Federal Medicaid Spending Would Plummet Under Ryan Plan

Today’s Managing Health Care Costs Indicator is $243 billion

There's been a lot of attention on the potential impact of converting Medicare into a voucher program. There's been a lot less attention to the Ryan proposal to convert Medicaid into a block grant program and limit the federal government's contributions.

The Kaiser Family Foundation Commission on Medicaid and the Uninsured has released its analysis of the Ryan budget plan – which shows that the Federal payment to states for Medicaid would drop by about a third by 2021 – a decreased transfer of $243 billion in that year.

Medicaid covers 60 million Americans -- about 1/3 of all children in this country, and 40% of births.    However, it also covers 70% of all nursing home residents, and pays for their custodial care, which is not covered by Medicare and which the frail elderly can rarely afford based on their savings. The elderly “dual-eligibles” on Medicare and Medicaid represent 15% of Medicaid beneficiaries, but 40% of total Medicaid costs.

There are a limited number of actions states can take to address increasing Medicaid costs.

1)     Decrease number of people on the Medicaid rolls.   That’s straightforward – but the problem is that the really expensive Medicaid members, those with disabilities, severe psychiatric illness, and nursing home residents, simply cannot be removed from the program
2)     Decrease payment to providers.  Medicaid payment rates are already egregiously low in most states, and they’ve been cut further over recent months.  Medicaid beneficiaries already have a hard time finding a physician, and this could get even worse.  Hospitals already state that they have to shift costs to employer-based health plans because of low Medicaid rates. This is a special issue in some service lines like maternity – where across the country Medicaid pays for a quarter of all deliveries.
3)     Better manage the care of those on Medicaid.  That’s not easy – since the most expensive Medicaid members are so complex, have so many simultaneous illnesses, and are cared for in fragmented systems.  State Medicaid programs tend to be administratively underfunded, and their ability to invest in health management programs is severely limited.
4)     Transfer the risk for Medicaid beneficiaries to managed care companies.  The managed care industry has developed some good models to better care for those with complex illness, and there are some very competent companies that can manage Medicaid “risk” contracts.  This means less choice for Medicaid members, as these plans have strictly limited networks. It means new marketing costs and sometimes the requirement for profit margins, so states should be very careful to avoid allowing managed care companies to “skim” the healthiest Medicaid members.  It’s always more profitable to cherry-pick healthy patients than to better manage those at high risk.

Notice I haven’t mentioned “administrative savings” as a viable approach to solving states’ Medicaid crisis – the administrative costs tend to be low.   Some states probably overspend on qualifying Medicaid beneficiaries – although it’s cheaper to throw someone off the Medicaid rolls than to keep paying their bills.

States are still reeling from decreased tax revenue due to the Great Recession, and many are making substantial cuts in their Medicaid outlays already.  Medicaid is a lynchpin of decreasing the rate of uninsured in the country; the Congressional Budget Office estimates that under the Affordable Care Act an additional 16 million Americans would qualify for Medicaid.

The federal leverage over states to expand Medicaid access is based on funding, and if federal funding is plummeting, Medicaid rolls will shrink rather than swell.  Hence, this decreased funding would lead to a dramatic increase in the uninsured.  These proposed cuts will have a a very high cost in disruption of medical coverage for the most vulnerable. As such, they are bad social policy.