The Crisis in Medicaid

Thursday, 05 May 2011 01:00

In response to a thoughtful letter to the editor concerning my recent article, “Saving Chairman Ryan,” concerning House Budget Committee Chairman Paul Ryan’s proposals, I responded in part, “I am worried about Medicaid, Medicare and Social Security, in that order.” The order I had in mind was in order of insolvency — if no changes are made — to eligibility, benefits and funding. This article will take up Medicaid, and following articles will consider Medicare, Social Security and approaches to taxation. It will become clear that that while Representative Ryan has raised important issues, many aspects of his prescription fall short.

Medicaid was created in 1965 as an aspect of President Lyndon Johnson’s “Great Society.” Since 1982, all the states have participated in the program. Congress added a drug rebate program to Medicaid in 1990. To receive Medicaid, you must have a low income but also fall within an eligibility group. Medicaid assists more than 70 million low income children and adults, with payments to aged, blind and disabled persons comprising about 60% of total Medicaid payments. A significant and growing portion of Medicaid payments goes to fund elderly care in nursing homes. Most states have switched over to a managed care model for Medicaid, similar to an HMO, where the state pays a per capita charge for covered individuals.

Medicare is an all-federal program, but Medicaid is operated jointly with the states and administered by the states. In effect, the federal government can define eligibility and minimum benefits, regardless of the fiscal position of individual states. Thus, the funding position of Medicaid varies from state to state, with hard-hit states like Illinois facing the gravest difficulties. The Medicaid programs face pressure because (on a national basis) the number and percentage of Medicaid eligible persons is increasing, the cost of Medicaid programs per capita is increasing faster than the rate of inflation, and because federal and state fiscal burdens have generally increased. Certain transfer payments to states for Medicaid under the federal economic stimulus program are ending. The Kaiser Family Foundation provides a good source of statistics on Medicaid spending in each of the states. Growth in Medicaid Spending, FY90-FY09 — Kaiser State Health Facts

The federal government could conceivably have total responsibility for Medicaid, and considerable administrative savings and greater consistency in coverage would probably result. This would, of course, worsen the fiscal position of the federal government but ease that of the states.

The states have bargained away in past years their right to determine Medicaid eligibility in return for increasing federal support. Now, with numbers of unemployed and underemployed individuals running high, the states face harsh choices. GOP governors are now bargaining to regain control over eligibility. I fear that the states may race to the bottom in terms of their coverage net. In 2008, the states gained the power to charge higher premiums and co-payments. The “Patient Protection and Affordable Care Act” provides Medicaid fiscal relief to the states beginning in 2014, with new funding to cover individuals with income up to $14,000 and up to $29,000 for a family of four. States Brace for Medicaid Crisis With Reform Relief Years Away — WNYC.

On average, Medicaid authorizes payments at about one-third the rate of private insurers. As a result, many doctors decline to participate in Medicaid, and those clinics that accept Medicaid may feel pressure to operate on a mass production basis, with a lower than average standard of care. Therefore, in addition to the fiscal issue with Medicaid, there are issues of quality of care, leaving aside the problem of fraud in “Medicaid mills.”

When individuals cannot afford regular medical coverage, they head for hospital emergency rooms, the most expensive option for non-emergency care. This is an irrationality of our current system that applies to both legal and non-legal residents. The ObamaCare idea package aimed to address this issue, but how effectively cannot yet be said. As will be seen, ObamaCare failed to change in a fundamental way the economic incentives that drive American medicine, and therefore I am skeptical of the vast potential cost savings touted by the administration.

Andrew Szabo CFA is managing director of NewOak Financial Solutions LLC. Questions, please contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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