TheDC analysis: Federal reimbursement system exacerbates Medicaid spending discrepancy among states

Kyle Jahner Contributor
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Medicaid: (MED-i-CADE) n: federally-funded program that provides health care for the nation’s neediest people.

It sounds the same whether you are in Utah or Maine. But as politicians grapple with reforms to one of the nation’s most expensive entitlement programs, the look and feel of it from state to state is a different story.

An analysis of Medicaid data reveals a wide discrepancy in spending among states. The federal reimbursement system exacerbates the differences, as residents in thriftier states effectively subsidize more generous programs with their federal income taxes.

Republicans want to slash Medicaid: The 2012 budget, engineered by Wisconsin Rep. Paul Ryan that passed in the GOP-controlled House this month included block grants for states, with each state receiving a set amount of money indexed for inflation.

President Barack Obama, whose health care reform plan expands Medicaid, has since left some room to negotiate on trimming Medicaid to address the budget crisis. The president, though, remains opposed to the fundamental changes being suggested by Republicans.

The rate a state receives federal money varies from state to state, with a minimum of 50 percent reimbursed. Depending on the wealth and economic data of the state, the total can eclipse 80 percent. If a state’s rate was 65 percent, for example, it would receive $65 in federal money for every $100 spent on Medicaid.

That leaves the states to decide how much they spend – and, therefore, how much they get back. In 2009 Rhode Island and Nevada qualified for the same reimbursement rate, according to Kaiser Foundation data on Medicaid spending. But Nevada spent about $1,500 per person below the poverty line, while Rhode Island spent nearly $5,600. That meant the rate of federal funding for Medicaid came out to about $2,700 in Nevada and almost $9,800 in Rhode Island.

“You have a range of very odd and perverse incentives,” said Kip Piper, a health policy expert who has advised government and businesses on Medicare and Medicaid policy.

The medical system is so complex and the political system so inherently political that meaningful reform becomes nearly impossible absent a crisis.

But increasingly, talk of reducing the $1.5 trillion annual U.S. deficit has become bipartisan. Chairman of the Budget Committee Sen. Kent Conrad, North Dakota Democrat, said on “Meet the Press” Sunday that the country is “heading off a fiscal cliff.”

Sen. Tom Coburn, Oklahoma Republican, the leader of the “Gang of Six” Obama currently working on a budget compromise expected in early May, said entitlements like Medicare and Medicaid cannot be left off the table as they chew up such a substantial portion of the budget.

The federal government spent about $250 billion of the total $336 billion spent on Medicaid. Spending has grown by nearly eight percent in each of the last three years including 2011 projections, and by at least 5.8 percent in 11 of the last 13. But growth of the program under Bill Clinton and George W. Bush was actually slow historically.

The Medicaid program, started in 1966 as a part of President Lyndon B. Johnson’s “Great Society,” saw only one year prior to 1994 where overall spending increased by less than 7.9 percent, with top growth rates as high as 34 percent.

Some states have managed to keep costs down, limiting services or eligibility for the program.

“Utah’s program is fairly bare bones compared to other states,” the state’s Medicaid spokeswoman Kolbi Young said.

Meanwhile, wealthy states that spend more on Medicaid have little incentive to spend less; even cash-strapped states considering Medicaid cuts would have to cut $2-$3 for every dollar it saves the state. Severe budget shortfalls have forced states to trim spending anyway, but other state programs like education remain more efficient cuts to make.

“Everybody responds to incentives, including states, and including members of Congress,” Piper said.

Piper, who has 28 years of experience working in both government and private consulting roles, including directing the Medicaid program in Wisconsin, said the vast array of variables in the health industry and complex, interlinked incentives they create leave a gridlock making serious political action difficult, as states with robust programs tend to dislike the removal of federal money relied on by the neediest of their people.

Cautioning against viewing Medicaid as separate and discrete from the overall health system, Piper said changes to one would result in ripple effects elsewhere. He also warned that major, rapid cuts to states used to spending a lot would create traumatic lapses in care, and sudden infusions of money dropped on states used to leaner programs with little time to figure out how to effectively use it would be similarly problematic.

The Affordable Care Act would set new baselines requiring states to provide Medicaid to residents making less than 133 percent of the poverty line. This would include uncovered people in many states with lower thresholds. The Congressional Budget Office estimates had said that cost cutting measures in the 2010 reform legislation would reduce the deficit overall even with the growth of Medicaid. But the CBO has tempered expectations of savings, and a Bloomberg Government study released Monday estimates Medicaid would expand by $90 billion over 14 years based on data from 35 states.

Sen. Orrin Hatch, the Utah Republican who is ranking member of the Health, Education, Labor & Pensions Committee, requested in a March press release that Health and Human Services Secretary Kathleen Sebelius waive the portion of the act with the new Medicaid standards, citing a $175 billion collective state budget crisis and stating that a majority of governors have requested waivers.

“Despite repeated calls from our governors to waive such burdensome regulations, Secretary Sebelius has turned a blind eye to the fiscal fiasco the maintenance of effort requirements have generated,” said Hatch, whose state would be among those needing to cater to more people with Medicaid as result of the health care law.

Under the block grant proposal from Ryan’s budget proposal, each state would receive a set amount from the federal government, and would be left to innovate cost saving measures. A letter signed by Democratic governors from 16 states and the Virgin Islands protested the concept, arguing it would expose states already limping financially to the risk of medical costs already rising faster than the economy and tax revenue.

Ten governors from the 20 states that spent the most on Medicaid per person below the poverty line signed the letter.