Medicaid in South Carolina

It's midday, but a travesty of economics I just read cannot go by unnoted. So here's the deal: South Carolina has petitioned the government for a waiver that would allow it replace its Medicaid system with a system of what amounts to private accounts. Basically, Medicaid spending would stay the same, but recipients would received a risk-based allotment each quarter rather than just spending as need to. The idea is that introducing a market mechanism would reduce costs by reconnecting what consumers pay and the health care they receive (this disconnect is what's largely responsible for exploding costs across the system).

One of the three options South Carolina medicaid recipients would have is joining a "medical home network," a type of managed care. The Center for Budget and Policy Priorities thinks this option would be ineffective. Their basis for this conclusion is that such networks do not currently exist, and they devote several paragraphs to quoting statistics about how few South Carolina Medicaid recipients presently used managed care. Their reasoning, if it can be called that, deserves to be quoted at length:

"the South Carolina waiver states that the new program would rely on private market development...This rosy scenario--that a sufficient number of new private health plans will somehow arise to compete for Medicaid customers in an extremely short timeframe in a state will extremely low managed care participation--is not jsutified by the current marketplace for health care in the state."

Do the folks at the CBPP really not realize that the market is currently distorted by Medicaid's monopoly? Let's walk through what will happen: recipients will be need in medical coverage, and some of them will want to join managed care networks. Private companies will take on new customers so long as they can turn a profit, and, in this aspect, the lack of a current market is good: providers can tailor their coverage so that it cost what Medicaid recipients can afford (doing the maximization on price and coverage might be interesting, but I don't have the data to do so). And, given that pre-existing companies are providing similar services, these home networks will step into the gap abandoned by the state literally overnight.

No magic here, just the market. And that's the point of the proposal: changing the contours of the market in order to cut costs.