Reforming Medicaid in Ohio: A Framework for Using Consumer Choice and Competition to Spur Improved Outcomes

posted March 13, 2003

Ohio Medicaid is enormously expensive. With a 2003 direct budget of over $7.5 billion, the program costs taxpayers almost $661 per year for every man, woman and child in the state. That equals $2,644 per year for a family of four. Indeed, it is likely that some people pay more in state and federal taxes to support Medicaid insurance for others than they pay in premiums to buy private insurance for themselves and their families.

In the future, the taxpayer burden will get worse. Over the past 20 years, Medicaid spending has been growing at a compound rate of 8.7 percent per year versus 6 percent for general medical inflation. If that trend continues, the program will double in size every eight and one-half years — along the way crowding out other valuable state programs.

Why are Medicaid costs rising so rapidly? Health care costs generally have risen over time for the nation as a whole. But Ohio’s Medicaid costs have risen faster than health costs in the private sector generally. Part of the reason is Ohio Medicaid pays for health care in ways that needlessly contribute to rising health care costs. Another problem is Ohio has not taken advantage of cost-control techniques widely used in the private sector. For example:

• Ohio makes no attempt to selectively contract with hospitals in order to minimize the costs of services it buys. Al though exact numbers are not available, if the experience of other states is a guide, Ohio spends 50 percent more at some hospitals than it pays at others for the same services in the same areas.
   
• Because Ohio’s method of paying for nursing home care is essentially cost-based, the state is paying for 13,000 empty beds.

Throughout the system, Ohio pays for inputs rather than outputs. This means physicians and facilities are paid more for the more they do — even if patients would have been just as well or better off, if less were done.
 

Medicaid patients also have incentives to waste resources; the only way they can realize more benefits is by consuming more health care.

Medicaid from top to bottom is organized in ways that create perverse incentives for those who are supposed to benefit from the system. For example:

Because Medicaid benefits are conditional upon having a low-income, the program penalizes those who succeed; individuals can lose eligibility (and therefore health insurance coverage) for themselves and their families simply by getting a promotion or a raise at their place of work.
 

Because Medicaid benefits are conditional on having few assets, the program encourages people to spend, rather than save, the income they earn.
 

Because Medicaid is an alternative to private insurance, the program encourages people to drop coverage paid by themselves and their employers and turn to "free" insurance paid by taxpayers instead.

Studies show that beneficiaries respond in perverse ways to the incentives they face. For example, states have expanded their Medicaid and S-CHIP programs with the goal of insuring the uninsured. But most of the expansion of Medicaid insurance has come at the expense of private insurance:

As much as 75 percent of the expansion of Medicaid nationwide has been offset by a reduction in private insurance.
 

Roughly speaking, for every dollar taxpayers spend on Medicaid, as little as 25 cents is actually used to provide insurance to the previously uninsured.

This is part of the reason why the number of uninsured in America keeps rising, despite the expansion of costly public programs.

What can be done?

One option is to simply reduce the size of Medicaid. In order to participate in Medicaid (and realize matching funds from the federal government), Ohio has to provide minimum benefits to certain categories of people. Nonetheless, about 42 percent of Ohio Medicaid spending is optional. It consists of spending on non-mandated benefits and on people who are ineligible. Reducing these optional expenditures is easier said than done, however:

Most of the "optional" people are children enrolled in the state’s S-CHIP program. Not covering them would mean giving up federal match money and would run the risk of having to provide free care if the children were subsequently uninsured.
 

A major optional benefit is coverage for prescription drugs. Yet because drug therapy often substitutes for more expensive hospital and doctor therapies, eliminating coverage for drugs may not actually save the state any money.
 

Another large optional benefit is mental health care. But mental health services are also often a substitute for other health services. Without Medicaid, the state may still have to spend money on many of the beneficiaries — but without federal matching funds.

A more promising approach is to change the way Ohio pays for medical care. There is every reason to believe the state could have higher quality care for less money. For example:

The state should contract with hospitals the way private insurers do — choosing hospitals that charge the lowest price for a given level of quality.
 

The state should stop paying for empty nursing home beds and instead pay for services rendered, not costs incurred.
 

The state should substantially increase the number of beneficiaries enrolled in managed care plans (currently only 39 percent).
 

The state should enroll substantial numbers of beneficiaries with disabilities into managed care programs designed to meet their special needs.
 

The state should employ techniques to eliminate unnecessary or questionable procedures.
 

Whenever possible, the state should pay for outputs, not inputs; for results, not for efforts made to achieve those results.
 

The state should also consider block granting Medicaid funds to localities who are willing to try innovative approaches to delivering efficient, high quality health care.
 

Lastly, the state should do more to eliminate waste, fraud, and abuse.

Although managed care has the potential to reduce costs, it is not necessarily the best way to meet patient needs. Allowing patients to control some of their own health care dollars is equally effective at controlling costs. And patient power is a better way to ensure high quality care than allowing bureaucracies to make all the decisions. In order to take full advantage of private sector techniques and private sector opportunities, the state should apply for a federal waiver, called a HIFA waiver. Under the terms of the waiver:

All "mandated" Medicaid enrollees would have the opportunity to enroll in employer plans or other private sector plans with premium subsidies from the state.
 

To qualify, the private insurance would have to be similar to the plans currently offered to employees in the private sector.
 

Those beneficiaries who do not qualify for an employer plan would have the opportunity to enroll annually in a plan of their choice through an insurance exchange (a health mart), organized and operated by the state.
 

At least one of the plans offered would make use of a Medicaid Benefit Account (MBA), which would be similar to a medical savings account, except the funds could only be used to pay health care expenses or health insurance premiums, now and in the future.
 

Projected savings (in a static sense) from these changes would be used to enroll additional, "optional" people in Medicaid (this may be a condition to get approval for a HIFA waiver).
 

The optional enrollees, consisting of additional people with disabilities and low-income families, could be offered a limited set of benefits (e.g., primary care benefits only) or they could be given the same options as other Medicaid enrollees — with premium support from the state diminishing as family income rises.

The HIFA waiver, combined with other recommendations in this report, would allow the state of Ohio to take advantage of the full range of techniques employed by the private sector. It would also allow the state to move large numbers of people from state-funded insurance to insurance largely paid by employers and (since employer-provided benefits are earned by working) by the beneficiaries themselves.

Overall, we estimate savings of roughly 15 percent, or $1.5 billion per year in the near term, and perhaps larger savings in the long term.

This article is based on The Buckeye Institute's study Reforming Medicaid in Ohio: A Framework for Using Consumer Choice and Competition to Spur Improved Outcomes that was released at a press conference at the Ohio Statehouse on March 13, 2003.