Health Care Reform Center

Sara Rosenbaum, J.D.

Defined by a history of both achievement and controversy, Medicaid has once again become central to the U.S. health policy debate, this time figuring as a key to national health care reform. Since its creation, Medicaid has repeatedly been called on to compensate for the shortcomings of a market-based health insurance system that excludes the poor and the sick. Whether the goal has been to insure poor children and pregnant women, enable people with disabilities to achieve community integration, treat uninsured women for breast or cervical cancer, or compensate for Medicare’s inadequacies in providing care for the elderly poor, Medicaid has been the remedy of both choice and necessity.

Financed jointly by federal and state governments, Medicaid has grown into the mightiest of all U.S. health insurers, covering nearly 60 million people in 2005, with an average federal contribution of 57% of states’ medical assistance costs.¹ Although federal Medicaid funding is enormous, states perpetually struggle financially, as escalating health care costs substantially outpace their economic growth. Problems have intensified during the current recession, given both declining revenues and an enrollment surge.² Even so, many states have sought to extend Medicaid’s reach and have benefited from the economic stimulus effects resulting from the flow of Medicaid funds into the health care system and the local economies of medically underserved communities.

Although Medicaid has been continually reengineered to respond to need, one key element remains absent: coverage of all poor, nonelderly adults. The federal Medicaid policy contains harsh limits on adult coverage because of the program’s original alignment with federal cash-welfare policy, which historically has targeted only certain types of poor people. Apart from special demonstration projects, no federal funds are available to help states finance medical care for poor, nonelderly adults unless they are pregnant, disabled, or parents or caretakers of minor children.

Furthermore, Medicaid lacks a uniform definition of poverty for adults. For children and pregnant women, the program establishes a national income-eligibility floor of 133% of the federal poverty level. There is no similar floor for other adults; consequently, the income-eligibility threshold for those adults who do fall into existing coverage categories can be as low as 17% of the federal poverty level for working parents (Arkansas, 2009) (see map).

Income-Eligibility Thresholds for Working Parents (Expressed as Percentages of the Federal Poverty Level) for Medicaid Programs in Each State.

Data from the Kaiser Family Foundation.

The effect of Medicaid’s coverage limits for adults is the jaw-dropping proportion of poor, nonelderly adults who are uninsured: in 2007, more than 45% were uninsured and only 15% had employer coverage. Over the period from 2006 to 2007, Medicaid reached only 27.7% of poor adults.³ Now Congress, with active White House support, is poised to eliminate these restrictions and fundamentally transform the program. The three principal reform proposals now pending would eliminate Medicaid’s categorical restrictions on coverage of nonelderly adults while establishing a national eligibility standard pegged to the federal poverty level (see table). July 2009 estimates prepared by the Congressional Budget Office (CBO) for the House bill indicate that by 2019, the Medicaid expansions would, at a 10-year cost of $438 billion, reach an additional 11 million people — nearly 25% of the number who were uninsured in 2008, and nearly one third of the 35 million people who would gain coverage under the House health care reform bill. (The Senate Finance Committee bill, although offering somewhat less generous benefits and being less costly, is projected to have a similarly substantial effect on the uninsured.) This transformation is not without controversy: entitlement expansion attracts philosophical opposition, and states are concerned about taking on increased coverage responsibilities even with considerable additional federal assistance.

It is worth asking “Why Medicaid?” Why not simply subsidize all poor people who do not qualify for Medicaid under current standards and enroll them in health insurance exchanges? The first answer is cost: expanding Medicaid, even with ongoing state contributions, would be far less expensive than expanding the private health insurance market. The CBO’s House and Senate estimates show that, despite its broader coverage for a population that is markedly less healthy than average, Medicaid costs less. According to the CBO’s estimates for the House bill, per capita federal costs in 2019 would be $5,926 for coverage through an exchange, as compared with $1,826 for coverage through a Medicaid expansion. States will continue to bear a portion of the cost of Medicaid, which explains in part why it will be less expensive. In addition, Medicaid generally pays providers less than commercial insurers do, contains no profit component, and has lower administrative overhead costs than do private insurers.

But if cost were the only consideration, an alternative might be for the federal government to make insurers’ ability to participate in an exchange — a market expected to serve some 30 million Americans — contingent on their agreeing to offer deeply discounted products to the poor. The cost of covering poor adults could thus be spread across all exchange plans, averting the need for further Medicaid expansion. Such an approach, however, would reduce coverage and quality for everyone in the exchange and would leave poor adults (who are disproportionately in poor health and lack the resources to supplement what insurance covers) especially vulnerable. Indeed, exchange-based insurance products can be expected to be geared toward a reasonably healthy, relatively young, working population with at least a modicum of disposable income. Medicaid, by contrast, is explicitly configured to meet the needs of a poor, less healthy population by offering broader coverage and greater protections against cost sharing, both of which are very important for people with chronic physical or mental illness.⁴

Furthermore, Medicaid is structured to address the realities of the health care system that currently serves the poor. Medicaid’s original goal was to “mainstream” the poor into the health care system. Although the program has had a profound effect on access to care, the health care system in many parts of the country remains segregated, with low-income communities heavily reliant on a health care safety net consisting of community health centers, public and children’s hospitals and other hospitals that treat a disproportionate number of poor people, and local health agencies. Comprehensive Medicaid managed-care systems build on this underlying provider system and often possess specialized expertise in managing care for a poor, isolated, and high-risk population. Ninety-six million people — a population that is disproportionately low-income and Medicaid-dependent — live in medically underserved urban and rural communities where the health risks are higher than average and the primary care resources are insufficient.

Health insurance reform alone cannot possibly alter this underlying reality, which will take years of investment. Indeed, conventional insurance expansions alone could worsen conditions in these communities because of thinner coverage, higher cost sharing, and the absence of Medicaid’s special payment rules for health centers and hospitals that serve a disproportionate share of indigent patients, which will continue to treat millions of uninsured people even after reform.

At the same time, retaining Medicaid as a fundamental building block of health care reform carries with it a need for three types of long-term investments. First, federal financing arrangements need strengthening. Continued reliance on fragile state economies makes Medicaid a high-risk financial proposition for states.

Second, certain basic investments are essential. Payment rates for primary and specialty care need to be increased if greater provider participation is to be attained. Indeed, in many states payment rates are so low that even with a substantial increase, Medicaid would still be a bargain.

Finally, Medicaid needs to be able to work toward improving the underlying health care system and to integrate these efforts with those expected of exchange insurers. These efforts encompass investments in facilities, workforce, health information technology, and quality-improvement strategies. They also include the joint development of high-quality provider networks so that care remains stable even as slight income fluctuations expose millions of low-income persons to the risk of frequent shifts between Medicaid and exchange coverage.

No potential conflict of interest relevant to this article was reported.

Source Information

From the School of Public Health and Health Services and the School of Medicine and Law, George Washington University, Washington, DC.

This article (10.1056/NEJMp0909449) was published on October 14, 2009, at NEJM.org.

References

1. Letter from Douglas Elmendorf, Director of the Congressional Budget Office, to Senate Finance Committee Chairman Max Baucus, October 7, 2009.
2. Kaiser Commission on Medicaid and the Uninsured. State fiscal conditions and Medicaid. September 2009. (Accessed October 13, 2009, at http://www.kff.org/medicaid/upload/7580-05.pdf.)
3. Idem. State health facts online. (Accessed October 13, 2009, at http://www.statehealthfacts.org/.)
4. Ku L, Broaddus M. Public and private health insurance: stacking up the costs. Health Aff (Millwood) 2008;27:w318-w327. [Free Full Text]