February 1, 2017

Early experience with federal health coverage suggests how future Medicaid reforms may work

Proposed Medicaid reforms are similar to the capped federal financing system in place during the ’50s and early ’60s, when states generally reimbursed a much smaller proportion of health care for the needy.

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Andrew Goodman-Bacon (Vanderbilt University)

The United States’ early experience with federally financed health care during the 1950s and early ‘60s can provide insight into the possible outcome of proposed Medicaid reforms, write Andrew Goodman-Bacon, assistant professor of economics at Vanderbilt University, and Sayeh Nikpay, assistant professor of health policy at Vanderbilt University School of Medicine, in a “Perspective” article for the New England Journal of Medicine titled, “Per Capita Caps in Medicaid: Lessons from the Past.”

“Under the current Medicaid financing system, the federal government pays for 50 to 100 percent, for some populations, of the cost of state Medicaid programs, regardless of the total cost,” said Nikpay. “Under the proposed reform, the federal government would pay only up to a fixed amount per person in the program.” This arrangement is called a per-capita cap, and it has been proposed as a way to encourage states to seek innovative ways to bring Medicaid costs down by making states responsible for all costs above the cap.

This is actually an old idea, Goodman-Bacon says—it’s how the federal government financed health care for needy Americans during the decade prior to Medicaid’s establishment in 1965.

Sayeh Nikpay (Vanderbilt University School of Medicine)

It did indeed keep the states’ health care spending down, but it did that chiefly by limiting enrollment eligibility and restricting the number and kinds of services approved for reimbursement. For example, under the pre-Medicaid system, 11 states excluded children altogether, Kentucky limited reimbursements to lifesaving care and Montana only reimbursed costs for services that preserved a person’s sight.

“When we moved from a capped financing system to an open-ended system when Medicaid began, we saw costs rise, but it wasn’t because states suddenly became a lot more inefficient overnight. What happened was that many, many more people were able to get on the program than there were before.”

Additionally, while the cost-per-patient did grow 68 percent after Medicaid was established, costs grew much less quickly than they did for patients on private insurance, which increased by 86 percent.

“If the past can inform us about the current proposal, introducing per-capita caps will therefore likely result in large cuts to the program rather than innovation to reduce costs,” said Nikpay. “Furthermore, Medicaid spending per enrollee is already quite low, yet the program provides tremendous benefits to individuals, states and the safety net. So, while reducing low-value care should always be a goal of health policy makers, Medicaid already provides good value. Per- capita caps are a blunt instrument to reduce costs.”

The article is currently available online at the New England Journal of Medicine and will appear in the March 16 print edition of the journal.