What Real Medicaid Reform Looks Like

North Carolina rejects the failed ‘Kasich model.’

Two weeks ago, North Carolina Gov. Pat McCrory signed into law a bill to reform the Tarheel State’s massive and rapidly growing Medicaid program. The plan to overhaul the joint federal-state health insurance program for poor families now moves to Washington for approval by the Obama Administration.

Despite enormous pressure to do so, the state emphatically rejected Obamacare’s optional Medicaid expansion and instead embraced reform based on insurer competition and consumer choice. That’s big news.

McCrory’s deft leadership on the issue puts to shame his fellow GOP governors Mike Pence of Indiana and John Kasich of Ohio, who both have taken the easier path of simply going along with Obamacare’s offer of ‘free’ money to expand welfare.

Reform yes, expansion no. North Carolina is one of 20 states to reject Obamacare’s optional Medicaid expansion to date. By contrast, Ohio, under presidential wannabe Kasich, has enrolled an additional 620,000 Ohioans, giving the Buckeye State the dubious honor of having 25 percent of its citizens on Medicaid, one of the highest percentages of any state.

According to Jonathan Ingram, research director for the market-oriented Foundation for Government Accountability, the Ohio expansion ‘has been an utter disaster. … [It] has already run $1.5 billion over budget, and more people are enrolled than the state thought would ever sign up.’

North Carolina Medicaid currently covers about 1.9 million residents, nearly a fifth of the state’s population. Expansion advocates wanted to add another 500,000 people to the rolls, including tens of thousands of childless non-disabled adults. McCrory and a Republican-majority legislature said no, opting to fix the program instead.

And for good reason. The program is broken. Bureaucratically antiquated and growing faster than state revenues, it has gone over budget in three of the past four years, and its taxpayer cost and total enrollment have both doubled over the past decade. Last year, it cost North Carolina taxpayers $15 billion, nearly a third of the budget and more than twice what the state spent in 2003.

When fully implemented four years from now, the state’s reform is expected to shave 2 percentage points off of the existing spending growth rate. That would save taxpayers hundreds of millions of dollars every year.

Reform is imperative. The national Medicaid program, too, is broken, having grown over the past five decades to $460 billion a year ($200 billion of that comes from state taxpayers, the remainder from federal taxpayers), and yet it provides poor access to doctors and has remarkably high fraud rates. And it’s growing by an unsustainable 6 percent a year. Medicaid has become the largest item in most state budgets and the third largest federal entitlement after Social Security ($900 billion) and Medicare ($600 billion).

So far, more than half the states have taken Obamacare’s offer of ‘free’ money to fund an expansion of an unreformed Medicaid to cover everyone under 138 percent of the federal poverty level. Predictably, enrollment has soared, swelling the national rolls by nearly 11 million to more than 70 million total, or one in five Americans. More uninsured Americans have gained coverage under Obamacare’s Medicaid expansion (10.8 million) than through its ‘marketplace’ exchanges (9.9 million). But as health reform expert Josh Archambault explains: ‘According to recent analysis of the 17 states where Medicaid expansion enrollment numbers have been made available, total enrollment has exceeded the projected maximums by 73 percent. Not one single state [has seen] enrollment numbers below projected maximums.’ (Emphasis added.)

Which bodes ill for expansion states, because over the next five years the current teaser rate is slated to be phased out, and states will be required to start kicking in some of their own money to fund the expansion. As fiscal pressures mount, it’s extremely likely that Congress will ratchet up the states’ required contributions, forcing expansion states to make tough decisions about raising taxes, cutting benefits, reducing enrollment or even ending the expansion altogether.

A more promising course. North Carolina wisely chose to avoid that whole tangle of dilemmas. Instead, it’s charting a safer, but also more promising, course toward a future of competition and consumer choice. The state is betting that it can simultaneously save money and improve health outcomes for its poorest citizens by forcing private health plans to compete with each other for enrollees’ business.

And that bet is a safe one, based on the positive results of other consumer-choice experiments, like the 55-year-old Federal Employees’ Health Benefit Program (FEHBP) and the decade-old Medicare Advantage program, an option with Medicare that nearly a third of Medicare seniors have joined. These experiments have proved beyond any cavil or doubt that consumer choice works better than bureaucracy.

To date, three states have adopted a consumer-choice model, all of them with the support of Republican governors: Kansas (Sam Brownback), Louisiana (Bobby Jindal) and Florida (Jeb Bush). So far, all three have reduced costs without harming quality. Importantly, all three have been approved or extended by the Obama Administration. Soon, if all goes well, North Carolina will join that small but happy band.

How will it work? Rather than simply pay for each hospital visit or medical procedure — the traditional ‘fee for service’ model — the Tarheel State proposes to start paying competing insurance companies a flat monthly fee for each patient enrolled, adjusting fees for sicker patients upward to reflect their higher costs. Taxpayers would no longer be liable for cost overruns; that risk would now fall on the insurance companies. Three insurers would be given contracts to compete for Medicaid customers statewide. Meanwhile, up to 10 smaller entities, led by groups of doctors and hospitals, would be authorized to form networks to provide care for patients in six geographic regions.

Shorter version: Instead of expanding the welfare rolls, North Carolina is going to start treating its patients less like dependents and more like customers. And save money in the process.

Here’s hoping more states emulate the Tarheel State and eschew the failed ‘Kasich model.’

Dean Clancy, a former senior official in the White House and Congress, writes on U.S. budget and constitutional issues. Follow him at deanclancy.com or on Twitter at @deanclancy.

[Originally published at USNews.com, October 9, 2015. @USNewsOpinion. Republished at deanclancy.com.]

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