The problem
Earlier this year, Illinois lawmakers purportedly passed a budget that reduced overall state spending. As part of this supposed budget reform, the state’s runaway Medicaid budget was to be brought under control. A review of the fiscal year 2012 budget will show that the money appropriated to the Medicaid program for fiscal year 2012 was reduced by $1.4 billion. In theory, taxpayers finally were getting a break, and state spending would be held below the previous year’s budget.

The problem, however, is that these Medicaid budget cuts are illusory. Lawmakers used an accounting loophole to push some of the costs of this year’s bills into next year. The trick is that costs of Illinois’ Medicaid program are not determined by appropriations. Rather, they are determined by state and federal eligibility rules, reimbursement rates and the list of covered services. When a doctor sees a Medicaid patient, he bills the state for services provided under these guidelines. Those bills must be paid. Rather than trim these costs, lawmakers cut the appropriations only and chose to let the bills pile up until next year.

As a result, Illinois is expected to have $2.4 billion in unpaid bills at the end of fiscal year 2012. To keep the backlog of bills from growing, the state must appropriate at least enough money to cover the true annual cost of Medicaid. Based on annual growth trends, this would require appropriations of at least $11.6 billion in fiscal year 2013.

Illinois must also pay 2 percent interest per month to doctors and hospitals for taking longer than 60 days to reimburse them for their services. Under the fiscal year 2012 budget, Illinois would be paying approximately 7 percent interest for the average Medicaid claim, costing the state up to an additional $760 million just in interest charges. In all, Illinois will need to appropriate $3.1 billion more in 2013 just to keep a six-month backlog of unpaid bills.

Our solution
Medicaid’s current program growth is unsustainable. If Illinois is to get its fiscal house in order, it must seek freedom from the federal government to pursue all known cost-saving measures and begin designing a new Medicaid program from the ground up that fits the unique needs of the state’s population. Lawmakers should seek greater program flexibility in exchange for capped federal funding to begin the process of these costs under control.

Why this works
The current Medicaid funding system is designed with a perverse incentive that rewards states for spending more taxpayer money. By capping federal funding, states will be rewarded for reducing costs – not for wasting health care dollars. To reduce costs, however, states must have the kind of flexibility needed to innovate and serve the unique needs of their communities.

The federal government already permits one state, Rhode Island, to manage its Medicaid program in this manner, and it has done so with great success. Block-granting Medicaid funding in exchange for wide flexibility in administering the program will give Illinois the freedom it needs to design a Medicaid program that effectively serves the needs of the most vulnerable in a sustainable way.