Medicaid “Spreads the Wealth” (Part 1 of Little Known Medicaid Facts)

During the campaign, there was a significant amount of talk, especially in the final weeks, after one candidate used the phrase “spread the wealth.” The resulting hyperbole got my memory machine going back to a recent report by the nonpartisan Tax Foundation.

Truth is, Medicaid is one of the largest ongoing wealth redistributions in our country’s history with money being transferred from high-income states (which tend to vote democratic) to low-income states (which tend to vote republican). As the graphic below shows, 8 of the 10 states that get the best deal from Federal money voted Republican in 2008 (though both VA and NM voted Republican in 2004) and the 10 states that got the worst deal from Federal money all voted Democratic in 2008.

A primary reason for this wealth redistribution is known as the Federal Medical Assistance Percentage (more commonly referred to as FMAP). The Medicaid program is funded by both federal and state dollars through a matching structure. The federal government usually matches state spending on an open-ended basis, using the FMAP, which is determined annually for each state using a formula that compares the state’s average per capita income level with the national average income level. Thus, high income states like New York, which pay a disproportionate share of Federal taxes get a lower Federal match for its Medicaid program. [A summary of the FMAP is found at the National Health Policy Forum and a list of state FMAPs is found at StateHealthFacts.org]

There have been some discussions recently with making the FMAP counter-cyclical (i.e. indexing it to GDP so that it is automaticaly increased in times of economic distress) so that states do not have to come to Congress with hats in hand during every downturn. There have also been some discussions with using the FMAP to incentivise quality like some of Medicare's P4P efforts. That said, it is the most effective tool the Federal government has to ensure states meet minimum standards and to encourage higher quality care.

So the important question to ask is not whether "spreading the wealth" is good but rather "whose wealth is being spread to whom?" One tends to get better answers that way.

Health Reform Sooner Than You Think

Federal government led health care reform will happen, soon. For years we have anguished about the number of uninsured, poor quality of care, and high rate of medical cost inflation. Since the Clinton proposal was rejected in the early 90s nothing dramatic has happened to ameliorate these matters. On top of it all, the current fiscal crisis would appear to dampen any ability to address our health care problems, especially by a Democratic party previously embracing significant government spending as a way out of the problem.

But just when you thought health care reform was "off the table," we will see a number of foreseen and unforeseen events coalesce to make health reform not only likely, but imperative. Let me briefly review the current landscape, describe why timing is right for significant health reform, and discuss what will happen next and why you need to act now if you want to participate in the next great wave of change. (NB: this is not arguing for or against federally mandated reforms, just an evaluation of the current state of affairs, and reasons why things are different than previous times we attempted to change the health system).

The Obama Mandate

On November 4 we elected a new President with a mandate for change. Although President-Elect Obama assiduously avoided focusing on health care, due to advisors' concerns about this "third rail" of politics, the campaign did set forth a proposal that (according to The Lewin Group) significantly reduces the number of uninsured persons by providing new health insurance coverage for 27 million of the 45 million uninsured. The Obama plan would:

• Require employers to provide health insurance or pay a tax,
  
• give insurance premium subsidies to persons with low to moderate incomes,
  
• mandate coverage for children,
  
• expand the Medicaid program to cover low-income adults,
  
• create a national Health Insurance Exchange, modeled after the Federal Employees Health Plan, giving insurance options for persons without employee health insurance, self-employed persons, small employers, and other individuals without coverage,
  
• regulate health insurance to prohibit pre-existing condition exclusions and individual underwriting, and require a minimum benefit package,
  
• give small employers a tax credit to purchase health insurance for employees,
  
• cover catastrophic expenses through a federal government reinsurance program, and
  
• require care coordination and health information technology for federally funded programs.

Nothing in this proposal is earth shattering, however collectively it will significantly impact the health system. It remains to be seen whether these changes will actually result in reductions in either health spending or the price of health insurance.

Call To Action, Health Reform 2009

On November 12 the Senate Finance Committee, led by Senator Max Baucus (D-MT) released a health care reform proposal in their document "Call To Action, Health Reform 2009," which would mandate health insurance coverage for everyone. Employers would have to provide insurance or pay a tax. Individuals and small businesses would be given income-based subsidies to purchase insurance through a national Health Insurance Exchange (modeled after the federal employees health plan). Significant expansion of government programs is also envisioned, including a Medicare "Buy-In" for persons aged 55 to 64, Medicaid for all persons below the poverty level, and SCHIP coverage for all children up to 250 percent of the poverty line.

The only major difference with the Obama plan is the universal mandate, already underway in Massachusetts, where we are learning much about unintended consequences and the challenges of implementation. Moreover, there is broad and bi-partisan support for many of the cost containment and quality improvement elements of the Baucus plan. Again, it remains to be seen whether any of these policy ideals will actually contain costs.

Chance of Becoming Law

The elements of both proposals, and whether they over-regulate health insurance, certainly can be debated. More important, neither Obama nor Baucus propose anything dramatically new. Rather, these are the latest in a long string of policy pronouncements and initiatives to reform healthcare going back before 1993 when the ill-fated Clinton proposal was launched. These latest proposals embody the latest thinking based on reforms already implemented in various states (e.g., Massachusetts), and policies already discussed in Congress for years (such as health insurance modeled after the federal employees plan, wellness and prevention, and health information technology).

Whatever the reform plan, timing is auspicious for health reform to be signed into law before the end of 2010 for fundamental reasons having nothing to do with the substance. First, health reform is popular as demand for health reform has increased dramatically. The economic downturn has refocused the private sector on the growing burden of health costs and the potential to bankrupt companies such as General Motors. State Medicaid programs also are feeling the pinch caused by decreasing tax revenues and increasing number of persons newly eligible. Health reform would appeal to many Members of Congress seeking a solution to complex issues.

Second, the process favors health reform. Our system of government is open to public scrutiny, has many levels of bureaucracy resulting in longer time to deliberate, more "touch points" to influence legislation, and significant critical mass needed for major legislation to pass - especially for an issue as complex as health care finance and delivery. There is a natural cycle to major initiatives, requiring considerable time for legislation to be developed, refined, debated, voted, and signed into law.

My years in the US Congress, White House, and since then as a "legislative advocate" include working on, and getting signed into law, several major bills. My experience is that it usually takes ten to fifteen years of debate before major reforms become law. For example, after the prescription drug benefit in the Catastrophic Health Act of 1988 was repealed, it took 15 years for a comprehensive Medicare prescription drug benefit to be enacted in 2003. As the person who led the process that developed the Clean Air Act of 1990, I was fascinated to learn the law had not been reauthorized in 14 years. The fact that major health reform was last seriously considered by Congress and the White House in 1993 is not insignificant, as critical mass for reform has been developing for the past 15 years. Major legislation is even more likely if the changes are perceived as being evolutionary, rather than revolutionary. Both the Baucus and Obama proposals are striking in that they are not radical departures from the current system, but build on a number of state reforms and other initiatives already debated or underway.

Finally, Democratic control of Congress and the Executive branch give additional momentum to issues such as health care. There is a brief, two-year window of opportunity at the beginning of any new Presidential term when significant issues can be addressed – before politics divert attention away from substantive reforms and towards the re-election process. Moreover, the current economic slump will increase the appetite for reform due to the high and growing cost of health care for businesses and government programs such as Medicaid, Medicare, and TRICARE. In light of the $700 Billion rescue package for banks, might there be $100 Billion annually available for the health and welfare of Americans? It could even be argued that health reform will help stimulate the economy by providing health insurance for everyone, and soften the economic downturn by reducing the financial burden of healthcare for businesses and individuals. At a minimum this might be good for the health industry as health insurance plans get increasing member volume, but perhaps at lower margins.

Next Steps

Both Congress and the new Administration have health reform proposals, with hearings going back decades in the former institution and a campaign proposal developed in the latter – with input from health policy "wonks" that have been deliberating the issues for decades. Although not set in stone, these proposals are now being further developed in the Presidential Transition to be announced in President Obama's Budget in late January 2009, and by Congressional Committees to be introduced in Congress when they convene again in February 2009. By then the general outline of reform will be established, with Congress taking the lead as the Administration is steeped in the quagmire of the economy. Hearings will be scheduled for Spring 2009 to bring all interested parties together and further refine legislative language.

By August 2009 legislation will be drafted, allowing constituent review during the August recess and triggering Congressional consideration before they adjourn in November for their mid-term break. Typically with significant legislation there will be constituent push-back and lobbying pressure, leading to some kind of “summit” meeting in September where Congressional and Administration officials come together to discuss their various constituent stakeholder interests. Several times I have been involved as a government official in these legislative denouement, and they usually result in “horse trading” where compromise is the rule and nobody fully wins or loses. The lesson learned is to make sure you talk early and often to whomever may ultimately represent your perspective, know where you have both support and opposition, and track the players carefully.

Legislation could be passed as early as October 2009, with changes to Medicaid and Medicare laws pushed through in the budget reconciliation process – requiring a simple majority (instead of the 60 vote majority to avoid Senate delay, see blog by Ezra Klein for more). If the legislation is too contentious, it can be set aside for Congress to take up again when it reconvenes in February 2010 for the second half of their two year term. This delay will also allow Congress and the Administration to work out any contentious issues, making it easier for Congress to pass legislation.

Conclusion

Everyone agrees that health care finance and delivery in the United States needs to be improved. Until now we have had neither the consensus to allow change, nor the events necessary to force change. My thesis is that we currently have a rare confluence of events (including financial crisis, change of power, policy ripeness, political will, and 15 years of policy debate experience) to trigger serious consideration of health reform. Given all the variables involved in passing major legislation, it will be difficult to stop the momentum beginning to build behind health care reform.

Updated: Major Reform Picks up Speed in the Senate

Things sure are moving quickly as we woke up today to find that Sen. Baucus, Chairman of the powerful Senate Finance Committee, released a 90 page overhaul proposal today for the United States health care system (see Wall Street Journal blog and article).

Sen. Baucus' proposal is much like the one presented by President-elect Obama except for one thing - mandates - which we knew were coming. With 42M uninsured in the U.S. and successful reform in Massachusetts requiring coverage (as reported in this article of Health Affairs), one has to acknowledge that requiring insurance is the only way to make a dent in the problem. Also, Sen. Baucus believes mandates are required to keep people from waiting to buy insurance until they are sick (the freerider problem).

But like President-elect Obama, he also proposes that plans have to take persons regardless of pre-existing conditions and the establishment of a national marketplace that he calls the Health Insurance Exchange (like the FEHBP model), in which individuals and small businesses could buy coverage with costs depending on income-based subsidies. Private insurers and a new Medicare-like public program would compete through the exchange to offer coverage.

Whereas private insurers believe the inclusion of a Medicare-like program will create an unlevel playing-field and eventually lead to "socialized medicine," a thoughtful analysis by the Urban Institute found "Strong private insurers that offer good value for premiums charged would survive. But most important, the amount of real competition in both insurance and hospital markets would be enhanced." Isn't that what we want?

To see a very nice description of health care reform landscape in the Senate, see Jonathan Cohn’s blog at the New Republic.

Innovation-Based Medicaid Reform

The country has entered a recession. Medicaid will be hard hit. An economic stimulus package will come to the rescue. Should the stimulus package be used entirely for short term consumption of health services, or could it be used for long-term transformation of healthcare?

Last week unemployment was reported to be 6.5% in October, with some predictions in the Wall Street Journal that it could exceed 8 percent next year. The impact on Medicaid is outlined in a recent report by the Kaiser Commission on Medicaid and the Uninsured, noting that every 1% rise in unemployment results in a 1% increase in Medicaid/SCHIP enrollment, a $1.4 Billion increase in state Medicaid spending, and a 3-4% decline in state tax revenues.

States are clamoring for an economic stimulus package, which will be used partly to fund the anticipated increase in Medicaid spending, and the states are likely to get an increase in their FMAP funds. Congressional hearings, and recent pronouncements by the Obama Transition Team, indicate they are looking at an economic stimulus that is timely, targeted, and temporary. These principles will have a short-term impact, designed to effectively spur a slow economy. But why can’t economic stimulus also give long-term, transformative benefits by focusing on innovation? A new report by Robert Atkinson calls for an “innovation-based economic stimulus package.”

The Medicaid program has seen numerous attempts at reforms since the program began in 1965. A Special Report on Medicaid by the Pew Center on the States shows every state has implemented a variety of projects attempting to manage better Medicaid costs and quality. Some of these initiatives have succeeded, but more can be done.

Rather than focusing only on short-term consumption of health services, wouldn’t it be better to use some of the economic stimulus to help find long-term solutions? The current economic crises affords a rare opportunity for short-term stimulus and long-range reform.

Pushing (or pulling) the Elephant of Health Care Reform

The ‘Lion’ of the Senate, HELP Committee Chair Edward Kennedy (D-Mass.) and Finance Committee Chair Max Baucus (D-Mont.) are both working on major health care reform proposals (see Kaiser reports for a summary) but just like with the new President-elect, I think it would be helpful to manage expectations. And even if major reform does not pass in the short-run, smaller more-likely reforms will have a large impact on Medicaid and SCHIP.

First, it has been known for over 30 years that our health system is wasteful (different estimates exist but most are within the 25-33 percent range). The reasons for this are many but in simplistic terms, the system is producing exactly what it is designed to produce. Peter Orzag, Director of the Congressional Budget Office and a one-man crusader, estimates that 5 percent of the nation’s gross domestic product – $700 billion per year – goes to tests and procedures that do not actually improve health outcomes. In fact, a little known fact is that we now spend more on health care than we do on food.

This is the proverbial ‘elephant in the room’ but just like with real elephants, they are very difficult to move unless they want to be moved. To put the $700B number in context, that is the size of the ENTIRE high-tech industry in the United States…represents a lot of jobs, local economies, and special interests to overcome in the name of reform.

The excitement is understandable because if there was a chance for major reform, this is it. With Sen. Kennedy negotiating from his hospital bed with members from both parties and the business community and with health care costs growing at an unsustainable rate to the point that it affects our global competitiveness (health care constitutes about $1500 of the typical cost of a car at GM where it is only $150 at Toyota), there is a definite need for change. But as the President-elect stated, we did not get here overnight and solutions to these problems will take time and sacrifice.

The most reasonable explanation of what to expect in the short-run is summarized by industry expert ROBERT LASZEWSKI at the Health Care Policy and Market Review blog. In the near future, he sees the priorities as re-authorization of SCHIP and expansion of the program from 6M to 10M children, rebasing Medicare Advantage plan payments so that they are consistent with FFS, and expansion of health information technology.

But you could also see the strengthening of current quality measurement and value-based purchasing efforts as described in President Bush’s Executive Order of August 2006, restructuring of physician payments to more appropriately value the inputs of primary care, and the chartering of a comparative effectiveness institution like NICE in the UK, among other things.

Just like any physics student will tell you, on object at rest tends to stay at rest, so it will take a significant amount of energy to get the elephant moving forward. But as the the physics 'cartoon' above shows - until we deal with the elephant, the natural laws of the world just do not make sense.

[Disclaimer: no animals were hurt during this posting and any resemblance between my 'elephant in the room' and the republican party is purely coincidental. ~BAA]

Yes, Virginia (and other states), there is a Santa Claus

UPDATE (11/8/08): President-elect Obama, at his first press conference on Friday, stated that his top concern is passage of a second stimilus package that includes relief for state Medicaid programs (source: Washington Post).

The famous editorial in the New York Sun in 1897 sums up the expectations and likely presents to be left under the tree for state Medicaid Programs. In fact, a second stimulus package may be one of the few things passed during the lame duck session.

Late last month, Federal Reserve Chairman Ben S. Bernanke tentatively endorsed the idea of a new stimulus package and yesterday, the International Monetary Fund projected the first annual decline in advanced economies since WWII and recommended a second stimulus package.

Additionally, Kaiser Reports summarized a hearing on Capitol Hill last week where support by economists on the Joint Economic Committee could bode well for a temporary increase in the Federal match for state Medicaid programs.

And finally, the Kaiser Family Foundation published
an updated factsheet today, State Fiscal Conditions and Medicaid, which examines the effect of the economy on Medicaid and the states’ use of fiscal relief that last time the Federal match was temporarily increased back in 2003.

[And by the way, the picture above is of the world's most expensive 'bauble' but in the figurative sense, it might as well be Medicaid.]

Impact on Health Insurers of Democratic Majority

A recent article in the Wall Street Journal assesses the impact on health insurers of Democratic rule. The article indicates health insurers are looking to get new business from policy changes due to the upcoming Democratic control of the Administration and Congress. The article also indicates, however, other Democratic supported policies will cut health insurer reimbursements.

Will the increase in one program and cuts in another just be an economic wash? Will health insurers truly see more business coming their way? Democratic control will result in significant policy changes, with important implications for the future of healthcare in this country that could help or hurt health insurers depending on how they are positioned. What is certain is that significant change is coming, which could result in winners and losers.

The article talks about two separate issues: additional funding to programs for low income persons, such as Medicaid and SCHIP on the one hand, and reductions in funding to Medicare Advantage and especially PFFS plans, on the other. The argument is that although potential Medicare Advantage cuts are now ever more likely, other public programs will see increasing spending and "net-net" the health insurers "could actually grow slightly more" under Democratic rule. For this to happen, however, the health insurers will have to deftly maneuver through a policy and legislative quagmire.

The seeds of the current environment, and the policy debate, have already been sown. Reauthorization of the SCHIP program caused a stalemate last year between Congress and the Administration, resulting in temporary reauthorization that has to be revisited by April 2009. The physician payment "sustainable growth" quandry helped make health insurers a target for reimbursement cuts in the effort to find funding to avoid physician cuts. Kinks in new programs, such as "Private Fee For Service" Medicare health plans and Special Needs Plans increased Congressional oversight and skepticism. State expansions of Medicaid coverage have begun to strain government budgets, resulting in rate changes and cuts. Compounding the matter are other background issues including the current economic downturn, growing unemployment, commercial membership attrition, state budget deficits, a large uninsured population, increasing government entitlement program liabilities, and higher costs of medical care.

What impact will all this have on health insurers? The Wall Street article is fair, and quotes a number of insurance company executives who assure they are ready for the change, but belies the fact the debate has been ongoing for years. As a result, policy positions are known and it is likely the pace and magnitude of change will increase, especially in the current economic environment, with far reaching consequences for publicly funded programs.

A research report, by the investment research firm Sanford C. Bernstein, cited in the WSJ article indicates changes in government may cause health insurance industry revenue to grow slightly, but with narrower margins. I contend the health insurance industry is going to grow anyway, because it a huge industry with the infrastructure and economic incentives to grow. The question remains what will be the impact on health insurers of the impending changes in government policy, how will they grow?

Under the circumstances growth will not come the same way it has in the past five years when Medicare business helped defray the cost of commercial business and both saw expansion in market share. Instead health insurers will be doing less high paying Medicare business, more high-cost chronic care Medicare work, less commercial business, and more low-margin Medicaid and SCHIP work. In this environment you will only stay in business if you have a good balance of Medicare and Medicaid business, use effective medical cost management, and can work in an environment shifting to higher volume with lower margins.

The good news is that many health insurers were set up to effectively manage high volume health care. Health information technology, transparency, gain sharing models, and other innovations have helped. On the other hand, higher payment rates in the past five years also resulted in complacency by some insurers. The changing political and policy landscape will force health insurers to change they way they do business, and could cause some companies to go out of business or drop government-funded programs. The one thing certain in this environment is change.

Mixed signals: least costly alternatives, medical homes, and the 5M lives campaign

Ladies and gentlemen, the day is finally here and I must admit that I have a lot of mixed feelings. It is not only an important election day but also my first day in over 8 years when I am not working with either the Federal or a state government on Medicare and Medicaid. Yeeaaah…pop open the bubbly!!!

Since I am incapable of organizing my thoughts today, I am going to let others do it for me by highlighting numerous recent developments and posts and even though they do not apply to Medicaid specifically, they do have implications for Medicaid programs.

First off, today the NY Times describes how a Federal court has blocked the Federal government from using one of its most promising tools to control costs - paying for services at the rate of ‘least costly alternative (LCA).’ This tool puts the onus on providers and manufacturers to demonstrate that their product or service provides value above and beyond least costly alternatives already on the market (e.g. costly me-too drugs in place of established generics). In fact, the Medicare Modernization Act of 2003 specifically prohibited Medicare payment at the LCA and the court ruled yesterday that Congress sets Medicare payment rates and never intended to give officials broad discretion to alter them.

[Note: Florida residents are not ‘dummies’ but we do have a knack for making things interesting, don’t we? I pass the Florida Supreme Court on a regular basis and some of my recent staff served as extras in the recent HBO movie ‘Recount.’]





Secondly, at the Healthcare Policy and Marketplace Review blog, Brian Klepper and David Kibbe provide a very insightful discussion surrounding the need to re-empower primary care if we wish to improve the care and costs of health care. At a recent meeting with Medicaid HMOs, one plan executive took offense to our discussing ‘medical homes’ and exclaimed that HMOs had been providing ‘medical homes’ for 30 years – they were called PCPs. I happen not to agree. The statement may have been true 30 years ago with Kaiser, Puget Health, and Harvard Pilgrim but not today.

In a recent op-ed piece co-authored by one of the leading improvement experts in health care, Don Berwick, MD of the Institute for Healthcare Improvement (IHI) points out that managed care plans were the originators of many of the innovations in health care but that managed care had been ‘hi-jacked’ and that the term managed care no longer meant managing care but costs.

This leads to a nice discussion at the
Disease Management Care Blog on disease management and the Medicare Health Support program. Let me say this and say it slowly…O-V-E-R-L-A-Y-S do not work. They usually save money on the back-end and they may improve care but they are costly and redundant.

Most DM companies and HMOs operate like overlays in that they sit above providers and do not integrate with the office care as a team focused on educating patients, improving care, and aligning incentives. Vince Kuratis at eCarmanagement blog, summed it up best in a recent discussion:

Finally, we detect a seismic shift in thinking about chronic care management at CMS. In the early days of MHS we heard CMS refer to two schools of DM: The “Vendorites” and the “Wagnerites.”

The “Vendorites” might have said: “Doctors are just too difficult to work with. It’s more effective to work directly with patients to help them manage their own conditions.”

The “Wagnerities” (referring to Dr. Ed Wagner’s Chronic Care Model ) might have said: “Doctors are integral — even central — to the care management process. Doctors should deliver and reinforce messages to patients that they need to be more involved in managing their own conditions.”

You might remember that all the awardees of MHS projects were health plans or DM companies — not physicians, hospitals, home health agencies or other local care providers. The “Vendorites” won.

Today’s thinking at CMS seems to be much more leaning toward the “Wagnerites”. [As evidence, last month CMS released a presentation on their upcoming Medical Home Demonstration]

And finally, speaking of Dr. Berwick and the IHI, David Harlow at Healthblawg posted an excellent conversation with Dr. Berwick and IHI’s 5 million lives campaign. If you forget, IHI’s succesful '100k lives campaign' back in 2004 focused on spreading best practices to hospitals around the country and was an example of what we can do when we focus on doing the right thing for patients.