Replacing Obamacare: Here's How Republicans Can Fix Medicaid

Replacing Obamacare: Here's How Republicans Can Fix Medicaid

REUTERS/Jonathan Ernst

Any Republican attempt to replace the Affordable Care Act must address Medicaid, which has literally become the 800-pound gorilla in the health-care policy room. Simply rolling back the ACA’s Medicaid expansion would spike the number of uninsured Americans and expose Congress and the Trump administration to withering criticism. On the other hand, leaving Medicaid unchanged exposes the federal budget to the program’s unsustainable cost trajectory: Federal Medicaid spending has doubled over the past decade.

While the debate over Obamacare normally focuses on the health-care exchanges, the law’s impact on Medicaid has been even more consequential. About 10.4 million individuals were covered under a health-care exchange plan in early 2016, but Medicaid enrollment increased by 14.5 million between the Affordable Care Act’s implementation and late 2015 (this and other Medicaid statistics I cite include the closely related Children’s Health Insurance Plan).

Related: One Expert Says Seniors Would Lose with Ryan’s Medicare Plan

By August 2016, Medicaid enrollment totaled 73.1 million people — over 22 percent of the nation’s population. Medicaid’s recent growth is attributable both to the expansion of eligibility under Obamacare and greater enrollment among individuals who were already eligible. As documented by Brian Blase of the libertarian-leaning Mercatus Center, Obamacare’s Medicaid expansion has cost much more than expected: In 2015, the cost per expansion-eligible enrollee was $6,366, more than $2,000 above projections.

In fiscal year 2016, the federal government spent around $368 billion on Medicaid, with states kicking in roughly $220 billion more. While the federal government sets many program rules, it is the states that manage Medicaid on a day-to-day basis. And this creates perverse incentives. Every time a state reimburses a provider for Medicaid services, its spending is matched at least one for one by a federal grant. Since states pay only a fraction of the budgetary cost of Medicaid reimbursements, they can enrich powerful health-care provider constituencies at a low budgetary cost to the state.

This effect was on display during this election season in California. Television viewers were bombarded by advertisements for Proposition 52, a measure that extends a temporary state fee on hospitals. Revenues the state collects from imposing the fee are dedicated to the state’s Medicaid program, known as Medi-Cal. Hospitals and other health-care interests spent more than $60 million in campaign contributions to get the measure approved. It may seem odd that hospitals would fight so hard to have a state fee imposed upon them until one realizes that the fee is simply a device for extracting more federal money through Medicaid — money that then flows back to hospitals. California is not alone in doing this; almost every state uses these financial gimmicks. Vice President Joe Biden has referred to these fees as a scam that should be scrapped.

Related: The Health Care Industry Is in a Panic Over Obamacare Repeal

This perversion of state fiscal policy is usually justified as a necessary evil in pursuit of providing health care to the poor. But a lot of the money is captured by hospital executives. For example, Patrick Fry, the CEO of northern California hospital group Sutter Health received $6.3 million in total compensation in 2014; Kaiser Foundation Health Plan Chairman George Halvorson pocketed $10.4 million the same year. Both Kaiser and Sutter obtain hundreds of millions of dollars in Medicaid funds annually. Runaway hospital executive compensation has also become a concern for organized labor: The Service Employees International Union prepared a measure limiting pay to $450,000 annually, but was ultimately persuaded against placing it on the California ballot.

Much of the federal money not paid out to executives falls to the hospitals’ bottom lines. In California, overall hospital revenues exceeded expenses by $7.9 billion during 2014. Although most hospitals are technically not-for-profit, it is still easy for stakeholders other than patients to harvest this windfall. The gains can finance future executive compensation or can be plowed into sparkling new facilities, which may be unnecessary, or unnecessarily opulent, for the care provided.

Hospitals are not the only provider group enriched by the Medicaid program. Provider reimbursement data from the state’s Department of Health Care Services (DHCS), which is available online (after by being obtained through a FOIA request), show several doctors receiving over $1 million annually from the state’s Medi-Cal program, including a couple of obstetricians who have mostly negative reviews on Yelp. With most of its funds coming from the federal government, DHCS has less incentive to monitor physicians receiving these large payouts.

Related: Why Trump’s Idea of Amending Obamacare Simply Can’t Work

To encourage states to properly manage Medicaid spending, Congress should replace the federal matching scheme with a different funding mechanism. Earlier this year, House Republicans suggested moving to either block grants or per capita allotments. A block grant is a fixed sum of money allocated to each state to support its Medicaid spending, while a per capita allotment would provide states a fixed amount of funding per Medicaid beneficiary. In either case, annual federal funding would grow at a slower rate than it does now, but states would have much more flexibility in the way they use federal Medicaid grants, enabling them to provide services in a more cost-effective manner. For example, Ohio would like to implement health savings accounts for Medicaid beneficiaries, asking them to contribute a small amount (not to exceed $8.25 per month) to these accounts, so that they have “skin in the game.” Ohio’s program was rejected by Health and Human Services but could be implemented if Congress moves to a block grant or per capita allotment framework.

A federal funding mechanism that eliminates perverse state incentives promises to provide better care for our less fortunate neighbors at lower taxpayer cost. While this solution may not be ideal for highly compensated hospital executives and unscrupulous physicians, it will be a win for the rest of us.