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Expanding Coverage for Low-income Americans: Medicaid Or Health Insurance Exchanges?



June 23rd, 2009

While the most visible national health reform fight at the moment focuses on a public plan option for people covered through health insurance exchanges (or gateways), a quieter debate is brewing over whether coverage for low-income people should be achieved through Medicaid expansions or subsidies to purchase insurance through an exchange. For example, the Senate Finance Committee’s coverage options paper indicated interest in expanding Medicaid coverage for people with incomes up to 100 percent or 150 percent of the federal poverty level, which would particularly help low-income parents and childless adults.

Currently, the median income eligibility level for parents in Medicaid is 68 percent of poverty, or about $12,000 for a family of three, and only six states provide Medicaid coverage for poor childless adults, although a few additional states provide more limited benefits. However, the Senate Finance Committee also suggested an alternative: that low-income people might be assisted via subsidies for insurance bought from an exchange. What makes the most policy sense?

Cost And Affordability

Some recent analyses shed some light on this issue. An article that I coauthored with Matt Broaddus in Health Affairs last June  found that it would be 26-30 percent more costly, in terms of total medical expenditures, to cover the uninsured with private health insurance rather than Medicaid, after adjusting for underlying health conditions and other factors. In addition, Medicaid’s administrative costs are about half those of typical private insurance.

Equally important, Medicaid is far more affordable from a low-income consumer’s perspective. The amount that each newly insured adult would have to pay out of pocket for copayments or deductibles would average seven times as high with private insurance — an estimated $771 per year with private insurance in 2005, compared with $109 under Medicaid. Medicaid and the Children’s Health Insurance Program (CHIP) were similarly more affordable for children. In principle, health insurance exchanges might try to limit out-of-pocket expenses by capping cost sharing for low-income members to some percentage of income, but experience indicates that such caps are almost impossible to administer well and confuse both patients and providers.

Current discussions about health insurance exchanges suggest that if a public-plan option is included, its price and policies would have to be roughly comparable to those of competing private plans. Thus, the costs of products offered through an insurance exchange or gateway are likely to approximate current private health insurance costs, whether or not a public-plan option ultimately is included. This means that compared to coverage through Medicaid, exchange-subsidized coverage either would require far higher subsidies or would impose much higher out-of-pocket cost burdens on low-income enrollees. Assumptions that competition will drive the price of exchange products down to Medicaid levels are unrealistic, given Medicaid’s track record and the history of prior market competition.

Medicaid costs for the newly insured would be lower than current experience suggests. On average, uninsured low-income adults tend to be healthier than current enrollees, and a large share are young men, who use significantly less care than current enrollees do. In the Health Affairs article, we estimated that the average medical expenditure for extending Medicaid coverage to the average low-income uninsured person would be about 55 percent as high as the cost of insuring current Medicaid enrollees. Savings are particularly strong if insurance expansions are accompanied by an individual mandate, since this would alleviate the cost problems created by adverse selection, in which those with the most serious health problems are most likely to enroll.

Access, Utilization, And Quality

An understandable worry is that access to health care might be worse under Medicaid than insurance exchanges because Medicaid usually has lower provider payment rates than private insurers and some providers do not serve Medicaid patients. A more recent study (available early online at Medical Care Research and Review) examines the differences in health care access and utilization for low-income people covered by Medicaid and private health insurance. It compares access and use for inpatient and outpatient hospital care, office-based physician care, emergency room care, dental care, and prescription drug use and also controls for health status and other sociodemographic factors.

For children, there are no significant differences in access or utilization for any service except prescription drugs, where Medicaid enrollees have greater utilization than the privately insured do.. For adults, Medicaid coverage is associated with somewhat fewer office-based physician visits and dental visits than private insurance, but with greater prescription drug use. Contrary to many assumptions (and consistent with other research), Medicaid patients do not use emergency rooms more than the privately insured, after adjusting for differences in patients’ underlying health conditions.

While utilization levels are a little lower, Medicaid’s office-based physician and dental expenditures are about one-third to one-half lower than private insurance for adults. These enormous expenditure gaps suggest that upgrades to Medicaid physician services for adults, such as moderate payment rate increases and improvements in payment processing, could improve access to office-based physician services, and Medicaid would still be less expensive than private insurance. Similarly, expanding adult Medicaid dental coverage and bolstering dental payment rates could improve dental access improvements, and Medicaid would still cost less than private insurance. Together, physician and dental services constitute a small fraction of total Medicaid costs, and modest increases in these two services would affect overall program expenditures only marginally. Health reform provides an opportunity to improve Medicaid physician and dental services for adults.

Another important question is how the quality of care compares in Medicaid and private insurance. This is much more difficult to assess, but a major RAND study found that both Medicaid and private insurance have imperfect records. The percentage of adult patients who received appropriate medical care was about the same — 54-55 percent — regardless of whether patients were covered by Medicaid or private insurance. Under health reform, we need to engage in a long-term effort to improve quality in both public and private systems.

Medicaid was designed for low-income populations and includes benefits, such as preventive care benefits and nonemergency transportation, that private insurance policies often lack. While these benefits are relatively inexpensive, low-income people often lack the discretionary income to obtain them unless they are covered by insurance. For example, a number of studies have shown that low-income children covered by Medicaid or CHIP are more likely than privately insured children to get preventive care.

Health Care Providers

Many wonder whether we will have enough health care providers to provide high-quality care for the newly insured after health reform. Early reports indicate that waiting times to see physicians rose after Massachusetts’ health reform because there were not enough providers — particularly primary care physicians — in the short run. In many parts of the country, this may be a challenge regardless of whether low-income people are covered by Medicaid or private insurance.

In Massachusetts, a relief valve that eased the situation was the ability of nonprofit community health centers to expand capacity to pick up many of the low-income newly insured. It is worth noting that while Medicaid usually pays less than private insurance, Medicaid’s payment rates to health centers and rural health clinics are enhanced and are typically higher than rates paid by private insurance. The enhanced rates help assure financial stability for these facilities in medically underserved communities and, in the case of health centers, prevent Medicaid programs from cost shifting onto grant funds meant to support care of the uninsured. Whether Medicaid or insurance exchanges are used, expansions of the health care safety net, such as community health centers, will be needed to help serve the newly insured low-income; federal grants can serve as investments to spur the growth.

Both Medicaid and private insurance could do more to bolster incentives for high-quality primary care services; patient-centered medical home and related initiatives are under way across the country and should be further tested and strengthened. But the challenge of ensuring an adequate supply of primary health care professionals, including physicians, nurse practitioners, physician assistants, and others, is broader than just insurance reform and will require direct investments in the health care workforce and a fundamental rethinking of how public investments in training programs are designed.

States And Enhanced Federal Funding

The most challenging barrier to a major Medicaid expansion is that most states are now experiencing the worst budget crisis in decades and will continue to face structural budget problems for the foreseeable future. Unlike the federal government, almost all states are required to balance their budgets and will confront major difficulties in paying for Medicaid expansions. Realistic approaches to offset costs for states include increasing overall federal matching rates; completely federalizing the costs of the expansion; and/or federalizing certain Medicaid expenditures, such as long-term care costs. Both the federal government and the states often seek to shift costs from one party to the other. One way or the other, public financing will be needed to expand coverage for low-income Americans, and the macroeconomic effects will be similar regardless of whether federal or state funds are used to meet these costs.

No matter what the mechanism, the cost of providing adequate health insurance coverage to the millions of low-income uninsured Americans will be high, although some of the costs can be offset through savings in our health care system. Nonetheless, if our intentions are serious, Medicaid expansion is the most cost-effective and appropriate method available.

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2 Trackbacks for “Expanding Coverage for Low-income Americans: Medicaid Or Health Insurance Exchanges?”

  1. Health Care. (united health care, universal health care) » Blog Archive » Medicaid: Uniquely Prepared To Deliver On Health Care Reform
    July 12th, 2009 at 4:32 am
  2. Tom Watson: Comment of the Week:…. Health Affairs Blog…. | Total Info
    June 25th, 2009 at 12:29 pm

2 Responses to “Expanding Coverage for Low-income Americans: Medicaid Or Health Insurance Exchanges?”

  1. David Witt Says:

    With regard to using Medicare as the vehicle for adding another 50 million uninsured, there are at least three considerations that must be dealt with. The first is mandates. The 50 states have 50 different levels of state mandated services ranging from 11 to 59. The federal law only specifies 2 mandates. If Medicare was to compete openly for subscribers, many states would have private plans completely eliminated. Texas for example has 59 mandates that add 100% to the cost of private plans whereas Medicare only has two. By law private plans would cost twice as much as a Medicare based plan competing for the same subscriber.

    Second, Medicare does not deal with medical necessity or value. No pre-approval for procedures; so, while prices are lower, waste is not controlled. Yes, administrative costs are low, but at what cost? The third issue, true with most any solution, is the new subscriber phenomenon. A person that has not had insurance for several years will be a very heavy user for their first year on a new plan. This must be budgeted for in any plan to insure the uninsured and medical necessity control (issue 2) should figure prominently in this budget.

  2. Neil Gardner Says:

    I have been involved with dental public health since about 1971. I have heard over and over that by increasing reimbursement, many more private dentists will take Medicaid dental kids, and this will increase access potential. It has been almost 40 years and still nothing major in the way of changes has happened in most of the country. The author says that increases in reimbursement would be only a small part of the program, but history suggests that it is still tough to bring about. Either that or there is something else at work in this access area dilemma.

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