Fair Allocation of Funds Is Key to Medicaid Reform, Advise Health Economists Grannemann and Pauly

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"In this era of national health care reform, failing to reform Medicaid would be a serious mistake"

--Thomas Grannemann and Mark Pauly


How fair is Medicaid to the poor, to providers, and to taxpayers? Designed fifty-five years ago as a welfare program that would provide standard relief for the poorest and most severely disabled members of society, Medicaid today is crippled by major inequities that violate that basic promise.

At a time when proposed Medicaid expansions could add 15 million new beneficiaries to the existing 58.7 million Medicaid enrollees, two leading health economists, Thomas W. Grannemann and Mark V. Pauly, examine the goals of the Medicaid program, how it functions, and how it ought to be reformed. Their comprehensive study, Medicaid Everyone Can Count On: Public Choices for Equity and Efficiency (AEI Press, March 2010), is guided by one fundamental question: What would health care programs for the poor look like if they were based on principles of equity, efficiency, and accountability?

Grannemann and Pauly explain that Medicaid is flawed because of unequal benefits among the states, federal funding that is disproportionate to state needs and resources, and disparities in payment to health care providers. Rectifying these flaws will require substantial changes in the way the program is financed and how it pays providers.

Today, lower-income states spend significantly less on Medicaid per poor person than do higher-income states. Measured on a payments-per-poor-person basis, New York, for example, provides benefits at twice the level of California and three times the level of Texas. Such differences are inequitable not only for the poor, who are treated differently across states, but also for taxpayers in poor states who bear a heavier tax burden because of the many poor families and the few wealthy taxpayers.

Analyzing the reasons for the variation in benefits, Grannemann and Pauly conclude that there is no logical, cost-based explanation for differences in spending among states. Instead, they point to a flawed formula for allocating federal funds to the states--one that could be changed to systematically account for interstate differences in the numbers and needs of the poor, the incomes of state taxpayers, medical prices, and the cost of living.

Controlling costs and redirecting the flow of Medicaid resources are keys to meaningful reform; establishing effective policy guidelines for payments to providers and equitable and efficient parameters for federal and state financing are the levers that must guide this reform. To achieve these objectives, Grannemann and Pauly offer practical guidance for policymakers about eligibility, benefits, care management, provider payment, and federal assistance to the states. The authors:

  • consider the implications of the program's low payment rates and the argument that Medicaid causes providers to shift costs to private payers.

  • identify and suggest new strategies to set payment rates at effective and necessary levels to enable states to access needed services.

  • recommend enforcing stricter oversight and better accountability for supplemental payments paid by states to providers, and basing payment to providers on services delivered, rather than on the setting of the services or type of provider.

  • demonstrate that while Medicaid spending levels are best determined at the state level, the program's financing should be restructured to ensure that the voting public's decision meets the needs of low-income and disabled populations and that the costs are distributed equitably among taxpayers.

Medicaid Everyone Can Count On is a comprehensive reference volume that will become an essential tool on Capitol Hill, in statehouses, and in classrooms. The authors have created a unified and pragmatic guide to the Medicaid program that offers unique insight into the complex interactions among the many stakeholders in America's state-based public health care program. This book is a valuable resource for lawmakers tasked with crafting policies that balance the distinct needs of taxpayers, providers, and the poor--and for anyone seeking to better understand this complex program.

Thomas W. Grannemann is a Boston-area health economist with many years experience in research, academic, and government organizations. Mark V. Pauly is a professor in the Health Care Management Department at the University of Pennsylvania’s Wharton School. Grannemann and Pauly are the authors of Reform Medicaid First: Laying the Foundation for National Health Care Reform (AEI Press, 2009) and Controlling Medicaid Costs: Federalism, Competition, and Choice (AEI Press, 1983).

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