Wall Street Journal: It’ll Take More Than a Band-Aid to Fix Medicaid: Save the program by giving states money to provide high-deductible plans with health savings accounts.

By   REGINA HERZLINGER and RICHARD BOXER

Feb. 5, 2017 6:12 p.m. ET

One of the most fraught questions in Donald Trump’s Washington is how Republicans will reform health care. No aspect of the debate over ObamaCare presents as much risk, or opportunity, as what to do with the law’s expansion of Medicaid, which gave government health insurance to millions of Americans. It won’t be easy, but President Trump and Congress have an opportunity to control Medicaid costs, improve the health of enrollees—and also win bipartisan support.

Republicans should combine two ideas popular in their party: block grants and health savings accounts. The former would let states tailor their Medicaid policies to their local communities, while the latter would give enrollees the ability to choose their own insurers and providers. In essence, Washington could give the states Medicaid block grants, allocated per capita, to provide beneficiaries with high-deductible insurance and health savings accounts.

Premiums on ObamaCare’s insurance exchanges are rising in part because so few providers participate. Our plan would allow Medicaid enrollees to shop for their high-deductible plans on exchanges. More people shopping would draw more insurers, thereby increasing competition and containing costs.

A 2015 study in the American Journal of Health Economics simulated what would have happened if all the insurers active on the exchanges in 2011 had participated statewide through 2014. The results? Premiums for silver coverage would have fallen by more than 10%, saving the government $1.7 billion in subsidies.

Health savings accounts, which force medical providers to compete for consumers who pay out of their own pocket, also reduce overall costs. When employers introduce such accounts, health-care costs are reduced by about 5% for each of the next three years, according to a 2015 study from the National Bureau of Economic Research.

Two years ago Indiana implemented a modified version of the program we propose, the Healthy Indiana Plan, or HIP 2.0. Comparing enrollees who used health savings accounts with those who didn’t showed that the former used more primary and preventive care, adhered better to their drug regimens, missed fewer appointments and showed up less frequently at the emergency room.

Although the Hoosier State’s “basic” traditional Medicaid was free, those in HIP 2.0 were charged 2% of their income but did not have to make copayments. If payments weren’t made for six months they would lose insurance. Yet the program remained popular: 70% of enrollees contributed and 86% described themselves as satisfied, according to a survey from the Lewin Group last summer.As more data are gathered, policy makers can better understand what beneficiaries want and how Medicaid dollars can be efficiently spent to meet their health needs.

Combining high-deductible plans and health savings accounts could also improve the health of enrollees. Current Medicaid coverage overemphasizes costly treatments. Duke University professor Barak Richman has long argued that the program doesn’t take full advantage of low-cost, high-value services, such as home care. Demonstration projects such as Medicaid’s Cash and Counseling program have shown that beneficiaries can fulfill unmet needs and improve their quality of life when they have more control over their medical dollars.

The high-deductible plan should be required to cover preventive care, as well as maintenance medications. And as with other health savings accounts, unspent funds could be rolled over to the next year or used for purchases beyond prescribed medical expenditures.

Current Medicaid rules also often pay for services that beneficiaries find unnecessary. For example, a 2015 paper for the National Bureau of Economic Research found that Oregon recipients gained only 20 to 40 cents in value for services that cost Medicaid $1. The integrity of the Medicaid program depends on bringing real value to its beneficiaries.

Democrats often say that block grants allow states to divert federal dollars away from Medicaid beneficiaries. But allocating the funds directly to beneficiaries through health savings accounts should allay concerns and draw more moderate Democrats to support the reform.

Combining high-deducible insurance plans and health savings accounts—and block-granting them per capita for use on exchanges—isn’t the sexiest proposal. But it would allocate scarce dollars more efficiently, address the nexus of poverty and illness, and make insurance markets work again. It could also pass even in a deeply divided Congress.

Ms. Herzlinger is a professor of business administration at Harvard Business School. Dr. Boxer is a professor at the UCLA School of Medicine.