As Congress returns from recess, the current version of the Senate bill to repeal and replace the Affordable Care Act (ACA) 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 more than 20 million Medicaid patients losing their insurance over the next decade.
In 2016, total Medicaid spending was $575.9 billion, which is 3.1% of gross domestic product (up from 1% of GDP in 1982). Federal funding accounts for 63% ($363.4 billion) of Medicaid spending (up from 53% in 1982). Actual state spending per Medicaid enrollee varies dramatically across states, ranging from $3,500 to $9,500 per person, per year. This immense variation is partially because of readily explainable differences in input costs (i.e., lower labor costs in low-income states) and significant differences in benefits between states. (Some states, for example, have generous home health programs.) But some of the variation in cost is because of poorly understood factors — such as the relative efficiency of the delivery system in each state.
See also: Don’t Be Dissuaded by Medicaid Myths
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 work 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 (2009–11), complications were reduced by 15%, saving $110 million (0.6% of total hospital cost). This success was attributed, in part, to Maryland’s use of financial rewards and penalties as incentives for 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% and re-admissions by 25%, for a savings of $100 million (the research on that has yet to be published). Minnesota has decreased re-admissions by 19%, 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? They use 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 measurable financial impact and that cover the vast majority of avoidable services or poor outcomes. (If there are hundreds of measures, healthcare 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 continuing conditions, such as out-of-control diabetes, at the primary care doctor’s office.
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 but also lead to better medical outcomes.
See also: When Leaders Don’t Lead on Medicaid
There are significant savings opportunities across other states to improve outcomes and reduce waste. Rather than uniformly cutting costs or health care coverage, the federal government could create incentives for progress by instituting programs like the ones these states have already shown can be successful. While the status of repeal-and-replace 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% and 30% of total healthcare 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.
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.
