The House of Medicaid Rests on Five Pillars: Service Delivery

As the U.S. House of Representatives returns from its District Work Period, its top priority will be to assemble its budget reconciliation package. The House Budget Resolution has charged the Committee on Energy and Commerce to produce $880 billion in savings over the next 10 years. The Congressional Budget Office (CBO), the nonpartisan scorekeeper for Congress, has informed leadership and members that this level of savings cannot be achieved without reductions in spending levels to the Medicaid program.

The Five Pillars

Medicaid, along with all forms of health insurance products, can be organized and visualized according to the following five pillars:

The challenge for Brett Guthrie (KY-02), Chairman of the House Energy and Commerce Committee, will be to find savings among the pillars without causing the House of Medicaid to collapse. This series will examine each of the five, focusing on 2030, the mid-point in the 10-year budget window.

Service Delivery

In 1963, Kenneth J. Arrow, professor of economics at Stanford University and later a Nobel Prize winner, published a paper in the American Economic Review, “Uncertainty and the Welfare Economics of Medical Care.” At the outset, he clarified that, “[i]t should be noted that the subject is the medical-care industry, not health. The causal factors in health are many, and the provision of medical care is only one” (emphasis in original). It is the complex of services that center about the physician, private and group practice, hospitals, and public health, which I propose to discuss.” [1]

He further explains:

Thus, a transfer of purchasing power from the well to the ill will increase the demand for medical services. This will manifest itself in the short run in an increase in the price of medical services and the long run in an increase in the amount supplied.

The redistribution of purchasing power among individuals most simply takes the form of money: taxes and subsidies. The implications of such a transfer for individual satisfactions are, in general, not known in advance. But we can assume society can ex post judge the distribution of satisfactions and, if deemed unsatisfactory, take steps to correct it by subsequent transfers. Thus, by successive approximations, a most preferred social state can be achieved, with resource allocation being handled by the market and public policy confined to the redistribution of money income (emphasis added). [2]

Remember that when this article was published, the Medicare and Medicaid programs would not be created for nearly two years. So now, fast-forward to 1992. Actuaries at the Health Care Financing Administration (HCFA), the predecessor to the Centers for Medicare & Medicaid Services, published an article, “National health expenditures projections through 2030” in the Health Care Financing Review Fall 1992. They warned:

If current laws and practices continue, health expenditures in the United States will reach $1.7 trillion by the year 2000, an amount equal to 18.1 percent of the Nation’s gross domestic product (GDP). By the year 2030, as America’s baby boomers enter their seventies and eighties, health spending will top $16 trillion, or 32 percent of GDP.

As it turns out, the predictions of the actuaries for 2000 were pretty close to the actual levels of spending and as a percentage of GDP. However, the latest estimates for 2030 are substantially different (thankfully!); national health expenditures are now projected to reach about $6.9 trillion and 19.2 percent of GDP. [3]

Certainly, there are multiple reasons to explain why expenditures will be less than half of the 1992 projections. One of the most important reasons is the marketplace forces Arrow referred to that have shifted what services are delivered, where they are delivered, and by whom. One of the most dramatic shifts, from inpatient hospital services to outpatient hospital services and further still to ambulatory surgical centers and physician offices, was made by marketplace advances in medicine, including pain management and technology.  Same-day surgeries for various injuries and ailments were hard to imagine 30 years ago.

Thus, we must ask, has the regulatory side of medical care kept pace with the innovative side of medical care?

In the early 1990s, Medicaid services were still predominantly purchased through a fee-for-service (FFS) delivery system. Medicaid managed care was still in its infancy.  States began to share risk for the cost of services with private entities, which would organize their own provider networks and negotiate rates largely based on the Medicaid fee schedule or some percentage of Medicare payments and volume purchasing.

In the early years, Medicaid managed care organizations (MMCOs) focused on the acute care costs of lower-cost children and adults and slowly expanded to more complex populations. Mental health services, for example, were generally “carved out” of managed care contracts. Only recently has the use of Managed Long-term Services and Supports (MLTSS) been steadily expanding.  The medical-care industry is moving closer to resembling a health-care industry with eyes wide open to serving the whole person, not just a problem.

Medicaid also provides states with options to target specific population groups and services.  For example, the Program for All-inclusive Care for the Elderly (PACE) is designed to serve individuals aged 55 and older.  However, because it is a highly regulated “full-risk” model, including hospitalization, fewer than 100,000 people are served by PACE sites across the country.  States can also enter into agreements with physicians and physician groups to provide Primary Care Case Management (PCCM) or “health homes” targeted to people with chronic conditions or to women with high-risk pregnancies.

On March 27, 2025, the Trump Administration announced a reorganization at the U.S. Department of Health and Human Services (HHS) that will consolidate a number of programs within a new Administration for a Healthy America (AHA). According to an HHS press release, this new agency “… will improve coordination of health resources for low-income Americans and will focus on areas, including, Primary Care, Maternal and Child Health, Mental Health …”.[4]

As these programs are administered at the state level, HHS and the states should work together to form new “partial risk” or “shared savings” delivery models supported by performance-based payments. States are likely to welcome new models for delivering care to adults with serious mental illness (SMI) and children with Serious Emotional Disturbance (SED) in particular.

Thus, the continued evolution of the service delivery system must provide competition to help slow the growth rate in Medicaid spending. Savings are achieved by providing quality care in less costly settings. Historically, the healthcare system has been based on patients/clients leaving their own homes to seek services. Many consumer-based services in the 21^st-century economy have reversed the process flow and are now delivered at home. Healthcare should be no exception to this trend, but it will need to be properly supported.

Types of service delivery with the potential to expand across Medicaid populations and make a difference in the cost and quality of life include:

• Telehealth in the home providing LTSS services and support caregivers
• Mobile crisis interventions
• Acute crisis units providing less than 24 hours of care for people with mental illness to access care instead of through emergency departments and hospital admissions
• Home visitation for a variety of populations
• Transitional care coordination reducing preventable hospitalizations and readmissions

Over the years, healthcare has proven to be quite resourceful in creating new types of healthcare workers. In many parts of the nation, especially in rural areas, the crisis of workforce shortages is already here. Lack of access to services at the community level increases costs. Thus, improvements in service delivery could result in substantial savings to the Medicaid program and increase the quality of care and patient satisfaction.

Although “healthcare” and “health insurance” are widely described as a “system,” the reality is that the present structure for both is incomplete. To be a true system, such as the human body, the energy grid, a space launch, or the airline industry, there must be continuous unbroken communication among its parts. Healthcare and health insurance still suffer from gaps in the continuum of care and gaps in communications among the individual parts. There is much to do to improve the Medicaid service delivery system. New Medicaid authorities should be added to Title XIX to streamline states’ process of adopting service delivery reforms through simple state plan amendments.

Next up: Financing

Citations

• [1] The American Economic Review
• [2] Ibid. p. 943
• [3] National Health Expenditure Data | Projected
• [4] HHS Announces Transformation to Make America Healthy Again