Looking For a Real Crisis: Try Medicaid

Social Security may be running out of money, but at least it's a single coherent program. Medicaid is a monster with countless heads.
by | April 2005

If you think Social Security's finances are bad, experts are saying, wait until you see Medicare. In the states, they're whispering that if you think Medicare is bad, wait until you see Medicaid.

Medicaid has long suffered confusion with its better-known Medicare cousin, which funds medical care for seniors. Most voters don't know that Medicaid covers 50 million lower-income individuals, that it pays the bills of two-thirds of the nation's nursing home residents or that it funds more than one-third of all births. And most don't know that Medicaid has now surged past Medicare to become the nation's largest health care program.

State officials know all these things, backwards and forwards--and that Medicaid is the fastest-growing part of most state budgets. The Bush administration is trying to reduce the federal government's contribution to the program, if only modestly. The president's new budget proposes a $60 billion cut over the next decade--about 2 percent--in exchange for more state flexibility. Stung by past offers of flexibility for cuts in other areas, the nation's governors are wary of the deal.

Solving the Medicaid problem is deceptively complex because of two key aspects of the program that lie buried deep under the debate. First, Medicaid isn't one program but many. It provides insurance for low-income children, pregnant women, and some parents. It provides long-term care for disabled, mentally ill and low-income persons. It supplements Medicare for seniors. And it backstops hospitals that serve most of the uninsured.

Moreover, Medicaid is a different program in every state. The federal government created it in 1965 to deal with the chronic problems of poor and older citizens without health care, but state governments have a wide variety of options for adding on.

Alabama pays for patients to visit chiropractors, but Alaska does not. Georgia covers home health speech and language services, but Florida has declined that responsibility. Tennessee finances dental care; Texas doesn't. Wisconsin recently trimmed some services for autistic children for fear that its generous menu was becoming an "autism magnet" for parents in other states struggling to provide the most elaborate care for their children. The combination of federal minimum care and state options has made the program incredibly complex.

Moreover, many state governments have developed creative accounting methods designed to shift costs back to Washington. The Government Accountability Office has called these procedures "abusive financing schemes," and the Bush administration wants to rein them in.

Medicaid is one of the most heavily leveraged programs in the government toolkit. The Centers for Medicare and Medicaid Services, the federal agency charged with managing both Medicare and Medicaid, employs just 4,600 people to oversee $485 billion in federal spending (and probably about half of them work on program design and policy analysis issues). The same is true in the states. A relatively small handful of government employees is responsible for a huge chunk of government spending.

The fact is, the government does not actually provide health care in the Medicaid program. Private and nonprofit hospitals, clinics and physicians actually do the work. They submit their bills to private companies, who act as financial intermediaries to process the paperwork for reimbursement.

This indirect system not only adds to the program's complexity, it also means that the abillity of states to control their costs depends heavily on the management skills of a handful of critical state employees and on the sophistication of financial management systems. And as the 2005 Government Performance Project analysis of state management found, the strength of these systems varies tremendously around the country.

"Medicaid is the monster in the middle of the road," Republican Governor Bob Taft of Ohio has contended, "and it's threatening the viability of every state in the union." The battles over the balance of federal and state power are critical to taming the monster. But to a degree not often appreciated, stronger state management will provide the whip and chair.

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