New Federal Medicaid Provision Creates Health Opportunity Accounts

The Deficit Reduction Act, the federal budget law passed last February, creates a new option for states to replace regular Medicaid coverage with a Health Opportunity Account (HOA). This is a strategy to advance the Bush administration’s theme of “consumer-driven health care” through a product that looks like a Health Savings Account (HSA) for Medicaid beneficiaries. Effective January 1, 2007, up to 10 states may start HOA demonstration projects. States should be very cautious: they are not likely to realize any savings for the Medicaid program, and participating states may become financially and medically vulnerable.

An HOA, like an HSA, is coupled with a high deductible health plan with the account used to pay for the many medical expenses not covered by the plan. In an HOA the state deposits funds into the account. In an HSA the individual makes the deposits. The state will deposit up to $2,500 for an adult and $1,000 for a child each year. States may set deductibles at up to 110 percent of the yearly account deposit. An account having been depleted and the deductible met, regular Medicaid covers enrollees. If the enrollee loses Medicaid coverage during the year, he may take the account with him and use it for approved purposes, such as employment training, within three years.

The idea behind consumer-driven health care is that individuals will shop around for the best prices and thus drive down costs. They will avoid “unnecessary” purchases of medical care and services because the money is coming out of their pocket. However valid these assumptions may be in the HSA context, there are problems in the HOA context. Medicaid enrollees cannot shop around for good prices because all Medicaid providers receive the same negotiated rates for services. While the HOA provision allows participants to visit non-Medicaid providers, it allows states to pay those providers only up to 125 percent of the regular Medicaid rates—still far below market rates. To the extent that these higher rates do motivate health care providers, they will motivate them to exit Medicaid and just serve HOA participants.

Another primary idea behind consumer-driven health care is that it will cut down on unnecessary services. For the groups that can opt into an HOA—low-income children and parents—the greater problem is the underutilization of primary and preventive and diagnostic care, particularly well-child care. HOAs will motivate parents to avoid using the account so that they have it to use in an emergency and they can avoid possibly having to pay the 10 percent deductible over and above the amount in the account. The most likely scenario is that the HOA arrangement will cause many to go without necessary services, thereby worsening underutilization.

States should not experiment with this flawed policy. Moreover, advocates and others should monitor the experience in states that do opt for HOA demonstrations and prepare for this policy becoming mandatory or nationwide.
For more information, contact John Bouman at the Shriver Center.