How States Can Innovate With Medicaid

With the House of Representatives’ vote to repeal the Affordable Care Act and replace it with a slimmed down version of the American Health Care Act that was filed earlier this year, all eyes are now on the Senate to see what will emerge from that chamber.

Regardless of the outcome, one thing is certain: Medicaid costs are ballooning for states that broadened eligibility under the Affordable Care Act, and the Trump administration and Congress are going to look for ways to rein in federal spending on Medicaid.

The Trump administration has made clear its vision for Medicaid, the massive federal-state program that serves those with low incomes, people with disabilities, and the elderly: Limit the federal government’s investment in the program on a per member basis and give the states the ability to manage the program the way they want.

This federalist approach is consistent with the way the administration is addressing other major policy areas: reduce regulation, limit federal investment, and let responsibility for managing the programs devolve to the states.

The significant growth in federal Medicaid spending results from the growth in people covered by the program. In Massachusetts, for example, more than 1 in 4 residents is covered by Medicaid.

Reforming Medicaid does not have to be an all-or-nothing approach, where millions of people are thrown off of the program to reduce the budget. The states, which administer Medicaid, are closest to the problem and also are in the best position to develop solutions for Medicaid. With leeway to innovate and the pressure to achieve savings, the circumstances are ideal for change.

Since the program’s inception, the federal government has had regulations in place that mandate certain services be provided and that also set rules around eligibility. Those states seeking to innovate have had to secure a waiver from those rules. Governors historically have not liked the waiver process, which can be time-consuming and subject to political considerations.

With a clean slate, here are four things that states could do to improve the care that is provided to Medicaid recipients leading to better health outcomes and healthier communities, while also creating cost savings.

  • Fund non-health services that can lessen illness and improve health: People who study the Medicaid population have known for decades that there are non-health services such as case management that are just as important to a person’s health as medical care. A homeless person who gets housed and receives help in managing their chronic medical conditions will be healthier, more productive, and will cost our system less. Case management costs a fraction of an encounter in a hospital emergency department. It is less costly to move a family with a child who has asthma because of the presence of mold than repeated medical visits and hospitalizations. We can be smarter in what we fund and how we fund it.
  • Invest in community services that can eliminate the need for more costly services: Patients who are elderly and disabled prefer to receive care at home whenever possible and it is in everyone’s interest for them to receive care at home. The supports to fully enable home care, however, are still not in place.  One simple example is post-discharge home visits. When elderly patients are discharged from the hospital, the instructions can be highly confusing and that can make patient adherence very challenging. The data shows that simple interventions like having a nurse or pharmacist visit at home with the patient post-discharge to ensure they understand what is required of them can dramatically improve compliance, thereby lowering the rate of hospital readmission. States will now have carte blanche to design solutions that might have previously been considered “unconventional” but that are proven to work.
  • Restructure the pharmacy program: State Medicaid programs have historically been limited in the changes they can make to the drug formulary and the methodology they use to pay for medications. Freed from these restrictions, state Medicaid programs can change their formularies and can engage in more direct negotiations with drug manufacturers. Pharmaceutical manufacturers receive a huge portion of their revenue from Medicaid, they should be willing to come to the table knowing how much is at stake.
  • Expand Managed Care: States have made managed care available for those on Medicaid since the 1980s but the enrollment has not reached the level it could or should have. State Medicaid agencies have begun moving to full managed care, even for populations that traditionally have never been in managed care, such as the elderly and those with disabilities. Managed care enables the states to limit its expense to a per-member per-month fee, and it is up to health plans to provide needed care for that fee. The health plans carry the risk. Plans have been doing this for a long time and they know how to fairly and effectively manage care. A subset of health plans is skilled in the Medicaid population, and they should lead the way.

Medicaid needs to be fairly funded and we must take a compassionate approach in the administration of the program. Cutting eligibility for families, seniors, and people with disabilities will create needless harm. Whatever happens in Washington, the dollars are never going to be large enough. In fact, they haven’t been large enough for many years, and that is why Medicaid underpays providers like hospitals and nursing homes for the cost of care.

Governors and their Medicaid directors need to be thinking now about what they can do differently when freed of federal constraints. The dramatic growth in the program and its cost is surely a problem. It also, however, creates the opportunity for true innovation.

We are about to witness the creation of 50 state laboratories for improving health care. With shared learning and collaboration, we can do things better than they are done now.


Gerard A. Vitti is the founder and CEO of Healthcare Financial Inc., a company that works with managed care organizations by assisting individuals in obtaining health care benefits.

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