Thursday, December 22, 2016

Spending Reform, Part 3: Medicaid

On Tuesday I presented some numbers indicating how big savings our state could see if we reformed our health care and health insurance industries here in Wyoming. I also pointed out that we might want to await the incoming Trump administration's proposal for how to "repeal and replace" the Affordable Care Act. This last statement surprised some readers, two of whom asked if it is not worth the while to go about these reforms at the state level. 

Normally I would agree, but Donald Trump has promised swift repeal-and-replace action regarding the ACA, and he has strongly indicated that he is generally interested in decentralizing the entitlement structure to the state level. Combined, these two opinions of his tell me that we could save ourselves a great deal of work by letting Trump take the lead on this issue. In the meantime, there are other issues - see my article on education reform - where it would pay off if we decided to be proactive here in the Cowboy State.

Another area where we can definitely be proactive is Medicaid. While Trump will very likely present a free-market oriented reform proposal to Obamacare, it is less likely that he will do anything of the same kind to Medicaid. Trump is not a conservative: he is a mainstream Republican with a healthy business attitude to government. That means reforms to excessively dysfunctional government programs, the ACA being one of them, but it also means he will not go for the core of the welfare state. On the contrary, based on what I know of his advisors I would suggest that he will try to slim down government but also strengthen its welfare-state core. 

In practice, this means concentrating government on what some consider to be its unique advantages, including national defense, some law enforcement and entitlements for the poor. From an ideological conservative or libertarian viewpoint, the poverty-relieving entitlement part should be taken out of the picture. But there are also good economic arguments for removing entitlements from the federal budget: in a country with a $19-trillion economy and 320 million residents, there are going to be enormous inefficiencies and distortions in entitlement programs, even if those programs are limited to benefiting the poor. 

In other words, sound economic arguments could convince President-elect Trump that it is a good idea to let states take full control over poverty-oriented entitlement programs. The largest among those programs, Medicaid, would be the most complicated, but also the most rewarding, program to decentralize.

For this reason, I do believe that Wyoming should take a proactive role on the Medicaid front. A while back some legislators floated the idea of turning Medicaid entirely into an in-state program. this would give Cheyenne full jurisdiction over a program that is now almost entirely run out of Washington, DC. 

There is actually a mechanism in place for a state to obtain full ownership of its own Medicaid program. It consists of a two-step application process with the federal executive branch. I discussed this mechanism with several experts in Washington about the time when Obama had been re-elected. They all told me that it was a waste of time to try anything of the kind so long as Obama was still president. With Trump's presidency only weeks away, the case is much better for Medicaid under full Wyoming jurisdiction.

This would therefore be a perfect point in time for our legislators to start a conversation about getting the federal government out of our state's Medicaid program.

Skeptics will, rightly, ask what the point would be in jumping through the federal hoops, even if those hoops were made easy by a favorable Trump administration. After all, would we not be saddled with the full cost of the program and thereby yet more spending out of a budget that is already structurally under-funded?

Those skeptics are correct, but only if we stop at obtaining full jurisdiction over our Medicaid program. That, however, is only a means to an end, and in fact a rather pointless endeavor unless put in the context of what we can do with an in-state only Medicaid program.

The purpose of bringing Medicaid home is to be able to reform it so that:

a) the program works more in tandem with the rest of the health insurance market here in Wyoming;
b) the costs go down without harming those who have been lured into depending on government for their health care; and
c) we can, eventually, make Medicaid redundant.

The first point is the most important one. Medicaid "in tandem with" private health insurance simply means that people on Medicaid would become health insurance shoppers like the rest of us. The key instrument here is a voucher for health insurance, which is then used to buy private insurance plans. Under the current ACA, such a voucher would not carry much weight on the insurance market here in Wyoming, but if we open the state's Medicaid system to a national market, it will be a lot easier for Medicaid enrollees to find a plan that suits their needs, at a reasonable cost. 

As an example of what a Medicaid enrollee could purchase, consider the following experiment. as of FY 2015, Wyoming spent a total of $566.4 million on Medicaid. If we took over Medicaid from the federal government, this would be the total bill we as Wyoming taxpayers would have to foot. 

Of this total Medicaid cost, $276 million goes toward long-term care and Medicare reimbursements. The rest is mostly acute-care costs, with minor amounts going toward managed care and hospitals with disproportionately high share of Medicaid enrollees among patients. Let us assume that the 55,000 Medicaid enrollees who are younger than 65 share an equal proportion of the remaining $290.4 million. This comes out to $5,536 per person, per year. 

Suppose, now, that we have a family of four who is enrolled in Wyoming Medicaid. Their health care costs the state $21,127 per year. Suppose, now, that we give them a voucher for that amount and send them out on a national health insurance market to buy a plan of their choice. 

Plans in Wyoming tend to be expensive. A representative plan - where there are no tax subsidies - costs this family $19,908 per year. Add to that a $1,500 group deductible and the total annual cost is $21,408. 

To provide coverage under Medicaid we have to assume that the voucher pays the deductible on top of the premium. As a result, the total cost of this representative Wyoming plan exceeds the cap of the voucher. Our Medicaid-enrolled family will have to look elsewhere. 

In Texas, they can find a plan with a premium and deductible that add up to $20,292 per year. The annual savings for the Medicaid system amount to a paltry $835. Nothing to write home about, as we used to say in the pre-e-mail era. 

A plan out of Maryland looks more promising, with a total cost of $16,508 per year. If the family chooses this plan, the Wyoming Medicaid system can save $4,699 per year. Applied to all 55,000 Medicaid enrollees younger than 65, Wyoming taxpayers would save $64.6 million per year. 

These numbers are all obtained under the assumption that the Affordable Care Act remains in place. If a repeal-and-replace reform takes us back to a health insurance market comparable to where it was before the ACA went into effect, there is a very good chance that a nationally applicable Medicaid voucher could cut the cost of the non-65 portion of Medicaid by up to 40 percent, or something in the vicinity of $116 million. 

If we apportion the federal funds for Medicaid, this amount is relatively close to the federal funding share. Under static conditions, it would not allow Wyoming to operate Medicaid completely on its current in-state funding. However, if we add the general health insurance reforms discussed in Tuesday's blog article, the case for a thrifty Medicaid system improves dramatically. If we can reform our health care industry here in Wyoming so that health care costs in general drop by 15 percent, then the cost of health insurance will - over time - adjust itself to that lower figure. That could push the cost of Medicaid in our state down to something equal to what the state is paying.

Even better: once private insurance becomes cheaper, we can encourage private employers to provide health insurance for their employees. (The Affordable Care Act has made it unaffordable for many small businesses to do just that.) Once more employers cover their employees, fewer will need Medicaid and costs will begin to tumble simply by virtue of reforms that give the private sector back control over something that government should never have been involved in the first place.  

Again, the main problem with any reform to our health care and health insurance industries is that Congress has decided to get so deeply involved in both, that states have much less room for its own reforms. It takes much more at the state level to get any reforms done, especially to obtain substantial cost savings, than it did before the ACA.  

That said, there are still things we can do on our own. One of them is to start the process to give Wyoming full jurisdiction over its own Medicaid system, and then move the system as close as possible to a free-market program. 

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