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Why Paul Ryan’s Medicaid Reform Works

by Benjamin Domenech on August 23, 2012

The selection of Congressman Paul Ryan as the vice presidential nominee for the Republican ticket has brought the issue of Medicare reform to the forefront of people’s minds. But Medicaid is next up, according to the Wall Street Journal:

Medicaid provides health insurance to more than 50 million poor Americans and nursing home coverage to six million seniors and Democrats will portray any “cuts” as heartless. The Agenda Project Action Fund, which ran the infamous tv ad showing Paul Ryan shoving an elderly woman over a cliff, is now running ads in up-for-grab states like Wisconsin. The spots warn of Medicaid cuts that would adversely affect hundreds of thousands of seniors in the state and claim that Madison “will lose $14 billion in funding.”

Earlier this year, Barack Obama berated the Ryan Medicaid cuts as well. Among the victims, he says, are “someone’s grandparents who, without Medicaid, won’t be able to afford nursing home care. … Many are poor children. Some are middle-class families who have children with autism or Downs syndrome. Some are kids with disabilities so severe that they require 24-hour care. These are the people who count on Medicaid.”

The Ryan budget is hardly radical: it would block grant Medicaid to states much like the successful welfare reforms in the 1990s. States would get less federal money, and no more dollar-for-dollar match on wasteful expenditures. In exchange, they would get far more flexibility in how that money is spent. So far 29 Republican governors have sought that deal – fewer dollars for less Washington rules. Rhode Island, a state that received a waiver from federal Medicaid rules, has saved millions of dollars and improved care to seniors. “Medicaid is by far our biggest cost driver in our budget,” complains Florida’s Republican Governor Rick Scott. “We can improve services and run the program easily with billions in cost savings here in Florida if the feds let us.”

The truth is that most Democrat and Republican governors alike would be willing to trade less federal funding in return for more freedom and flexibility for their Medicaid programs. One of the reasons for that bipartisan undercurrent of agreement on the need for flexibility, rather than just throwing money at an already broken entitlement system, is that we now have examples of policy approaches beyond simply managed care to lower Medicaid costs and increase the quality of care. Chief among these examples is Florida’s pilot program, which you can read about here.

Here’s the story, in brief: A little more than six years ago, then Gov. Jeb Bush established a pilot program in five big counties in Florida with a total overhaul of Medicaid. (This plan has actually been endorsed by some key Obama administration HHS officials, so it’s not some instance of right-wing extremism.) The population involved is quite large, roughly 300k people on Medicaid – bigger than the total programs in 17 states. The program has received a wealth of attention from policy wonks but little mainstream coverage, in part because Gov. Crist never touted it, as it wasn’t his program. Thankfully, that’s beginning to change, and the Foundation for Government Accountability is beginning to highlight the successes of the program.

Under the pilot program, Medicaid recipients are given the choice of a wide variety of plans created by multiple insurers. The insurers are allowed to escape the vast majority of mandates on coverage, and instead just have to meet an actuarial value for the plan. This allows the state to keep costs flat while giving the insurers an incentive to create more tailored plans depending on need. You also have risk-adjusted capitated rates – or in non-insurer speak, you allow for better matching of payment to risk – so this doesn’t warp the incentives for insurers to make them avoid sick people. Instead, they’re rewarded for making sick people well.

Medicaid recipients get to choose among a dozen different plans with different offerings: one hospital, multiple, HIV-positive, etc. The plans are competing on benefits, copays, and provider networks, even above traditional Medicaid FFS. There’s a default plan, but the engagement is huge: 70 percent of recipients in the pilot choose a plan other than the default. (This is because, as Jeb was fond of saying, they’re poor, not stupid.) Early engagement in this form has a side benefit, too: It makes them more likely to seek care earlier, as opposed to waiting ‘til they need to go to the emergency room. Patients also get access to seven extra services not covered by any other Medicaid program (over-the-counter medication, dental, vision, etc.) They also have a cash incentive for healthy behavior, including quitting smoking, of up to $125 per person/per year – 64 percent of people in the program do it.

The outcome, according to the Florida Agency for Health Care Administration, is 64 percent better health vs. managed care, with 83 percent higher satisfaction from those in the program. And they’ve saved money, too: Florida is currently saving roughly $118 million a year on Medicaid in the five counties, with better outcomes for the people in it. The state will be approved soon for a statewide expansion of the program, and it expects to save almost a billion dollars per year.

The problem, of course, is that the pilot exists only thanks to the whim of HHS. States currently have to go back and beg every five years for an extension of their waivers. Massachusetts Gov. Deval Patrick, for instance, did this for Romneycare – he was overbudget, so he extracted another $4.3 billion from you the taxpayer for it, thanks to Sens. Kennedy and Kerry and then-HHS Sec. Mike Leavitt. States will always have an incentive to expand coverage and socialize costs until we reorder the system into one where they have to choose. Block grants – either the pure or partial variety – would allow for massive improvements in this broken program. Here’s the Republican Study Committee’s plan on that score. But what states do with that money and freedom is what really matters.

In sum: Florida is the best example we have, and perhaps the most replicable, for how statewide reforms should look going forward. Throwing money at the problem won’t fix it. Medicaid needs reform. It needs to return to its original purpose: covering the poorest of the poor, the sickest of the sick. That’s a true safety net.

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