Indiana’s Medicaid program is doing just that, using some novel practices that have vastly improved how people transition from Medicaid to private-sector health insurance. What’s more, it delivers better health-care outcomes at a lower cost, with some important takeaway lessons for the state of North Carolina.

Let’s put the federal Medicaid program into perspective first. It spent $872 billion in 2023 and is one of our largest federal government programs, with expenditures about eight-and-a-half times the size of Target’s annual sales, at $103 billion that same year.

Medicaid’s reach is far and wide; it includes $1 out of every $5 spent on health care in the US and provides health coverage and long-term care for low-income residents.

It directs ponderous federal rules that dictate how the health care is delivered and how much federal funding each state gets to run its own Medicaid program, ranging from a 50% subsidy (New York) to a 77% subsidy (Mississippi). States follow regulations that come from Washington and have limited power to change them.

Target, on the other hand, is a successful multinational corporation with company-wide strategic goals. Competing with other companies, it customizes its product selections based on local customer needs and economic conditions, or it risks losing money. Adaptation and experimentation — unusual words for government programs — are the name of the game for a successful company like Target.

When North Carolina helped 600,000 newly eligible families get health care through an expansion in the Medicaid program, it solved one problem but not others.

One, NC Medicaid is still an expensive proposition, costing $20.5 billion in state and federal taxpayer funds in 2023, or just over $7,000 per Medicaid recipient.

Two, transitioning from Medicaid to a privately run or government-subsidized health insurance program can be highly stressful, for reasons we discussed in a previous article.

But private sector-like innovation in health-care delivery is possible while delivering improved health and economic mobility outcomes and keeping state budgets neutral. It’s known as the “Section 1115 Medicaid demonstration waiver” and allows states to act more like a Target.

Section 1115 waivers are a way for states to experiment in different ways that may be better than the top-down approach favored by the federally mandated Medicaid program. Waivers have been used to expand coverage or benefits, change policies for existing Medicaid populations, modify how health care is delivered (say through Zoom interviews vs in-office visits), or change incentives for how patients receive health care.

The “Healthy Indiana Plan” (HIP), begun in 2008, provides an example for North Carolina, with innovative approaches to improving health outcomes as well as the transition from Medicaid to the private sector.

HIP has been successful in lowering uninsured rates and improving the health of its Medicaid participants with one simple idea. It puts more power in the hands of individuals to make personal health-care decisions, just like giving choosy Target shoppers a gift card they can use now or in the near future.

Specifically, each Medicaid recipient on the Indiana HIP plan receives a $2,500 “Personal Wellness and Responsibility” (POWER) debit card to use for the year’s health expenses, which pays for the first $2,500 in medical services in a given year. HIP members contribute a modest monthly amount between $1 to $20 for the POWER account, and employers can also contribute up to 50% of the monthly cost. In addition, the state gives free preventive health care and $20 gift cards for each visit.

If annual health expenses rise above $2,500 and HIP members have been making consistent monthly payments, the additional health services are fully covered at no cost. What’s more, the POWER account gets refilled again at the beginning of the next calendar year with another $2,500. If the members still have money left at the end of the year, those remaining funds can be used to lower next year’s monthly payments.

The advantage of this program is that Indiana citizens have some power and control over their health, thinking wisely about those decisions in the same way as we manage a Target gift card, to use some today (or not) and saving funds for a future time. The HIP program incentivizes people to get preventive health care, eat well and exercise, rather than having a bottomless bowl of reimbursements that don’t recognize people’s improving health habits.

After using their POWER card for a medical expense, users get a receipt that shows the cost of each health-care service as well as the amount left in their POWER account, giving them a way to track health-care spending just as we do in other areas of our lives.

The Indiana program works with private Managed Care Organizations (MCOs) to facilitate Medicaid coverage. These MCOs earn a flat fee for Medicaid enrollees and thus gain higher profits as people’s health improves, with the aim of aligning their incentives with the state residents.

In 2018, Indiana saw a dramatic increase in preventive services, mammograms and vaccinations, as well as smoking-cessation therapies. Pregnancy management programs skyrocketed by an annual 41% from 2015 to 2018. By 2016, ER usage compared to traditional Medicaid programs had fallen by 30%, as individuals sought local clinics for non-emergency ailments.

Indiana has also figured out how to improve the transition after a rise in salary leads to a sudden drop-off in Medicaid eligibility. Residents get to use $1,000 from their POWER medical savings accounts for up to 12 months to pay premiums, deductibles, copays and coinsurance during their transition to commercial coverage. It’s called the “Workforce Bridge Program,” and Indiana was the first state to establish this innovative approach.

However, there is one major problem that Indiana’s program doesn’t solve — many health ailments happen through no fault in people’s behavior, such as birth defects, debilitating accidents, and chronic or terminal diseases. These patients may still struggle to get the care they need, since commercial insurance companies, getting flat monthly payments, are incentivized to resist giving medical care to these high medical cost individuals for a simple reason: they lower company profits that can even risk insolvency. So as innovative as HIP is, it doesn’t solve every problem facing the US healthcare system. That approach requires another innovative strategy, one which we will discuss next week.