What if Medicaid Enrollees Were Given Cash Instead of Insurance Benefits?

Everything old is new again.

Back in 1989, U.S. conservatives were promoting an approach to Medicare known as “defined contribution,” under which — instead of receiving a certain set of defined benefits from the government, seniors would receive money they could use to buy their own private health insurance policy. Under such a system, “the elderly would have more incentive to question costs,” wrote Stuart Butler, PhD, who was then with the Heritage Foundation. “By fostering consumer sensitivity, the reforms also would encourage the same kind of competition through Medicare as the tax reforms would accomplish for the working population.”

On Thursday, David Hyman, MD, JD, a professor of health law and policy at Georgetown University, in Washington, said something very similar about the Medicaid program — in this case, using a defined-contribution approach as a way to lure in the 10 states who have yet to take advantage of the Affordable Care Act’s incentives for expanding their Medicaid programs.

“We ought to be considering the challenges that these individual states are facing … that are going to make them reluctant to sign onto the heavily subsidized, but nonetheless open-ended commitment that opting into the traditional Medicaid program would mean,” Hyman said during a briefing sponsored by the American Enterprise Institute. He was referring to the fact that although the federal government pays 90% of the cost under the expansion deal, the states are still left with the remaining 10%, which doesn’t have a dollar limit.

“The core idea here is … instead of paying the providers, we should just put money into HSAs [health savings accounts], and the beneficiaries would be in the direct-purchasing market,” he said. They could use the money to buy a catastrophic health insurance policy, pay for social determinants of health, or any other health-related needs.

“And because [beneficiaries] care about price and quality, direct purchasing creates huge incentives for providers to care about what their patients care about, rather than what the third-party payers/insurers/government payers care about,” Hyman continued. In addition, he predicted, “fraud losses … are going to start dropping.”

There are several other advantages as well, he said. For one thing, “the government’s not going to be in the business of price setting anymore. The challenges of price setting are well known.” And “there isn’t much of any need for prior approval requirements because people are spending their own money … Administrative headaches, particularly for providers, go down, because suddenly they’re dealing directly with their customers.”

“This is not going to be perfect,” he added. “No human institution is, but I think it’s implausible that it’s going to be worse than what we’ve done already.”

Thomas Miller, JD, senior fellow at the American Enterprise Institute, agreed, noting that the core of the proposal “is the idea that cash is king. If you have cash in your pocket, you’re the customer, you can begin to have more leverage and control over what you’re getting, and you’re the person they’re going to pay attention to. Cash transactions are more transparent in the prices and costs and also, hopefully, the quality produced while you’re giving away that money.”

How could such a plan be accomplished? Possibly through a process known as a 1332 waiver, suggested Peter Nelson, JD, a senior policy fellow at the Center for the American Experiment. However, there are issues that would need to be addressed with this plan, “and that is the fact that the population of people below 100% of the federal poverty level [who would be part of the program] are a very different population. They have higher health risks, a higher rate of chemical dependency. They have a higher rate of mental health issues.”

That means if these people buy policies on the individual health insurance market, “it will increase premiums, because it will increase the risk profile of the individual market,” said Nelson. In addition, “people with higher-risk conditions also have less ability to manage their care, and that lower ability to manage care will basically result in worse care for them.”

Andy Schneider, JD, research professor of the practice at Georgetown University’s McCourt School of Public Policy, had bigger problems with the proposal. “I’m a defined-benefit guy, not a defined-contribution guy,” he said.

He praised the authors for trying to address the issue of patients who are uninsured in the 10 states that haven’t accepted the expansion. “We do need to solve for that,” Schneider said. However, “I don’t think the proposed solution is going to work.”

The written proposal includes an overall cap on spending for the program; Schneider said he wasn’t sure whether that meant a cap on federal spending, but if it did, “I think that would certainly raise concerns for some of us who like the current structure of the program,” he said. “What is that overall cap on spending, and do the states who we’re looking to market this proposal to understand that there would be an overall cap on federal spending for them, and if there is, what are the implications of that for the people enrolled?”

Specifically, he continued, suppose “somebody with sickle cell, with an HSA, needs the $2.1-million or $3.2-million treatments that are now available. How does that work? We can walk through a lot of different examples of high-cost services and treatments,” and “it’s not clear to me that at least for national markets, that putting dollars into hands of individuals in these 10 states is going to result in better prices from a lot of these institutions or providers or manufacturers.”

Another issue would be “how do we get this proposal enacted?” Congress seems to be an unlikely vehicle at the moment, and using the Medicaid waiver program seems like a murky proposition, Schneider said.

Miller agreed that the proposal wasn’t as specific as it would need to be eventually in some areas, but added, “This is an honest effort to try to work through the issues.”

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