Health Care Reform From the Bottom Up

Published September 3, 2015


(To read the full version of Mr. Capretta’s report on which this column is based, click here.)

For many years, Republican politicians, both nationally and in the states, have called for converting the federal Medicaid program, or at least portions of it, into a block grant. The latest example is the well-conceived health-care-reform plan proposed by Wisconsin governor and GOP candidate for president Scott Walker.

There are good reasons for supporting a Medicaid block grant. The current method by which Medicaid’s costs are split between the federal government and the states — the federal government automatically covers a certain percentage of each state’s costs, based on a formula that takes into account the state’s average income — is the cause of much dysfunction and waste. The federal government pays, on average, 57 cents of every dollar spent by the states, no matter how much a state spends. This is an important reason for rapid Medicaid spending growth. It is much easier than it otherwise would be for state policymakers to approve higher Medicaid spending, because much of the added expense will be paid for by taxpayers located in other states. The current approach also undermines political accountability, because neither level of government is fully in charge. A block grant would force the states to take responsibility for all aspects of Medicaid because any spending beyond the federal block grant would come entirely out of state funds.

As important as it is to push for changing how Medicaid is financed, it is just as important for state leaders, especially those who have been opposed to the Affordable Care Act and its expansion of Medicaid, to focus on what they would do differently if they were given the opportunity to run the program without federal interference. In fact, the best way to promote a Medicaid block grant is to demonstrate how it would help improve the program’s performance. Governors and other state leaders who have resisted the ACA should feel a special sense of urgency to articulate — and demonstrate — what they would do differently if they were given the authority to implement reform plans based on markets and consumer choice rather than federal control.

But is that even possible? Can states move forward with reforms even without a block grant? And, if they can, why is a block grant even necessary?

It turns out that, yes, in theory, aggressive use of what is known as “section 1115 waiver authority” (referring to a section of the Social Security Act) can allow states to move forward with far-reaching Medicaid-reform plans. Waivers of this kind allow states to operate their programs outside of the normal rules, as long as the reformed program does not require additional federal funding. Further, the ACA included a new waiver authority — under section 1332 — that allows states to take control of that law’s funding for premium credits and cost-sharing subsidies provided to low- and moderate-income households getting their health insurance through the exchanges. In effect, the ACA allows states to ask for these funds in a flexible block grant, beginning with calendar year 2017. Moreover, section 1332 funding can be combined with more flexible Medicaid funds in a mega 1115-1332 waiver program, allowing states to receive one large funding stream, to be used in accordance with an alternative plan for health-care reform drawn up by state officials. This combined waiver authority provides an opportunity for state leaders to move health-care policy in a very different direction from current Medicaid policy and the strictures of the ACA.

There is precedent for federal approval of a block-grant-like funding plan in Medicaid. In 2009, Rhode Island and the outgoing Bush administration reached an agreement in which the state’s federal Medicaid funding would be capped, but in exchange the state would be freed from much of Medicaid’s extensive red tape. It wasn’t exactly a block grant; federal funds were provided using the regular “matching” formula, but only up to the cap. Nonetheless, it was definitely a step in the direction of a block grant. And the reforms Rhode Island implemented under this more flexible arrangement were found to be effective at controlling costs and improving the quality and integrity of the program.

In today’s context, with full ACA implementation now in its second year, it is important for conservative governors and state leaders to think even bigger than a Rhode Island-like effort. What is needed a far-reaching market-based alternative vision to the current Medicaid/ACA construct.

The starting point for reform is the recognition that Medicaid is really two distinct programs. About two-thirds of the program’s beneficiaries are low-income, able-bodied adults and their dependent children. The rest are disabled and elderly, with significant needs beyond traditional medical care. States must develop separate reform plans for these very different populations.

For the able-bodied and their children, states should put in place a program to integrate Medicaid with a larger plan to reform the health-insurance marketplace:

• Income-Tested, Defined-Contribution Premium Assistance. With an 1115-1332 waiver, states can pool Medicaid funding with the ACA’s premium credit funds and cost-sharing subsidies into a large pool for a redesigned premium assistance program. The premium assistance would come in the form of defined-contribution payments — meaning the amount an individual would get would be the same regardless of the insurance plan he selected. This design would ensure the participants were cost-conscious. The defined-contribution payments would be set based on a combination of household income and some measure of the premium necessary for an average-cost plan.

•​ State-Regulated Insurance Offerings. The states, not the federal government, would establish regulations for the insurance offerings. The state could choose to abandon the “essential health benefit” requirements of the ACA in favor of a more flexible approach. This would allow insurers to tailor coverage to the preferences of consumers.

•​ State-Determined Mechanism for Choosing Plans. States could choose to retain the ACA exchange as one mechanism for enrolling in coverage, but it could also allow subsidy-eligible participants to use other mechanisms to select and pay for an insurance plan. This could include privately-run insurance exchanges and traditional insurance brokers.

•​ Promotion and Use of HSA Options. States should follow Indiana’s lead and promote consumer-directed care in the form of Health Savings Accounts (HSAs). Indiana has pioneered HSA use in Medicaid through an 1115 waiver. Participants get a high-deductible insurance plan and a HSA-like account and, in most cases, are required to make their own monthly contributions to the HSA. This approach fosters personal responsibility and ensures the participants in the program are as interested in eliminating unnecessary costs as are the state’s taxpayers.

For the disabled and elderly, states should continue to push for empowering the beneficiaries and their caregivers to make choices for themselves about how to use Medicaid’s resources. For instance, states could provide a predetermined level of financial support to the frail elderly and persons with disabilities based on the acuity of their disability and their family financial resources. The beneficiaries and their caregivers could then use the resources to select the services they need from a preapproved list of vendors, who would compete on price and the quality of the services they provide. Money left over at the end of a year could be used to supplement funding in subsequent years, and disabled or elderly Medicaid beneficiaries in need of nursing-home services would be handled separately. States could improve the quality and cost-effectiveness of such care through more aggressive use of competitive bidding.

All of these reforms could be pursued through an 1115-1332 waiver program. But, of course, the catch with waivers is that they are granted entirely at the discretion of the federal government. The states have every right to ask for them, but there is nothing guaranteeing federal approval. And the Obama administration has made it clear that it will grant waivers only to states that are pursuing goals the administration favors.

That is why a block grant, or something approximating it, is necessary — to give the states the certainty that they can proceed with effective reforms without first needing permission from the federal bureaucracy.

But even without a block grant in place, states should move ahead with plans for reforming their programs. A new administration will be taking office in January 2017, at the same time that section 1332 waivers can become effective. A new window of opportunity for greater state flexibility could therefore open up at that time, and states will need to begin planning sooner rather than later if they want to be ready to take advantage of it.

There is also value in states’ developing compelling, market-based plans for health-care reform, even if such plans meet with continued resistance in Washington. These plans can provide a clear contrast with current policy and help other like-minded state leaders to communicate with the electorate about what would be possible if power and authority over the health system were to move from the federal government to the states.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute. This article is based on concepts developed in his most recent paper, “Nebraska’s Department of Health and Human Services and Medicaid Reform,” published by the Platte Institute for Economic Research.

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