Policy Reports
Reforming North Carolina’s Medicaid Program

May 9th, 2011

Executive summary

Medicaid is a program in crisis – poorly serving many enrollees and taxpayers. Total Medicaid spending at the federal and state levels has increased from $72 billion in 1990 to over $400 billion in 2010. Low Medicaid provider payment rates in many states result in access problems for Medicaid recipients and an overuse of emergency care for nonemergency purposes. Economists have shown that Medicaid’s payment of long-term care expenses discourages saving and retirement planning. Furthermore, Medicaid’s sizeable crowd-out of private coverage (economists estimate it on the magnitude of 60 percent) and the lack of evidence that Medicaid delivers quality care underscore the fact that a substantial amount of public spending on Medicaid could be saved without an adverse impact.

The open-ended federal reimbursement of state Medicaid spending is the primary driver of the program’s problems. This reimbursement encourages states to grow inefficiently large programs because of the ability to pass costs to federal taxpayers. The perverse incentives that encourage Medicaid’s unsustainable growth became exacerbated by persistent state bailouts. When state budget situations deteriorated in the past decade, states received a Medicaid bailout, in the form of an increased percentage of state spending reimbursed. This enabled states to avoid dealing with irresponsible program growth and created a moral hazard problem in which states could look to Washington to rescue them if their programs grew too expensive.

North Carolina’s state taxpayers pay about 36 percent of the state’s Medicaid spending, with federal taxpayers paying the remainder. In North Carolina, an extra $1 of Medicaid spending brings in an extra $1.75 in federal support. Conversely, the state needs to cut $2.75 from its Medicaid program in order to reduce state spending by $1. Thus, it is much easier for states to grow Medicaid than to cut it. In large part, this has fueled North Carolina’s inflation-adjusted per capita Medicaid spending almost quadrupling over the past two decades. North Carolina’s Medicaid spending grew over 20 times faster than the increase in state education spending and over 10 times faster than the increase in state spending on transportation.

Instead of reforming Medicaid’s unsustainable financing mechanism and targeting public assistance to individuals who really need it, ObamaCare worsens existing problems. ObamaCare’s Medicaid expansion will likely add over 600,000 North Carolinians to Medicaid at an annual cost to taxpayers (federal taxes plus state taxes) in the state of around $4 billion. Moreover, the maintenance-of-effort requirement in the law effectively means that states must limit Medicaid spending by cutting provider payment rates or optional benefits. A recent survey of physicians indicated that only 10 percent of them believe individuals who gain Medicaid coverage through ObamaCare will be able to find a suitable primary care physician. Since Medicaid is already too big, the ObamaCare expansion must be repealed.

The most important element of Medicaid reform is to replace the open-ended federal reimbursement with fixed allotments to the states. Doing this will provide states the incentive to reform their programs and stop developing schemes to leverage additional federal dollars. After utilizing its federal allotment, a state would absorb the full cost of additional program spending, so states would form more efficient programs. Fixed allotments would encourage states to control eligibility for their Medicaid programs by limiting the program to individuals who genuinely need public assistance. Greater discipline exercised by states would make future state budget crises less likely.

In order to improve safety net health care, states need flexibility from onerous government rules and mandates. For example, the federal government needs to allow states the ability to reduce the asset exemptions that allow many people to game the rules and qualify for taxpayer-financed long-term care through Medicaid. Greater state freedom to experiment is not only consistent with federalism, it also enables states to be laboratories, where they can adopt a variety of policies and learn from each other about what works and what does not work.

North Carolina should consider a premium assistance model for certain low-income populations in order to increase individual choice and allow improved access to providers. Enrollees would be given a voucher to purchase a private health insurance policy that meets their needs and risk preferences. If federal flexibility is granted, North Carolina needs to impose meaningful income and asset tests for Medicaid on the long-term care side. North Carolina also should increase estate recovery collections after nursing home care to discourage families with means from manipulating the safety net.

One of the most important lessons for state legislators and policymakers is to understand the impact of the open-ended federal reimbursement on state growth and to realize that Medicaid is a national problem, not just a state problem. All states are faced with the same incentive to grow their Medicaid programs because of the federal match. But when all states increase Medicaid enrollment and spending, the result is a very large tax bill. Moreover, unsustainable Medicaid spending is exacerbating the debt crisis at the federal level. If the United States does not get control of this crisis very soon, the problems facing the states now will seem rather trivial. It is paramount that state policymakers put pressure on Washington to reform Medicaid and willingly trade the open-ended federal reimbursement of state spending for freedom from federal roadblocks to make common-sense reforms to their programs.

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