Medicaid medicine: let consumers, not bureaucrats, make decisions

On Medicaid's 40th anniversary -- just upon us -- some visionary governors are showing how chopping the $300 billion spent on the joint federal-state program for 53 million poor and disabled Americans is not the only solution to its staggering costs. For example, were Florida's $14 billion 2004 expenses to grow at current rates, Medicaid would account for 60 percent of its budget by 2015; but its governor, Jeb Bush, has a different, better cure -- a consumer-driven program that fundamentally alters Medicaid's power equation: it allows consumers to allocate their own health care, instead of bureaucrats doing so on their behalf.

Three characteristics are central to such programs:

(1) liberating enrollees to manage their own health care purchases;

(2) freeing providers to design innovative care programs, tailored for the unique needs of the recipients; and

(3) enabling intelligent choice with new information and support.

For example, South Carolina Gov. Mark Sanford's plan would liberate recipients with a budget sufficient to meet their particular health care needs, a catastrophic health insurance policy, and free preventive care. Enrollees could roll over unexpected annual funds. He would enable intelligent choice by transforming the Medicaid agency from a health care purchaser and micro-manager to an educator and facilitator. Jeb Bush's consumer-driven Medicaid program frees supply by encouraging innovations such as provider-sponsored, community-based health service systems.

As a last example, programs initiated by Howard Dean and expanded by present Vermont Gov. James Douglas permitted the elderly and disabled to choose between home- and community-based care or nursing homes, reversing the misuse of expensive nursing homes by those who preferred cheaper alternatives were they only given the choice. Satisfaction with all aspects of this program substantially increased. Vermont hopes that the reductions in nursing home funding will enable support for more enrollees.

The private sector has already enrolled more than three million employees in similar consumer-driven health care plans. Results are encouraging.

For example, the health insurer UnitedHealth Group found that current enrollees in consumer-driven plans made intelligent changes in health care utilization relative to their past behavior, such as reductions in costly emergency room visits and substantial increases in the use of health information sources. Aetna discovered that while more than half of one employer's 13 percent cost reduction was caused by changes in consumer behavior, sick enrollees, like diabetics, continued to seek appropriate care and preventive services increased. Indeed, McKinsey found improved care for victims of chronic diseases in consumer-driven plans. Enrollees like these programs too. For example, 83 percent of the supermarket chain Whole Foods' team members voted for a consumer-driven health plan in preference to old managed care plans. After three years, the firm's health care costs increased by only 3.3 percent annually, while turnover plummeted.

Those who worry about the ability of Medicaid's recipients to shop as intelligently as the bureaucrats should consider the remarkable results achieved by consumer-driven programs for the disabled. They typically feature individual budgets, free choice of care providers, and unbiased "brokers" to assist adults to work and contribute to the community.

A 2003 evaluation of nearly 1,800 disabled participants in Arkansas's "Cash and Counseling" program found greatly enhanced satisfaction with caregivers and reductions in unmet needs, without impairment of health and safety. Direct consumer-control caused 38 percent reduction in neglect by caregivers and minimized fraud and abuse.

What a difference from a New York program which was characterized by a senior official as one "that almost begs people to steal." Small wonder that 11 states have since adopted similar programs. Last, Switzerland's long-standing national consumer-driven health care program gives the poor sufficient funs to buy their own health insurance. Switzerland has held the lid on costs -- spending is one-third less than in the U.S. -- while providing the excellent quality of care and socioeconomic equality that eludes other countries with centrally managed universal health care.

Some Congressional solons decry plans that include freeing the federal chokehold on innovative state Medicaid programs. Bad mistake. The best cure for Medicaid's budget woes -- and the best medicine for its beneficiaries -- are market-based innovations by prescient governors.

Regina E. Herzlinger is the Nancy R. McPherson Professor at Harvard Business School, a fellow at the Manhattan Institute and author of "Consumer-Driven Health Care." Tom Nerney is director of the Center for Self-Determination at Ann Arbor, Mich.