We will soon have a Vice President and a head of CMS who hail from the great state of Indiana, and are proud of what they’ve done with Medicaid there through the Healthy Indiana Plan. Seema Verma, the proposed CMS Administrator, is credited with being the architect of Healthy Indiana, and Mike Pence, the Vice President-elect, presents Healthy Indiana as one of the signature achievements of his term as governor of that state.
It is too early to tell if the program will be enough to raise Indiana up the ranks on health and healthcare from the bottom quintile (1, 2). However, since Republicans have run the table with Congress, the White House and soon the Supreme Court, we can reasonably conclude that the future of Medicaid in America is going to look more like Indiana.
That doesn’t mean that income-based Medicaid eligibility will dramatically change. Pence was one of the few Republican governors who took advantage of the opportunity to expand Medicaid eligibility up to 138% of poverty, and President-elect Trump has promised, in his emphatic way, that people will not be denied healthcare coverage in his administration. Some Republicans in Congress have different ideas, however, and the outcome is not at all clear yet.
While eligibility levels and the overall level of federal support for program costs get worked out over the next few months, there appears to be more clarity on coming changes to the financial responsibilities between Medicaid and the people the program serves. One can sum up the core shift in a phrase: Medicaid recipients will take on greater responsibility for the cost of their care. This responsibility may take several forms: greater out-of-pocket expenses for care, the introduction of Medicaid premium payment obligations, or a requirement to work in order to receive Medicaid benefits.
The Healthy Indiana Plan has more serious carrots and sticks than traditional Medicaid, which had one very big carrot (sign up, get benefits) and almost no sticks. As the safety net insurance plan for those who are impoverished and/or who have behavioral or developmental issues, the standard idea was that even small access barriers like a $10 copay or monthly premium would lead to the avoidance of necessary care and would harm public health. Healthy Indiana took this standard view as a challenge: build a system that gives recipients more “skin in the game” and creates an ethic of accountability, while not creating a public health disaster.
It starts with a carrot: an enriched benefit program called HIP Plus, which includes benefits that traditional Medicaid in Indiana did not, such as vision and dental. Everyone eligible for Medicaid starts in HIP Plus, but they only get to stay there if they pay a monthly contribution of 2% of their income. So, someone earning $250 a month would pay $5 each month. That’s about the price of a pumpkin spice latte, but it is paid by someone who isn’t earning enough to (a) pay for an unsubsidized studio apartment in Indianapolis, (b) pay for the gas and insurance on a car, or (c) buy food, toiletries and clothing at market rates–let alone do all of these things together. Still, one can argue that compared to other expenses on such a tight budget, $5 for health insurance is a great deal, and a rational person would prioritize this above other things.
In most respects, this personal 2% contribution functions as a premium, though it is framed as a payment into a health savings account. And that’s because Medicaid in the Healthy Indiana program technically has been turned into a high deductible health plan, with a $2,500 deductible. Almost the entire $2,500 is funded in advance each year by the state, so primarily it is an artifact of accounting and an attempt to take advantage of the psychology of savings. The only part that isn’t paid by the state is the 2% income contribution. If someone earning $1,000 a month in HIP Plus gets care that costs $3,000 in a year, the person’s own contribution is $240 ($20 x 12), the state-funded HSA pays $2,260 ($2,500 – $240) and the Medicaid benefit pays $500 ($3,000 – $2,500). In short, this considerable amount of bookkeeping complexity results in $240 of real additional cost to the recipient, and for it they get enhanced benefits.
In addition, if money is left in the account at the end of the year, it rolls over and can pay for some or all of the personal contribution the following year. That means that the healthy could get enhanced benefits at no cost, while those less healthy would pay a monthly contribution. (Whether this is intended as an incentive not to get sick is unclear.)
Now for the big stick: If you miss enough of your monthly payments, there is a punishment. For those at or below the poverty line, the name of that punishment is HIP Basic. The HIP Basic high deductible is entirely funded by the state, making that part of the plan an accounting exercise. HIP Basic doesn’t have a premium (sorry, “contribution”) but it reduces coverage to only the essential health benefits required under the Affordable Care Act. Copayments are also added for pretty much every type of service and visit, ranging from $4 to $75. These differences may mean nothing to a healthy person, or an unhealthy one who avoids care, but for someone seeking treatment for medical or dental issues it could mean hundreds or even thousands of dollars in additional costs a year.
For those between 100% and 138% of poverty, the punishment for not paying the monthly contribution is to be cut off from Medicaid and be forced to go on the exchange for insurance, assuming there still is an exchange. At those income levels, it would be difficult or impossible to purchase insurance for as little as the HIP Plus contribution, and if you did, the out of pocket expenses would be larger, on the order of 6% to 40% of medical expenses depending on the type of plan purchased and whether cost-sharing subsidies are retained in 2017. In short, if you are in that income range and didn’t contribute for the HIP Plus Plan, you are very likely going uninsured.
Last but not least, Healthy Indiana includes a Gateway to Work program. Contrary to what some have suggested, it is voluntary rather than required to receive benefits. The program attempts to assess skills and refers participants to training programs and employment opportunities. The voluntary nature of the program was designed to comply with Obama administration hostility to restrictions deemed to create barriers to health care access under Medicaid.
What to Make of All This
In interpreting why Healthy Indiana is designed the way it is, it’s important to remember that it needed to be approved by a skeptical Obama administration that would look for reasons to reject it on the grounds that provisions to shift costs to recipients, or other requirements making it more onerous to receive coverage or care, were antithetical to the purpose of the Medicaid program. Ohio is an example of a state that didn’t know when to stop penalizing the poor for not paying in, and had its Medicaid waiver rejected. Healthy Indiana is to be commended in that sense, as a cleverly designed program that would maximize Republican reform priorities in a hostile regulatory environment. Consultant Verma has been an expert operator within the system, among the most adroit in the nation on the conservative side. In the new regulatory and legislative environment, future CMS Administrator Verma and others have much more flexibility to add teeth to personal responsibility requirements. Rather than pleasing the CMS approver, she will be the ultimate approver of waivers and state plan amendments, and the states will have to please her. Mandatory work requirements, less fully-funded HSAs, and higher premium contributions are all on the table. Today’s Healthy Indiana might actually look tame compared to other state programs four years from now.
So if that’s where we are going, what do we know about how well the personal responsibility incentives are going to work? Quite a lot, actually, because premium contributions, HSAs and out-of-pocket costs have been tried before in Medicaid. The results are not promising from a public health standpoint, though Verma has posted statistics in Health Affairs indicating that those who stay in HIP Plus are doing better on numerous measures of appropriate medical utilization than those in HIP Basic. Whether this is causation or correlation (and if causation, in which way it runs) remains to be seen.
The clearest outcome of responsibility requirements historically has been in saving the Medicaid program money by having fewer people enrolled, or by their avoidance of services. We know going all the way back to the RAND experiment 40 years ago that utilization does decrease as cost-sharing increases, but it does so across the board and not only for wasteful services. In Oregon, increasing copays and requiring a premium contribution in Medicaid had disastrous results, causing around a 75% drop out rate in 30 months. In the first year of Healthy Indiana 2.0, about 30% didn’t make their contributions and were demoted out of HIP Plus. A lighter touch has its own problems: In Arkansas, a CMS-approved plan for cost-sharing was cancelled when it was recognized that the administrative cost of collecting the small premiums outweighed the revenue from the premiums, and since people were not being kicked off the rolls for non-payment, no real incentive was created.
There are other reasons to be skeptical. Roughly half the cost of the Medicaid program is not for the income-eligible population, but for special populations like the mentally and physically disabled. These skin in the game reforms do not touch those costs. But most importantly, homo sapiens is not homo economicus. Unlike the Economics 101 view of the individual as a consumer with rational preferences whose satisfaction is maximized using all available information, real people are shortsighted, distracted, forgetful, don’t seek all available information, and are subject to emotional decisions that aren’t in their long term best interest. We can argue about whether a conservative or liberal approach is more insultingly paternalistic, or maternalistic, for those whose fortunes in life have brought them to Medicaid, but in the end if we don’t design a program for real people rather than ideological constructions, it will fail.
There Is an Alternative
There is a very large caveat to attach to all this speculation on the future of Medicaid. One of the pillars of Republican proposals on Medicaid reform is to implement block grants for the states. These are global budgets by another name, which liberal policy wonks sometimes pursue as means of cost control (nearly every nation with universal healthcare has already adopted global budgets of some kind). Part of the point of block grants to states, and similar proposals like Paul Ryan’s capitated approach to state funding, is to push the hard details for cost control and quality improvement to the states, along with the credit or blame that attaches to the efforts. Block grants outsource responsibility for the details to states, while the states outsource responsibility to managed care organizations (MCOs), and through value-based contracting MCOs outsource responsibility to providers. The buck can get passed a long way, but under a block grant approach the state is supposed to have control over its destiny. If Texas and Florida want to follow Indiana while New York and California do not, the block grant approach should be neutral and allow each to go their own way with minimal interference.
However, if that approach gains headway, then the responsibility-intensive approach of Indiana would not be the national standard but more of a red state template enacted in maybe 20-30 states instead of 50. Seeing this threat to the universal adoption of “skin in the game” for Medicaid, the Heritage Foundation and some other groups have argued that block grants should be coupled with more centralized requirements on cost-sharing. Block grants for Medicaid are also feared and loathed by liberals due to the belief that it is a Trojan horse to further impoverish the program relative to Medicare and commercial insurance, and the proposal will likely receive strong opposition unless funding levels can be set in a way that doesn’t damage states with richer benefits. But if block grants do pass, liberals and blue states like New York may find themselves in the worst of both worlds, contending with a fixed federal budget and tight federal management on how the dollars are spent. In the end, the conservative program for personal responsibility may be poised to win over the conservative principle of states’ rights. The battle lines are being drawn up, and the consequences of the outcome are huge.
Jonathan Halvorson edits the New Economy section for THCB and is a senior consultant with Sachs Policy Group. FD: As a consultant Jonathan works with startups, providers and health plans, advising clients on policy issues, strategic direction and related topics.