Congress Focuses on Medicaid and Medicare Spending
As Congress tackles the pressing issue of spending, its focus has shifted particularly toward Medicaid and, to a lesser degree, Medicare.
This isn’t groundbreaking territory. Just seven years after Medicaid was enacted in 1965, Congress began to prioritize cost reduction strategies for these programs, mainly targeting federal support for low-income individuals and Medicare recipients, as well as those on Social Security.
Tennessee has emerged as a trailblazer in managing Medicaid costs. Congress might find value in looking at Tennessee’s experiences with its Medicaid initiative, Tenncare.
Nearly three decades ago, the state faced crippling annual spikes in Medicaid costs. The well-regarded Democratic governor at the time, Ned McWorter, known for his efforts to manage budgetary issues, sought a way to fund these increases through state income taxes—a proposal that ultimately didn’t pan out. To address the financial strain, the Tenncare program was introduced, incorporating a growth rate in costs.
Tennessee successfully obtained a waiver to put in place a universal, essential managed care program. The state bypassed full Medicaid-controlled care, with plans to transition entirely to managed care projected to yield a 20-25% reduction in costs. This approach was bolstered by assurances from patient advocates, who agreed to utilize savings to expand Medicaid access for previously eligible individuals.
The mandatory Medicaid managed care initiative was labeled a success; since 1997, the state implemented it without needing a waiver. Managed care added economic considerations to medical decisions. Although the projections aimed for cost reductions, it became evident that once these savings materialized, cost increases would eventually bounce back, albeit from a lower starting point. The accuracy of these forecasts was noteworthy.
Following McWorter, Republican governor Don Sandquist wasn’t able to enact an income tax. Another Democratic governor, Phil Bredesen, came into power with a promise to avoid implementing an income tax and sought out ways to control Medicaid spending growth. During this time, I worked as an advisor to him.
The reform team concluded that the focus should be on “health needs.” This insight stemmed from research I participated in, examining hospital staffing across three integrated facilities. We explored various models, but consensus on the “right” one was elusive.
Historically, “medical need” defined the scope of health benefits, including those provided by Medicaid. This viewpoint relied on there being a singular correct way to deliver medical care, grounded in scientific agreement. However, the presence of clinical uncertainty has raised questions about this traditional perspective. There are countless alternatives, often without clear evidence for their superiority.
What this suggests is that the state shouldn’t cover more expensive alternatives unless solid scientific proof demonstrates they’re genuinely better and justified in cost. For instance, if aspirin suffices, it should replace pricier options. Tenncare shouldn’t cover costly inpatient choices when effective outpatient treatments are available at a low cost.
This perspective has formulated Tenncare’s definition of “health needs,” potentially setting a national example for significant, albeit challenging to quantify, savings. This definition has been in effect for almost two decades and has gained federal court approval. Tenncare even proposed methods for managing costs so that states can remain within their existing revenue frameworks and accept financial risks if they can share savings beyond predicted expenses.
The Tenncare definition maintains the traditional requirement that a physician (to avoid “doctor shopping”) recommends any medical items or services considered “safe and effective.” Anticipated medical benefits must outweigh expected medical risks, gauged by both the registrant’s status and scientific backing.
This approach includes three main features:
- First, medical items or services must directly “diagnose or treat a registrant’s medical condition,” specifying what qualifies for the program.
- Second, these items or services must represent “the least expensive alternative.” This factor integrates economic considerations into medical choices. Alternatives can encompass lifestyle changes or outpatient options when low-cost and safe.
- Third, any alternative must be suitable for the registrant’s medical condition, except for cost. Standards of care differ from private plans, but substandard care is not permissible.
These reforms sparked controversy two decades ago, yet they have formed a fundamental part of the Tenncare system and have been executed successfully over the years. They consider costs while shaping a culture of medical decision-making that’s notably absent in some private plans, focusing instead on validity of care. Interestingly, a degree of differentiation is explicitly supported in affordable care strategies, referencing opportunities for health plans to exceed the essential health benefits outlined in the Affordable Care Act.
During discussions on these reforms, it was estimated that savings could reach between 1% and 5% of total Medicaid spending. In programs with extensive expenditures, even a 1% reduction could be considerable.
