Illinois’ Medicaid program suffers from a number of maladies that increase costs for all while deteriorating service for its enrollees.  Among these are a perverse set of incentives—incentives that not only perpetuate a culture of dependency among Medicaid recipients, but that also block potential reforms to fix the system.

Because Medicaid is a joint federal and state program, it is easy for politicians to spend freely while ducking accountability for the program’s inefficiencies.   Because Medicaid is “free,” enrollees can utilize care in an inefficient and wasteful manner without regard to consequences.  The program underpays providers and the state is chronically behind in making payments.  Most perversely, however, is that Medicaid discourages work and savings, creating a dependency mentality that traps enrollees in poverty.

The end result of these poor incentives translates into higher health care costs for the rest of us.  Providers, to make ends meet, have to charge more for services to make up for Medicaid patients.  This primarily impacts those without health insurance, who must pay full price for services because they haven’t the negotiating power of private insurance companies.  Because providers are limiting exposure to Medicaid enrollees, particularly for preventive care, expensive emergency room visits become the primary point of service. This is both wasteful and harmful, and feeds into a situation where no one wins—not doctors, not Medicaid enrollees, and certainly not taxpayers.

A Successful Solution:  Medicaid Health Accounts
In order to fix the system, incentives need to be better aligned.  One successful approach, enacted in South Carolina, has been the introduction of Health Savings Accounts as part of an overall Medicaid reform effort.  These accounts provide a way to align the interests of doctors, Medicaid enrollees, and public officials.  By offering them as a choice for the seventy percent of enrollees that use thirty percent of Medicaid’s budget, Medicaid Health Accounts can be a first step in an effort to arrest runaway Medicaid spending while providing better service for enrollees.

Medicaid Health Accounts (MHA’s) would operate much like private health savings accounts (HSA’s).  An HSA combines a high deductible catastrophic health insurance with an interest-bearing, tax-free account in which day-to-day health care expenditures are paid for through withdrawals from the savings account.  Once the insurance deductible is reached, private insurance pays for 100% of health care.

This model works as a form of Medicaid reform because it puts the Medicaid enrollee in charge of the first dollar spent. It allows enrollees to choose a health insurance provider that best suits their needs, and also provides competition because providers will have to compete for this class of customers.  Stability comes from the shifting from a defined benefits program to a defined contribution program in which individuals control costs instead of rationing types of services—which, it should be noted, is the current (failing) model for Medicaid cost containment.  Like larger Medicaid reforms, MHA’s would serve as a budget-neutral proposal seeking to stabilize runaway costs rather than cutting the program.

South Carolina as a Model
In 2005, South Carolina sought and was approved for a Department of Health & Human Services 1115 Demonstration Project Waiver to implement a program centered on consumer empowerment.   Under the plan there are a host of different options presented to enrollees including HMO’s, PCCM’s, and a self-directed care plan with personal health accounts (PHA’s).  PHA’s are in fact HSA’s, and they are available for eligible individuals who have demonstrated an ability to manage their own affairs.

Since that time, South Carolina has launched a demonstration project consisting of 1,000 enrollees.  Five hundred enrollees are taking part in the PHA portion while another 500 have Health Opportunity Accounts, a similar plan made possible by the 2005 Federal Deficit Reduction Act.

Under the program, beneficiaries are given the option of choosing from a plethora of programs ranging from Self-Directed Care, private insurance, Medical Home Networks (MHN’s) and alternative coverage options. Funds are deposited directly into the beneficiary’s account, and with the aid of a counselor, the beneficiary picks the program best suited to their needs.  Since January 2007, private insurance companies have moving to design products for enrollees.

If the beneficiary chooses a comprehensive health insurance or a managed care provider; the state pays the premium and deposits the residual funds into the account. In combination with a debit card, these funds can be used to purchase other medical services as needed. The money for the account is distributed every quarter and funds are allowed to roll over if they are not used as long as the beneficiary is Medicaid eligible.

Any account chosen by beneficiaries would have to be actuarially equivalent to the state’s current Medicaid Program. Accounts would, at a minimum, require the same mandatory services as currently required by federal law. More importantly, the program would also allow for beneficiaries to use leftover funds in the account or maintain the account by rolling it over into a private HSA once they accepted employment.   If the new employment didn’t include health benefits, then the enrollee could be allowed to stay in the program either indefinitely or for a limited period of time. South Carolina, for example, limits participation to three years, thus giving the enrollee the opportunity to move up to a position that has benefits.

The idea behind any mechanism in Illinois would be to ensure that enrollees who are able to maintain employment can keep their health insurance.  The results of such a program would mean that Medicaid enrollees who chose the MHA would no longer have to choose between finding employment and losing their access to health care.

In addition to these fundamental elements, South Carolina has safeguards in place such as counseling and consumer protection.  These would include:

• Customer satisfaction requirements – 24/7 user-friendly access; timely access for office appointments, consumer education and customer service evaluations of a representative mix of patients will be required.
• Provider performance measures – Compliance with national best practices and monitoring the number of Board Certified Physicians and in-hospital infection rates will demonstrate improved quality. Health status surveys are also important indicators.
• Incentives for healthy lifestyles – Rewards can be in the form of cash, gift certificates, and co-pay forgiveness for complying with meds and treatments, smoking cessation and exercising regularly.
• Services to beneficiaries – This could include disease management programs, pregnancy and newborn programs and lifestyle programs.

This would mean that Medicaid enrollees wouldn’t be abandoned to the “vagaries of the market,” but instead become partners a program that replaces the culture of dependency with a culture of dignity.

The Bottom Line
Medicaid Health Accounts are an excellent example of how Illinois can and should build a Medicaid Program that improves access to quality health care in a more cost-effective manner for those most vulnerable in society.  For up to 70% of beneficiaries, who often can find themselves trapped between health care for them and their children and finding a job, this can be a bridge to economic mobility.  Like welfare reform, Medicaid Health Accounts have the potential to transform a program that currently takes away rungs on the economic ladder and instead begins to help enrollees climb it.