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What if we looked for innovative ways to reduce the cost of the Medicaid program per customer?

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The Senate will likely soon vote on a new version of the House-passed American Health Care Act, a bill intended to repeal and replace the Affordable Care Act. The current version of the bill aims to reduce Medicaid spending by $800 billion over 10 years. By reducing the federal match for new enrollees and tightening eligibility standards related to the federal poverty level, the plan will make it harder for people to cycle on and off Medicaid in accordance with their employment status, ultimately reducing the number of “expansion enrollees” that qualified for Medicaid under the ACA. The net effect is to make it financially infeasible for states to continue to cover the ACA expansion population, leading to over 20 million Medicaid patients losing their insurance over the next decade.

In 2016, total Medicaid spending was $575.9 billion, which is 3.1 percent of gross domestic product (up from 1 percent of GDP in 1982). Federal funding accounts for 63.1 percent ($363.4 billion) of Medicaid spending (up from 52.9 percent in 1982). Actual state spending per Medicaid enrollee varies dramatically across states, ranging from $3,500–$9,500 per person per year. This immense variation is partially due to readily explainable differences in input costs (i.e., lower labor costs in low-income states) and to significant differences in benefits between states. (Some states, for example, have generous home health programs.) But some of the variation in cost is due to poorly understood factors such as the relative efficiency of the delivery system in each state.


So what if, instead of attempting to control Medicaid costs by reducing the number of individuals enrolled in the program, we looked for innovative ways to reduce the cost of the Medicaid program per customer? If we focus on reducing waste as a way to bring down costs, we could simultaneously improve health outcomes, too. Such an approach is not wishful thinking—it has already been shown to produce real cost savings in some states.

All hospitals operate in slightly different and distinct ways, and only recently has there been enough data available for hospitals and managed care organizations to meaningfully compare their outcomes and use the results to help them create more efficient systems. But some states are starting to do this within their own hospital systems, with promising results. Take Maryland—by focusing relentlessly on improving outcomes—for example, through implementing new practices aimed to limit unnecessary medical complications—Maryland has witnessed extensive decreases in hospital complication rates. In the first two years of its initiative (2009–2011), complications were reduced by 15.26 percent, saving $110 million (0.6 percent of total hospital cost). This success was attributed in part to Maryland’s use of financial rewards and penalties to incentivize hospital performance. The continuation of the program has resulted in further reductions in complications.

Other states have seen similar success. Texas has decreased avoidable emergency room visits by 10 percent and re-admissions by 25 percent for a savings of $100 million (the research on that has yet to be published). Minnesota has decreased re-admissions by 19 percent, meaning a savings of $70 million for Medicaid. New York is beginning to see similar success. (Full disclosure: Some of the U.S. states referenced are using classification tools from my company, 3M Health Information Systems, to develop new Medicaid payment models.)

How do these state Medicaid programs achieve better outcomes? It is a combination of sharing comparative results between hospitals or managed care organizations to highlight differences between institutions, sharing of best practices, and modest financial incentives to improve. Just as important, a pay-for-outcomes approach must focus on a small number of outcomes that have a measureable financial impact and that cover the vast majority of avoidable services or poor outcomes. (If there are hundreds of measures, health care institutions will simply get lost.) This small set of outcomes includes hospital complications that can be minimized, such as limiting the risk of patients’ acquiring pneumonia in the hospital after a stroke, treating a cold at a primary care doctor’s office or an urgent care center instead of an emergency room, and limiting avoidable hospital admissions or re-admissions by treating ongoing conditions, such as out of control diabetes, at the primary care doctor’s office.


It should be noted that these states are led by governors of both parties. These are programs that can have broad bipartisan support, in part because they not only lead to cost savings, they also lead to better medical outcomes

There are significant savings opportunities across other states to improve outcomes and reduce waste. Rather than uniformly cutting costs and/or health care coverage, the federal government could incentivize progress by instituting programs like the ones these states have already shown can be successful. While the status of the AHCA is unclear, the need to address payment reform—especially for Medicaid—remains. How much money can be saved by improving outcomes? The Institute of Medicine estimates that between 20–30 percent of total health care spending is either wasteful or a consequence of poor outcomes. Is there $800 billion in savings available? A pay for outcomes approach won’t solve every problem—but it would be quite a start.

Disclaimer: Norbert Goldfield, MD, is medical director of clinical and economic research for 3M Health Information Systems. The opinions expressed in this commentary are the author’s own and do not necessarily reflect the views of 3M Company.

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Between 20–30 percent of medical spending comes from inefficiency. – Slate Magazine