The Case For Medicaid Block Grants

As first seen in Forbes

Much of the discussion regarding health care reform centers around the federal government’s perspective on health care, yet the real world impact of these policies must be addressed by individual state governments.

Medicaid covers 70 Million people, or 1 in 5 of the United States population. In the wake of the “Healthy Michigan” program which expanded eligibility for Medicaid in our state, we now have 2.4 Million people, or 24% of our 10 Million residents enrolled in Medicaid.

Medicaid accounts for over $545B of the $3.65T federal budget. Unlike Medicare which is administered by the federal government, Medicaid is largely administered by the states. Medicaid accounts for $17.7B of Michigan’s $56.7B budget. Our latest Federal Medical Assistance Percentage (FMAP) is roughly 65% for traditional Medicaid, and ultimately nearly $5B of our Medicaid budget still ends up coming from state revenue sources.

What comes along with the Federal Medicaid funding? Regulations…and lots of them. As of February 23, 2017, there were 1,337 rules, 1,130 proposed rules in the queue, and 3,377 notices for state Medicaid authorities to abide by. Regulations pertain to a variety of functional areas including: Eligibility, Eligibility Verification, Cost Sharing, Data Collection, Financing and Reimbursement, Benefits, Quality of Care, Program Integrity, Prescription Drugs, Long Term Service and Supports, and Managed Care.

In 2013, Michigan passed Medicaid expansion under the provisions of Section 2001 of the Affordable Care Act and called it “Healthy Michigan.” It has been heralded by its proponents as a success because the number of people who signed up for it exceeded projections. I have a fundamentally different view of how to judge the success of government welfare programs. I believe that they should be judged on the basis of how many people eventually no longer need it, not the number of people who need it. The key to less people needing government assistance to afford health care is to promote policies that lower the cost of quality health care.

I stood in strident opposition to the Healthy Michigan legislation, but I didn’t just say “no.”  I provided a better alternative that I referred to as the Patient-Centered Care Solution (PCCS). Rather than trying to make health care more affordable by taking money from one group of people to subsidize the cost of health care for another, my solution expanded access to care by actually lowering the cost of delivering quality care. Direct Primary Care Services (DPCS) were the lynchpin of this solution. By providing Medicaid-eligible citizens with better access to preventive care via DPCS, we could have lowered the overall cost of health care by mitigating their need to seek basic primary care via expensive hospital visits. This approach was hindered by the federal strings attached to Medicaid funding.

One of those hidden strings is a barrier to getting reimbursement for patients seeing Direct Primary Care doctors from the Centers for Medicare & Medicaid Services (CMS). DPCS can save over 20% on total health care costs, provide Medicaid enrollees with better access to primary care physicians, and improve the overall quality of care via preventive care. This solution needed a waiver from the Secretary of HHS to work. Unfortunately there was little support for this alternative among big government advocates because DPCS does not require using any of the 159 new organizations that were created and put between a doctor and patient as a result of the ACA.

Proponents of Healthy Michigan were willing to fight for other waivers that financially benefited its advocates, however. As passed, the Healthy MI legislation required two waivers from the federal government before the program could be initiated. These waivers amounted to politically-calculated strings that the federal government would likely be willing to cut. These waivers were eventually issued to a certain extent and the program was launched. However, the failure to achieve a state-imposed savings goal has all but doomed the program to automatic repeal by 2020 due to provisions embedded in the public act that gave it life.

In fact, if it were not for this automatic repeal provision, Michigan taxpayers would be on the hook for an additional $533M in state funding in 2020-2021 and nearly $739M the following budget year. So much for “savings.”

We can do better. The key for states to be able to do better is to convince the federal government to allow us to do better.

How can the federal government allow us to do better?

By issuing Medicaid block grants to states free of regulatory strings. However, we need to be careful with the term block grants as not all “block grants” are the same.

One version of block grants are referred to as “per capita” block grants. Per capita block grants would appropriate a flat, capitated amount per Medicaid enrollee to the state. Per capita block grants are a bad idea because they incentivize states to add more people to Medicaid rolls. How do they do that? At an FMAP rate around 65%, the state would receive roughly $2 from the federal government for every $1 of state funding. Big government advocates see this as a way to draw down “investments” or access “free money” from the federal government. That is why Healthy Michigan is promoted as a success as a result of enrolling 640,000 people and not the initial projection of 300,000. Its proponents choose to call it a success while ignoring the observation that it will automatically be repealed in 2020 because the projected “savings” go negative. In addition to incentivizing bad policy at the state level, per capita block grants would not substantively restrain the growth of federal Medicaid liabilities.

Another version of block grants is referred to as a “lump sum” block grant. Under this approach, states would receive a block grant of Medicaid funds equal to the previous year plus some inflationary adjustment. Under this type of block grant, Michigan would receive roughly $12B each year without the federal strings. This approach incentivizes states to find ways to decrease the number of Medicaid enrollees either by promoting advancement of Medicaid-eligible citizens into good paying jobs or by lowering the cost of health care so that less people need financial assistance. Success would be measured on the basis of the number of Medicaid enrollees who no longer need government assistance. Furthermore, lump sum block grants would restrain the growth of federal Medicaid liabilities.

What could states do with a lump sum block grant?

In Michigan, we could convert MI Health Accounts into Health Savings Accounts (HSA) and encourage DPCS payments from these accounts. States could then seed each HSA with funds sufficient to cover a DPCS contract and the premiums for a High-Deductible Health Plan. Medicaid enrollees would then have the same insurance options as non-Medicaid enrollees and improve their access to primary care physicians. As their income rises, their health plan can remain the same. All that would change is their contribution level as the annual government subsidies are scaled back proportional to their income rise. If enrollees participate in a DPCS, their deductible will be paid for by the state as needed. If not, they would be liable for the deductible amount. Coupling DPCS with HSAs will enable the state to save more than 20% on total health care costs as a result of better preventive care and not via the current rationing of care through managed care organizations. In Michigan, if deployed to all 2.4 million Medicaid enrollees, this policy would free up an excess of $3.5B that could be used for other purposes in the state budget.

The bottom line is that Medicaid spending is the single largest line item in most state budgets, yet states have little control over how it is spent. Lump sum Medicaid block grants provide an opportunity for both state governments and federal governments to rein in out of control spending while still providing quality care to those who need it.

Posted in Colbeck-Editorials.