Thursday, July 22, 2010

Medicaid Reform in One Easy Step

Cross-posted from Critical Condition on National Review Online.

Stimulated by the comments of reader Joe C., I went back and looked at the Medicaid numbers. From 2010-2017, here are the Congressional Budget Office’s pre-Obamacare projections for the number of people covered by Medicaid and CHIP, and the Medicaid Actuary’s 2008 projections for federal and state spending on Medicaid (apologies for the small type):

Year (pre-PPACA)
Covered lives (millions)
Federal expenditures ($bn)
  Federal share
  State share
Cost per covered life
  Growth rate

As you can see, we currently spend almost $10,000 per Medicaid beneficiary, a number that will exceed $19,000 in 2017. The growth of per-beneficiary expenditures is not only well above conventional inflation, but also health care inflation. This is why Medicaid is annihilating state budgets.

What does the average individual health plan cost in the private sector, you ask? According to the Commonwealth Fund, the average private-sector individual health plan in 2008 cost $4,386. If we assume that premiums increased by 6% in 2009 and 2010, we get to a 2010 average of $4,928. In other words, the government is spending twice per Medicaid enrollee than middle-class Americans spend on their own insurance. And this is the system that PPACA wants to expand by nearly 50%.

Austin Frakt asks us to choose between two options: being uninsured, or accepting Medicaid. He posits that most people given that choice would accept Medicaid, despite its problems, and so the solution is to spend more money on the program. But this is a false choice, for two reasons.

The first is, as I’ve discussed elsewhere, a large proportion of the uninsured are not poor. These people are uninsured by choice. (In Massachusetts, instead of responding to the individual mandate, as Austin and others suggest they have, such people will game the system by claiming they have insurance when they don’t.) There are definite advantages to being uninsured over being on Medicaid, if you can pay the bills. The most significant of these is that nearly any doctor will take an appointment with someone who is willing to pay out-of-pocket.

The second of these, and the most important, is: why on earth are we spending twice as much on people with Medicaid as we do on private insurance for middle-class Americans, only to get substantially worse medical outcomes? People on Medicaid have poorer access to care (for reasons I have discussed elsewhere), and have more health problems in general. Let’s generously say that their health care should cost 50% more than that of the average American.

So here’s a modest proposal: Instead of spending $400 billion on Medicaid in 2010, let’s spend $300 billion, but instead of spending it on Medicaid, or even on vouchers, let’s write checks to the poor. Instead of filtering $9,815 per Medicaid enrollee through a cascade of government employees, let’s send $7,361 in cash into the mailboxes of impoverished individuals, to spend on whatever is most important to them and their families. It achieves more efficient wealth redistribution than does Medicaid, and allows the poor to afford high-quality, private-sector health insurance. If they are healthy, they can buy inexpensive insurance and save the extra cash; if they are sick, they can use the entire amount for insurance. This approach would not only save money, and appeal to the poor, but it would align Medicaid inflation with health inflation, saving trillions of dollars over time. Indeed, if healthy Medicaid beneficiaries choose less-expensive, consumer-driven plans, such a reform could actually bring Medicaid inflation below overall health inflation.

I can already hear an objection: what if they spend the cash on bad things, like alcohol, instead of good things, like health insurance? I would argue that the enormous efficiencies of a direct transfer payment outweigh that risk. At any rate, vouchers are designed to address exactly that concern. But those who wish to better control how the poor spend taxpayers’ money are perfectly able to do so without my encouragement.


  1. While some of these points are true and I do not disagree that Medicaid can be better managed and cost less, the reality is a large portion of Medicaid spending, unlike regular health insurance is on Nursing home care which is very expensive. Add to this the costs for the disabled such as those with schizophrenia, HIV/AIDS etc, who are disproportionally in Medicaid and the fact that overall Medicaid beneficiaries are of poorer health, have more access issues etc, and the answers are not quite so simple.

    The entire health care system, not just Medicaid, will bury this country no matter how paid for if we do not lower the incidence of preventable chronic diseases such as heart disease, diabetes and obesity. 75% of the cost increase over the past decade has been due to an increased prevalence of chronic diseases. We have younger and younger Americans of all walks of life coming down with these conditions which are expensive from a medical perspective and perhaps more importantly have a huge effect on workforce productivity and our ability to copete in a global economy.

    In the end, the largest driver of health care costs today are lifestyle issues and these are not addressed by our health care system which provides some of the best medical care in the world, the problem is this great service becomes available after you developed the preventable condition in the first place.

    Your ideas have merit but unless we solve the root cause, will be for naught.

  2. Hi Anonymous, thanks for all of the intelligent comments. Here are my thoughts:

    You argue that my analysis doesn’t take into account that a “large portion of Medicaid spending…is on Nursing home care which is very expensive” along with “those with schizophrenia, HIV/AIDS etc., who are disproportionately in Medicaid.” This is true, which is why I suggested that it might be fair to spend 50% more on Medicaid patients than average Americans do on private insurance.

    You also point out that “Medicaid beneficiaries are of poorer health” and “have access issues.” This is also true, but this is largely caused by Medicaid itself: by underpaying physicians, physicians are less willing to see Medicaid patients, leading to poorer health and poorer access. This is precisely why Medicaid reform is needed. I would also disagree with Anonymous on the cost savings of preventing chronic disease. While preventing chronic disease may be good for public health, numerous studies convincingly show that prevention does nothing for health costs. After all, we all have to die of something.

  3. Here are some comments that were posted to NRO; I thought I would cross-post them here because they make worthwhile points:

    JEM ( rightly points out that “cost per covered life and insurance premium don’t mean the same thing.” He notes that I didn’t take administrative costs and actuarial value into account in my comparison of private insurance and Medicaid.

    Incorporating administrative costs makes the comparison worse for Medicaid. If we assume a medical loss ratio of 15%, then the actual amount spent on health care for private insurance is $4,189 instead of $4,928. Remember, though, that Medicaid also has administrative costs—costs that aren’t reported in a transparent fashion.

    As to the fact that people on private insurance have more stringent co-pays, deductibles, coinsurance, etc. compared to Medicaid, this is also true, and is also an indictment of Medicaid insofar as Medicaid as far less cost-sharing, and yet far worse medical outcomes. Moving Medicaid into a consumer-driven model, as JEM suggests, is certainly one way to rectify this.

    Cab ( compellingly expresses the difficulty of obtaining insurance if one is self-employed or unemployed, especially with pre-existing conditions. “I want to have insurance, but if it comes to rent vs. insurance, rent will win, and I never thought I would be faced with that.”

    One of the depressing aspects of the Obamacare debate is that there is an obvious solution to this problem that was explicitly rejected by the President: ending the tax subsidy for employer-sponsored health insurance. If we all bought insurance on the individual market, we would be able to keep that insurance throughout our lives, regardless of where we worked, and the pre-existing condition problem would go away. Instead, we will get hundreds of thousands of pages of new regulations to deal with what is actually a very simple problem.

  4. Reform Needed

    Limo Divers Protest Medicare Mediciad Reform Cuts, It's rumored this issue could become part of the Tea Party movement. AmeriChoice Health is also rumored to take a position on this reform. Recirculate those tax dollars? Help keep limo drivers working, benefits flowing and overpaid tax dollars remain in abuse. as well as other Federal agency's encourage you to report any fraudulent activities, yet, the same government agencys were notified the way this company does business yet did nothing. Three years ago they were reported to these Federal agency's and as of todays date not only were they allowed to continue doing business but were never charged once. Protected vendor status sure, politics sure,limited government budgets sure, Federal and State officals looking the other way sure, and rather then stop these activities a strong desire not to rock the boat existed. Even with the vast changes in the laws and budgets,a hands off policy remains, you tell me what's wrong with this picture? The Government created this monster and now they don't know what to do about it, like shooting yourself in your own foot etc. Tons of money to advance their national growth, its market positions, tons of money for political donations, tons of money to send 75 millon back to its home office from New York state alone, tons of money to suppot National TV shows, tons of money to pay hugh State fines, tons of money to hire the very best law firms, tons of money to pay for bribes and kickbacks, tons of money for hugh salarys and bonuses, all done on the back of the American taxpayor, you see this company receives all its money from the Federal government. Should your tax dollars be held to a higher standard? Should the government agencys responsible for there review be held to that same standard?Should the IRS audit their corruption? Why has this company not been charged? How long can the buck be passed here in more ways then one? Hey, it's your tax dollars don't complain now.. then don't complain later on…

    ps… I know times are tough for a lot us, but it would be great to have a free limo to go to the Doctors, Pharmacy, Movies, Grocery shopping, and given free tickets for the movies. Offered soda, pop corn and hotdogs, as well as have them receive free coupons for Grocery items……Kind of makes you wish you also had Medicare and Mediciad right?

  5. Why do you compare medicaid spending to private insurance premiums? It's like comparing how much it takes to send a kid to summer camp versus how much the kid spends on snacks at summer camp - you're comparing apples to oranges. Why don't you compare medicaid spending to private insurance spending?