laborious) waiver authority to demonstrate and exercise broader, innovative reform ideas.[14]

In addition, several proposals grant states additional flexibilities that would not require the extensive federal negations in exchange for replacing the current open-ended federal matching rate with a fixed capped amount, and still other proposals envision states pursuing broader reforms that go beyond Medicaid.[15]

Under all these scenarios, states would be able to test varying models that support consumer, market-based solutions. Similar to welfare reform, this process of state experimentation will enable states to learn from each other, adapt successful models, identify federal barriers, and lead the way to a better health care solution that reflects the differences across the country.

More Reform Still Needed

However, even more should be done. The Heritage Foundation’s Saving the American Dream fiscal plan rethinks Medicaid as we know it.[16] It begins with repealing the PPACA. A solid consumer, market-based health care system cannot be built on a flawed foundation. Then it puts federal Medicaid spending on a real budget along with other anti-poverty programs.

Next, it mainstreams healthy moms and kids out of the failing Medicaid program and into the private market to buy the kind of coverage that best suits their needs. In conjunction with insurance reforms based on choice and competition, these families will have the same coverage options and similar federal assistance available to them as other working families enjoy under this new plan.

Finally, it reorganizes “traditional” Medicaid into a safety net for those who are truly vulnerable in society—the frail, elderly, and disabled—and provides the states with the flexibility and tools to deliver value to their patients and taxpayers.

PPACA ignores the serious problems facing Medicaid. It will increase federal spending by federal taxpayers, shift unknown costs onto state taxpayers, further challenge already limited access issues, and reenforce a two-tiered health care system, locking more of the poor out of private coverage and into government-run health care.

The Heritage Foundation’s Saving the American Dream fiscal plan offers a better future for America, Medicaid, and those who depend on it.

Show references in this report

[1] U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, Office of the Actuary, 2010 Actuarial Report on the Financial Outlook for Medicaid, December 2010, at https://www.cms.gov/ActuarialStudies/downloads/MedicaidReport2010.pdf.

[2] Ibid.

[3] Ibid.

[4] Spending Projections from Congressional Budget Office, CBO’s Long-Term Budget Outlook, June 2011, at http://www.cbo.gov/doc.cfm?index=12212.

[5] National Governors Association and National Association of States Budget Officers, “The Fiscal Survey of States,” Spring 2011, at http://www.nasbo.org/LinkClick.aspx?fileticket=yNV8Jv3X7Is%3d&tabid=38.

[6] Edmund F. Haislmaier and Brian C. Blase, “Obamacare: Impact on States,” Heritage Foundation Backgrounder No. 2433, July 1, 2010, at http://www.heritage.org/Research/Reports/2010/07/Obamacare-Impact-on-States.

[7] U.S. Department of Health and Human Services, 2010 Actuarial Report on the Financial Outlook for Medicaid.

[8] Douglas W. Elmendorf, Director, Congressional Budget Office, “CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010,” statement before the Subcommittee on Health, Committee on Energy and Commerce, U.S. House of Representatives, March 30, 2011 at http://republicans.energycommerce.house.gov/Media/file/Hearings/Health/033011/Elmendorf.pdf.

[9] Richard S. Foster, Chief Actuary, Centers for Medicare and Medicaid Services, “The Estimated Effect of the Affordable Care Act on Medicare and Medicaid Outlays and Total National Health Care Expenditures,” testimony before the Committee on the Budget, U.S. House of Representatives, January 26, 2011 at http://budget.house.gov/UploadedFiles/fostertestimony1262011.pdf.

[10] Denise Grady, “Children on Medicaid Shown to Wait Longer for Care,” The New York Times, June 15, 2011.

[11] Ibid.

[12] U.S. Government Accountability Office, Medicaid and CHIP: Most Physicians Serve Covered Children but Have Difficulty Referring Them for Specialty Care, GAO-11-624, June 30, 2011, at http://www.gao.gov/products/GAO-11-624.

[13] Damien J. LaPar et al., “Primary Payer Status Affects Mortality for Major Surgical Operations,” Annals of Surgery, Vol. 252, No. 3 (September 2010), pp. 544–551.

[14] Nina Owcharenko, “State Medicaid Reform After Obamacare,” Heritage Foundation WebMemo No. 3062, November 16, 2010, at http://www.heritage.org/Research/Reports/2010/11/State-Medicaid-Reform-After-Obamacare.

[15] See “The Path to Prosperity: Restoring America’s Promise,” Fiscal Year 2012 Budget Resolution, Committee on the Budget, U.S. House of Representatives, at http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf, and S. 1031, The Medicaid Improvement and State Empowerment Act, at http://coburn.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=f78e0cfe-8c8f-49fc-a895-e9f131dabb79&ContentType_id=d741b7a7-7863-4223-9904-8cb9378aa03a&Group_id=7a55cb96-4639-4dac-8c0c-99a4a227bd3a.

[16] Stuart M. Butler, Alison Acosta Fraser, and William Beach, eds. Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity (Washington: The Heritage Foundation, 2011), at http://www.savingthedream.org/about-the-plan/plan-details/SavAmerDream.pdf.

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