Healing Medi-Cal

Like many states, California is struggling to pay for the health insurance it offers poor residents. The ranks of the Medi-Cal program grew by more than 12% after the economy tanked, and rising healthcare costs increased the fiscal burden. Making matters worse, state officials kept trying to solve the problem mainly by paying doctors less for their services and charging Medi-Cal beneficiaries more, ignoring the skewed incentives and inefficiencies in the system that were driving costs higher.

The courts and the Obama administration have blocked several of the state’s cost-saving efforts over the past year. Although those decisions will make it harder for legislators to balance the budget, they should also force the state to start addressing the Medi-Cal problem at its root. Gov. Jerry Brown has stepped up with a plan to change the way Medi-Cal provides some costly types of care, and it seems promising, if highly ambitious. The key to its success will be its ability to provide care more effectively rather than simply providing less care.

Medi-Cal is the state’s version of Medicaid, a joint effort by state and federal governments to provide health insurance to the poor. The higher a state’s average income, the less the federal government kicks in. Although California has an unusually large number of residents living in poverty, average incomes in the state are relatively high. As a consequence, it gets the bare minimum federal Medicaid contribution: 50%.

Another factor in the Medi-Cal burden is that California makes coverage available to more low-income residents than other states do with their programs. That’s been the state’s approach for years, and it can’t reverse course now — the 2010 healthcare reform law bars states from tightening their eligibility limits. That law pushes Medicaid and Medi-Cal in the other direction, extending coverage to millions of additional low-income adults starting in 2014. The federal government is required to cover virtually the entire cost of the new recipients for the first several years; after that, there are no guarantees.

California has been trying for more than two decades to control Medi-Cal costs, moving many of its recipients into managed care — that is, HMOs — in the 1990s. It also has tried freezing or cutting the rates paid to doctors, narrowing the types of care that it covered and bargaining for lower drug prices. The result is one of the country’s most cost-effective healthcare programs. But that also means that any further cuts California makes to healthcare providers or to benefits are likely to deny Medi-Cal recipients the kind of access to care that privately insured Americans receive, in violation of Medicaid rules. That’s why the federal courts stopped the state from making more cuts in the fees it pays Medi-Cal doctors, and why the Obama administration has resisted the state’s efforts to charge Medi-Cal recipients stiff co-pays.

Clearly, the state needs a new approach to controlling Medi-Cal costs. The cuts Brown sought last year, some of which he suggested again this year, seem to have been recycled from his predecessor’s proposals to trim around the edges of Medi-Cal. Rather than simply limiting the dollars and services available, the state has to find a way to get more and better care from the money it’s spending, especially on the chronically ill beneficiaries who rack up most of the bills.

It’s the same challenge the entire healthcare system faces. The federal healthcare reform law begins to address the problem by taking tentative, experimental steps to change the financial incentives for doctors, hospitals and insurers. The goal is to reward everyone in the system for keeping people healthy and minimizing the cost of healing the sick and injured.

Medi-Cal isn’t set up that way today. Whole categories of recipients aren’t in managed care, which means no one has an incentive to keep them from taking minor problems to the emergency room, bouncing in and out of hospitals or eschewing preventive care.

Brown’s Coordinated Care Initiative aims to cut more than $3.6 billion from Medi-Cal spending over the next four years by gradually shifting disabled and elderly Medi-Cal patients into managed care. That includes people receiving long-term care at home or in nursing homes. The chronically ill among them are some of the costliest patients to treat, in part because the current approach pays doctors and hospitals for every treatment and service provided. In managed care, by contrast, HMOs receive a set amount per patient, encouraging healthcare providers to offer the most effective treatment and to prevent health problems from recurring.

That’s not to say HMOs by themselves are the answer to rising healthcare costs. The healthcare industry is still figuring out how to encourage efficiency without limiting people’s access to the care they need. In other words, there’s still a risk that “managing” care from the insurer’s perspective will lead to rationing and a loss of patients’ ability to control their own destinies. State officials say Brown’s proposal is designed to guard against both of these problems, but the issue has to be taken seriously.

That’s why some lawmakers and county health officials want to proceed more cautiously than Brown has proposed, waiting to make sure that the shift to managed care works before committing to it statewide. They’re right to be concerned, but the state’s fiscal realities cannot be ignored. Policymakers and healthcare providers must change the financial incentives in Medi-Cal and deliver more value for the dollar through better coordinated, more effective care. The governor’s proposal may not be the complete answer, but it’s the right starting point.