What Really Ails Medicaid

For the third time this decade, states are looking to Congress for help with their Medicaid costs. At least the Big Three auto manufacturers only come around once a generation.

States got a straight up $20 billion bailout for their Medicaid programs in 2003. Later that same year, Medicare Part D was signed into law and went into effect in 2004. Ever since, states have offloaded tens of billions of dollars in prescription drug costs to the federal government for their Medicare/Medicaid dual eligible populations.

Now in 2009 the states are back at the federal trough. This time a bailout of up to $100 billion is being seriously discussed.

All of this is despite the fact that since 1966 every state has had an open-ended claim on the federal treasury for their Medicaid costs. Whatever a state spends on Medicaid, within very broad parameters, it receives an average federal match of nearly 60 percent. In poorer states it exceeds 70 percent.

That federal match has set in motion two dynamics that overwhelm every discussion of Medicaid in state capitals: "If we spend one dollar on Medicaid we get two 'free' dollars from the federal government," or "We can't cut Medicaid because for every dollar we cut we lose $2."

The result of these incentives is that the cost of Medicaid to the states and to the feds has continued to skyrocket disproportionately.

It is worth noting that Congress only mandates a floor of services and populations that states must cover under Medicaid. All 50 states exceed that floor and cover "optional" benefits and populations to varying degrees. Those optional items receive the same federal match percentage and add considerable cost at each state's discretion. States that have chosen rich optional packages are at more fault than states with leaner programs.

In December, President Bush authorized the bailout of the Big Three automobile manufacturers. That was a mistake as it merely subsidized bad management and bloated union contracts, which has led to a flood of requests for bailouts from virtually every other industry, including adult entertainment (but at least Larry Flynt was joking).

However, the Detroit bailout did contain two appropriate provisions. The money was a loan and it came with key requirements for fundamental restructuring designed to ensure permanent solvency.

The same two standards should be part of any Medicaid bailout and the latter should aggressively target the tens of billions of dollars in fraud and abuse that occurs in Medicaid annually. According to the New York Times and a private study, New York Medicaid alone loses more than $10 billion each year to fraud and abuse.

States should have to apply individually for their loan with a detailed plan for serious, long-term reform that includes the following:

  • First, states must post online for public access all Medicaid claims and patient encounter data. It imperative this information is individually de-identified. All facilities that accept Medicaid dollars must be listed by name and include the amount they received and the number of patients they treated. Gov. Mark Sanford in South Carolina was the first leader to create a version of this transparency. Medicaid spending is among the most opaque in all of government. It desperately needs sunlight. This is a taxpayer right-to-know issue.
  • Second, insist on enhanced use of (and 100 percent by a date certain) of electronic remittances/electronic fund transfers for accuracy to and from providers. This would save on paper printing costs and postage while increasing accuracy and timeliness of payments for honest providers.
  • Third, make a bailout conditional on states implementing aggressive predictive modeling prior to payments being sent to providers. These technologies have been used by credit-card companies for years. They catch outlier billing practices before money is sent and would move Medicaid away from its traditional, slow-footed "pay and chase" model that is a magnet for criminals.
  • Fourth, require biometric identification for Medicaid patients to access services in lieu of paper or plastic cards which are easily lost, stolen and forged. This would make it considerably more difficult for fraudsters to appear at multiple pharmacies and emergency rooms to run up huge bills.

If Congress insists on a third federal bailout of state Medicaid programs this decade, then at the very least it should aim to not have any more in the future. Taxpayers cannot afford it.

Newt Gingrich is a senior fellow at AEI. Jim Frogue is state project director at the Center for Health Transformation.

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