Wall Street Journal - February 2, 2005

By far the most promising answer to date comes from Florida, where Governor Jeb Bush is proposing a radical restructuring of the program that serves 2.2 million low-income people at an expected cost this year of $14.7 billion. The aim is twofold -- to provide incentives for better service by putting more choice in the hands of the consumer and to rein in the rate of growth in spending.

If it succeeds, the Sunshine State's vision could serve as a template for reforms in other states. And in the best case, it could lead to a remaking of Medicaid in the same way that reforms in the early 1990s in Wisconsin and elsewhere paved the way for an historic and hugely successful national welfare reform.

Over the past six years, Florida's spending on Medicaid has grown at an average of 13% a year while service has worsened. Alan Levine, Secretary of the Agency for Health Care Administration, tells us and anyone else who asks that the growth rate is "unsustainable." It's a measure of how bad things are that no one is contradicting him. One-quarter of the state budget already goes to Medicaid, a figure that, if left unchecked, is projected to hit 59% in 10 years.

Every state is in a similar bind. Last year, for the first time ever, Medicaid spending surpassed combined state spending on elementary and secondary education, according to the National Association of State Budget Officers. Things have gotten so bad that Tennessee's Democratic Governor Phil Bredesen has decided to eliminate 325,000 participants from TennCare, the state's once-hailed HMO-like alternative to Medicaid. In New York, Republican Governor George Pataki has just called for $1.1 billion in Medicaid cuts.

From the consumer's perspective, Medicaid is a nearly incomprehensible maze -- which explains in part why so many participants head for expensive hospital emergency rooms when they need routine treatment. The defining feature of the Florida proposal is that it would transform the system into one centered on consumer choice, starting with letting participants decide how to spend the money allocated on their behalf.

Each participant would be assigned a premium with which to purchase coverage for basic and catastrophic care. Options would include HMOs, insurers and community-based networks of physicians and hospitals. Premiums would be risk adjusted, which is to say that someone with AIDS , severe mental illness or other serious conditions would receive a higher premium than a generally healthy person. By introducing competition, the aim is to encourage diversification of products and services.

A third feature of the Florida plan is even more innovative. Patients who follow the medical plan laid out for them by their doctors -- take their medication, have their children vaccinated, stop smoking -- will earn extra money that will be deposited for them in flexible-spending accounts.

They will be able to use that money for medical services not covered under their basic plan (say, eyeglasses or dental care) or to purchase more expensive coverage. Participants who eventually earn enough to go off Medicaid get to keep the money that's accrued in their personal accounts to use for health expenses -- a feature that should help ease low earners' transition to the private system.

This emphasis on personal responsibility will encourage healthy outcomes by providing incentives for patients to comply with their doctor's orders. And since a huge share of Medicaid budgets go to managing chronic conditions that often can be ameliorated by personal behavior, the potential to save money is enormous.

The Florida idea must still be approved by the Republican-controlled state legislature, and parts of the plan must receive waivers from the Department of Health and Human Services in Washington. The waivers ought to be a priority for new HHS Secretary Mike Leavitt, who used to be a governor himself. However, he took a beating on Medicaid during his confirmation hearings from liberals who don't want anything to change, and so he may feel politically gun-shy.

If he really wants to leave a legacy as opposed to merely serving out his time, Mr. Leavitt will dust off the Medicaid reform the GOP Congress passed in 1995 that gave every state more flexibility, but was vetoed by Bill Clinton. Had that bill become law, every state budget would now be far better off. The complaint will rise that the poor will be hurt and that heartless states will "race to the bottom," but those are the same unfounded fears we heard about welfare reform.

Without Medicaid reform, governors across the country will be unable to balance their budgets and coverage for the poor will inevitably get worse. By allowing states like Florida to test new ideas, Republicans in Washington can both honor their federalist principles and do better by the poor.

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