Medicare and Medicaid’s birthday facts

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Medicaid is already on a budget

One of the arguments in favor of the GOP plan to institute per-capita caps, or limits of federal funding, onBudgetCalculator the Medicaid program is that “states need to be on a budget” and states should have more “skin in the game.” Medicaid is perceived by proponents of the proposed reforms as an open ended entitlement that gives states the incentive to foolishly spend money on things like “disabled children.” Unlike many other arguments for this policy that espouse the virtue of federalism and push for “flexibility” to allow states to design their programs as they see fit, this argument places little trust in states to be fiscal stewards of taxpayers’ money. In fact, this point borders on making an argument that states are mismanaging the programs they are running. While no actors in politics are perfect, it is far from accurate to critique states for excessive spending in Medicaid. States already have a strong incentive to keep Medicaid on a budget.

States are already operating financially lean and benefit robust Medicaid programs. Medicaid has been often criticized and shown to spend less than private insurance and Medicare. However, this may mean that there is little waste or overpayment for services and that most beneficiaries on Medicaid spend less than other comparable insured beneficiaries.

States see pressure to reduce spending under the current federal reimbursement framework because of state budgets. State revenue is limited. Many states require balanced budgets or limits on year-to-year spending which limits the amount that they can spend annually on Medicaid. Additionally, states and politicians have competing priorities. A state cannot spend their entire, limited budget on Medicaid because schools, roads, prisons, and higher education are all competing for this money in addition to Medicaid. This means that a state has the incentive to reduce their spending on Medicaid and to enact innovative approaches to saving on medical expenditures. For example, states have been innovative by instituting delivery system reforms and applying for waivers to test new models of delivering care. Most Medicaid patients are in managed care plans intended to keep costs minimal.

It is also true that states have some incentive to spend money. Medicaid is a driver of state revenue under a Keynesian economic theory. When people require Medicaid’s medical financing assistance they spend state money at hospitals and primary care facilities. This employs the hospital staff and doctors as well as the construction of new medical centers and other auxiliary professions that are funded by the medical industry. In turn, these professional buy things, pay taxes, and invest in further jobs and economic development. In addition, because the federal government contributes more than half of the amount spent, a state will see a better return on their investment than if they were to make their investment alone. However, the incentive to spend more on Medicaid to boost the economic counter-cyclical revenue generation is far smaller than the other incentives to keep Medicaid costs down.

More perplexing, is that it is often argued that Medicaid should pay doctors higher rates, in other words that it doesn’t spend enough money. It is also argued that no expense should be too much for providing care to kids and that costs should not be used to limit treatment for government programs. Limiting state spending is not going to solve the problems of states not spending enough on Medicaid. The debate that should be playing out is over what kind of care is the right care and where more money should be spent. Instead, we are engaged in a confusing argument that at times critiques states for spending too much and at other times critiques states for spending too little. It is no wonder that states are nearly universally opposed to the changes in the Senate bill.

Then again we are in a debate space where we are arguing over whether a cut is a cut and the trusted CBO is “wrong.”


How do we Control Costs in Medicaid?

Recently some efforts have been made to look to bipartisan approaches to reforming Medicaid in response to the Senate’s debate over the future of the Medicaid program. How successful these new bipartisan efforts become remain to be seen, but these efforts remind us that Medicaid in its current form is a very flexible program that allows states to undertake improvements and experiment with new models of care that can be spread to other states facing the same problems.


John McConnell and Michael Chernew came out with a paper in NEJM titled “Controlling the Cost of Medicaid.” In it, they note that the debate in Congress has focused on the “able-bodied” population that account for a small fraction of Medicaid spending and the fact that Medicaid spends less per a patient than Medicare and Private insurers. It points to relaxing some managed care rules, increasing delivery system reform projects, drug spending, integrating physical and behavioral health services, and most notably reforming Medicaid long-term care policies. The largest portion of Medicaid expenditures is devoted to serving those who require long-term services. While this article does not go into depth about the reasons that many previous attempts to address the costs of long-term services have failed to see broad scale implementation, the article is headed in the right direction by pointing to the need to address these growing costs to the Medicaid program.


The Affordable Care Act instituted a number of programs aimed at providing those who need long-term services with better care, while not exacerbating costs to states through Medicaid. Addressing the fragmentation of care that face many of the 11 million people that qualify for both Medicare and Medicaid, known as dual eligibles, is one key way to both reduce cost and provide higher quality care. However, as with most things in health care, reform should proceed with caution. Several existing demonstrations that have shown to have success in improving care do not always reduce cost and vice versa.


Cindy Mann and Avik Roy wrote a similar assessment that solving issues facing the dual eligible population is a key Medicaid reform that both political parties could back. They offer caution to policy makers in Capitol Hill that are currently debating ways to block grant and reduce federal spending for Medicaid. According to the two, “success depends on the structure of care delivery models, and states’ ability to invest in promising care models.” As early results of the Financial Alignment demonstrations that worked to provide dual eligible enrollees with coordinated benefits through a combined Medicare and Medicaid managed care option, these demonstrations can yield success but require both financial support and the support of the federal government to give flexibility to the much more rigid Medicare program.


While reforming polices that impact dual eligible may prove to have bipartisan support, the current proposals undermine the potential for success. The capping of federal funding available to states to cover the dual eligible population only will hinder the ability for states to encourage private and federal cooperation and make investments in improving care for these expensive populations. What’s more, states such as Louisiana have statutory and constitutional requirements to maintain and increase spending for nursing facilities and other long-term care services despite the potential cuts. This will mean that the status quo of nursing facilities is maintained while cheaper and often preferred alternatives such as home and community-based care will see even greater reductions under the GOP plans.


One common thread that efforts to reduce spending in Medicaid share is that the programs are complex and require caution when making reductions. An attempt to reduce spending in one area could end up increasing spending elsewhere. With a program as complex of Medicaid, blunt reductions in spending that the block grants provide will undoubtedly have unintended consequences and may not end up reducing spending that they intend.