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You Decide: Will Medicaid Reform Work?

Dr. Mike Walden

North Carolina Cooperative Extension

Medicaid is the public program assisting limited-income households with their health care expenditures. Begun in 1965, the program is jointly funded by the federal and state governments. In North Carolina, the funding split is 65 percent federal money and 35 percent state money.

Medicaid takes more than 17 percent of spending in the state’s General Fund. Driven by rising medical costs and increasing enrollments, the program has been one of the fastest growing in recent decades. Many are concerned that if these trends continue, Medicaid will crowd out spending on other public programs.

The traditional structure of Medicaid was “fee-for-service.” Here, expenditures incurred by Medicaid clients are paid by the program if they are approved. Some have questioned whether this system encourages more health care spending. Indeed, many states – including North Carolina – have experienced frequent overruns on Medicaid spending from the amount initially budgeted.

Therefore there has been an incentive for public policymakers to find alternative payment plans to tame Medicaid spending without compromising services to recipients. Three such plans have been considered: managed care, a set fee paid to providers and a health insurance voucher provided to Medicaid recipients.

In managed care, the state delegates the operation of Medicaid to a one or a number of private firms. The firms coordinate the provision of care by health care professionals in an attempt to control health care costs. The goal is to have health care providers work together to solve clients’ health care issues and thus eliminate unnecessary treatments and expenditures. Typically the managed care firm works with a limited network of care providers.

The second alternative – providing a set fee paid to providers – also moves the micro- managing of Medicaid from the state to the private sector. Here the state calculates an annual dollar amount deemed adequate for a person’s health care and pays that amount to a private provider. The private health care provider then agrees to deliver necessary health care services to the Medicaid client. Any cost overruns are absorbed by the provider.

In the third option – the health insurance voucher — the state would again calculate an annual dollar amount needed for a person to obtain health care. However, this time the state would send the funds to the Medicaid client in the form of a health insurance voucher. The voucher could be spent only purchasing a health insurance policy. The voucher amount would be adjusted for the health condition of the client; for example, it would be higher for older Medicaid clients and for those with serious medical conditions.

Each of these ways of delivering health care to Medicaid recipients has pluses and minuses and supporters and detractors. Managed care has been used in many states, and in some cases it has contained health care costs. But critics worry the system limits the choices of patients and reduces their input into medical decisions.

Paying a set fee per Medicaid client to private providers and letting them accept potential cost overruns has the obvious advantage of protecting the state from exceeding its annual Medicaid budget allocation. Yet the concern is the private providers will scrimp on health services to the clients in an effort to avoid cost overruns and increase profits. So in this system it is essential for the state to act as the “watchdog” over the private firms by monitoring measures of care and cost. It is also essential many firms compete for the health care payments from the state.

The health insurance voucher system is favored by those who think our economy works best when the consumer is in charge. Medicaid clients would now have the financial resources to shop for health insurance policies and compare coverage and prices. They would be in the same position of those with adequate income.

Doubters express two concerns about this consumer-focused system. One is the need for counseling of Medicaid clients over how to evaluate alternative health insurance policies. They argue that without this education, the system won’t perform. Critics also question whether there is a sufficient level of competition in the sale of health insurance policies to really put the consumer in charge. These are important issues that would need to be studied and addressed.

In the just-concluded session of the North Carolina General Assembly, state leaders picked “door No. 2” and will implement the model in which the state pays providers a set annual amount to deliver health care services to Medicaid recipients. Over the next several years we will observe how the system evolves. This will help all of us decide how the important goal of providing adequate health care to all should be structured.


Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.


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