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Rio Grande Foundation
P.O. Box 2015 Tijeras, NM 87059

505-286-2030

Solutions to the Medicaid Crisis in New Mexico

January 2003

By Kenneth M. Brown and Harry Messenheimer

The paper answers the following questions: Why is Medicaid so expensive? How rapidly will the costs grow if nothing is done to change the program? What are the options for controlling costs and how will these options affect the health and well-being of Medicaid recipients? What are the larger issues facing New Mexico and other states that stem from the federal government's approach to Medicaid?

We find that New Mexico's problems have five main sources:

  • Mandated benefits (no choice, really bad principles of insurance)
  • Overly generous benefits (no private insurer provides a benefit package as generous as Medicaid's)
  • No incentive on the part of beneficiaries to be careful shoppers in finding and using health care benefits (payment is made almost entirely by someone other than the user)
  • Major disincentives to work and earn income (the generous benefit package comes with a means test, meaning you are severely penalized if you earn too much money)
  • The federal match to the state's Medicaid expenditures provides the illusion of "free" money. Since each state is under the same illusion, the match actually results in a free-for-all among the states (each state pays a small portion of its own Medicaid to the federal treasury plus 49 small portions for each of the other 49 states, summing to one huge portion)

We make some major recommendations to fix these problems. Now is an opportune time to do so, since the whole program is out of control. The Bush administration is encouraging states to apply for waivers from Medicaid rules to try innovative, market-like solutions to solving problems. This presents New Mexico with a real opportunity to be on the cutting edge of innovation. One promising solution to Medicaid is a defined contribution approach. We illustrate the approach and the incentives involved by use of an example for a family of four.

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