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Capretta: Medicaid Overhaul Must Focus on Long-Term Care

With costs pushing budgets to the breaking point, Republicans need to show that states can manage the most challenging part

Congressional Republicans want to convert Medicaid into a block grant — an idea the Obama administration strongly opposes. The federal government would provide fixed levels of funding to the states, and the states would be given the freedom to manage the program with fewer federal restrictions.

This is the right direction for changes. Medicaid’s costs are pushing the federal and state budgets to the breaking point, even as there is growing evidence that the program’s participants are all too often poorly served.

But to win the argument over block grants in Congress, the GOP needs to show that states can manage the most challenging part of Medicaid — the long-term-care component.

Medicaid’s enrollment is dominated by younger families with children, but most of Medicaid’s costs are for the elderly and disabled who need Medicaid to help with the normal activities of daily life, including eating, bathing and transportation. (Many of the elderly and disabled also rely on Medicaid to pay for health service costs not covered by Medicare.) According to the Kaiser Family Foundation, the elderly and disabled account for about 25 percent of total Medicaid enrollment but 65 percent of the program’s spending.

Today’s Medicaid program works against budget discipline. When a state spends $1 for medical services, the federal government picks up about 60 cents of the bill (on average). This “matching system” provides incentives for more, not less, spending. States can cut their budgets by moving non-Medicaid expenses into the Medicaid program. And efforts to make Medicaid more efficient are unattractive because state legislators must produce $2.50 in savings to improve the state budget by $1; the first $1.50 goes back to the federal treasury. That’s not a formula that appeals to politicians.

Recently, I worked with a team of consultants and the Texas Public Policy Foundation to produce a Medicaid long-term-care services-and-supports strategy for the state of Texas. This plan can help congressional Republicans make the case for a federal block grant.

Today, states try to manage long-term-care costs and quality through regulations and supply controls, but these efforts are never a match for the cost pressures that build when services are “free” to the users — and when rising use of services increases the incomes of those providing the services.

The solution is to enlist the support of those enrolled in the program in a cost discipline effort. The starting point is to calibrate financial assistance for long-term-care services and supports to the level of disability and financial needs of a Medicaid applicant. The most severely disabled applicants — as determined by an independent evaluator — with the lowest level of personal resources should get the maximum “allotment,” set at the level necessary to cover the range of support services needed to stay in the community. Other applicants with lesser disabilities or more personal financial resources would get a percentage of the maximum allotment commensurate with their circumstances.

Whatever the level of the monthly allotment, the beneficiary — or the beneficiary’s family or designated caregivers — would be fully in control of its use. States would certify and oversee the service providers, but the Medicaid participants, and their support networks, would make the decisions about which of the eligible service providers would help them with their daily needs.

With the patients in charge of the available resources, those providing services to them would be forced to improve the quality and efficiency of what they do, lest they get pushed aside in favor of a higher-value competitor. Funding left unused in one month would automatically be available for a beneficiary’s use in future months.

This change would keep many patients out of the nursing home. But states could cut costs for nursing home care, too, by creating a preferred network with competitive bidding. Quality of care would improve as well.

These changes would take time to show results. Other changes, such as broader use of managed-care arrangements and closer evaluation of each family’s ability to pay, could cut costs in the short term. But stabilizing Medicaid permanently will require more fundamental changes. By embracing a long-term-care overhaul, states could demonstrate to Congress that fundamental change is well within reach.

James C. Capretta is a visiting fellow at the American Enterprise Institute and a senior fellow at the Ethics and Public Policy Center.

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