John Hood: Medicaid reform holds promise

Apr. 15, 2013 @ 06:00 PM

RALEIGH — There are many unknowns regarding the proposal Gov. Pat McCrory announced to use competitive contracting to reform North Carolina’s Medicaid program. But what I do know about it suggests the governor is heading in the right direction.
His idea is to award contracts to three or four provider networks that would coordinate and deliver services to poor, disabled and elderly Medicaid recipients. The state currently uses a single nonprofit, Community Care of North Carolina (CCNC), to perform this task, but it does not bear any financial responsibility if costs come in higher than budgeted. In other states, and in managed-care programs more generally, such at-risk contracts are commonplace.
The McCrory administration doesn’t have the final word on Medicaid reform. The plan will have to pass muster in the General Assembly and receive the necessary waivers from Washington. But here’s why it is worth considering:
• We have a relatively high-cost Medicaid program. North Carolina spends just over $6,000 per enrollee on Medicaid payments, plus additional funds for administration and disproportionate-share hospital subsidies. Our program costs 10 percent more than the national average and 26 percent more than the average of Medicaid costs in Southern states.
• These percentage differences translate into very large dollar amounts. If North Carolina’s Medicaid costs were at the regional average, we’d be spending about $640 million less in state money. That’s money that could otherwise be devoted to fiscal priorities such as tax relief or education.
• Unlike some state programs, Medicaid cannot be properly thought of as investment. While funding roads or schools might increase future economic growth, by moving goods more efficiently or making future workers more productive, most Medicaid dollars go to fund acute and long-term care services to elderly and disabled North Carolinians. These are necessary and valuable expenditures, obviously, but they represent consumption, not investment. To the extent state policymakers can provide this medical safety net at a lower cost, they can use the savings to enhance the state’s economy through a combination of private investment (via tax relief) and public investment (such as roads and schools).
The current Medicaid contractor, CCNC, originated as an arm of the state Department of Health and Human Services, becoming a private nonprofit a few years ago. It can and probably will become one of the comprehensive-care contractors under the new system.
Defenders of the current CCNC contract observe that North Carolina experienced the slowest rate of Medicaid growth in the country from 2007 to 2010. That’s true, as far as it goes. But this comparison was for Medicaid payments only, excluding administrative cost, and came after many years in which North Carolina had higher-than-average growth. Moreover, the program has struggled with cost spikes since 2010.
While the development of CCNC may have been a first step toward cost containment, it’s time to take the next step and create financial incentives for coordinating care more efficiently. So far, so good.

John Hood is president of the John Locke Foundation, which has just published “First In Freedom: Transforming Ideas into Consequences for North Carolina.” It is available at Representations of fact and opinions are solely those of the author.