Medicaid Spending – Where Can We Make Health Spending Cuts?

Recently cuts to Medicaid spending have been proposed at both the state and federal levels in order to reduce overall spending on health care. When you look to see where Medicaid money goes, you’ll find that about 50 percent of Medicaid beneficiaries are children, and another 25 percent are pregnant women and/or the parents or caretaker relatives of covered children.  About 10.2 percent were elderly and 15.1 percent disabled.  Because children and their caretakers are usually healthier, spending for them is much lower  than for the elderly  (10.2 percent in 2007) or the disabled (15.1 percent).  In 2009, the national average   per capita was $$2,848 for children and $4,1231 for non-disabled adults. In contrast, the average Medicaid expenditures for elderly beneficiaries and the disabled were $15,678 and $14,481, respectively.  Put another way, about 2/3 of Medicaid spending is for services for individuals with disabilities and the elderly, who comprise and about 1/4 of beneficiaries.

One reason for the disparity is that so many disabled or elderly individuals need long-term care, which is more expensive than most acute care.  In fiscal year 2009,  Medicaid spent about $349 trillion on services for beneficiaries. Of that about 1/3 was for long-term care.  Nursing home services are the most expensive, and these beneficiaries are the most dependent and vulnerable. 

In recent years, agencies serving the aged have begun work to “rebalance” long-term care expenditures  by putting more resources into home- and community-based services (HCBS) to prevent or delay beneficiaries’ entry into nursing facilities.  HCBS are an effective way to save on long-term care, and the Centers for Medicare and Medicaid Services (CMS) has funded several demonstration projects to test different models in an effort to preserve maximum independence for beneficiaries. One unanticipated effect of the increased availability of HCBS is that more individuals who are blind or have other disabilities who had not  used nursing home services have applied for benefits, so that total costs for long-term care have not decreased.

Where, then, can we cut Medicaid expenditures?  Perhaps the more important question is “what drives health care spending?” Might more consideration of the value and effectiveness of various treatments help to save money?   Dartmouth researchers have consistently found that higher Medicare spending per beneficiary does not lead to better health. Many services are “supply-sensitive” — in other words, in areas with more doctors, or hospital beds, or testing equipment, beneficiaries stay in the hospital longer, see more specialist and undergo more medical procedures, but they aren’t healthier. In fact, beneficiaries in those areas were less likely to get evidence-based care.

Health care spending is not only driven by beneficiary costs, both within Medicaid and out. Recently, a manufacturer began marketing a “new” drug used to prevent premature labor, announcing a price of $1,500 per injection. The company did not develop the drug, but purchased the marketing rights. However, it persuaded the FDA to approve the drug as an “orphan” drug”, one that’s expensive to develop in relation to the number of people with the rare condition who might use it.  Physicians had long  been prescribing a generic version of the drug available through compounding pharmacies, where it  cost  $15.00 for a made-to-order dose.  Because patients ordinarily receive  weekly injections of the drug for as many as 18 weeks of pregnancy, the average cost of treatment would skyrocket.  The company warned compounding pharmacies that dispensing the compounded drug would violate their exclusive rights to market the drug and prompt FDA action.  After backlash from payers, including administrators of Medicaid drug programs, the FDA announced it would not take enforcement action. The company reduced its price to $590 per dose.  Still, some payers are afraid that denying authorization for the branded drug may be hazardous to their financial health. Fraud enforcement might help, too.  The drug maker had a history of sanctions for fraud and other violations of federal law, and its long-time  chief executive officer was excluded from participation in Medicare and Medicaid  in November 2010.

How would you decide to cut health care spending?