The high price of static analysis obstinacy

TennCare's first budget, $2.64 billion, was based on a not very dynamic analysis of the increase in health-care-service demand as a half-million more previously uninsured or uninsurable mostly low-income consumers were given access to "expanded Medicaid", or "TennCare Standard", for modest premiums and co-pays.

By 2005 the budget had grown past $8.5 billion. As both Adam Smith and Arthur Laffer had earlier observed and codified, consumer demand and participation increase as prices fall, whether those prices are health-care charges or taxes: when they're seen as high, consumers passively go without or actively avoid, and when they're seen as lower, they do the opposite.

The Tennessee experts had foreseen some of these behaviors, and a key part of TennCare was the creation of a dozen new Medical Care Organizations to provide "managed care" for all the 1.2 million beneficiaries, with the expectation that "managed care" would produce, by means of judicious gate-keeping, reasonable cost control.

It didn't, and by 2002 the MCO's got the state to relieve them of the previous cost-guarantee provision (capitation) in their original contracts. After that, understandably, costs went even higher, so the state responded, in 2005, by changing the rules to reduce the enrollment numbers in TennCare Standard by 170,000.

More recently, the Tennessee Hospital Association has revealed plans to "tax" its membership (except the tiny rural ones) at the rate of 3.5 percent of net patient revenues, and donate the proceeds (which, in an arcane federal-funds increase formula, bring in an additional $430 million from Washington) and the monies would go to Nashville to be used to prevent further cuts in TennCare, which by 2009 had been whittled down to the $7.6 billion level. Of course Vermont, a highly-skilled-in-taxation governance, already has a 6 percent provider tax.

This year the new Tennessee governor, first-Republican-in-150-years Bill Haslam, has proposed another $40 million in TennCare cuts, which will require either further enrollment cuts or more intensive gate-keeping. The aim of both would be to rescue as much as possible the original budget, by reducing the dynamic aspect of service-demand growth closer to the original more static analysis number, which is exactly what the innovative MCO's were set up (and failed) to accomplish.

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