Radical Surgery For Medicaid?

South Carolina Governor Sanford has a plan to slash costs -- but a political battle looms

The 40th anniversary of Medicaid is on July 30, but few will celebrate. The state and federal program that provides essential health benefits for the poor is in big trouble across the country -- under fire for providing often substandard care even as it breaks the budgets of many states. Now, in what could be the first step toward a fundamental remaking of the huge public program, South Carolina's Republican governor, Mark Sanford, has quietly asked the federal government for permission to redesign Medicaid for the 800,000 low-income residents of his poor, largely rural state.

Under Sanford's proposal, Medicaid would be dramatically transformed. It would no longer provide unlimited care, instead offering beneficiaries -- mostly mothers with children -- a fixed amount of money each year to buy insurance and pay out-of-pocket costs. If they run through their accounts, they would have to pay for additional care on their own. But if they hold spending down, they could bank the leftover money to pay future medical costs -- or even use it to buy private insurance if they leave the program. "This is the biggest change ever for Medicaid," says Cleveland State University finance professor Michael Bond, who helped design the plan.

Republican governors in "red states," such as Florida and Georgia, and in "blue states," such as Massachusetts and Vermont, are mulling similar proposals. The rethinking is part of a move by states to lighten the burden of rising medical costs for the poor. Those obligations have doubled over the past decade as the ranks of the uninsured have risen, high-tech care has increased, and nursing care for the elderly has exploded.

Because Washington splits the cost of this spiraling health-care burden, it must approve a plan such as South Carolina's. But that won't be a big hurdle given the Bush Administration's interest in "ownership society" ideas, such as trying to create markets by replacing open-ended benefits with vouchers and other one-time payments. The Centers for Medicare & Medicaid Services, which oversees Medicaid, already backs the concept. "These kinds of approaches can lead to lower costs and more effective treatment," says CMS director Mark B. McClellan. "You can't treat chronic illness without active patient involvement. And you can't get that through some government pricing program."

A green light from the feds will spark two huge political battles. Liberals will object to any plan that turns Medicaid from a guaranteed benefit into the same sort of defined-contribution program that many employers now use. Such cost shifting is especially unfair for the poor, they say, and for those who have little experience with private insurance. "All Medicaid beneficiaries would face a significant increase in out-of-pocket costs," says Judith Solomon, a health-policy analyst at the Center on Budget & Policy Priorities, a liberal Washington think tank.

But the plan could also pave the way for an overhaul in the way Medicaid is funded, which is sure to spark more controversy. Instead of Washington reimbursing states for a fixed percentage of their costs, President George W. Bush wants the feds to contribute a fixed dollar amount, leaving states on the hook for big unanticipated hikes. Faced with opposition from the National Governors Assn., the White House is no longer pushing a nationwide change. But some governors, including Sanford, may accept such a deal in exchange for the flexibility to run Medicaid their way.

The benefit, says Robert M. Kerr, director of South Carolina's Health & Human Services Dept., is that patients will become better consumers if they have to pay for part of their care. "People are going to manage their accounts more carefully," he says. "We're exposing beneficiaries to the type of market the rest of the population has to deal with."

The plan would work like this: A 45-year-old would receive say, $3,800 from the state; a 5-year-old might get $900. The funds -- called personal health accounts -- would be distributed as vouchers or debit cards, not cash. Accounts would be adjusted based on a beneficiary's age, sex, and health. For now, seniors in nursing homes would remain in traditional Medicaid.

Beneficiaries would have several ways to pay for their health care. If they have insurance at their jobs, they could use the accounts to pay their premiums. If they do not have such coverage, they could buy hospital insurance through Medicaid and use remaining funds to buy care from any doctor they choose. Or they could use a portion of their account for private managed-care insurance and for copayments and deductibles. Another option: They could use the entire account to join a medical home network -- a group of local doctors who serve as gatekeepers for specialty care, pharmaceutical drugs, and the like. Those additional services would be paid by Medicaid, though patients would still be responsible for small out-of- pocket costs.


The South Carolina plan will require wide use of managed-care plans. The problem is, fewer than 10% of poor South Carolinians have such coverage. There are no plans in 16 counties and competing plans in only one. Even backers say that must change for the idea to work. "You've got to have competition," says Cleveland State's Bond.

It's no surprise that states such as South Carolina are desperate to hold down Medicaid costs. The program is now the biggest single expense for most states -- and costs are rising at close to double-digit rates. South Carolina spends $1 billion a year on Medicaid benefits, or about 14% of its budget. So state officials say they have only two options: slash benefits for all but the poorest patients, or boost costs modestly for all.

The jury is still out on whether health accounts -- which are increasingly common in the employer setting -- can save money or improve care. But with Medicaid costs threatening to overwhelm his budget, Sanford is willing to roll the dice on private accounts. And if, as anticipated, the feds give him the O.K., expect other governors to follow suit.

By Howard Gleckman in Washington

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