Hawaii, like almost all other states, is facing a budget crisis for Medicaid. This is due to the underlying rise in health care costs for everyone, increased enrollment due to the recession, and the fact that Medicaid is the insurer of last resort for the sickest, most expensive segments of our population.

The Hawaii Department of Human Services recently announced a reduction in eligibility from 200 percent to 133 percent of the federal poverty level and limits on benefits, including doctor visits and hospital days, for Medicaid recipients in the General Assistance and Aid For Dependent Children categories. This will increase the number of uninsured and restrict access to necessary care for the sickest among these groups.

Possible measures to reduce Medicaid costs include limits on eligibility and benefits, cutting fees for doctors and hospitals, and streamlining and reducing the cost of administration.

Conservative myths notwithstanding, health care is not a form of discretionary consumer spending, and people with serious or chronic health problems cannot cut their diseases if their benefits are cut. Benefits limits can literally be "death panels" for patients with life-threatening diseases. Especially for the Medicaid population, research shows benefit limits lead to unnecessary ER visits and hospitalizations, increasing the total cost of care.

Making Medicaid cost-effective should mean ensuring ready access to care in the most cost-effective setting, and whenever possible this should be in a doctor’s office. However, cutting provider fees can lead hospitals to go bankrupt and drives doctors away from treating Medicaid patients.

Cutting administrative waste is the only one of these measures that can reduce cost without compromising necessary care.

The conversion of Hawaii Medicaid to managed-care plans, and especially the mainland for-profit plans in the QUEST Expanded Access program for the aged, blind, disabled population, has meant much more restrictive and burdensome prior authorization policies, claims-processing problems, and numerous obstacles to care for patients.

For-profit plans siphon off more of the health care dollar for administration and profit, and add administrative burdens that are driving many doctors to refuse to accept new patients with these plans. More Hawaii residents are becoming dependent on Medicaid for their health care while access to care is deteriorating.

The Hawaii Medicaid program has assumed the desirability of competition among plans, but all the evidence shows competition in health care financing has destructive effects on health care. Competition adds administrative cost and complexity, disrupts care when patients switch plans, restricts access to care due to restricted panels of doctors in each plan, and causes extensive problems with drug formularies and prior authorizations.

Competition increases plan incentives to deny care, cut corners and try to avoid sicker (high cost) patients by pushing them onto other plans. Competition doesn’t even save money. The cost of the Hawaii Medicaid program was growing at the same rate as the rest of the country until competing managed care plans were introduced in the mid-1990s, but costs have been rising faster than the national average since then.

Hawaii could simultaneously cut administrative costs and expand access to care by consolidating all of Medicaid into a single plan. Governance should include a board that is accountable to the health needs of the Medicaid population, with representation from doctors, hospitals and the community. Instead of treating doctors as adversaries, Medicaid should enlist doctors in a cooperative quality-improvement effort focused on the processes of care, along the lines of William Deming’s "Continuous Quality Improvement" model that has been so successful in automobile manufacturing and airline safety. This model has already been shown to reduce cost while increasing access to care for Medicaid in Western Colorado and North Carolina.

Rocky Mountain Health Plans in Western Colorado went even further and combined the funds from Medicaid, employer-based commercial insurance, and Medicare (via a Medicare Advantage plan), and they pay doctors a blended fee schedule that is the same for all patients regardless of the source of their funding.

Their quality improvement program is physician-led, and there are no access-to-care problems for their Medicaid recipients. Their Medicare costs are much lower than the national average, and their per capita acute care Medicaid costs in 2008-09 were less than half the cost for the rest of Colorado. We need to do something similar in Hawaii.