2005 February – Backgrounder #43 – Reform⁠i⁠ng Flor⁠i⁠da’s Med⁠i⁠ca⁠i⁠d Program W⁠i⁠⁠t⁠h Consumer Cho⁠i⁠ce and Compe⁠t⁠⁠i⁠⁠t⁠⁠i⁠on

By: The James Madison Institute / 2005

Executive Summary

Florida’s Medicaid Program is in serious trouble. It suffers from major quality issues as well as a rapid and unsustainable growth in spending. Although Medicaid is a needed program for those who otherwise would “fall between the cracks” in our health-care system, the current plan perversely encourages people to “fall between the cracks”.

At the heart of the problem is the lack of a free market in the payment for and delivery of health services to beneficiaries. The system is fundamentally flawed because it uses a centrally administered pricing scheme to pay providers. This payment framework ensures that reimbursements are not set at market levels, and it renders the program inherently inefficient in terms of both quality and cost. The quality issue is as crucial as cost because, in general, no one receives lower quality care than fee-for-service Medicaid patients.

In short, there is no markeplace in a tranditional sense for Medicaid. The solution lies in the creation of a market similar to those for other products. This involves creating an Insurance and Provider Exchange (IPE). It would give buyers incentives to economize on the use of health care services, and it would take advantage of providers’ desire to maximize their incomes. In this state-operated health mart, Medicaid would promote competition among providers, generate easy-to-understand information for beneficiaries, and set the rules in terms of minimum benefit packages and quality requirements.

HMOs, provider networks, nursing homes, and others interested in offering services to the Medicaid population would submit bids for various levels of coverage. Medicaid would award “grants” to beneficiaries equal to the lowest bid for each type of service needed in each area. Administered pricing would be replaced by market prices. Enrollees would be free to upgrade to more expensive plans or purchase care with their own funds. This process would reward efficient, low-cost providers and produce competition that would force cost savings, quality enhancements, and innovations in the delivery of Medicaid services.

Beneficiaries also would be free to use their grants to enroll in private health plans. Beneficiaries whose incomes are above the poverty line would be awarded grants on a sliding scale to encourage them not to drop private health insurance. An additional reform might allow small-group private firms to purchase at the IPE. This would reduce Medicaid enrollment by allowing these firms to offer lower cost insurance. It would alsoassist in providing more choices to Medicaid beneficiaries if firms wishing to sell in the small group market were required to offer products to enrollees as well.

These reforms, along with modern risk adjustment tools, would prevent any significant risk selection. In addition, market distorting practices such as formularies and certificate of need determinations would be eliminated. Once such broad-based Medicaid reform proposal has already been submitted by the State of South Carolina.