Medicaid Reform

This is the final installment of a four-part series outlining a blueprint for meaningful state budget reform for North Carolina. This article focuses on much-needed reform to the state’s Medicaid program that could offer enrollees more options while saving millions of taxpayer dollars.

  1. A Blueprint for Budget Reform
  2. Reforms Needed for North Carolina’s Ailing Pension System
  3. State Health Plan for Employees and Retirees Reform

The popular image of Medicaid is that of a small program that provides basic but good-quality medical care to a limited, impoverished segment of North Carolina’s population – and that politicians have skimped on funding it. The reality is different.

  • A small program? Try this experiment: Walk down the street and think of every fifth person as a Medicaid recipient. That’s because nearly one in five North Carolinians is enrolled in the program.
  • Limited? Imagine that over eight years one city the size of Greensboro and another the size of Durham were added to North Carolina. Well, that’s how many people were added to the Medicaid rolls in one recent eight-year span.
  • Impoverished? Someone with a $490,000 house, jewelry, a good retirement account, a nice car and a business can still qualify for long-term care under Medicaid.
  • And good care?  Care may be good quality – if you can get it. Poorly designed cost-cutting measures have significantly reduced the availability of care to Medicaid patients.

State politicians have vowed to rein in the spending. To their credit they’ve tried – but seem to have failed. Yet there is hope, if North Carolina pays attention to how one of its neighbors in the Southeast has tackled the problem.

North Carolina’s Medicaid Program – Overview

North Carolina’s Medicaid program is the state-run health insurance program for “low-income individuals and families who cannot afford health care costs.”[1] There are a number of groups eligible for the state’s Medicaid program, including children, disabled people, the elderly, otherwise healthy adults, pregnant women and the blind. Medicaid is a “means-tested” program, meaning that individuals must have incomes below a certain threshold to be eligible. The income threshold varies according to an individual’s situation, i.e. blind, disabled, etc. (To see an eligibility chart, click here.)

Some people may think of Medicaid as covering only a limited range of care, but that’s far from the case. Medicaid covers a majority of potential medical care services, including regular doctor visits, hospital stays, and mental health, vision, dental and nursing home care.[2] The program is a fee-for–service program. In short, Medicaid enrollees “purchase” medical care services, and the service providers are reimbursed by Medicaid, with some services requiring a minimal co-payment by the patient. The payment fees for medical services to service providers are established annually according to the directive of the General Assembly. Indeed, each year the Medicaid program sets and adjusts roughly 500,000 rates for more than 200 different provider types within 200 different billing specialties.[3] Yet, as we will see, such micro-managing of the health system has failed to either control costs or ensure good care.

Medicaid expenses are shared by the state and federal governments. The federal government picks up approximately two-thirds of the program costs, with the state paying for the other third. Reimbursement rates from the federal government vary somewhat according to the specific service and eligible population being served.[4] So although this article focuses on North Carolina’s plight, keep in mind that the federal government is also being hammered by these rising costs.

Also, if Medicaid brings up an image of a small number of very poor people, think again. Total Medicaid enrollment in North Carolina in FY 2009 (the latest data available) was 1.8 million, or about 19 percent of the population.[5] Total Medicaid spending (state and federal dollars) in North Carolina that year was $10.9 billion. The three largest expenditures in the Medicaid program are reimbursements to inpatient hospital stays, nursing facilities and prescription drugs – each consuming roughly $1 billion in total Medicaid spending.

Of the wide variety of medical services covered by North Carolina’s Medicaid program, some are mandated by the federal government — but many more are optional. As of 2009, North Carolina covers all but two optional services allowed by Medicaid – one of the more generous programs in the nation.[6]

Medicaid Program Rapidly Growing

With such factors affecting other states, too, growing Medicaid budgets are soaring at a rapid pace across the country. North Carolina is a prime example of that explosion in costs. For example:

  • Medicaid is now the second biggest item in the state budget. At $3.1 billion in state spending for FY 2012-13, Medicaid spending is second only to K-12 public education.[7]
  • That price tag has shot up by nearly a billion dollars from just a decade ago. That’s an increase of 42 percent.[8]

Driving the growth of the Medicaid program are significant increases of both enrollees in the program and health care costs in general.

  • The number of people added to the Medicaid rolls in a recent eight-year period skyrocketed. In FY 2001, the number of unique recipients of Medicaid services was 1.2 million.[9] By 2008, that number had climbed to 1.8 million, a dramatic rise of 50 percent in eight years.[10] The number of people enrolled is almost certainly higher today because the state’s continued economic troubles.
  • The average cost of paying one person’s Medicaid costs went up one-third from 2000 to 2008. Not only has the number of people participating in the Medicaid program grown at an alarming pace, the cost per enrollee has likewise climbed sharply. The total Medicaid expenditure per recipient in 2008 was $6,424, up from $4,821 in 2000 – good for a 33 percent hike.[11]

Current Cost-Containment Methods are Failing

The North Carolina General Assembly has tried to slow down the spending, but to little avail. For instance, an ongoing effort to curb Medicaid costs is the utilization of the managed care program overseeing the majority of enrollees: Community Care of North Carolina/Carolina ACCESS (CCNC/CA). This program was the end result of nearly two decades of growing pilot programs across the state. CCNC came to full fruition in 2003 and now features 14 networks covering all 100 counties, and serving more than 1 million Medicaid enrollees.[12]

The purpose of a network program such as CCNC is “to provide cooperative, coordinated care through the Medical Home model. This approach matches each patient with a primary care physician who leads a health care team that addresses the patient’s health needs.”[13]  In short, this arrangement is intended to empower an enrollee’s primary care physician to better coordinate the patient’s medical care needs through greater oversight and referrals to specialists, in order to find the most efficient means of treating the patient while avoiding unnecessary expenses.

CCNC receives a minimal, per-member/per-month fee to coordinate the medical home model for Medicaid enrollees, and primary care doctors serving as the head of the “medical homes” also receive a pm/pm fee for participating in the CCNC program.[14] Meanwhile, service providers receive fee-for-service payments for the care they provide Medicaid patients.

CCNC has been credited with saving the Medicaid program $1.5 billion in the three-year period from 2007 to 2009.[15]

The studies citing these cost savings, however, have faced serious criticism.[16] If CCNC is producing such significant cost savings for Medicaid expenses, why are key categories of Medicaid expenses so much higher here than for North Carolina’s Southeastern neighbors? The group with the highest rate of CCNC enrollment is children, yet North Carolina’s average Medicaid expenditure for children is 15th highest in the nation and a whopping 27 percent higher than the average of our Southeastern neighbors.[17] Furthermore, the other eligibility group to have CCNC oversight the longest is the adult population, of which North Carolina’s Medicaid expenses are 12th highest in the nation and 16 percent higher than regional states.[18]

Regardless of the true effectiveness of CCNC, it is clear its cost-containment efforts have been insufficient to stem the rising tidal wave of Medicaid costs, as the unsustainable path of Medicaid costs outlined above indicates.

As such, state lawmakers have turned to another measure to try to rein in Medicaid costs: freezing or cutting provider reimbursement rates. This measure simply involves state budget writers telling Medicaid that the amount the program pays providers of medical care for covered services is to be reduced, kept at prior-year levels, or increased at a lower rate than overall rising health care costs should dictate.

Indeed, an examination of state budget documents dating back to FY 2001-02 shows that 10 of the last 12 state budgets included either a service-provider rate reduction or reduction in the inflationary increase for reimbursement rates.[19] An inflationary increase is a planned increase in reimbursement rates to providers to keep up with the rising cost of medical care.

In short, the most popular Medicaid cost-containment measure utilized by state lawmakers has been to squeeze the reimbursement rates paid to those providing medical services to Medicaid patients. But the history of such price controls makes the end results sadly predictable – a decline in the supply of services.

First, because payments for services to Medicaid patients fall further behind rates for privately insured patients, providers are incentivized to stop accepting Medicaid patients. For instance, in 2000, North Carolina had 33,787 physicians enrolled as Medicaid service providers.[20] But in 2008, that number had dropped to 30,075.[21] So at a time when the number of Medicaid enrollees skyrocketed by 50 percent, the number of physicians they could see dropped by 11 percent. Instead of one enrolled doctor for every 36 patients, it is now one doctor for every 57 patients. With more patients chasing fewer doctors, patients have less access to care.

Moreover, doctors who do continue to treat Medicaid patients are forced to charge higher rates for private insurance patients in order to compensate for the low Medicaid reimbursements, driving up the price of private insurance plans. As private insurance plans become more expensive, more people become uninsured, and more of them turn to Medicaid. The vicious cycle is self-perpetuating.

Long-Term Care

Medicaid’s flaws are especially acute when it comes to providing help to those with chronic problems. Long-term care (LTC) is the term commonly referring to “assistance provided for an extended period of time to people who are unable to fully care for themselves.”[22] The most significant share of LTC expenditures is service for older citizens – especially for nursing home stays. The largest payer of nursing facility care is the Medicaid program. The federal Medicare program covers mostly short-term nursing home stays and skilled home care services, leaving Medicaid to cover a majority of long-term nursing home care expenses.[23]

To qualify for nursing facility care under North Carolina’s Medicaid program, one’s income must be less than the cost of care in the facility (based on the facility’s Medicaid rate). Medicaid must also approve of your need for nursing facility care. Enrollees are expected to pay a “monthly liability” for the nursing facility care, but Medicaid covers the majority of the costs.[24]

In addition to the income limit, there are limits on the amount of assets a person can own and still qualify. The asset test can be fairly complex depending on the nature of one’s assets. According to North Carolina Medicaid guidelines, however, many personal assets are exempt from the limit. The applicant’s home, car, certain retirement accounts, business property, life insurance policy and many others are exempt from the limit.[25]

For the home to be exempt from the limit  a spouse or dependent minor must be living in the home while the Medicaid enrollee is in the nursing facility, or the enrollee’s stay in the nursing facility is expected to be for six months or less.

The federal government does, however, place a cap on the exemption amount for one’s home. Courtesy of the Deficit Reduction Act of 2005, there is a $500,000 cap on the home exemption for the Medicaid asset test.[26]

In other words, a Medicaid applicant applying for LTC benefits is not eligible if his or her home is valued at more than $500,000.

What these generous exemptions suggest is that people with considerable amounts of assets can still qualify for Medicaid coverage for their long-term care in nursing facilities. Remember, Medicaid is supposed to be a program for “low-income individuals and families who cannot afford health care costs.” By any standard of fairness, those with significant assets should contribute toward their own care.

Medicaid expenditures on nursing care facilities in North Carolina totaled more than a billion dollars in FY 2008,[27] making it the second largest Medicaid expenditure, only slightly behind inpatient hospital stays. Moreover, nursing care expenditures are rising rapidly. In FY 2004, the average cost per Medicaid recipient of nursing home care was $20,658.[28] By 2008, that number had climbed to $25,562,[29] a 24 percent spike in just four years.

Demographic changes will further exacerbate LTC funding pressures. The over-85 population in the U.S. is expected to increase 52 percent between 2005 and 2020.[30] That people are living longer is an achievement to celebrate, but it does present financial challenges when considering all the benefits promised to older citizens via government programs.

Clearly, any Medicaid reforms must include the issue of long-term care.

Medicaid Reform Recommendations

It should be obvious that any serious efforts at state budget reform in North Carolina must include significant changes to the state’s Medicaid program. Several other states have experimented with numerous different Medicaid reform programs, to varying degrees of success. The most successful of such reform effort comes from Florida, whose reforms should be replicated in North Carolina.

Florida’s Medicaid Reform Pilot Program

In 2005, the state of Florida was granted a waiver from the federal Centers for Medicare and Medicaid Services to launch a pilot program reforming its Medicaid system. By 2007, the pilot program had been implemented in five counties with a diverse population totaling nearly 3 million.[31] The most significant part of the pilot initiative was that instead of merely being enrolled in the Medicaid program, enrollees could instead choose from a selection of eligible insurance coverage plans. Under the pilot program, eligible enrollees have been able to choose from as many as 11 different plans.[32] So instead of a cookie-cutter government program that treats people of varying needs the same, the program offers patients more options, freeing them to find one that best suits their needs.

Plans must still offer state-established standards of service and care, but have enough leeway to tailor plans in order to offer significant options to enrollees. In exchange for their participation with Florida’s Medicaid program, the insurance providers receive a per-person premium (adjusted for health and demographic status) for each Medicaid enrollee choosing their plan. The plans therefore become responsible for efficiently managing enrollee costs, as well as handling fraudulent claims. Thus, the risk of exorbitant patient costs or fraudulent claims is transferred from state taxpayers to the insurance providers.

The diversity of options empowers enrollees by giving them choice over their care plan, and the competition between insurance organizations forces them to serve their covered populations more efficiently. Offering a diversity of plans allows plans to be created that meet the unique needs of enrollees, rather than the “one size fits all” system still imposed upon North Carolina Medicaid patients.

The results for the Florida pilot program have been impressive:[33]

  • 290,000 Medicaid recipients have received coverage in the pilot program.
  • The pilot program is estimated to have saved the state’s Medicaid program about $118 million annually. If such a program were enacted statewide in North Carolina, the savings could easily be three to four times that amount.
  • Estimates suggest the pilot program achieves 16.8 percent savings per person for families and children, and 10.9 percent savings per person for elderly and disabled, compared to overall Florida averages.
  • Enrollees in the pilot program report higher satisfaction rates than reported by traditional Medicaid enrollees and commercial HMO enrollees.
  • Health outcomes for pilot program enrollees exceed those of traditional Medicaid enrollees in a majority of target categories.

As demonstrated in Florida’s pilot program, the savings potential for North Carolina’s soaring Medicaid costs are quite substantial. Moreover, satisfaction and health outcomes of those in Florida’s pilot program suggest an improvement of the quality of care for enrollees can be expected should North Carolina adopt such a reform.

Long-Term Care Reforms

Long-term care in nursing facilities is the second-highest category of expenditures in North Carolina’s Medicaid program. No serious attempt at reining in the state’s Medicaid costs can ignore this growing expense. If North Carolina adopts Florida-style reforms as outlined above, however, it is likely that competing insurance organizations will develop more cost-efficient options for long-term care. That would provide one step in the right direction.

More reforms to long-term care, however, are needed.

As indicated above, the generous asset exemptions allowed for applicants to long-term nursing facility care allows for asset-rich seniors to receive Medicaid subsidies for their nursing care.

Also, private long-term care insurance plans are an option that individuals can purchase and receive coverage for nursing facility care. If the purchase of such plans were made more attractive, then fewer people would need to turn to Medicaid to subsidize their long-term care.

Therefore, the following two recommendations would provide for more cost-savings to North Carolina’s Medicaid program:

  • Reduce the cap on asset exemptions to qualify for Medicaid. Under the current system, an applicant can own a house valued at up to half a million dollars, an expensive car, expensive personal belongings like jewelry and furniture, and significant retirement investments, yet still receive Medicaid subsidies for long-term care in a nursing facility. The state should tighten up these exemptions in order to focus Medicaid coverage for more needy citizens.
  • Extend and increase the state tax credit for long-term care insurance plans. By tightening up the asset exemptions, more citizens will be incentivized to seek private long-term care insurance for coverage of nursing facility care. According to one study, a decrease of household assets exempt from the Medicaid asset test of just $25,000 would increase demand for private long-term care insurance by 2.7 percentage points.[34]

The state can provide even greater incentive by increasing the tax credit for long-term care insurance purchases. Currently, the state offers a tax credit for those purchasing LTC insurance worth 15 percent of the premiums paid, up to a maximum credit of $350. The credit, however, is scheduled to sunset on Jan. 1, 2013.[35] North Carolina should extend and increase this tax credit. By increasing the amount of the credit, more people will be incentivized to purchase LTC insurance as an option to relying on Medicaid to fund their LTC needs. The minimum amount of foregone revenue to the state via the tax credit would leverage significant savings to the Medicaid program.


Any serious attempt at state budget reform in North Carolina must include an examination of its Medicaid program. Costs have been soaring, and past cost-containment efforts have proven both insufficient and detrimental to enrollees’ access to care. Moreover, Medicaid enrollees are merely passive participants in the program with little or no choices, and at the mercy of the whims of politicians.

Florida’s pilot Medicaid reform program provides an excellent template that North Carolina should replicate. The results would be a win-win: greater choice and superior results for Medicaid patients coupled with significant savings to hardworking taxpayers.

Long-term care in nursing facilities represents the second-highest Medicaid expenditure in North Carolina, behind only inpatient hospital stays. And the costs of nursing care are growing rapidly. By tightening up the asset exemptions for applicants applying for Medicaid coverage of nursing facility care, the state could focus nursing care coverage for the more truly needy. Moreover, more citizens would choose private long-term care insurance, especially with a more generous tax credit. The result would be to shift coverage for this rapidly growing expense away from Medicaid, producing savings for taxpayers.

There’s a saying that’s grown popular recently: “If something can’t go on … it won’t.” Medicaid simply cannot continue growing in cost; the only question is how it will be changed. The North Carolina General Assembly must take action to reform the program. Fortunately, Florida provides a model for how to do it.

[1] North Carolina Division of Medical Assistance website. Available online at:

[2] Ibid.

[3] North Carolina Division of Medical Assistance, “Medicaid in North Carolina, Annual Report State Fiscal Year 2008.” Available online at:

[4] Ibid.

[5] State Health Facts, Kaiser Family Foundation. Available online at:

[6] “Medicaid Overview,” A presentation by Fiscal Research Division of the N.C. General Assembly. Available online at:

[7] The Joint Conference Committee Report on the Continuation, Expansion and Capital Budgets, S.L. 2012-142 (FY 2012-13 State Budget). Available online at:

[8]  The Joint Conference Committee Report on the Continuation, Expansion and Capital Budgets, S.L. 2002-126 (FY 2002-03 State Budget). Available online at:

[9] Division of Medical Assistance, Medicaid 2000 Annual Report Tables. Available online at:

[10] Division of Medical Assistance, Medicaid 2008 Annual Report Tables. Available online at:

[11] Medicaid 2000 and 2008 Annual Report Tables, Ibid.

[12] Community Care of North Carolina website. Available online at:

[13] Ibid, available online at:

[14] L. Allen Dobson Jr, MD, FAAFP; Denise Levis Hewson, RN, BSN, MSPH, “Community Care of North Carolina—

An Enhanced Medical Home Model”, North Carolina Medical Journal, May/June 2009, Volume 70, Number 3. Available online at:

[16] Al Lewis, “Is North Carolina Medicaid the Healthcare Industry’s Solyndra?” posted at The Health Care Blog in Feb. 2012. Available at:

[17] MACPAC (Medicaid and CHIP Payment and Access Commission), Report to the Congress on Medicaid and CHIP, June 2012. Table 8, Medicaid Spending Per Full-Year Equivalent (FYE) Enrollee by State and Eligibility Group. FY 2009. Found on pages 126-127. Available online at: . Southeastern neighbor states in this reference include: South Carolina, Virginia, Tennessee, Georgia and Florida.

[18] Ibid.

[19] Annual state budget documents for each year from FY 2001-02 through FY 2012-13

[20] Medicaid 2000 Annual Report Tables, Supra.

[21] Medicaid 2008 Annual Report Tables, Supra.

[22] Stephen Moss, “Long-Term Care Financing in North Carolina: Good Intentions, Ambitious Efforts, Unintended Consequences,” a Policy Report prepared for the John Locke Foundation. Jan. 2008. Available online at:

[23] Ibid.

[24] North Carolina Division of Medical Assistance website, available online at:

[25] “Medicaid Eligibility for Nursing Home Benefits”, N.C. State University Family and Consumer Sciences. Available online at:

[26] “Deficit Reduction Act of 2005: Implications for Medicaid,” Kaiser Family Foundation Policy Brief, Feb. 2006. Available online at:

[27] Medicaid 2008 Annual Report Tables, Supra.

[28] Division of Medical Assistance, 2004 Annual Report Tables. Available online at:

[29] Medicaid 2008 Annual Report Tables, Supra.

[30] Moss, Supra.

[31] “A Medicaid Cure: Florida’s Medicaid Reform Pilot,” Foundation for Government Accountability. Nov. 2011. Available online at:

[32] Ibid.

[33] Ibid.

[34] Moss, Supra.

[35] The credit is limited to those in households earning less than $100,000 per year (married filing jointly), or singles earning $60,000 annually. G.S. 105-151.28, available online at:

This article was posted in Healthcare by Brian Balfour on September 10, 2012 at 3:41 PM.

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