Viewpoint: Ohio Should Follow Florida's Lead on Medicaid
Medicaid reform is central to the stability and health of Ohio's budget going forward. Fortunately, Ohio state legislators just passed a budget bill that includes some initial steps in the right direction. Much more effort remains for the next session, however, but policymakers in Ohio can take advantage of the experience of states such as Florida where innovative reforms are underway that benefit both taxpayers and recipients.
The problems of Medicaid are widespread, severe and rapidly worsening. Medicaid, created almost as an afterthought to Medicare in 1965, is now the largest health plan in the U.S. Financed by federal funds along with state money, its growth rate is unsustainable and threatens to place most state budgets, including Ohio's, in a precarious position. Just as serious are the major quality issues that plague the program. No one in the U.S. receives worse health care on average than Medicaid beneficiaries.
In order to fix Medicaid, policymakers need to understand what is wrong with the plan. The most significant problem is that there is the lack of a traditional marketplace. In real markets buyers spend their own money and act in their own interest, seeking to purchase the best quality goods and services they can find at the best prices they can obtain. Sellers acting in their own interests market their products/services at the highest possible price. Further, since reducing their cost of production increases their profit/income they have an incentive to continually innovate and become more efficient.
Medicaid, Medicare and most private sector health care does not work like a traditional market. Consumers of health care are largely insulated from their purchasing decision by government and/or third party insurance payment. Since much care is "free" the effective demand for it is extremely high. Even worse, the payments set by government plans such as Medicaid are not real prices but governmental decrees. In the case of Medicaid these are usually set below what the market would determine. This produces a "shortage" that takes three forms.
First, it is often difficult to obtain quality treatment from providers. Stingy payments produce "Medicaid Mills" that provide low quality care. Second, providers agreeing to see beneficiaries cost-shift to private payers, which in turn increases the private sector medical inflation rate. Third, the lack of competition and market forces in Medicaid strongly reduces the incentive to be efficient and to innovate. This leads to much higher long-run inflation in health care than the rest of the economy.
Florida's plan attempts to address these deficiencies by picking up where Ohio's first steps this session leave off. Ohio legislators are moving away from a cost-based system for nursing home care, for example, but still plan to set prices. Ohio policymakers also intend to expand managed care, but a marketplace for those beneficiaries remains to be developed.
In Florida, beneficiaries will receive risk-adjusted credits to purchase managed care plans from providers. Unlike the current system, they will have numerous choices among providers. These plans may tailor their benefits and services to their perceived market. Providers will then compete for Medicaid dollars by offering better care for their patients. Beneficiaries also have a financial incentive to control unnecessary utilization and seek preventative care since the reform plan will allow them to earn additional benefits if they do so.
Providers would have an incentive to innovate and deliver services more efficiently since those gains in effectiveness would flow to their bottom line. Thus, one could expect effective disease management programs that concentrate on high cost beneficiaries as opposed to fee for service that blindly pays bills.
In the long run, these productivity gains will reduce Medicaid inflation and make the plan more fiscally sustainable. Just as important, the quality of Medicaid will improve. In the absence of these reforms the outcome will be soaring taxes, even lower medical quality and outright rationing of health care.
Florida has taken the lead in preventing those dire consequences. Ohio policymakers need to follow their example and build upon their current efforts. Free markets and competition, not government regulation and control, will fix Medicaid's serious problems.
Michael T. Bond, Ph.D., is Director of the Center for Health Care Policy at The Buckeye Institute and a professor in the Department of Finance at Cleveland State University.
