The Case for Consumer-Driven Medicaid

The Medicaid program is a health insurance safety net for 52 million Americans, but the price tag threatens the financial stability of the states. Regina Herzlinger looks to South Carolina for a model in consumer-driven healthcare. Key concepts include:
  • Medicaid costs threaten the financial health of states.
  • Consumer-driven plans dramatically control costs and improve the health of those with chronic disease.
by Regina E. Herzlinger

The Medicaid program provides a much needed health insurance safety net for 52 million of our nation's poor and medically needy, but its price tag threatens the financial stability of the states, growing 9.5 percent in 2004 alone—far in excess of revenues.

Fiscally responsible governors and state legislators who decline to raise taxes and, instead, attempt to control these costs, face three choices: Cut Medicaid expenses through reductions in enrollment, benefits, and provider reimbursement; cut other state expenditures for the likes of education and roads; or try a new approach. South Carolina Governor Mark Sanford (R) has suggested an option that is worth serious consideration in other states.

His plan gives Medicaid enrollees a choice: Every recipient would obtain catastrophic and preventive coverage as well as a personal health account (PHA). Enrollees could then use their PHA funds to pay for a consumer-driven option of a traditional Medicaid hospital insurance, along with a doctor of their choice; a managed care policy, with its deductibles and copayment; or a network group of local physicians. If employed, they can use the funds to pay their share of employer-provided insurance.

Those who worry about giving Medicaid participants choices are especially concerned about the consumer-driven option. These critics may well believe that Medicaid recipients will overwhelmingly choose the consumer-driven opportunities. But when consumer-driven plans are offered along with other health insurance choices, they are not necessarily the most popular. A 2005 Kaiser Family Foundation survey, for example, found that when enrollees were offered other insurance plans, only about 7 to 15 percent went the consumer-driven route. They also contend that Medicaid enrollees are too poorly educated and lack access to sources of information like the Internet. Although these sources are depicted as high tech, much of what patients learn actually comes from the phone and face-to-face interactions.

These plans appear to have transformed how some enrollees approach their healthcare.

As for the private sector's consumer-driven experiences with lower-income populations, the experience of Whole Foods, a supermarket chain, is instructive. As of 2004, its employees, primarily blue collar, have saved $14 million in health savings accounts, while costs increased by only 3.3 percent.

The overall accomplishments of the consumer-driven plans are notable. They not only dramatically controlled cost increases but also improved the health status of those with chronic diseases. Definity Health, a provider of consumer-driven insurance policies, demonstrated a reduction in flare-ups among its diabetic and asthmatic enrollees due to increased testing and drug utilization, while management consulting firm McKinsey found that consumer-driven enrollees were more likely to "very carefully follow treatment regimens for chronic conditions."

These plans appear to have transformed how some enrollees approach their healthcare. By enabling participants to trade off current expenditures against long-term health status and savings, consumers' behavior changed from "I do it because my health plan covers it" to "I do it because if I catch a problem early, I will save money in the long run." Thus, 75 percent of the enrollees in one consumer-driven group complied with the regimen for their chronic medications as opposed to 63 percent of those enrolled in other insurance plans with virtually no deductible.

Consumer-driven plans also increase enrollee satisfaction with both insurers and providers. A recent Blue Cross-Blue Shield survey found that satisfaction levels exceeded those achieved by non-consumer-driven plans, while patients in Switzerland, which has a century-old consumer-driven system, ranked their hospital care much higher than that in Germany, Great Britain, and the United States.

Let's face it. Medicaid enrollees are treated like second-class citizens in this country, with some providers choosing either to ignore them or treating them only after considerable delay because providers are so poorly paid by Medicaid. Beyond that, enrollees have little access to managed care and no access to the consumer-driven plans available to the rest of the population. Governor Sanford's plan for transforming his state's Medicaid program will give its enrollees the same choices and access to care as the rest of us, and it promises to control costs, too. When it comes to healthcare, what's good for South Carolina is good for America.

About the Author

Regina Herzlinger is the Nancy R. McPherson Professor of Business Administration at Harvard Business School. She is the author of Market-Driven Health Care (Perseus 1997) and the editor of Consumer-Driven Health Care (Jossey-Bass 2004).