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Medicaid’s cost conundrum

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Kaiser Health News’ Chris Weaver has an excellent story in today’s Washington Post on what insurers view as an growing and lucrative market: Medicaid. As he writes, states increasingly rely on private, managed care companies to cover Medicaid patients. With the health reform law expected to expand Medicaid to 16 million more Americans, insurers see a “potential bonanza.”

Insurers see Medicaid as a place to expand business. It’s worth exploring, too, whether that expansion can accomplish one of the key things states really want it to: reduced Medicaid spending.

Across the board, states are facing incredible budget pressures in Medicaid; managed care is often looked to as an antidote to that. And on the surface, it does feel like it should reduce costs. Insurers, for example, generally have to bid for states’ plans, so they have an incentive to keep proposed contract fees low.

An important new study, however, suggests otherwise. The National Bureau of Economic Research published this month the first national report on Medicaid managed care and cost savings. It’s verdict: moving Medicaid recipients into managed care “did not lead to lower Medicaid spending during the 1991 to 2003 period.”

“Last time I checked, there are a lot of slogans that sound great, like paying for quality,” says University of Pennsylvania’s Mark Duggan, co-author of the NBER study. “People just take it as a given that it saves money. But that’s not always true.”

Why not? One possible explanation has to do with Medicaid’s provider reimbursement rates, which tend to be low. The NBER study suggests that rates are low enough that private insurers couldn’t negotiate a similar payment. Any decrease in utilization would have to be massive to generate a cost saving.

To be sure, some states did show cost savings. And there are indeed ample case studies that can show a particular state or region reducing Medicaid spending by switching to a managed care program.

The NBER study found that those places have at least one thing in common: they tend to already spend more on their Medicaid programs in the first place, reimbursing health providers at a higher rate.

“If...Medicaid’s reimbursement is close to that by private insurers, then there may be some scope to reduce Medicaid spending through reductions in utilization of care,” the study explains.

Duggan’s study results are surprising on their own. But there’s one other thing about the study that makes it stand out: it is the first national look at whether Medicaid managed care has actually does a key thing that states want it to do. This is a trend that has swept through Medicaid since the 1990s as a means of reducing costs within the $450 billion entitlement program. Seventy percent of Medicaid patients now receive coverage through a managed care plan, up from 11 percent in 1991.

That there’s been so little academic work into whether this approach has delivered on its assumed goal startled me, and Duggan too.

“It’s hard to see how formidable the fiscal challenges we face are and how we’re not looking at the hard data,” he says. “We’re just trying to move things forward one inch here. You’d think we’d want to ask, have we been saving money?”

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