There is growing support in the United States, especially among left-of-center constituencies, for universal government-managed health care coverage achieved by expanding Medicare down the age scale and expanding Medicaid up the income scale. Many supporters of this double-creep approach, which, once achieved, would displace both Medicare and Medicaid as separate programs, simply assume that both of these programs work well and would continue to work well if expanded and then merged. That may or may not be true of Medicare, but it is certainly not true of Medicaid.
Most people seem to think that Medicaid just provides medical care for indigent adults and children. In fact, that accounts for only a small part of the billions of dollars Medicaid hands out every year. It’s so vast and complex a program that even the most astute politician or scholar has difficulty grasping it whole, and it is certainly vastly larger and more complex than anyone contemplated when Medicaid became law in July 1965.
Consider Medicaid’s current size and program diversity. It enrolled 68.5 million people as of July 2017, a 16.4 million increase in enrollment since the inception of the Affordable Care Act in 2010—which is precisely where the ACA intended its main impact to be. CHIP (Children’s Health Insurance Program), which is basically a separate Medicaid program for children, enrolled an additional 5.8 million children. Medicaid and CHIP facilitated treatment for 48 percent of all children, 23 percent of the population of the United States, and 60 percent (2.9 million) of children with special health needs (disabilities). As of July 2017, Medicaid also enrolled 8.8 million disabled adults, one million expectant mothers, 25 million non-elderly adults, and four million senior citizens in nursing homes and community care facilities. Eldercare used 21 percent of the total Medicaid budget to cover 64 percent of all nursing home and community care expenses in the country.
What these numbers mean, among other things, is that most Medicaid enrollees are healthy children and adults, but most of the money goes for the disabled and the retired. Indeed, so much of the money goes to the disabled and the elderly that medical outcomes for everyone else, when they need care, are mostly substandard. There are only two ways to explain such outcomes: Either poor people make poor patients—because they are sicker for having avoided medical care for too long, or because for one reason or another they are less likely to follow doctors’ instructions—or something is lacking in the quality of the care they receive. Or some combination of the two.
It is essential to understand what Medicaid is and how it functions—and how the Centers for Medicare & Medicaid Services (CMS) tries to manage all this—because we need to make it work more efficiently and effectively both for the sake of its beneficiaries and to avoid busting the Federal budget. Further expansion of Medicaid or folding Medicaid into Medicare, as some have suggested, are simply not viable options without significant reform of the program. Indeed, combining Medicaid with Medicare might well compound Medicaid’s current problems and destroy Medicare in the process.
The biggest problem with Medicaid is cost. Eliminating fraud, abuse, and waste, minimizing rent-seeking behavior among stakeholders, and controlling budget gaming by the states, could reduce Medicaid costs by 20-40 percent. But that’s still suboptimal. Medicaid has grown too large and complex and should be divided into three parts. Eldercare should be moved to the Social Security Administration and reformed in the process of gaining new management. Disability programs should be combined with Veterans Affairs disability and rehabilitation programs to form a separate agency. That would leave Medicaid to handle medical care for poor people, which is what it was supposed to be about from the start.
This new, slimmer Medicaid needs to be driven through the gauntlet of the Federally Qualified Health Center (FQHC) movement, which combines scientific medical care with social outreach and support. Most health problems suffered by the poor are often not strictly medical (or at least they don’t begin that way); they are consequences of lifestyle choices, with a large social, mental health, addiction, and subcultural dimension. The FQHC movement is ideally constituted to help such people get and stay healthy.
Let’s now look under the hood of Medicaid’s assembly of interlocking government bureaucracies. Since budgetary allotments are the life-blood of bureaucracies, I refer often in the following discussion to budgetary categories, amounts, and percentages because these numbers display the relative importance and magnitude of Medicaid’s program. I am well aware that budgetary analysis such as the one below makes some people’s eyes glaze over. It simply cannot be helped; to understand the real problems with Medicaid requires learning some facts. Take a deep breath if you think it might help.
Medicaid spent $574 billion and CHIP spent $14.5 billion in FY2016 (compared to $116 billion in 1978, in constant 2016 dollars). For perspective, the U.S. economy spent an estimated $3.4 trillion on healthcare from all sources. Medicaid/CHIP spent 17 percent of the total expenditure on 23 percent of the population, which indicates some budgetary virtuosity. But it is still a lot of money and it’s growing bigger.
The Federal government must reimburse the states for the pre-expansion beneficiaries according to the Federal medical assistance percentage (FMAP), which is larger for poorer states but is on average 57 percent. Individual states pick up the balance. The states are then responsible for selecting the actual delivery of care arising in significant budgetary disparities among the states. New York spent $63 billion on Medicaid, while Florida, a more populous state, only spent $22 billion.
Who are the patients and other beneficiaries of Medicaid? Medicaid spent the largest percentage (40 percent) of its budget on the disabled in FY2014, although that group compromised only 14 percent of its enrollees. In 2017 alone Medicaid and /CHIP enrolled 2.9 million children with disabilities and enrolled 8.8 million adults with disabilities such as autism, brain injury, Alzheimer’s disease, and mental illness.
For children with disability there is variability among the states as to income qualification. Tennessee requires income less than 200 percent of the Federal Poverty level (FPL) while all the other states have some version of the Katie-Beckett-option. The Katie-Beckett-option places no limits on parental income or assets, but merely limits the child’s income to around $220/month and assets to less than $2,000. In other words, Jimmy Kimmel, a wealthy man (estimated net worth $35 million) could have his son’s disability covered by Medicaid. Of course, Medicaid requires a disability such as mental disease, intellectual disability, or developmental disability. States enroll disabled adults with SSI (federal Supplemental Security Income) in Medicaid. In summary, disabled children up to the age of 19 get Medicaid relatively easily, resulting in Medicaid coverage of 60 percent of all children with disabilities. Disabled adults only get Medicaid if they are already receiving SSI benefits.
Medicaid spent the second largest amount of its budget (21 percent) on nursing home and community care of the elderly. The actual medical care of these beneficiaries isn’t specified in this amount since it is covered in the Medicare budget as a subset of the overall nursing home cost. To qualify for Medicaid long-term care (LTC) a patient must meet income and asset limits that vary by state. There is a look-back period of five years for assets to make sure that applicants have not unloaded assets to relatives just prior to the need for nursing home care. Despite the apparently stringent criteria, individual state waivers and gaming of the system (“retirement home planning”), allowing an amazing 64 percent of all eldercare patients to qualify for Medicaid nursing home and community care payment. That is a shocking percentage considering that 64 percent of elders are not poor—not even close. But 68 percent of households headed by persons over 55 were in debt in 2016. Since these people were working for most of their life, funding through a social security income deduction makes more sense than treating the beneficiaries as outright indigents.
Non-elderly adults consume about 19 percent of Medicaid’s budget and constitute 34 percent of the enrollees. Families of three or more with income levels less than 138 percent of the FPL qualify for admission in most states, but the limit varies from 18 percent to 100 percent of the FPL in 18 states. Single individuals qualify for Medicaid in most states with FPL’s of 138 percent, but 16 states require an FPL of zero percent, which means they don’t cover them. These extreme variations of the qualifying Federal poverty levels (FPL) among the states and among the programs further complicate an already complex situation.
Pregnant women qualify for Medicaid if their income is below 138 percent to 324 percent of FPL. Medicaid covers the pregnancy and extends for sixty days postpartum. Medicaid is the largest payer for patients with HIV. The 16 States with zero percent FPL won’t cover HIV patients until they become disabled, usually by getting full-blown AIDS, and then getting SSI that then qualifies them for Medicaid. Medicaid pays for 40 percent of those receiving HIV care.
Non-disabled children consume about 19 percent of the Medicaid budget and are 43 percent of the enrollees. Healthy children qualify for Medicaid as part of their family who must meet income levels less than 138 percent in Medicaid expansion states. More stringent limits of 18 percent to 100 percent apply in 18 other States. The CHIP program enrolls children in families that don’t qualify for Medicaid and whose family income varies from 138 percent to 300 percent of FPL depending on the state of residence.
Politicians often debate about more generous care for children. Non-disabled children and non-elderly adults comprise 77 percent of Medicaid enrollees, but only consume 38 percent of the Medicaid budget. The reality is, as already noted, that most Medicaid money is spent on the disabled and retirees. Why is this?
The huge variation and complexity of who qualifies for the various target groups within Medicaid, and how they do so, are the result of a half century worth of negotiations and tradeoffs among special interest groups, bureaucrats, politicians, state governments, and lobbyists. As a result, Medicaid has grown into a dysfunctional, internally inconsistent, and unfair hodgepodge.
Now that we have seen who Medicaid covers, let’s see where they are treated by again using budget data, but slicing it along a different dimension. The broad budgetary divisions are fee-for-service acute care (26 percent), fee-for-service long-term care (21 percent), managed care and health plans (46 percent), payments to Medicare (3 percent), and disproportionate share hospital (DSH) payments (4 percent).
Acute fee-for-services further breaks down into these five categories: inpatient hospital (39 percent); physician, lab, and x-ray (8 percent); outpatient services (18 percent); prescribed drugs (6 percent); and other services (30 percent).
The first group, inpatient hospital services, accounts for the largest share ($57 billion) of the fee-for-service Medicaid budget. Medicaid pays hospitals in a very complicated way. In summary, there are three major components. First is the base payment, which is collected from fee-for-service Medicaid and Medicaid HMO contracts and which amounted to $50 billion (56 percent) in 2014. Second comes DSH supplemental payments, which are meant for safety-net hospitals that see a large proportion of Medicaid patients. The third component is non-DSH supplements (NDSH), which may come from upper payment limits (UPL) or intergovernmental transfers (IGT), which are provider taxes.
UPL payments are made by the state, which is permitted to pay the hospitals the difference between Medicaid and Medicare reimbursement rates. IGT’s are generated by taxing counties, nursing homes, or other providers and then paying the money back to them. Why is this so complicated? The good reason is that states use DSH payments to keep safety-net hospitals solvent. The bad reason is that states have used the supplemental system to game the Federal government.
By statute, the Federal government must reimburse the states a fixed percentage of Medicaid expenses averaging 57 percent. States thus use the supplemental payments to get the Federal payments as high as possible. The Federal government has naturally responded by placing limits on supplemental payments—for example, IGT payments are limited to 60 percent of state contributions. After all payments are made, hospitals receive amounts varying by specific hospital from 81 percent to 130 percent of Medicare equivalent reimbursement. The national average is difficult to determine but was estimated to vary between 93 percent and 107 percent in 2014.
A national study in 2008 showed that Medicaid beneficiaries received quality hospital care 73 percent to 88 percent of the time for various measures, but this was 1 percent to 3 percent less than the case for privately insured patients. This difference is small but significant at the p < 0.05 level. In summary, some hospitals are reimbursed well for Medicaid patients and give Medicaid patients good quality care. Other hospitals, not so much.
The CMS fraud and abuse report highlights for 2017 cites multimillion-dollar recoveries from five major hospitals for embezzlement, kickbacks to physicians, false claims, and charging for more complex procedures than those actually performed. Rent seeking is excess profit gained through political leverage. Rent seeking in the form of certificates of need (CON) is an even bigger story. Combining CON with mergers of remaining local competitors has enabled many hospital groups to charge from 6 percent to 18 percent economic rent. Those are heavy fingers on the scale.
The second category—physician, lab, and x-ray—collected $11 billion (8 percent) of the acute care Medicaid budget in 2016. In 2013 a CDC analysis showed 69 percent of physicians would accept a new Medicaid patient while 85 percent would accept a new Medicare patient. Subsequent surveys showed wide variation by state going from 97 percent in Nebraska to 39 percent in New Jersey. The strongest factor correlating with patient acceptance rate is the state’s physician payment rate.
In nearly all cases, physicians complain of slow payment, difficult billing, frequent no-show appointments, poor compliance, and generally sicker and more difficult patients requiring more resources even though reimbursement for care is usually much less. Acceptance of Medicaid also varies by specialty, from 63 percent for cardiologists to only 27 percent for dermatologists. Specialty physicians are even harder to find in states with lower payment rates. Nevertheless, roughly 85 percent of Medicaid patients do see a physician at least once a year.
The third category, consuming $26 billion annually, is outpatient services received from federally qualified community health centers (FQHC), rural health centers, hospital emergency rooms (ER), and hospital clinics. Instead of going to a physician’s office, one in six Medicaid patients goes to a community health center. Once again, usage varies by state from 6 percent of beneficiaries in Georgia to 35 percent in the District of Columbia. Medicaid payment only reimburses about 80 percent of their costs.
Recognizing the shortfall, the Health Center Consolidation Act of 1996, section 330, allows CMS to make up the difference if a community health clinic meets the standards of a FQHC. For CMS to certify a FQHC, three conditions must obtain: The governing board must be more than 50 percent patients of the center; it must serve a medically underserved population; and it must offer a sliding fee schedule to patients earning less than 200 percent of the Federal poverty level. Although physicians provide services, nurse practitioners, physician assistants, nurse-midwives, clinical psychologists, clinical social workers, visiting nurses, self-management trainers, and medical nutrition therapists provide much of the care. One 2016 study indicated that the health centers save $2,400 per patient per year, or 24 percent, compared to other providers. Medicaid and FQHC’s seem to be a great match, and they have received bipartisan support.
Emergency room (ER) visits are another option for Medicaid patients. Half of the states charge a co-pay in the ER for Medicaid patients to discourage unnecessary visits. Medicaid ER visits consumed 4 percent of the Medicaid budget in 2011. Surveys have shown that although Medicaid patients are twice as likely as other patients to seek ER care, it is not mainly because they are sicker: About 8 percent of non-Medicaid visits are typically classified non-urgent while 9.8 percent of Medicaid visits were thus classified. The difference is probably owed to the fact that poorer patients have more difficulty accessing other kinds of outpatient care.
Prescription drugs were $8.4 billion (6 percent) of the acute care Medicaid budget in 2016. Medicaid gets pharmaceuticals at a 23 percent discount compared to Medicare. Medicare is prevented from negotiating drug prices, but Medicaid is required by law to get the lowest price negotiated by anyone for drugs. This demonstrates rent seeking by the pharmaceutical sector. I purchased antibiotic eyedrops in Germany for $18 for which my patients were paying over $180 for in Tampa. Assuming that the $18 is close to the economic marginal cost of production of the eyedrops, the other $162 represents 90 percent economic rent. So, the 23 percent discount that Medicaid receives is probably just the tip of the rent-seeking iceberg.
“Other services” account for $43 billion (30 percent) of the acute care Medicaid budget. Other services include dentists, physical therapy, nurse midwives, case managers, eyeglasses, prosthetic devices, rehabilitation, free-standing birthing centers, and a host of other services. States may choose not to provide many of these services.
So much for reviewing the acute fee-for-service budget; on now to the fee-for-service long-term care (LTC) budget. A large part of the Medicaid service budget goes for LTC: $118.4 billion (21.4 percent of the total) in 2016. The LTC budget can be divided into nursing home facilities (37 percent), intermediate care facilities for the intellectually disabled (8 percent), mental health facilities (3 percent), and home health and personal care (52 percent).
More than half (52.1 percent) of the LTC budget actually goes to home and community-based care for 3.2 million functionally disabled elderly. The Omnibus Reconciliation Act of 1981 under the Reagan Administration enabled funding through 1915(c) waiver programs known as the home and community-based services waiver (HCBS). Since waiver programs are not entitlements, states can set limits on enrollment in the HCBS programs by setting quotas. The goal was to save money by decreasing the use of the more expensive nursing home entitlement. However, the new benefit was so popular and generous that it became Medicaid’s biggest expense.
The specific services covered vary by state. Medicaid can pay for an assisted-living facility stay, home-care services, homemaker, adult day care, and skilled nursing care. HCBS has resisted quality assessment because the public has regarded it as “intrinsically good.” There is no standardization or explicit standards for services because of diversity among the states, diverse settings, and dispersed delivery. A matched pair study from Alabama in 2016 showed that Medicaid home health patients cost a significant (p < 0.001) $4,600/year less than Medicaid nursing home patients. Medicaid waivers for home health care will probably never be challenged because of their cost savings and popularity.
The CMS fraud and abuse report for 2017 cites fines of $9 to $268 million for fraudulent certifications of eligibility for patients, money laundering, and kickbacks and bribes for patient referrals to home health agencies.
Nursing homes constituted the second-largest part, $43.8 billion (37 percent) of the LTC budget for 832,000 patients in FY2016. Nursing homes make 10 percent on private pay patients but lose 2 percent on Medicaid patients. Medicaid patients are still desirable, however, for filling empty beds. Ratings by Federal inspectors show that the more Medicaid patients that are mixed with self-paying patients, the greater the reduction in quality of care for everyone in a nursing home.
The CMS fraud and abuse highlights report for 2017 cites nursing home recoveries ranging from $8 to $145 million for fraudulent billing for unnecessary services. In a 2015 academic paper describing the five largest nursing home chains, four had many quality violations and all five had low nursing staffing and government legal action against them. In 2008 real estate investment trusts and private equity firms discovered that good cash flow from government subsidized nursing home patients could turn a great profit if the staffing and overhead costs were cut to the bone or lower. Lawyers have found it increasingly harder to successfully sue for these abuses.
Intermediate care for the intellectually disabled is a relatively small part of the total LTC budget, running 8.2 percent but still totaling $9.8 billion. Many patients have multiple disabilities. Patients eligible for Supplemental Social Security Income due to intellectual disability qualify for this program. In 2013 there were only 120,470 children in this program, which is not very many of the Medicaid total. The individual states do most of the monitoring of quality and abuse for this highly vulnerable population.
Mental health facilities comprise the final 2.6 percent ($3 billion) of the LTC budget. This covers inpatient psychiatric care for children up to 21 years of age and other mental health facilities for those 65 and older. Medicaid covers stand-alone mental hospitals as well acute care hospital psychiatric units. Inpatient substance use disorder (SUD) programs are covered for Medicaid eligible adults of all ages for stays up to 15 days. Follow-up day-treatment centers are also funded through Medicaid.
So far we’ve covered fee-for-service acute care, fee-for-service long-term care, and DSH payments. Another, smaller area is payments to Medicare from Medicaid, which amounts to 2.6 percent of Medicare resources ($17 billion).
Here Medicaid pays the Medicare premiums for dual-eligible patients who are over 65 or under 65 and disabled. This is a relative bargain for Medicaid because the 9.2 million dual-eligible patients in 2011 were sicker than average. They constituted 20 percent of Medicare enrollment but used 31 percent ($148 billion) of the budget. This is a form of cost-shifting from Medicaid to Medicare. Patients are automatically shifted to Part D Medicare, getting more restrictive pharmacy benefits.
Medicare and Medicaid are two different systems that “don’t talk to each other.” CMS has recently established the Federal Coordinated Health Care Office to integrate the two programs more closely. This shows that some active work is already being done on the “Medicaid-for-all” concept by merging budgets and coordinating benefits between Medicare and Medicaid. This tendency to merge might solve many coherency problems in the system, but it also adds further to the burden of centralized management—thus pushing in exactly the opposite direction from where we should want to go.
The final and largest part of the Medicaid services budget is the Managed Care segment. The penetration by managed care, constituting 46 percent ($253 billion in 2016), is striking. Management fees alone subtract at least 15 percent ($38 billion) before a cent is spent on patient care. This budget covers the same services discussed above as fee-for-service items but is contracted out to insurance-style corporations that manage the patients in HMOs (Health Management Organizations) or other similar settings such as Prepaid Health Plans (PHPs) and Primary Care Case Management (PCCM). As a group they are called Medicaid Managed Care Organizations (MCOs).
In 2016, CMS published a massive 1,425-page new set of regulations called The Final Rule on Medicaid Managed Care. It represented a kind of CMS power grab from individual states, presumably to limit the states’ gaming of the Federal budget. Many of the regulations are essentially mandates regarding the delivery of long-term care. CMS ordered the states to adjust rates so that at least 85 percent of the money paid to the managed-care firms would be spent on patient care, although they did not require repayment of any overage as for the Medicare program.
The rule requires states to implement a value-based system and demands that quality of care and program integrity measures be implemented and reported: Federal payment is conditioned upon them. Obviously, CMS is trying to introduce accountability where there is little to none by molding Medicaid to be more congruent with Medicare. Though an understandable impulse, the move toward more centralized management is still a mistake. This can be seen in the nature of the added reporting obligations demanded by the new regulations, which constitute a massive diseconomy in the health care system.
Physicians who have worked in this system complain that the new rules focus on management and create a huge and costly bureaucracy dedicated to preserving the status quo rather than to improving delivery of effective medical care. Doctors complain specifically that Medicaid HMOs provide narrow and irrational formularies, unresponsive specialty networks, and difficult care coordination.
Washington is setting-up Medicaid to be a group of MCOs managed by CMS that in turn mandates financial contributions from the states, but with ever less “local” control over Medicaid delivery. HMOs and MCOs are disliked by the public and are regarded by most physicians as second-rate care providers. They potentially could save money by limiting the prompt availability of medical care and, hence, quality.
The CMS fraud and abuse highlights report for 2017 cites $31 million and $45 million MCO-related fines for failing to screen pre-certifications for insurance companies, falsely representing an inadequate network, illegal schemes to maximize payments from the government, and inflating expenditure information. Heavy insurance regulation in combination with heavy insurance lobbying make rent seeking through regulatory capture likely. The ACA mandates patients to pay for more and more required services, which explains why so many of these MCOs keep popping up. This kind of rent seeking is making them very profitable.
Here is a startling fact that hasn’t been much discussed so far. People with mental illnesses and drug and alcohol addiction—jointly termed behavioral health conditions (BHC)—consume 48 percent of the entire Medicaid budget but make up only 20 percent of Medicaid enrollees. Only about 10 percent of the total Medicaid budget is spent on treatment of BHCs themselves. The other 28 percent of the total Medicaid budget is spent on over-usage of regular health care. The average yearly expenditure per patient with a BHC was $13,303, but only $3,564 for patient’s without a BHC in 2011. Members of this group do not take care of themselves well due to psychiatric problems. There is an opportunity to improve the general health of the BHC group by offering more aggressive and effective treatment of their psychiatric problems. There is some hope. The Oregon Healthcare Trial showed evidence of significant improvements for patients with depression.
Although I have alluded above to the ACA, most of Medicaid policy evolved over the past 50 years, long before the ACA came into being, so it’s a mistake to attribute Medicaid’s problems to that law. Nevertheless, let’s look at the ACA’s impact on Medicaid, for its effect has not been trivial.
The most important impact of the ACA has been the expansion of Medicaid to non-elderly adults with incomes up to 138 percent of the Federal poverty level, which was $16,243 for one person or $33,465 for a family of four in 2016. Medicaid expansion under the ACA successfully increased enrollment by 11.5 million beneficiaries at a cost of $68 billion, which was 62 percent higher than the initially projected $42 billion. Studies have shown improved results for life-improving treatments. But self-reported health status showed no improvement. As per the Supreme Court ruling of 2012, 18 states opted out of the expansion despite 100 percent Federal reimbursement for the first two years, tapering to 90 percent Federal reimbursement by 2020 and for subsequent years.
Why would any state opt-out? The Federal government reimburses the pre-expansion group according to the Federal medical assistance percentage (FMAP), which is on average 57 percent of state expenditure. In some states enrollment of the pre-expansion group was below 50 percent of the eligible, but enrollees cost the states on average 43 cents of every dollar spent. If this group expanded its participation rate because of the more streamlined enrollment process of ACA exchanges, budgets would be devastated in states like Florida and Texas. The states also feared that future Administrations would eventually reduce the Federal share from 90 percent, leaving states with entitled recipients but inadequate funds.
Both sides of the aisle in Congress are aware of Medicaid’s cost problems. Nevertheless, the Democrats, in the words of Chuck Schumer, believe “we are a rich country, we can afford it.” The Democratic solution focuses on increasing coverage, inclusiveness, and equality of care. Their Medicare-for-All bills had 16 co-sponsors in the Senate and 122 sponsors in the House. It merges Medicare and Medicaid coverage, eliminates private insurance, and creates numerous new taxes, especially for the wealthiest 5 percent.
Republicans point out that, at projected rates of growth, Medicaid, Social Security, and Medicare will crowd out everything but debt payments on continued and mounting annual deficits. The Republican solution keeps the present Medicaid and Medicare programs, seeks to eliminate waste and gaming with block grants to the states, and frees states to include abortion restrictions.
Neither approach to the ACA-era Medicaid problem is adequate, in part because neither addresses the fundamental problem of management chaos due to the scale of the program. The Democratic approach would break the bank faster, but the Republican one would break the bank too. What we need is an approach that accomplishes real reform of Medicaid in three respects: cost, size, and quality control.
Out-of-control costs arise mainly from fraud, abuse, rent seeking by stakeholders, and gaming by the states. DHHS has estimated that 12 percent ($139 billion) of total budget expenditure was for improper payments. The Medicaid Fraud Control Unit recovered $1.9 billion in 2016, which is less than 2 percent of the $139 billion. Outright fraud like money laundering or billing fraud by criminal syndicates are clear-cut and easier to identify than abuse in the form of inflated billing and billing for marginally necessary or unnecessary services and goods. Better fraud prevention and recovery would help solve this problem, but that would require our spending more on this capacity. No such plans are in prospect.
The greatest contribution to out-of-control costs is good old-fashioned rent-seeking by the “Medicaid-medical-industrial complex.” For private companies that means excess profits enabled by political manipulation. The principal rent seekers are nursing homes, hospitals, pharmaceutical companies, pharmacies, insurance companies, MCOs, and, to a lesser extent, professional practitioners. Lobbyists for these stakeholders love a mammoth, overly complex program like Medicaid because it is a black box to the public and therefore “easy pickins.”
Rent-seeking mechanisms are not always easy to see, but here are a few more examples. CVS has recently been shown to use a pharmaceutical benefit manager (PBM) to pocket money as an intermediary between pharmaceutical companies, pharmacies, and MCOs. They have also used PBMs as an anticompetitive weapon against individually owned pharmacies. The MCOs took no notice of the PBM rip off because it didn’t affect them: Stakeholders have no incentive to control rent seeking or corruption by other stakeholders. But now that PBMs have attracted public notice, the Office of Management and budget is reviewing them.
In another example, lobbyists for the pharmaceutical industry convinced Medicaid to fund excessively large and expensive prescriptions of dangerous opioid drugs for low-income workers, as recently pointed out by Senator Ron Johnson (R-WI). Joseph Schumpeter once estimated rent-seeking costs at 4 percent of an economy. Posted profits for biological drug companies range from 21 percent to 41 percent, but rent seeking by drug companies could be as high as 90 percent.
Then there is the fact that over 80 percent of hospitals are not-for-profit or government-owned. These institutions nevertheless have their own version of rent seeking, characterized by excessive executive salaries and benefits, oligopolistic price setting, and an “edifice complex,” involving excessive investments in physical plant, from which one can extract kickbacks as well as actual rents. There is nothing illegal about a hospital investing in commercial real estate, essentially renting offices to others, as part of a business model. Almost all major urban-based universities do the same thing. But it does almost invariably distort the function of the institution. The only solution to rent seeking, aside from making it illegal, which is unlikely, is to increase transparency so as to create political pressure through public awareness.
Another contribution to out-of-control costs is the gaming of Medicaid Federal funding by the states. The Federal government must match state funding at a fixed rate determined by formula as discussed above. By using waivers for DSH, IGT, and UPL and, in some fairly outrageous cases, reclassifying county and city mental institutions, nursing homes, and hospitals as state medical institutions, they have been able to shift state costs back on to the Federal government, resulting in the states effectively paying significantly less than their agreed share.
The use of block grants to the states could be an effective long-term solution, with amounts determined by a per-capita formula adjusting for population growth, for inflation, and for states having a higher proportion of elderly or disabled beneficiaries. The states could be given waivers to determine eligibility, service delivery, benefits, and patient incentive programs—like Indiana’s proven HSA-like program—in spending their block grants. The HSA-like program gives Medicaid beneficiaries $2,500 to purchase health care using their own judgment and discretion. After meeting a $2,500 deductible, Medicaid picks up the rest of the tab. Eliminating DSH payments with block grants could save about 4 percent of the total Medicaid budget.
Above all the mammoth size and overly complex program of Medicaid makes it difficult to administer, opaque to the public, and exposes it to all of the mechanisms of out-of-control costs. Businesses reorganize or go bankrupt when they get too complicated to be profitable. Contrariwise, overgrown failures like Medicaid just keep getting bigger. They prey on all the vulnerabilities of big government, including rent seeking by stakeholders, bureaucratic empire building, the public opiate of entitlements, and intellectual and moral laziness in the service of ideology. The best available solution is to break up the present Medicaid into three separate programs: one for healthy children and adults below certain income levels—the original program concept; a second for nursing homes and community care for the elderly; and a third for disabled children and elderly.
Certainly, the eldercare component could be split into a separate agency. Although nursing homes were part of original Medicaid, the popular HCBS was not, but it has come to be seen as a middle-class entitlement and has very broad support. The eldercare program is more clearly aligned with goals of the Social Security Administration and its mainly non-medical expenses could readily be managed like social security payments.
The disability and rehabilitation programs in the Veterans Administration are close in mission to Medicaid disability program. Combining the two programs into a separate agency for management of the disabled would benefit both programs.
Divesting Medicaid of eldercare and care for the disabled should let the program concentrate better on what it was created to do: provide adequate medical care for those who cannot afford it out of pocket. The quality of care delivered by Medicaid has always been controversial and hard to measure. But on balance, most experienced people have come to conclude that Medicaid outcomes are not as good as outcomes for those who can afford private insurance, but vastly better than what they would be without Medicaid.
They can get significantly better, however, thanks to the advent of the federally qualified health center (FQHC), which dates from 1989 and started small. The FQHC team approach delivers education, nutrition, social support, and psychological counseling in addition to science-based medical care, all at a lower cost. Many low-income beneficiaries are poorly educated, not least about nutrition, and come from significantly different subcultures that benefit disproportionately from the multifaceted FQHC approach.
One measure of quality is the availability of different treatment options. A solution is preserving the fee-for-service option. This allows Medicaid to adapt to future changes, gives beneficiaries more options, and applies needed competitive pressure to the MCOs. Although it is easier for the states to contract with a small number of MCOs, the MCOs don’t typically provide higher-quality or lower-cost care than fee-for-service, and they have demonstrated a lack of interest in policing other stakeholders. So another fix would be to create objective measures of quality and effectiveness for every Medicaid program remaining once eldercare and care for the disabled are hived off. An outside agency or private contractors should perform the evaluations to ensure objectivity.
Without thoughtful reform, Medicaid will ultimately be forced to decrease the number of its beneficiaries, decrease services covered, and shift more costs to enrollees and the private sector. In desperation the Trump Administration has already begun doing many of these things to the extent permitted by administrative discretion. It won’t be enough.