The Ripon Forum, December 7, 2007

What Can Congress Learn From the States?

The editor of the Ripon Forum has offered me the challenging privilege of submitting an “essay that examines some of the key health care reform initiatives that have been passed by the states, how these initiatives are working, and whether any of them are ideas he believes the U.S. Congress should pursue.”

The challenge arises from the fact that many state initiatives result from the federal government doing less of what it should not have been doing in the first place: meddling in how states run their health care “safety net,” that is, Medicaid. So, my best advice to Congress would be to do more of doing less!

Unfortunately, given the current Congress’ enthusiasm for roping more and more kids into government-run health care via SCHIP, I doubt that the current Congress will take heed. Nor is it alone in pushing for more federal entanglement in health care.

Indeed, ever since President George W. Bush required states to enroll 95 percent of eligible lower income children (living 200 percent under the federal poverty level) before coming to the federal government for more handouts to cover kids in higher income families, the calls for more federal involvement has become deafening.

Fortunately, the previous Congress tried to change the incentives for Medicaid growth, primarily through the Deficit Reduction Act (DRA) that President Bush signed in February 2006, which really increased states’ flexibility to reduce costs and improve quality for Medicaid beneficiaries. Traditionally, the Medicaid funding formula creates over-expansion of Medicaid, because the federal government pays states over half of the program cost, and this automatically ratchets up when a state increases Medicaid spending.

Nor has the traditional matching formula resulted in distributing federal Medicaid funds to poor Americans fairly, because by simply comparing a state’s per-capita income relative to the national average, it ignores the number of poor residents. Pamela Villareal, writing for the National Center for Policy Analysis, concludes that New York, with less than eight percent of the nation’s poor, received 13 percent of the federal government’s Medicaid matching funds in 2004, whereas Texas, with more than 10 percent of the country’s poor received only six percent of the funds. Vermont, Alaska, and Maine received twice as much as they would if funds were allocated based on poverty, while Nevada received half as much. The DRA created to opportunity to break out of this vicious circle.

The Congressional Budget Office estimates that the DRA will save $4.7 billion from 2006 to 2010, and $21.7 billion from 2011 to 2015. This is because; of the 39 sections of Medicaid that the DRA opens up to reforms, only four require regulation from the Secretary of Health & Human Services. Until now, states wanting to improve Medicaid faced huge obstacles because the law required a mind-numbing regulatory journey to get a waiver from the federal Centers for Medicare & Medicaid Services (CMS) – even for changes at the county level. Importantly, the U.S. Department of Health & Human Services grants these waivers in return for a state limiting the liability of federal taxpayers: No more open-ended match funding! The DRA also creates exciting new tools that states can use to empower Medicaid beneficiaries, such as Health Opportunity Accounts, which give them a degree of direction over how Medicaid dollars are spent on their needs. This builds on the success of “cash & counseling,” which has shown measurable success in a number of waiver demonstration projects in New Jersey, Arkansas, and Florida, and was being implemented in twelve additional states as of spring 2006.

Some states have seized the initiative on comprehensive “consumer-directed Medicaid,” which will benefit both Medicaid beneficiaries and taxpayers. Leaders in this effort include governors Mark Sanford of South Carolina, Ernie Fletcher of Kentucky, and former governor Jeb Bush of Florida. It is too soon to tell the degree to which these efforts have succeeded, but the indicators are certainly positive. In Kentucky, for example, the Governor recruited leaders from private health plans to run the state’s Cabinet for Health & Family Services and Medicaid, resulting in stemming a tide of red ink and moving decisively towards balancing the program’s budget this year.

Unfortunately, most states are still addicted to Medicaid as a cash cow, from which they draw the milk of federal taxpayer kindness, without transforming this out-of-control program, which is becoming a serious burden on our nation. Indeed, while Medicare (the health care part of Social Security for American seniors) increased its share of national health spending by three quarters between 1967 and 2004, Medicaid’s share increased by more than twice as much, such that the lines on the graph have now crossed: Medicaid costs more. (SCHIP is included in these figures because that joint state-federal welfare program suffers from similar perverse incentives). For this disproportionate growth to be reasonable, the number of poor people in the U.S. would have had to grow twice as fast as the number of seniors, which defies reality.

Medicaid is so out of control that, while every American spent almost five times as much (inflation-adjusted) dollars on private health care in 2004 as in 1967, he contributed more than 14 times as much towards Medicaid as he did before. Largely, this is due to rapidly increasing enrollment. Indeed, coverage for optional services or populations is now the norm: only 39 percent of Medicaid spending in 2001 was on mandatory coverage.

Medicaid’s natural tendency to expand has led to serious “mission creep” that is so deeply rooted that even Tommy Thompson, the former Secretary of Health & Human Services and short-lived Republican presidential candidate, who is regarded as the father of welfare reform for his valuable efforts in that regard when governor of Wisconsin, succumbs to it. According to Mr. Thompson, “Medicaid is not doing its share to address the problem of the uninsured”, and “states must be encouraged to expand Medicaid coverage.”

Despite some examples noted above, it is clear that most states do not enjoy the leadership required to undertake seriously the changes required to get a grip on Medicaid. The DRA is a good measure, but it does not go far enough. In order to motivate fiscal responsibility and improve quality in Medicaid, Congress needs to concentrate state politicians’ and bureaucrats’ minds by drafting a bill to convert federal Medicaid matching funds to simple, straightforward, non-negotiable block transfers.

Of course, I cannot complete this essay without considering the lessons of a reform that goes well beyond Medicaid: the Massachusetts Commonwealth Health Insurance Connector, the result of collaboration between former governor Mitt Romney and Democratic legislators to achieve “universal” health coverage. The mandate that everyone in the Bay State either buy health insurance or sign up for a subsidized plan fell to the wayside long before the deadline of July 2007, but costs continue to mount. Although the governor originally estimated a cost of $125 million, a muni-bond filing a few months after the law was signed in 2006 disclosed $276 million, and will provide $386 million in rate increases for hospitals, doctors, and other providers.

However, this reform did not directly arise out of a need to address the "crisis of the uninsured," less critical in the Bay State than others. Rather, it was needed to preserve $600 million that the U.S. transfers annually to state coffers. A Medicaid waiver allowed Massachusetts to use the federal money to fund its Uncompensated Care Pool, which paid hospitals' bills when patients would or could not. The U.S. Secretary of Health & Human Services admirably prefers to see subsidies targeted to patients, rather than providers, so did not intend to renew the waiver. So, the hospitals and state politicians had to find a way to keep that money. By forcing everyone to have health insurance, the state preserved the money while moving dollars from the supply side to the demand side.

Well, not really: the Alliance of Massachusetts Safety Net Hospitals is upset that the state proposes to “cut millions of dollars from annual payments to Massachusetts hospitals that provide care for the majority of low-income and uninsured residents,” as reported by the Boston Globe; and “safety-net hospitals contend that few residents in their low-income communities have signed up for the state’s free or subsidized health plans.” This corroborates previous evidence of continuing uninsurance in Massachusetts.

Unfortunately, the Massachusetts reform did not change the fundamental incentives facing participants in health care: the patients have little incentive to enroll, and the providers have no incentive to wean themselves from government dependency. First, federal law (EMTALA) requires hospitals to "stabilize" anyone who walks in the door. This, among other regulations, has led to a huge issue of "uncompensated care," to which the hospitals' policy response is appalling. Rather than pushing for insurance reforms, American hospitals use this issue to lobby for protection from competition, such as restricting new hospitals from opening, especially specialized ones owned by physicians. The Massachusetts plan does nothing to change the hospitals' environment, but does keep the subsidy spigot flowing.

Second, although the plan includes some protections from pricey mandates and excessive regulation, they are not robust in the long term. As long as insurers and providers can look to taxpayers to fund new mandates, the pressure to load basic policies with additional bells and whistles will be overwhelming. We should also expect one or two insurers eventually to dominate the market, as we have seen in other state pools.

Third, Massachusetts optimistically expects a brand new agency, efficiently and confidentially, to connect information from people's tax returns, doctors' and hospitals' billing records, as well as private health plans. Excuse my skepticism: government agencies are incapable of stopping the traffic in second–hand social security numbers, or preventing people illegally in the country from getting driving licenses.

This carries a lesson for federal legislators who want to compel “universal” coverage through private insurance. Instead of significantly reducing the obstacles to their voluntarily becoming insured, Massachusetts has simply ordered its residents to become insured without appreciating why many are not. No matter how badly the government messes up health insurance, the individual should at least have the right to exit. The Commonwealth of Massachusetts is denying its residents that right. Pray Congress does not make the same mistake.

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John R. Graham, Director of Health Care Studies, Pacific Research Institute, San Francisco , CA. He is the author of “What States Can Do to Reform Health Care: A Free-Market Primer.”