Medicaid Reform: Mending the Holes in Pennsylvanias Health Care Safety Net

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Executive Summary
Medicaid, the joint federal/state program that was created to provide health care for the poor, celebrated its 40th birthday in 2006. There was no party for the program, however. In Pennsylvania and around the nation, Medicaid is growing at an unsustainable rate and threatens both state and federal budgets. Medicaid represented 2% of Gross Domestic Product (GDP) in the year 2000 and is projected to rise to 9% by 2075. This, combined with unfunded liabilities in Social Security and Medicare, will require a devastating doubling of federal taxes and enormous increases in state funding.
Indeed, Medicaid is now larger than education—and any other program—in many state budgets, including Pennsylvania’s. Over the last 25 years, Pennsylvania’s Medicaid spending increased approximately 8% annually, versus approximately 6% for overall medical spending.  In 1980, Medicaid represented around 12% of the state budget. As of 2007, that total had increased to almost 26%. At this rate of growth, Medicaid will consume 94% of the Pennsylvania budget in the year 2075.
Unfortunately, the enormous fiscal problems facing Medicaid often overshadow its other major flaw: a well deserved reputation as a low-quality provider of health care. The program delivers episodic treatment, provides poor preventive care, and offers low-quality services to many beneficiaries. The plan produces some tragic health outcomes for America’s most vulnerable populations. It is routinely abused by both providers and beneficiaries. This ranges from Medicaid “mills” to outright theft. There have been estimates that as much of 40% (over $100 billion) of Medicaid spending involves abuse and fraud.
States should create insurance and provider exchanges for the provision of services to beneficiaries. Unlike the current price control system, those eligible for Medicaid will receive risk-adjusted credits to purchase services from competing plans. This would turn Medicaid into a real market in which buyers act in their own interest and providers compete to enroll beneficiaries and would also produce gains in efficiency that would make Medicaid sustainable in federal and state budgets and, just as importantly, improve the quality of health care that beneficiaries receive.
While this exchange model may seem worlds away from Pennsylvania’s current Medicaid program, it is a realistic reform within our grasp. The state of Florida received approval from the federal government to begin converting their Medicaid plan to an exchange model. In its early stage, these reforms are working well. It is time for Pennsylvania to look to bold reforms for Medicaid along these free-market lines.
The Pennsylvania Office of Medical Assistance Programs (OMAP), which administers Medicaid, should establish an Insurance & Provider Exchange (IPE). The IPE would be nothing more than a state-run market from which Medicaid beneficiaries would purchase their health care. Providers could offer packages of services to the enrollees at the IPE. The role of the state will change from being the buyer of the health care to facilitating a real marketplace in Medicaid.
Beneficiaries would receive a Medicaid Health Credit from the state to buy the coverage they want at the IPE from competing providers. This may be an HMO, a network plan, an HSA-type product or some hybrid product. The state would mandate minimum required benefits and services from providers and should also require complete transparency on the part of providers with regard to the services that they offer to enrollees and will assist beneficiaries in selecting health products that best meet their needs (but the actual choice will be made by the enrollees). 
Those enrolled in Medicaid will receive actuarially adjusted credits to purchase care they need from competing providers. This will induce new providers to enter the marketplace and focus on treating the sick rather than “cherry picking” the healthy. In order to promote competition in rural areas, the state should reinsure smaller plans. Beneficiaries also should receive Reverse Health Savings Accounts, which would be used to pay them for engaging in cost-saving and health-improving behavior.
Medicaid enrollees should be free to use their Medicaid Health Credits to join existing employer-provided plans. Given that a significant number of new Medicaid enrollees in the last 15 years dropped family coverage, this could be a low-cost way of offering coverage to these groups. Since many of them are above the poverty level, the state could offer grants to them on a sliding scale, with high amounts for the poorest and lower amounts for incomes near the arbitrarily established income limit.
Pennsylvania Medicaid is in serious trouble. It delivers low-quality health care, and its long term fiscal situation is unsustainable. The systemic problems exist because of the lack of a real marketplace for medical services for beneficiaries. Medicaid is, instead, a vast price control system that is inherently inefficient. Any plan for reform needs to address this fundamental flaw. If changes are not made, the fiscal health of the program will only worsen. The Commonwealth of Pennsylvania faces the unappealing situation of huge cuts in other government spending or dramatic tax increases that would wreak havoc on its economy.
Pennsylvania should move to reform its troubled Medicaid program immediately.  The creation of a real marketplace in Medicaid would improve the quality of care for beneficiaries since they can switch to alternative providers offering real choices in care. It would also accelerate innovation in the delivery of medical care and produce efficiency gains in the Medicaid program. Competition would translate these productivity gains into lower program inflation. The compounding effect of this reduced cost growth would make Medicaid far more sustainable in the Commonwealth of Pennsylvania.