Health Reform and the Lessons of TennCare

There is a lot of talk going around that TennCare failed, and the health reform bill does the same things as TennCare, so the new Affordable Care Act will fail, too.   While this seems like a simple progression, it’s far from true.  In its first 7 years, TennCare saved money for the State while covering many more people than it had before.  While TennCare’s costs did rise in the early 2000’s, it’s not because Tennessee tried to cover more people or provide more benefits – it’s because Tennessee stopped using managed care and instead started paying providers directly.  Because the insurance companies no longer had incentives to control costs, TennCare quickly became unaffordable.

Prior to 1994, Tennessee’s Medicaid program operated like most other states’.  When a doctor saw a Medicaid patient, she sent a bill directly to the State and got paid.  This is called fee-for-service.  In 1994, TennCare started when Tennessee began to use managed care.  Managed care is when a state contracts with private insurance companies and pays a flat fee for every patient the insurer covers.  Essentially, the State pays a monthly premium for each person.  No matter how many services the patient uses, the HMO gets the same amount.  Therefore, each HMO had incentives to prevent the overuse of services and encourage cost-effective preventative care.  This system was extremely successful – TennCare had the lowest cost per enrollee in the country and saved the State hundreds of millions of dollars.  It did all this while covering 500,000 more people than it had under the fee-for-service program.

In 1999-2002, Tennessee began moving away from this managed care model. While there were mixed motives for this decision, the most prominent one was then-Governor Sundquist’s desires to revise Tennessee’s state tax system and attempts to get insurance companies on board. The State continued to contract with HMOs to administer plans, but it began paying the cost of care directly.  Essentially, the insurance “risk” was moved from the insurance companies back to the State.  This is when costs began to rise drastically.  The HMO’s had no reason to take cost-controlling measures.  When costs rose, the State was on the hook for the expense.  The main scapegoat were the optional, newly insured populations of people, but these people had been covered for several years already without any significant jumps in cost.  It was this change in “risk” policy that was the true reason for the program’s problems.

Instead of reevaluating the program’s failures, cost-cutting measures were targeted at TennCare’s eligibility categories.  Those 500,000 uninsurable people that relied on TennCare for their life-saving services?  They were a prime target.  You’ve probably heard about the 2005 cuts and the blame game surrounding whether they were necessary and who was responsible for them.  You can read about those events on our page about it, but that was when “TennCare” really went back to plain old “Medicaid.”  It’s still got the same name, but it’s hardly the same program.  Click here to read a brief history of the rise and fall of the TennCare program.

So what “lessons” can we learn from TennCare when thinking about the Affordable Care Act?  Here are just a few:

Private insurance companies have to take on risk to keep costs down

TennCare’s problems in the early 2000’s were due to the removal of cost-containment measures.  Private insurers had no reason to manage care, since their payments and profits were guaranteed either way.  TennCare showed that private insurers must take on the responsibility of managing care and controlling costs (this is exactly what will happen in the Exchanges that offer a selection between private plans).

Insuring new populations can actually save money

TennCare added almost 500,000 new enrollees almost overnight in 1994.  The budget rose only slightly.  By ensuring that programs run efficiently and responsibly, we can get more health care for every dollar spent.

If done correctly, insuring “uninsurable” people doesn’t drive up costs as much as you think.

Again, it’s all about good management.  Do people with severe medical conditions cost more to insure?  Of course.  If you don’t start cancer treatment until the late stages, it will cost much more in the end than if you had caught it early and taken precautionary steps.  For long term savings, people need access to insurance to catch their medical problems before they become too serious.

The “Unfunded Mandate”

Finally, we’ve heard numerous Tennessee officials, including Governor Bredesen, say that health reform is an unfunded burden on the states.  They claim that the expanded Medicaid populations will bankrupt Tennessee.  For starters, the Affordable Care Act says the federal government will pay 100% of the cost of all new Medicaid-eligible people until 2016.  After that, the government will slowly decrease its share to 90% of the cost by 2020.  That means the State will pay only $1 for every $9 the federal government spends on insuring new Medicaid-eligible people in Tennessee and across the country.   This is a huge infusion of money into Tennessee’s economy, but officials are still claiming they will have to spend hundreds of millions of dollars to pay for Medicaid changes.  What they don’t tell you, though, is that that extra money will be to pay for people who are already eligible.

The individual-responsibility mandate will require that all uninsured people purchase insurance.  When they apply, they will be screened for Medicaid eligibility first.  TheState estimates that there are currently hundreds of thousands of people who are eligible for Medicaid right now but aren’t getting it for one reason or another.  When they apply for coverage, they’ll discover that they were eligible all along.  Some cynical commentators have called this the “woodwork effect,” to describe the large population of people, currently going without benefits, who will suddenly begin requesting the benefits they’re entitled to.  People who are already eligible will not get the extra federal matching dollars.  Instead, the feds will pay $2 for every $1 the State spends.  So yes, costs might rise, but not because the Affordable Care Act is unfairly burdening the states.  It’s because the states are currently failing to serve populations that are eligible for services already.  To say it’s an unfunded mandate is clearly avoiding responsibility and extremely misleading.

Click here to read more about the myths surrounding the TennCare cuts.

Tennessee Justice Center | 301 Charlotte Ave | Nashville, TN 37201
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