Why Medicaid Cost Containment Fails To Contain Medicaid Costs

For over thirty years, states have tried and failed to contain Medicaid costs.

And if they continue to do what they’ve always done, then “more flexibility” through block grants – code words for cutting people and benefits from the programs – isn’t going to help. 

This is because the strategies they have used don’t work.  I wrote a few weeks ago about problems with some of the specifics of Florida’s Medicaid reform bill this year.  In this column, I want to add a more global perspective. 

source: US DHHS, 2007

Between 1980 and 2004, total personal health care expenditures in the United States increased by 726%.  Total Medicaid expenditures increased by 1,028%. 

That’s a pretty compelling opening argument against the four common “cost containment” strategies -- cutting provider rates; reducing the number of people eligible; eliminating chronic disease detection, prevention, and management services; and making recipients pay for services.

These strategies have two things in common that lead to higher Medicaid costs – they cause patients to become sicker before getting care, and they force Medicaid to pay higher-cost providers. 

Consider the well-documented problem with cutting provider rates, a most favored state strategy.

Providers often opt out of the Medicaid program when rates are cut.  A Merritt Hawkins and Associates 15-city survey in 2009 found that only 65% of family practice physicians, 44% of orthopedic surgeons, 44% of dermatologists, and 41% of obstetrician/gynecologists accepted Medicaid.

The American Psychiatric Association reported in 2010 that 46% of psychiatrists were accepting no new Medicaid patients as of 2008, and only a third were participating fully in the program.  Also, many who do accept Medicaid patients work in community mental health clinics, not as independent practitioners. 

Paying community providers too little doesn’t keep costs down.  It just pushes patients to hospitals.  Medicaid paid for only 10% of all hospital care in 1980, but the percentage increased to 17% in 2004.

Ignoring the needs of the near-poor population is another strategy with the perverse consequence of raising Medicaid costs.

Poverty and illness go hand in hand.  People living in poverty are approximately 50% more likely to suffer from migraines, chronic back pain, chronic neck pain, and heart disease as are people who are well off. 

Yet those are the only people who often qualify for Medicaid. 

This is bad for the program, because people just above the poverty level are often uninsured.  They are around 10% less likely than those below poverty to have a variety of chronic conditions, including migraines, low back pain, heart disease, and cancer. 

But they are also one diagnosis away from poverty and Medicaid.

According to a study published earlier this year by the U.S. Library of Medicine, treatment for localized breast cancer costs the Medicaid program an average of $22,343 after twenty-four months, but the cost of advanced breast cancer averages $117,033 over the same time period. 

When the Affordable Care Act required Medicaid to cover people up to 133% of poverty in 2014, it didn’t go far enough.  200% of poverty would have been far better to reduce Medicaid costs, provided the program offered a full range of early disease detection and health maintenance services.

Though it may seem counterintuitive, covering more people with a greater range of services is the way to save Medicaid money.

Here’s an example.  A major expansion in the Medicaid long term care program in the 1980s and 1990s was saving $8 billion every year by 2004.

The expansion was to new home and community-based services, beginning in 1981.

Medicaid paid 50% of the nursing home bill in 1980, but only 44% in 2004.  It accomplished this by increasing Medicaid’s share of payments for home health care from 12% in 1980 to 32% in 2004.  Because many home health care services cost less, the overall Medicaid share of long term care payments went from 46% for of total long term care costs in 1980 to less than 41% in 2004.

If Medicaid had continued to spend the same percentages on nursing and home care in 2004 as it spent in 1980, it would have spent $73 billion on these 2004.  Its actual bill was $65 billion – not a small amount, but $8 billion per year less.

That’s a pretty big difference.  Long term care costs increased by 833% in that time frame, to $158 billion.  But Medicaid long term care costs increased by “only” 738%.

While program expansions are often seen as the culprit in Medicaid growth (the number of people on the program grew from approximately 20 million in 1980 to over 50 million in 2004), the long term care experience – where most of the money still goes – suggests something different. 

To save Medicaid money, we should do more, not less, with it, and stop pushing “cost containment” strategies that don’t contain costs.

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