By Dr. Christopher D Casscells
Guest Columnist
Historically, Medicaid has represented approximately 17% of the state of Delaware’s budget. It is a state and federal funding partnership, unlike Medicare, which is strictly federally funded. In recent years Medicaid has risen to over 25% of the state’s budget and is on track to grow well beyond that. Currently, 59% of Delaware’s Medicaid program comes from the federal government and that is scheduled to decline slightly in the near future.
There are many reasons for this rise in the cost of the program and the increasing prominence in the budget. Firstly, the cost of health care is rising at a pace of 5.2% per year, according to the U.S. Bureau of Labor Statistics – considerably higher than inflation of about 3% per year. While the rate of rise in past decades, notably the 1980s, was multiples of this rate, the acceleration of the cost of health care annually has stabilized around 5.2%. In aggregate, for Fiscal Year 2021, Delaware’s spending on health care has been estimated at nearly 40% of the budget.
At the same time, the stock market as measured by the two most prominent indices, the NASDAQ and the S&P, have risen quite dramatically in recent years. Since the inception of these two indices almost 100 years ago, they have risen by an average of 10% per year over any decade.
One of the fundamental problems with the distorted economy of our health care sector is that the recipient or purchaser of care is largely disconnected from the cost by insurance, whether that be Medicare, Medicaid, employer-sponsored health insurance or private insurance. The single exception to this rule is the health savings account, or HSA.
When originally proposed, it allowed individuals to contribute to a savings account to pay for care while deducting the cost from taxable income. Unlike a flexible spending account, or FSA, the money can roll over into the next year if not spent. HSA monies continue to grow, are investable in indices and compound year-over-year.
With HSAs, the purchaser is more directly connected to the cost of the service and far more likely to seek out a better price or a higher quality service because they’re spending their own money.
HSAs have been described as IRAs on steroids, but they aren’t available to those on government-assisted health care. But what if they could be made available to a portion of the Medicaid population?
While the average Medicaid enrollee costs $8,875 per year, the demographic group from birth to age 20 averages $3,745 per year. Delaware could request permission from the Medicaid program to do a demonstration project on this demographic group where it would fund a HSA for each participant. Those accounts would then be placed in an index fund and spent as needed on appropriate approved health care needs.
The money would grow considerably faster than the rise in the cost of health care and the cost to the Medicaid program would stabilize at that level. If we are to assume that the law of supply and demand is in play, cost would necessarily stabilize or go down and quality would go up (to attract business). The compounding effect of invested money would substantially exceed the decade-over-decade 10% per year average.
Using this scenario, our modeling showed that over 10 years, on average, there would be an excess of $7,366 remaining in the HSA after all health care expenditures. After two decades, assuming average health care expenditures, there would remain $14,491 in the HSA in real purchasing power.
If the individual were to not spend any money at all on health care by age 20, they would have $143,417 in the account. During that entire time, they would have been covered by the catastrophic health insurance product and the state would have been indemnified against such costs.
Currently, many enrollees in Medicaid functionally cannot get appropriate health care because a limited number of providers accept Medicaid as payment and are enrolled as Medicaid providers. Often the only place a Medicaid enrollee currently can get health care is in an emergency room or hospital, both of which are very expensive to the system.
Delaware is a small state with a big-budget problem. It is the ideal place for innovative and necessary experimentation. Writing an opinion on the case before the U.S. Supreme Court in 1932 Associate Justice Louis Brandeis said the following as he pondered the implications of the Constitution’s 10th amendment: “A single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”
Given the obvious impending budgetary crisis, it is high time for our legislators to innovatively think out-of-the-box.
Dr. Christopher D. Casscells serves as director of health policy sector for the Caesar Rodney Institute.
