10 strategies for trimming Medicaid budget deficits

A new report from the Washington, DC-based American Legislative Exchange Council (ALEC) offers 10 strategies states should follow to cut their budget deficits, including a radical restructuring of benefits programs such as Medicaid.

In Show Me the Money: Budget-Cutting Strategies for Cash-Strapped States, Manhattan Institute senior fellow William Eggers, author of the report, says, "States are facing their worst fiscal crisis in a decade or more. As hard as it is to fathom, budget problems in fiscal year 2003 might be even worse than they were in 2002."

ALEC was formed more than 25 years ago by state legislators and conservative policy advocates as a membership organization committed to the notion that "the government closest to the people [is] fundamentally more effective, more just, and a better guarantor of freedom than the distant, bloated federal government in Washington, DC."

In his report, Eggers say the causes of deficits estimated at $40 billion are clear — the recession, Sept. 11, spiraling Medicaid costs, and high spending in the mid- and late 1990s. "Add them all up," he says, "and you have the budgetary equivalent of a perfect storm."

Eggers says one of his most important recommendations is to modernize government by reforming entitlement programs, especially Medicaid. He says that states simply have no chance to solve their long-term budget problems if they don’t get a handle on the rising cost of entitlements.

With 10-year projections from the Centers for Medicare & Medicaid Services calling for double-digit cost increases well into the future, states are experimenting with a variety of approaches to reducing Medicaid costs, including cutting mental health care; tightening eligibility requirements; reducing payments to providers; lowering drug costs through use of generic drugs and drug rebates; and reducing coverage for acupuncture, podiatry, dental care, home health care, and chiropractic care.

"Some of these proposals make sense," Eggers says. "Some will even save money. But none of them are likely to have more than a marginal impact on the long-term problem of rising Medicaid costs."

He says the real problem lies in Medicaid’s defined benefits structure, which fixes benefits and eligibility and makes costs variable — a recipe for skyrocketing costs. The most promising reform plans from Eggers’ viewpoint allow consumers to choose among multiple providers; customize benefits according to patients’ needs and circumstances; target benefits to the truly needy; and recognize that the Medicaid population consists primarily of three distinct groups — older people, blind and disabled, and low-income families — each of which needs to be treated differently.

Eggers’ recommendations for entitlement program reform include:

• Adopt market-based, consumer-choice Medicaid reform under which consumers are given vouchers or refundable tax credits to purchase personal insurance through independent brokers from a variety of state-approved plans, including medical savings accounts, fee-for-service plans, and managed care plans. This approach would require a change in federal law to turn Medicaid over to the states. Absent such a change, some of it could be accomplished through Medicaid consumer-choice waivers.

• If comprehensive Medicaid reform is not possible, reduce costs through more targeted approaches such as implementing home- and community-based alternatives to institutional long-term care; instituting private pharmacy contracts to manage drug consumption; imposing copayments; contracting for specialized services; eliminating coverage of optional services; using buying pools; and changing the service utilization of existing populations. Eggers says use of disease management programs has been one of the most successful Medicaid reforms.

• Use technology to reduce fraud, abuse, and overpayments. Currently, Eggers says, billions of dollars worth of welfare and Medicaid benefits go to people who are ineligible for the programs. Data brokers and on-line eligibility systems can help fix the problem by instantly verifying the income and assets of Temporary Assistance for Needy Families and Medicaid applicants.

Other strategies for cutting state costs and reforming government proposed in the ALEC paper are to:

• Reduce work force costs since state employee salaries and benefits account for a large portion of state costs. "Most states," Eggers says, "will find it almost impossible to balance their budgets without impacting their employees."

• Impose broad-based spending cuts, even though they are not the best approach because they don’t provide any guidance about what services government should deliver or how services should be delivered.

• Sell or lease government assets or enterprises to private entities, turning dormant physical capital into financial capital that can be used for more pressing needs such as rebuilding decaying infrastructure, reducing debt, or cutting taxes.

• Introduce competition into service delivery because private vendors often are able to produce savings through innovation, advanced technology, and a commitment to customer service.

• Reduce or eliminate programs that perform poorly.

• Reward employees for saving money. Eggers says that while most public employees are smart, industrious people, traditional state compensation systems treat all workers the same, giving them little incentive to increase efficiency and perhaps even rewarding inefficiency.

• Reduce duplication and overlap. With duplication and overlap costing billions of dollars, the first steps should be to implement performance-based budgeting, coordinate information technology purchases, and consolidate state data centers and small state agencies.

• Use technology to slash overhead. The private sector has started to realize cost savings and productivity increases from information technology investments not yet seen in states, Eggers says.

• Create cost-cutting brigades, powerful independent agencies that conduct periodic top-to-bottom reviews of state programs, agencies, and departments and make recommendations to maintain, eliminate, redesign, or restructure them.

You can find additional information and download the full report from www.alec.org or by contacting Eggers at (202) 223-5450.