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JAMA Forum Archive, 2012-2019: Health policy commentary from leaders in the field
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Innovation Isn't Easy When it Comes to Medicaid

It’s almost impossible to find a politician these days who isn’t very concerned about the deficit. And it has become clear that the deficit problem is largely a health care spending problem. Given the political difficulty of reducing Medicare spending in the short-term (politicians want to win, after all), the focus inevitably turns to Medicaid. That’s not surprising. Medicaid composes a significant portion of health care spending, costing about $400 billion in fiscal-year 2011.

Aaron Carroll, MD, MS

The fiscal-year 2013 budget recently passed by the House of Representatives would reduce federal Medicaid spending by $750 billion over the next decade, even if the Affordable Care Act (ACA) is repealed or struck down. It would do so by changing the program from an open-ended program for eligible individuals using matching funds from both the federal and state governments to a block grant of a fixed sum given to states, and the states decide how to allocate the money. The idea is that states can “innovate” at a local level to find ways to deliver needed benefits at reduced cost.

The question is, though, can they?

To significantly reduce spending, there are 3 major changes that a state could make to the program. The state could (1) reduce the number of beneficiaries, (2) reduce the benefits those beneficiaries receive, or (3) reduce how much it pays for those benefits.

Let’s start with the first of these. It’s important to remember who is covered by Medicaid. By law, the program must now cover poor children (from families whose income is 100%-133% of the poverty line, based on age). It must cover poor pregnant women (up to 133% of the poverty line). It must cover parents to a point often well below the poverty line. And it must cover the very poor elderly and the disabled. That’s all.

Notice who is left out? Adults without children. That’s because in most states, an individual who doesn’t have kids can’t get Medicaid, no matter how poor that person is. It’s not much better for parents. For example, a married couple in Texas who have 1 child and earn only $4818 a year is too “rich” for Medicaid.

The chart below, based on US Census data, illustrates the point. The bars and the left axis represent the number of millions of people covered by Medicaid:

The largest group covered by Medicaid by far is children. The second biggest group, adults, contains large numbers of pregnant women. Medicaid covers about 40% of births in the United States. The third largest group includes people who are blind or disabled. That leaves what are known as dual eligibles. Those are elderly people who are so poor that they receive both Medicaid and Medicare benefits.

So when states innovate, who might they eliminate from Medicare eligibility? Children? Pregnant women? The elderly? Persons who are blind or disabled? There are no easy choices.

Perhaps states will then focus on the second option: reducing benefits. That’s where the orange line and the right axis on the chart above come into play. The line represents the amount of money spent (in millions of dollars) on each of those groups. The most expensive group by far includes persons who are blind or disabled, followed by the elderly. Together, they compose two-thirds of all Medicaid spending.

However, because there are so few elderly individuals or persons who are blind or disabled in Medicaid compared with children or adults in the program, the spending per elderly person or per blind or disabled person is more than 7 times that for a child and more than 5 times that for a nonelderly adult. That means that benefits would have to be reduced far more severely for children or nonelderly adults to achieve a significant reduction in overall Medicaid spending.

When states innovate, how many benefits can they eliminate? Will they reduce benefits for blind or disabled persons, and for the elderly, who account for most spending? Will they reduce benefits for pregnant women? For children?

The only other option is to try not to reduce the number of people, or the benefits they receive, but instead to focus on how much the state pays for benefits. In other words, the state  can try to reduce the amount it  reimburses for services. This is problematic, though, as most physicians and hospitals already feel as if Medicaid underpays them. Moreover, Medicaid spending has already been increasing more slowly than private insurance. In fact, one way Congress made the ACA less expensive was by having more people covered by Medicaid in the future than by receiving coverage through private insurance purchased from the state-based health insurance exchanges. Medicaid is already “cheap.”

How much more can states reduce reimbursement before physicians, hospitals, and others revolt? Is this how states will innovate?

Make no mistake about it, under the block grant plan in the budget proposal approved by the House, states must innovate. Even if the ACA’s Medicaid expansion were eliminated, the House budget would reduce federal Medicaid spending by $163 billion in 2022. That’s a 34% reduction 10 years from now.

How can states possibly account for that difference? Where’s the magic in innovation? If states refuse to cut benefits and spend the same per enrollee, then even if the Medicaid expansion of the ACA never takes place, an additional 19 million people need to be dropped from the 2021 Medicaid rolls to meet budget cuts. That’s about one-third of all people on Medicaid. If states cut benefits or somehow slow spending to that of GDP growth, they still need to remove 13.8 million people from Medicaid in 2021, in addition to forgetting the ACA Medicaid expansion. If states act to protect the elderly and blind or disabled persons by holding their spending/benefit reduction to 10% (which is still a large cut), then 27 million people, most of them children and pregnant women, need to be dropped from Medicaid in 2021 even if ACA’s Medicaid expansion never occurs.

Alternatively, states could drastically cut reimbursement for physicians and other clinicians. And I mean drastically.

There are hard decisions to be made in the future when it comes to the cost of health care and the cost of Medicaid. But there’s no easy innovation to be found at the state level that can’t be found at a larger level. Drastically reduced funding, even when paired with block grants, will not somehow result in a solution that doesn’t lead to millions more uninsured, millions more underinsured, and clinicians everywhere refusing to accept Medicaid patients.

All Congress is doing is leaving the tough decisions to state politicians. That’s not innovative at all.

About the author: Aaron E. Carroll, MD, MS, is a health services researcher and the Vice Chair for Health Policy and Outcomes Research in the Department of Pediatrics at Indiana University School of Medicine. He blogs about health policy at The Incidental Economist and tweets at @aaronecarroll.
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