States begin leafing through medicaid fund alternatives

Faced with the prospect of reduced fedderal funds for medicaid, state officals are taking up President Reagan's challenge to draw up an alternative. Washington's contribution to the federal-state medicaid partnership, which provides medical services for some 22.2 million of the nation's poor, is expected to drop by $1 billion to $2 billion in fiscal 1982 and $5 billion to $ 11 billion by 1986, according to the national Conference of State Legislators (NCSL).

The White House also is offering states greater flexibility in administering the program. But the offer falls short of converting the federal government's contribution into a no-strings-attached block grant.

Grant local control over federal funds than Reagan offers, plus changes in reimbursement policy for medicaid and medicare, would provide savings at least equal to what the administration envisions without reducing the quality of health care, state officials say.

These officials do not disagree with Reagan's goal. In many states, the need to get control of medicaid spending has become urgent. Since 1966, when medicaid was passed, a typical state's medicaid outlays have grown to 13 percent of its total expenditures.

Paul Allen, director of Michigan's medical SErvices Administration, says that despite a program "so tight it squeks," his state's medicaid outlays have grown to $1.2 billion this year. Payments per person have soared 63 percent, from $ 622 in 1974 to $1,081 in 1979 -- almost entirely because of inflation. In many states medicaid is cutting into other budgets, such as education. and like the US government, the majority of states are operating under severe financial limits.

Nationwide, combined federal-state medicaid payments have grown from $360 million in 1966 to a projected $32,5 billion in 1982, while the number of people lining up for benefits has dropped from 26.5 million to 22.2 million.

Improved management techniques may have squeezed as much fat, fraud, and abuse from medicare and medicaid as they can. Most states have established sophisticated computer accounting systems, which have minimized eligibility errors and payment of improper claims, argues Paul Willging of the US Department of Health and Human Services.

As a result, a federal cap will leave many states with no immediate alternative but "wholesale cutbacks in people or services" Allen argues. The "Catch-22 of medicaid" is that more than two-thirds of the money goes to the aged, the blind, and the disabled -- those most dependent, Mr. Willging adds.

While cutting medicaid costs ultimately amy depend on how successful Mr. Reagan and Congress are in controling inflation, state official believe more flexibility would enable them to make major strides in improving medicaid's cost effectiveness. The major problem, they say, is timing. If the medicaid cuts clear Congress, they will take effect almost immediately. But the impact of state-proposed improvements will only appear over time.

The National Governors' Association says several techniques could save more money than Reagan's fiscal ax approach, and do it less traumatically. These techniques include:

* Allowing medicaid agencies to set prices for medical services, keyed to general cahrges in the Area. Currently, many medicaid recipients go to university and inner-city hospitals, which have substantially higher-than-average costs -- costs most medicaid programs have been paying.

* Setting reimbursement rates in advance. Medicare and many medicaid programs pay hospitals for costs after they have been incurred. Thus hospitals have less incentive to control costs. Setting reimbursement rates ahead of time would provide that incentive, many experts believe. However, because medicaid represents such a small portion of hospital business, the medicare program also would have to adopt this approach. Such change in the programs would keep hospital costs in line with inflation.

* Giving medicaid block grants. About 50 percent of the current medicaid budget goes toward caring for the elderly. Current federal statutes are baised toward institutional care even when not really needed. This has led a number of states to experiment with programs that allow elderly people to remain at home as long as possible. State officials say that block grants would allow wider use of programs such as this, providing a greater range of better, more efficient programs for the aged.