Setting the Record Straight on Medicaid’s “Success”

In last Sunday’s New York Times, Paul Krugman extolled the virtues of Medicaid. Here are some excerpts from this astonishing column:

“Medicaid has been more successful at controlling costs than any other major part of the nation’s health care system.”

“How does Medicaid achieve these lower costs? Partly by having much lower administrative costs than private insurers.”

“Medicaid is much more effective at bargaining with the medical-industrial complex.”

“Consider, for example, drug prices. Last year a government study compared the prices that Medicaid paid for brand-name drugs with those paid by Medicare Part D — also a government program, but one run through private insurance companies, and explicitly forbidden from using its power in the market to bargain for lower prices. The conclusion: Medicaid pays almost a third less on average?”

In the days since this column was published, I have spoken with many experts on Medicaid who are uniformly appalled by it. While I may not reach the same audience as the New York Times (at least not yet!), I feel compelled to set the record straight on Medicaid’s “successes.”

Let’s start by considering Medicaid’s exemplary administrative costs. When a program does little monitoring for fraud and abuse, nor attempt to limit unnecessary care, and when a program monopolizes the customer segment is serves, it is going to have lower administrative costs. I am not sure why this is a virtue.

As for drug prices, Congress has given Medicaid effective most-favored nation status for prescription drugs. This all but guarantees that Medicaid will have the lowest drug costs. This accomplishment is no credit to Medicaid; it is the natural result of legislative fiat. The irony is that by granting MFN status to Medicaid, Congress gave drug makers incentives to raise prices to everyone else (in order to simultaneously raise the MFN price given to Medicaid.) Widely cited research by Fiona Scott Morton and Mark Duggan has shown that Medicaid’s MFNs raise all of our drug costs by 5-10 percent or more (depending on the drug.) So the overall impact of the law granting MFN status to Medicaid is to drive up total U.S. drug spending. This is nothing to brag about.

The situation with drug pricing helps us better understand the secret of Medicaid’s “success.” Unlike private insurers, which do have to “bargain with the medical-industrial complex,” Medicaid can dictate prices through legislative fiat. So does Medicare. Both Medicaid and Medicare routinely set prices below those “bargained” by the private sector, but Medicaid is especially “effective” because states know that they can abuse their power without serious repercussions. States do not care that “quite a few doctors are reluctant to see Medicaid patients,” as Krugman modestly states. (It might be more accurate to say that “most doctors, hospitals, and other medical providers treat Medicaid patients as second class citizens” or even “low Medicaid payments have created a two-tiered system in which Medicaid patients have inferior access to the best providers and the latest technologies.”)

Congress could not get away with this for Medicare without incurring the wrath of millions of seniors. When states slash Medicaid payments, the most vocal opponents are providers, not patients, and the voices of providers are usually drowned out by the voices of taxpayers. Private insurers could not get away with this either. Thanks to the HMO backlash of the 1990s (led by liberal Democrats), insurers seem to have given up on offering narrow network health plans.

Any monopolist – and Medicaid is a monopolist — can reduce its costs by choosing to pay low prices to its suppliers. Not only does this keep down the price of supplies, it also limits the monopolist’s production, as few suppliers will want to do business with it. This further holds down the monopolist’s total spending. These basic concepts, understood by any first year economics student, help explain the great “successes” of Medicaid, as well as most nationalized healthcare systems, which contain costs largely by limiting the prices they pay for medical services.

Surely there is more to judging a healthcare system than looking at how much it spends. What about access and quality? Does the system pay providers enough to attract new entrants? (I am especially concerned about doctors and nurses who may find more lucrative options in other sectors.) Are prices high enough to stimulate technological change? Are regulations so rigid as to hinder process innovation? I don’t mean to give carte blanche to higher medical spending, but only to suggest that it is shortsighted to heap praise on Medicaid because Congress and the states have chosen to abuse their monopoly powers.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

23 replies »

  1. So lower drug prices for Medicaid patients causes pharma to go looking elsewhere to recoup the hit to their bottom line. Why is this a surprise? The population at large pays 5-10% more for drugs. It’s an honor and a privilege to pay more so that the 75% of Medicaid recipients who are children, blind and disabled can get their medication.

    Did Duggan and Morton estimate the long term economic impact of leaving these people untreated? Might it be more than a relatively modest cost shifting to those better able to absorb it.

    I am a citizen not a unit of human capital, there is more at stake than accounting.

    But if you really want to save money, get rid of the private insurance administrators.

  2. If this is a reply to the immediate below comment I addressed to you in the middle of it, I never said nor inferred that just changing insurers would make care and progress better for Medicaid patients. A sizeable portion of people on Medicaid reveal the less than stellar efforts at insight and judgment to make themselves more difficult to provide care for with an impact. And, the insurer pays fairly woefully for the amount of time and energy by a provider. So, where is the real honest and dedicated intent by a provider to work with this reimbursement source?

    The usual PPACA suspects will falsely pounce that I am derelict in duty by even suggesting this an issue. They then go on to deny it, but, all their words infer they want doctors to take a vow of poverty.

    Those paying attention and are realistic, we are onto the false prophets of hope and change. So should those of you who are tired of being used and abused!

  3. The commenter that I was responding to implied that Medicaid was a causative factor in their unhealthy behavior, and that removing their health insurance would make them healthier.

  4. I make a living in part measuring continuity of care. No easy task, and I’m not certain it means all that much. I’m in the habit now of carrying my records on my android phones. I think that’s the future of continuity. Anyways, my only point is we don’t need constraints on care. We need a greater supply of care, and we need it delivered with some imagination, and imagination is clearly not what the Gov does well… at least any imagination which requires big investments which invariably become political rather than patient centered decisions. (speaking as a 35 yr civ servent spent mostly in health care w/ hcfa and some other agencies…..)

  5. “Am I clear?”

    Yes in that you think delivery of health care can be compared to the retail industry, but increasing providers has never reduced costs. What the Walmart types are doing is not providing doctors, but nurses, and hoping in the bargain someone will buy the nose spray or a pair of panty hose.

    Continuity of care is probably one of the most important patient needs, fractionalizing delivery of care and taking the business away from, what seems to be, struggling PCPs, in not quality care, nor solving the problem.

    Anyway, the cost crisis is not in primary care, it’s in hospitals, those monoliths to billing prowess and high costs.

    It also seems you think forcing Medicaid clients to Minit Clinics is their (or our) answer, when it’s just second tier care.

  6. I should say, Quinn was the ex-communist Doc who would NOT see Medicaid patients. No way to edit posts here. Up late, close friend laid off from a speciality Lab yesterday and it was almost certainly related to ACA. Very tough times ahead for all Americans.

    Good night….

  7. I didn’t lambast Medicaid. My fellow Chicagoan Quentin Young did. As my very progressive former MD boss would joke, Young was the ex-communist doc who would see Medicaid Patients in his practice.

    My concern with the so called reform of ACA is it does nothing to increase the supply of care which is what would really drive down costs. Instead it imposes price controls, which will restrict supply, and continue to increase costs.

    If our Public Policy were really concerned with decreasing costs, we’d look at people who knew how to do that: bit box retailers as an example. What form that kind of delivery would take I don’t konw. I just know they’re good at delivering goods and service cheaply and I bet have some lessons for us.

    That’s not an easy leap for many in our industry to buy. I was roundly denounced once by an ED manager in Florida when I mentioned liqour stores routinely stock up before big football games, how come clinics can stock up before usually very predictable demand trends. She never got to looking at her trends because she was so bent out of shape over the comparison to a beer peddler. Well, sometimes those peddlers know a thing or two.

    Am I clear?

  8. Bill Baar says:
    November 7, 2012 at 9:56 am
    Would reduce the amount to be reimbursed. Better Access too… my daughter was on Medicaid and the clinic ran 9 to 5, five days a week. Walmart, Walgreens, the other big box retailers go almost 24/7 (she had a occassion to use the Nurse at Walgreens and pleased with service). A lot of healthcare could be turned over to them, and lessons learned from them, that would do patients a big favor. Retailers know how to drive down costs. If were serious about cost reductions and increased availability, the lessons to be learned are there. Not with the Government for sure…

    I,m a little confused Bill, you seem to lambast Medicaid for not paying enough to attract providers yet look to Walmart and RPNs to fill the void. Is your intent that Minute Clinics will drive down provider costs? If so how will that attract providers?

    Is there going to be a Minute Clinic for hospital care as well?

  9. Would reduce the amount to be reimbursed. Better Access too… my daughter was on Medicaid and the clinic ran 9 to 5, five days a week. Walmart, Walgreens, the other big box retailers go almost 24/7 (she had a occassion to use the Nurse at Walgreens and pleased with service). A lot of healthcare could be turned over to them, and lessons learned from them, that would do patients a big favor. Retailers know how to drive down costs. If were serious about cost reductions and increased availability, the lessons to be learned are there. Not with the Government for sure…

  10. The cost cutting begins with fewer pastures from real insurance reform, and looking at organizations like Walmart that really know how to drive down costs. Government is going to get you there. All government can do is impose price controls and plunge us into the cycle of control and restricted supply. I cite Dr. Young because he was honest enough to be frank on the problem. He’s single payor system certainly no solution.

  11. One should try to avoid stereotypes and look at every patient individually, but on average, unhealthy behaviors seem more prevalent in the medicaid population, considering the young age of that cohort.

  12. Bill, if increasing reimbursement solves the problem will abandoning Medicaid and folding it’s clients into Medicare improve their situation?

    How long before docs complain the extra load will also bankrupt them?

    When is the necessary cost cutting of medical care nation wide going to begin if all we do is listen to docs looking over the fence and saying, I could earn a lot more in that pasture?

  13. Gimme a break, I get these ‘incredulous’ comments from readers that act like my opinion is from pluto, which by the way is still a planet, what the political gain to deny it as one I just don’t get. Fewer providers does not have a flat line projection leading to zero after 20 years, it is a curve and will never reach zero as there are enough providers who will always take Medicaid patients, including me mind you at community health clinics I have worked since finishing residency, so the point of Steve in that dismissive retort, huh?!

    And Medicare patients, at least those on Medicare who are older than 65 and just trying to survive as long as possible, those patients have some insight and judgment to at least try to work with providers. The disability crowd growing in what is at least partially a logarithmic pattern however, they are as entitled a group I have ever encountered, and they will not change, they just aid and abet the Democrat agenda of “what’s in it for me”!

    And Private Insurance, what is your point in adding them, Southern doc? When people challenge me, is it real debate or just echoing partisan platitudes that give your choir idiots time to clap for you? If you are a practicing clinician in 2012, do you really see no difference between Medicaid patients as a whole versus other insurance populations? Or are you just doing this ‘devil advocate BS’ that just is intended to annoy and humor yourself?

    I see it as it presents in my offices. Patients are growing more entitled, more indignant to have to work at change and identifying poor choices and goals, and this medium of the internet just dumbs down efforts. No one who embraces the internet will ever step back and reassess challenges like mine, and in the end, surrendering to the foolish choices of the growing majority is a lemmings’ endpoint. And this EMR agenda, well, good luck what ya wish for. It has some positive endpoint, but you let government set the pace, it will be corrupted and ruined before people with real concern and commitment can intervene for the better.

    At least as it stands now at 10PM Tuesday night, we will have Obummer for another 4 years, but, will have an entrenched Repugnacant House and lame Senate to negate any one party rule for 2 years at least. I hope the 2 parties slowly kill each other politically, and if we can get to 2014, the electorate can figure out how to get rid of the pathological incumbency that is killing us like slow arsenic intoxication.

    I can’t wait to see how continued PPACA will cause more havoc and ruin, and how sites like this will spin it as “this is the best we’ve got, ignore the death and destruction in medical care that we screamed down dissenters telling us was coming, ’cause it doesn’t affect us elites and cronies who are protected anyway”.

    History repeats itself, don’t let the door slam into your heads when it closes!

  14. “the majority of patients with Medicaid coverage aren’t interested in making sincere efforts . . . to maintain good health”

    And patients with Medicare and private insurance are?

  15. “Fewer providers” have been accepting Medicaid for 20 years. By now it should be zero.


  16. If Medicaid is so great, then why are fewer providers accepting it as an insurer these days? Listening to people extol alleged virtues and false promises solely to sell partisan agendas is becoming hideously disruptive at the very least, to me just plainly harmful.

    Face it, the majority of patients with Medicaid coverage aren’t interested in making sincere efforts to either maintain good health or make changes to try to restore good health. Yes, poverty is a sizeable factor to this, but, so is entrenched lack of insight and judgment.

    Frankly, the Democrat hacks in the media are beyond disgusting and disingenuous these days. They actually are beginning to make some Republican hit men seem somewhat tolerable.

    Yeah, that may change after tomorrow, if the election is decided by Wednesday afternoon.

  17. Chicago’s Quentin Young in the NYT in 1991. As far as I can tell, little’s changed http://www.nytimes.com/1991/04/12/us/as-medicaid-fees-push-doctors-out-chicago-patients-find-fewer-choices.html

    With low fees pushing doctors away from Medicaid patients, the medical tradition of charitable service to those who can pay very little or nothing at all has been sorely tested.

    Dr. Quentin Young, a prominent Chicago physician and a longtime champion of liberal causes, has strict rules on the number of Medicaid patients he will see because otherwise, he said, “I’d go broke.”

    He calls his policy a mix of “reality and shame.” Dr. Young said that if doctors refused to treat patients based on race instead of a Medicaid card “there would be Federal protection.”

    “The health status for people represented by Medicaid is declining,” he said. “The people are shunted about. Either they are rejected by competent physicians or are very often put into clinics that abuse the system, with very little gain in health.

    “It’s a reflection of the powerlessness of the poor,” he said, “and the hardening heart of American that is ominous.”

  18. Seems like the OP is just proving that everthing Krugman said was true. He just doesn’t like Medicaid’s methods of achieving those successes.

  19. Medicaid is “successful” in controlling health costs because its beneficiaries pile up in a few places where hospitals and nursing homes have no choice (morally or politically) to take care of them. It pays hospitals 60-70c on the dollar vs. Medicare in a lot of places, and those lucky safety net providers survive on those rates by passing the costs on to private insurers and, god help them, private pay and uninsured patients in the form of far-above-cost charges. That cost shifting will be stamped out by ACA’s private insurance regulatory scheme.

    Medicaid pays physicians in “fun bucks”. No honest physician can survive on what Medicaid pays if Medicaid is a large enough proportion of their practice, which is why Medicaid physician coverage is falling (fast).

    I don’t know off hand what proportion of Medicaid expense drugs represent, but it’s less than 12% of total US health spending. 70% of prescriptions in the US today are generics. 30% savings on branded drugs is a nice savings, but it is peanuts compared to the absurd rates Medicaid pays for hospital and nursing home care. Medicaid is actually a large, poorly constructed 1960’s era nuclear reactor in the process of melting down.

    Krugman is an inhabitant of an alternate universe. . . There’s no other explanation for his obnoxious column.

  20. I work in HIT (for the Nevada REC). And get vilified for it routinely here by our resident clown car of anonymous posters. I could easily make 3x my current salary (more than a lot of specialist MDs), were I to relent and go back into subprime credit risk modeling. Easily


    I told my wife I’d never do that again. Money is not the only measure, notwithstanding what Mitt Romney thinks.

    Doctors and nurses should be among our best paid.

  21. “(I am especially concerned about doctors and nurses who may find more lucrative options in other sectors.) ”

    Like what? This always cracks me up.


  22. As a physician having seen medicaid patients over the last decade, I don’t agree with a lot of what Krugman said and how he said it, but this critique seems even worse than Krugman’s op-ed – in fact Dr. Dranove does “give carte blanche to higher medical spending”, even though he states he does not mean to.

    Take the drug prices – most rational people would agree that drug prices are running amok and are in no relation to their value and cost, due to the peculiarities of the HC market (payment by 3rd party payors with neglect of cost/benefit ratio, impossibility of medicare D to negotiate rates). If one program like medicaid gets cheaper rates (for individuals who may not likely have purchased drugs at all without the program), it does not automatically make prices for everyone else go up. With that logic, one has to ask: why even have government negotiate contracts? Whatever government pays less, everyone else has to make up by paying more …
    It’s basically the old drug industry canard: we are paying for the drug research of the rest of the world (because most other countries are paying much less for drugs).

    I would agree, in principle, with the “innovation” argument, but this is like complaining that hobos, despite all their alcohol consumtion, don’t contribute much for the refinement of the best wines in Burgundy and California.

    Re. Best providers: the quality of providers is in my experience not a clear factor for medicaid non-acceptance . I worked for a large private MSG and a state University, both rather clearly high quality providers, and both accept (or at least did accept) medicaid patients (probably because otherwise, it would backfire financially for the private MSG, maybe in the inpatient martket).

    Yes, it’s a dictated monopoly, and pricing is often unfair, below cost. Medicaid patients are often challenging patients because of low socioeconomic and educational status resulting in lower compliance, and moreover, many benficiaries have nonorganic disability – a problem I would like to see addressed more. As safety net, it is much better than nothing.