With revenues reduced to a trickle, some states are considering drastic measures to balance their budgets. Gov. Rick Perry of Texas has proposed abandoning Medicaid, the federally mandated program that provides health care for the poor. That idea also has its advocates in Florida, Nevada and here in South Carolina.

But before ditching Medicaid, let’s do ourselves the favor of considering this cautionary tale from Indiana.

Indiana’s experiment with Medicaid a flop

By LAURA HERMER
HOUSTON CHRONICLE

Nov. 20, 2010, 3:59PM

The health policy world is in a tizzy. Texas is thinking about dropping Medicaid. Gov. Rick Perry thinks a private solution can work better. Several other states are paying close attention and considering doing the same.

Texas’ actions shouldn’t come as any surprise. Legislators and others in Texas, Florida, Nevada and elsewhere started threatening to drop Medicaid months ago, claiming they could create a better and cheaper program by providing subsidies for private coverage for the poor.

We’ve heard about how private business works better and cheaper than government for many years now. We’ve made a lot of public policy decisions based on this premise. Consequently, we also have some data on how well this has worked. How much better and cheaper has the private market in fact functioned in comparison with government programs?

In the case of Medicaid, we have a particularly good example from Indiana. The state’s Healthy Indiana Plan offers subsidies to help certain low income uninsured people purchase private health insurance plans, in lieu of offering them traditional Medicaid. The concept sounds irreproachable. Beneficiaries who otherwise wouldn’t be able to afford coverage get it, health care providers get better reimbursement than they would if the beneficiaries were covered via Medicaid, and the state pays less than it would if it offered the beneficiaries traditional Medicaid coverage. What’s not to like?

Unfortunately, lots. First, many beneficiaries have to pay a lot more out of pocket than they would if they had traditional Medicaid coverage. Nonpayment has been the No. 1 reason for terminating beneficiaries from Healthy Indiana since the program began in 2008, with up to 35 percent of beneficiaries in certain income levels failing to make their first payment.

Second, providers serving Healthy Indiana beneficiaries have indeed been paid more than they would have if the beneficiaries had been covered under Medicaid. However, Healthy Indiana covers only about 44,000 Indiana residents, while more than 830,000 Indianans are uninsured. And in order to pay for the 44,000 Indianans in the Healthy Indiana Plan, the state took $50 million from funds that it uses to help reimburse hospitals for uncompensated care. In other words, 40 percent of the state’s uncompensated care funds were spent on only 5 percent of Indiana’s uninsured population.

But maybe this was still a much better deal for everyone. Maybe most of Indiana’s uninsured population doesn’t need health care, and those who do got a much better deal through the Healthy Indiana Plan than they would have if they’d been in traditional Medicaid.

Unfortunately, neither premise is correct. Healthy Indiana’s waiting list is longer than the number of enrollees it has. And uninsured Indianans, whether eligible for Healthy Indiana or not, continue to need health care. Meanwhile, for those actually in the program, the state paid $75 more per month in 2009 for the healthiest group of Healthy Indiana enrollees than it did for comparable adult Medicaid beneficiaries, even though Healthy Indiana beneficiaries are ineligible for many expensive services, such as maternity care, that Medicaid beneficiaries receive. That doesn’t include the cost that Healthy Indiana beneficiaries must pay out of their own pockets: up to $1,100 per year.

There is no evidence that Healthy Indiana beneficiaries are getting better care than Medicaid beneficiaries. However, the care they are receiving costs more, and leaves less for reimbursing uncompensated care for the remaining 95 percent of the uninsured.

Why, in this budget climate, would a state pay more to incompletely subsidize private coverage for only a fraction of its low-income uninsured residents than it would to provide more comprehensive health benefits to the same population under Medicaid?

The data is in. Texas should pay heed.

Hermer is an assistant professor at the Institute for the Medical Humanities at the University of Texas Medical Branch in Galveston.