Tag Archives: State Health Flexibility Act

Distinguishing between Medicaid Expenditures and Health Outcomes

As the LA Times reports, the Obama administration has vowed not to approve any cuts to Medicaid during budget negotiations:

Preserving Medicaid funding became even more crucial to the Obama administration after the Supreme Court ruled last summer that states were not required to expand their Medicaid coverage. Administration officials are working hard to convince states to expand and do not want any federal funding cuts that could discourage governors from implementing the law.

“There is a big irony,” said Ron Pollack, executive director of Washington-based Families USA, a leading Medicaid advocate. “The fact that the Supreme Court undermined the Medicaid expansion is now resulting in greater support and a deeper commitment to making sure the program is not cut back.”

Paying for Medicaid remains a major challenge for states. The program has been jointly funded by states and the federal government since it was created. And many states, including California, Illinois and New York, have had to make painful cutbacks in recent years to balance their budgets by reducing physician fees and paring benefits, such as dental care.

However, protecting Medicaid spending — without changing incentives for the healthcare industry or patients — does not necessarily mean improved health outcomes for beneficiaries. As of 2011, nearly one-third of doctors said that they would not accept new Medicaid patients because they are losing money on those who they do see, indicating not only a lower quality of care for Medicaid patients compared to those on private insurance, but reduced access to care. Under the current Medicaid structure, states are incentivized to spend more to receive larger federal matching funds grants, but at the same time federal requirements limit opportunities to improve quality of care through innovation.

The State Health Flexibility Act proposed by Representative Todd Rokita (R-IN) proposes a way to change these incentives. Under the State Health Flexibility Act, state funding for Medicaid and the Children’s Health Insurance Program would be capped at current spending levels. At the same time, states would be released from many federal Medicaid mandates and instead would have the flexibility to determine eligibility and benefits at the state level. Rokita proposed this bill last year, and parts of the bill made it into the House budget.

While this bill seems unlikely to make any progress under the current administration, it mirrors reforms proposed by at least one democratic state governor. Oregon’s Governor John Kitzhaber, a former emergency room doctor, received a Medicaid waiver in 2011 to receive a one-time $1.9 billion payment from the federal government to close the state’s Medicaid funding gap. In exchange, he promised to repay this money if the state failed to keep Medicaid costs growth at a rate two-percent below the rest of the country. Kitzhaber sought to achieve this by allowing local knowledge to guide cost savings. The Washington Post reports:

Oregon divided the state into 15 region and gave each one a set amount to care for each patient. These regions can divvy their dollars however they please, so long as patients hit certain quality metrics, like ensuring that adolescents get well-care visits and that steps are taken to control high blood pressure.

The hope is that each of the 15 regions, known as coordinated care organizations, will invest only in the most cost-effective health care. A behavioral health worker who can prevent emergency admissions becomes a lot more valuable, the thinking goes, when Medicaid funding is limited.

While the Oregon plan is not a block grant — the federal government has not capped the amount that it will provide to the state — it does share some similarities with the State Health Flexibility Act. The state and its designated regions have a strong incentive to provide their Medicaid recipients better health outcomes at lower costs because if they fail the state will have to repay $1.9 billion to the federal government. Additionally, the state and the regions have the freedom to find cost savings at the level of patients and hospitals, which isn’t possible under federal requirements.

Federal Medicaid Proposal Could Help State Budgets

Representative Todd Rokita (R-IA) has proposed a new bill, the State Health Flexibility Act that could vastly improve incentives in state Medicaid administration. The bill would convert Medicaid and the Children’s Health Insurance Program (CHIP) into a block grant program under which states would have the freedom to shape the program as they see fit. Additionally, up to 30% of the block grant could be transferred into the state general fund if state lawmakers could administer the program for less than the grant amount.

Currently, Medicaid operates a little bit differently in each state, but most states receive matching funds from the federal government at levels between 50% and 74% of what they spend out of the state budget. This set up encourages states to overspend on this program because the federal government pays them to increase spending.

This program would bring all states in line with reforms already implemented in Rhode Island and Washington. In a recent podcast, Scott Beaulier discusses some of the benefits that these states have acheived through reform, both in their budgets and in their healthcare outcomes.

The State Health Flexibility Act would save money for taxpayers at the state and federal levels by capping federal spending at its current nominal amount. Both inflation and GDP growth would serve to reduce real Medicaid spending at the federal level. By removing the incentive for states to increase Medicaid spending to receive federal dollars, the bill would also reduce spending at the state level. Furthermore, states would enjoy freedom to determine Medicaid and CHIP spending for themselves, better tailoring the program to meet their citizens’ specific needs.

Despite reducing Medicaid spending, this reform bill would provide better incentives for improved outcomes by shifting state focus from matching funds to better healthcare. In Rhode Island and Washington, Beaulier found that states used cost saving measures such as not allowing Medicaid patients to use emergency rooms for non-emergency care and encouraging preventative care, improving healthcare while saving money.

Current Medicaid spending patterns are unsustainable. The State Health Flexibility Act provides an opportunity to save taxpayers money, put state budgets on a saner trajectory, and improve health outcomes for benefit recipients.