Nudging Medicaid

Should people newly eligible for Medicaid be treated differently from people getting coverage on the exchanges or, for that matter, from the general population who get coverage through their employers?

The state of Michigan in its plan to expand the low-income healthcare program said no. The law about to be sent to the CMS for approval requires people earning between 100% and 138% of poverty pay up to 5% of their meager incomes for coverage, which can be in the form of premiums, copays or deductibles. That could take as much as $750 out of the paychecks of someone earning $15,000 a year.

Several states still sitting on the fence are contemplating similar approaches to expanding Medicaid. Their economic logic is the same as the many employers moving to high-deductible plans. Once a beneficiary—whether in a public program or on private insurance—has “more skin in the game,” he or she is more likely to take a closer look at the cost and value of the healthcare prescribed.

There has always been warranted concern about the real-world effect of the “more skin in the game” approach to reining in unnecessary healthcare spending. Ever since a seminal 1970s RAND Corp. report, it has been generally recognized that people charged more upfront for healthcare will cut back on services. The problem is that they do an extremely poor job of discriminating between high-value and low-value care. They are just as likely to cut out an age-appropriate cancer screening test as an unnecessary trip to the doctor.

Yet there are numerous reasons why it makes sense to have low-income working people, including those newly eligible for Medicaid, pay at least something for their coverage.

Levying charges makes the program more seamless with the coverage they will be asked to obtain on the new insurance exchanges as they move up the income ladder. All those plans will have cost-sharing elements.

Minimal premiums inhibit system gaming by removing the incentive for people to limit their incomes or avoid limited employer plans to take advantage of a free public program. On the flip side, paying a small premium reduces the social stigma of joining Medicaid. It's not free.

There's even precedent for cost-sharing in the basic Medicaid law. The federal statute governing the program prohibits premiums for people whose earnings fall below the poverty line. But it doesn't prohibit other forms of cost-sharing. States can require their Medicaid beneficiaries to pay up to $4 for a doctor's visit, for instance, or $75 for a hospital stay.

Medicaid has always been treated as special among poverty programs, which becomes another argument for treating it like other forms of health insurance. It generally provides the same level of care that others receive when serious illness strikes (although it pays at lower rates to providers). This is very different from programs such as food stamps or housing assistance, which limit assistance to what is considered the bare minimum.

However, state officials moving down the “skin in the game” path need to give careful consideration to how they design their cost-sharing programs.

Research dating from the late 1990s after Hawaii, Minnesota, Tennessee and Washington attempted to expand Medicaid to cover the uninsured showed that charging premiums, even small ones, stopped many near-poor people from obtaining coverage. More recently, a limited demonstration project in Indiana, which covers some people up to 200% of the poverty level with a plan tied to a health savings account, led to mostly older and sicker people using the program because everyone was required to pay 2% of income to obtain coverage.

A far better approach is to avoid premiums entirely. Instead, states that want to go down the “more skin in the game” path to Medicaid expansion should implement well-designed copays that send appropriate signals to beneficiaries. They should institute higher copayments for low-value services and low or no copays for high-value services.

Many private insurers are incorporating value-based insurance design into their traditional plans. It's time for public programs to do the same.

Merrill Goozner is the editor of Modern Healthcare.

Follow Merrill Goozner on Twitter: @MHgoozner