Measuring Medicaid

Most of the recent public attention paid to the federal Medicaid program has focused on the question of whether or not states will participate in the program's expansion as allowed in the Affordable Care Act.
Such a focus is understandable, given the importance of Medicaid expansion to the ACA's goal of extending health insurance coverage to a broader swath of the currently uninsured in the various states.
The opposition to the program's expansion has been driven primarily by ideological or fiscal concerns. On the fiscal side, the governors of those states currently resisting expansion have expressed concern that said the extension of Medicaid benefits to a greater number of their states' residents would be financially ruinous.
In the near term, that argument is simply inaccurate, given that the federal government will shoulder most of the financial burden of expansion. Nonetheless, with state coffers still bare in much of the nation, these concerns may not be without merit in the long term.
Yet this debate is not the financial aspect of Medicaid spending that interests me here. Instead, I'd like to assess the manner in which federal Medicaid funding is allocated to the states, and whether it could be distributed more fairly.
My interest was stoked by a recent study performed by the U.S. Government Accountability Office (GAO). In its analysis, the GAO considered whether the current Medicaid funding formula - known as the Federal Medical Assistance Percentage, or FMAP - led to an equitable distribution of funds among the states. FMAP is based solely on state per capita income (PCI) in relation to national PCI.
On the face of it, relating state PCI to national PCI seems to make sense in best determining which states are most in need. But prior work by the GAO raised questions about the fairness of FMAP, and found that PCI - in the organization's words - "does not accurately represent states' populations in need of Medicaid services or states' ability to finance services, and does not account for geographic cost differences among states."
The current GAO research began with the premise that, to allow states to provide a "comparable level of services to each person in need," a Medicaid funding allocation method should "take into account the demand for services in each state and geographic cost differences among states."
Additionally, an equitable allocation method should ensure that "taxpayers in poorer states are not more heavily burdened than those in wealthier ones, by taking into account state resources."
These basic but insightful premises could lead to a reconfigured means of distributing federal Medicaid dollars that would better address the real needs of low income populations in the states.
For instance, the GAO report argues for the use of a measure of "demand for health services" that accounts accurately for both the size of the target population in need of services and the health services needs of that population. This is important, as Medicaid would measure not only the raw number of people in a state who would qualify in economic terms, but adjust these numbers to "reflect variation in health services needs" within a population, using additional data sources, such as Medicaid data on enrollment or spending.
Complex indeed, but you perceive the utility.
The GAO also calls for utilizing a revised measure of geographic cost differences among states that "accounts for all components of healthcare costs" (my italics). These components would include the cost of the personnel who provide healthcare services, which represents the greatest share of costs, and varies between and within states.
This is so obviously important that you might ask why it isn't already being factored into Medicaid allocations. Indeed, I can see no reason not to use readily available national data to estimate average wages for healthcare personnel by state - data such as the Occupational Employment Statistics survey conducted by the federal Bureau of Labor Statistics.
Finally, the GAO says a truly accurate measure of state resources should account for all personal income, regardless of whether a state taxes the income or not. This is a key insight, as PCI includes the personal income of state residents, but excludes other taxable income, such as undistributed corporate profits.
A more accurate assessment mechanism would be the Total Taxable Resources (TTR) measure, which is generated by the Department of the Treasury. The TTR contains the income included in PCI but also other significant sources of taxable income. Using the TTR to measure state resources would generate a much more equitable distribution of Medicaid dollars. For example, in 2010 the TTR measure of income was 42 percent larger on a per capita basis than PCI.
Don't let the numbers bore you. That was not my intention. On the contrary, the GAO report should excite us. For while the ideologically driven debate over whether states should expand Medicaid may be more entertaining, the GAO analysis of how Medicaid dollars are allocated is also serious business.
And if the recommendations were implemented, they could have a profound impact on how the nation makes most efficient use of healthcare resources directed to very vulnerable populations.