Last week, we wrote about the importance of the Medicaid program, especially given its size as, by far, the largest health insurance plan in the United States.  We noted that Medicaid covers 71 million people (this number increased dramatically after the Affordable Care Act was enacted in 2010).  We said that “Medicaid is important for all of us” – whether you are a program beneficiary, a taxpayer who helps pay for it, a State or Federal government official who administers it or a provider who provides health care services to a beneficiary.

But Medicaid is also in desperate need of reform.  It is a 1960s-era health insurance plan living in a 21^st century world.  Whereas Medicare has implemented program reforms (Medicare Advantage; Medicare Part D; delivery system reform through the Innovation Center), Medicaid has been slower to innovate.  The program's costs are skyrocketing:  in 1987, Medicaid consumed 8.1% of State budgets.  By 2013, that share had increased to 18.9%.   This increase is crowding out State spending on education, roads and transportation, criminal justice, and other needs.

Last week we wrote about “five things we know about Medicaid in 2017.”  This week, we are going to suggest three areas for broad reform of Medicaid that we think the incoming Trump Administration may be in a position to consider.

First:  as we noted last week, States will play a bigger role in managing Medicaid in 2017.  That is only appropriate; after all, Medicaid is, at its core, a reflection of the American federalist system of government, in which States can act as a check and a counter-balance to the vast power of the Federal government.  That's why we think that the incoming Trump Administration may make greater use of and vastly simplify the waiver authorities that exist under Federal law.  Too often, the waiver process is a “mother, may I?” experience under which States come hat-in-hand to CMS requesting flexibility in administering their programs.  We think that the incoming Trump Administration may change this paradigm to give far more power to the States.  And of course, if Congress couples this administrative flexibility by block granting or converting Medicaid to a per-capita spending program, State flexibility will increase even more.

Second:  the financing system for Medicaid is a mess.  Consider:

• There is a gross inequity in funding Medicaid. Right now, States receive greater funding for able-bodied adults with income above the poverty level than they do for children, pregnant women, elderly individuals and individuals with disabilities whose incomes are below the poverty level.
• The Medicaid financing system disadvantages States when they can least afford it: in times of economic uncertainty.  Anytime that the American economy enters into a recession – as happened in 1991 – 1992; 2000 – 2001 and, most recently, in 2008 and 2009 – that economic stress places enormous demands on State Medicaid programs at the very time that States can least afford those demands, as State revenue streams are dwindling.
• These quirks in Medicaid financing encourage States to use creative financing arrangements that result in their not paying their full share of program costs, and shifting those costs to the federal government.

The incoming Trump Administration, working with Congress, could address the financing inequities in Medicaid.  The last time that there was a major financing shift in Medicaid was in 2006, when the federal government assumed the costs of prescription drug coverage for dual-eligibles.

Third:  rising prescription drug costs are negatively affecting Medicaid budgets.  This gives the incoming Administration and Congress an opportunity to re-think the existing prescription drug rebate program.  There are many issues that need to be addressed in the program.  For example, the current rebate system is ill-equipped to address the revolution in payment system reform that is occurring in the health care system such as value-based purchasing and pay-for-performance; in fact, it actively dis-incentivizes manufacturers from entering into these arrangements.  Manufacturers have complained that States are not living up to the requirements of the prescription drug rebate statute that drugs be covered once manufacturers agree to provide rebates.  And in the final outpatient prescription drug rule that CMS published on February 1, 2016, the agency did not finalize a policy on key issues such as the treatment of “line extensions” of brand name drugs.

Our view is that the Medicaid program has been treated as an “afterthought” in the American health care system for much of the past 50 years.  In fact, that's part of the reason that we started this blog – because we think that Medicaid should not be treated as an afterthought.  As we noted last week, it is a health care program that affects the lives of over 70 million people.  The incoming Trump Administration and the incoming 115^th Congress has a once-in-a-generation opportunity to improve the operation of this vitally important program.