Medicaid Health Savings Accounts

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					Policy Brief                                                                              April 1, 2008

                                                                                  Greg Blankenship

                               MEDICAID HEALTH ACCOUNTS

(Springfield, Ill.) Illinois’ Medicaid program suffers from a number of maladies that increase costs
for all while deteriorating service for its enrollees. Among these maladies are a perverse set of
incentives—incentives that not only perpetuate a culture of dependency among Medicaid recipients,
but that also block potential reforms to fix the system.

Because Medicaid is a joint federal and state program, it is easy for politicians to spend freely while
ducking accountability for the program’s inefficiencies. Because Medicaid is “free,” enrollees can
utilize care in an inefficient and wasteful manner without regard to consequences. The program
underpays providers and the state is chronically behind in making payments. Most perversely,
however, is that Medicaid discourages work and savings, creating a dependency mentality that traps
enrollees in poverty.

The end result of these poor incentives translates into higher health care costs for the rest of us.
Providers, to make ends meet, have to charge more for services to make up for Medicaid patients.
This primarily impacts those without health insurance, who must pay full price for services because
they haven’t the negotiating power of private insurance companies. Because providers are limiting
exposure to Medicaid enrollees, particularly for preventive care, expensive emergency room visits
become the primary point of service. This is both wasteful and harmful, and feeds into a situation
where no one wins—not doctors, not Medicaid enrollees, and certainly not taxpayers.

A Successful Solution: Medicaid Health Accounts
In order to fix the system, incentives need to be better aligned. One successful approach, enacted in
South Carolina, has been the introduction of Health Savings Accounts as part of an overall Medicaid
reform effort. These accounts provide a way to align the interests of doctors, Medicaid enrollees,
and public officials. By offering them as a choice for the seventy percent of enrollees that use thirty
percent of Medicaid’s budget, Medicaid Health Accounts can be a first step in an effort to arrest
runaway Medicaid spending while providing better service for enrollees.

Medicaid Health Accounts (MHA’s) would operate much like private health savings accounts
(HSA’s). An HSA combines a high deductible catastrophic health insurance with an interest-
bearing, tax-free account in which day-to-day health care expenditures are paid for through
withdrawals from the savings account. Once the insurance deductible is reached, private insurance
pays for 100% of health care.

This model works as a form of Medicaid reform because it puts the Medicaid enrollee in charge of
the first dollar spent. It allows enrollees to choose a health insurance provider that best suits their
needs, and also provides competition because providers will have to compete for this class of
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customers. Stability comes from the shifting from a defined benefits program to a defined
contribution program in which individuals control costs instead of rationing types of services—
which, it should be noted, is the current (failing) model for Medicaid cost containment. Like larger
Medicaid reforms, MHA’s would serve as a budget-neutral proposal seeking to stabilize runaway
costs rather than cutting the program.

South Carolina as a Model
In 2005, South Carolina sought and was approved for a Department of Health & Human Services
1115 Demonstration Project Waiver to implement a program centered on consumer empowerment.1
Under the plan there are a host of different options presented to enrollees including HMO’s,
PCCM’s, and a self-directed care plan with personal health accounts (PHA’s). PHA’s are in fact
HSA’s, and they are available for eligible individuals who have demonstrated an ability to manage
their own affairs.

Since that time, South Carolina has launched a demonstration project consisting of 1,000 enrollees.
Five hundred enrollees are taking part in the PHA portion while another 500 have Health
Opportunity Accounts, a similar plan made possible by the 2005 Federal Deficit Reduction Act.

Under the program, beneficiaries are given the option of choosing from a plethora of programs
ranging from Self-Directed Care, private insurance, Medical Home Networks (MHN’s) and
alternative coverage options. Funds are deposited directly into the beneficiary’s account, and with
the aid of a counselor, the beneficiary picks the program best suited to their needs. Since January
2007, private insurance companies have moving to design products for enrollees.

If the beneficiary chooses a comprehensive health insurance or a managed care provider; the state
pays the premium and deposits the residual funds into the account. In combination with a debit
card, these funds can be used to purchase other medical services as needed. The money for the
account is distributed every quarter and funds are allowed to roll over if they are not used as long as
the beneficiary is Medicaid eligible.2

Any account chosen by beneficiaries would have to be actuarially equivalent to the state’s current
Medicaid Program. Accounts would, at a minimum, require the same mandatory services as currently
required by federal law. More importantly, the program would also allow for beneficiaries to
use leftover funds in the account or maintain the account by rolling it over into a private
HSA once they accepted employment. If the new employment didn’t include health benefits,
then the enrollee could be allowed to stay in the program either indefinitely or for a limited period
of time. South Carolina, for example, limits participation to three years, thus giving the enrollee the
opportunity to move up to a position that has benefits.

The idea behind any mechanism in Illinois would be to ensure that enrollees who are able to
maintain employment can keep their health insurance. The results of such a program would mean
that Medicaid enrollees who chose the MHA would no longer have to choose between finding
employment and losing their access to health care.

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In addition to these fundamental elements, South Carolina has safeguards in place such as
counseling and consumer protection. These would include:

        •  Customer satisfaction requirements – 24/7 user-friendly access; timely access for office
           appointments, consumer education and customer service evaluations of a representative mix
           of patients will be required.
        • Provider performance measures – Compliance with national best practices and
           monitoring the number of Board Certified Physicians and in-hospital infection rates will
           demonstrate improved quality. Health status surveys are also important indicators.
         • Incentives for healthy lifestyles – Rewards can be in the form of cash, gift certificates,
            and co-pay forgiveness for complying with meds and treatments, smoking cessation and
            exercising regularly.
         • Services to beneficiaries – This could include disease management programs, pregnancy
            and newborn programs and lifestyle programs.

This would mean that Medicaid enrollees wouldn’t be abandoned to the “vagaries of the market,”
but instead become partners a program that replaces the culture of dependency with a culture of

The Bottom Line
Medicaid Health Accounts are an excellent example of how Illinois can and should build a Medicaid
Program that improves access to quality health care in a more cost-effective manner for those most
vulnerable in society. For up to 70% of beneficiaries, who often can find themselves trapped
between health care for them and their children and finding a job, this can be a bridge to economic
mobility. Like welfare reform, Medicaid Health Accounts have the potential to transform a program
that currently takes away rungs on the economic ladder and instead begins to help enrollees climb it.
1    South Carolina Dept. of Health & Human Services. “South Carolina Medicaid Choice” June, 2005
2.   South Carolina Dept. of Health & Human Services. “South Carolina Medicaid Choice” June, 2005

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