A recent story on CNN Money mentioned that states could face a $12 billion shortfall if Congress doesn’t pass a bill to help them out. Four states in particular will see shortfalls in money of more than $1 billion each.

While this is a scary figure, especially with the way the economy is working, it seems no one has attempted to explain why there’s such problems with Medicaid. I’m going to answer that question for you, or at least give you an idea of what states are up against, and I’m going to base it on New York, the state where I live.

First off, the problem certainly isn’t how medical entities are paid. To use the easiest term most people will understand, Medicaid pays on a fee schedule. This means they pay a certain amount for procedures and services. That’s pretty much how most insurance companies pay claims, just so you know. In Medicaid’s case, many payment amounts haven’t changed in more than 30 years. However, if you’re a hospital in New York, you must accept both Medicare and Medicaid patients, so hospitals end up losing a lot of money because of Medicaid.

About 15 years ago or more the state added a new feature where they threw in co-pay amounts that patients “had” to pay. That money was taken from the payments medical facilities received, since now they were supposed to get it from the patients. However, that came with a caveat; if a patient told you they couldn’t pay, you had to write it off and you couldn’t bill the patient for the balance. And you were supposed to ask them while they were in the hospital, or any other medical facility. The co-pay amount for the most part is only $3, but multiply that times a couple of million people who probably go for services more than once a year and it all adds up. Anyway, this part is just to show that states aren’t losing money because they’re paying out too much to hospitals or physicians.

What’s the problem then? The problem is in administering the program. It’s unwieldy and unmanageable, both because of the way the state runs it and because of the people who are on Medicaid, though for the second, probably not for the reasons you might expect.

In New York, every county has its own Medicaid program. The way Medicare is run is that the federal government contracts with different companies throughout the country to administer the program in certain states. Medicare is considered a federal program, whereas Medicaid is considered a state program. So, every county has to have people to staff those offices. And sometimes, there are multiple offices handling different aspects of each program. So, there’s a lot of duplication of bodies, which means money gets eaten up fairly quickly.

What the state has allowed are Medicaid HMOs, which seems like a good idea except for a problem I’m going to mention now, and a problem I’ll mention later. The “now” issue is that those insurance companies running Medicaid HMOs must have at least one competing insurance company in the state. Otherwise, subscribers don’t have to select a HMO at all, which almost renders them useless in some counties. The reason there aren’t many HMOs is because the money they’re given to try to handle claims is pretty low, and the best a HMO can hope for is that there’s a significant number of people they’re paid for that decide not to use any services. That doesn’t happen often, however.

Medicaid also funds programs through the Department of Social Services whenever they see a need for something extra special. For instance, in Wayne County, there’s a special program for migrant workers that travel into the area to help pick crops, yet don’t speak English. In Westchester County, there are special programs that pay for specific types of things such as psych services or chemotherapy, especially if you’re an undocumented worker. Payments still aren’t great, but it all takes a drain on the money available.

Now, let’s talk briefly about the subscribers. Something not generally known is that probably half of Medicaid subscribers are fairly transient; they move around all the time for whatever reason. And they don’t tell the DSS that they’ve moved, which is problematic in the first place, and then gets worse when they move to another county, because there’s no true state system where someone can just go in and update one system and have everything working great. Subscribers are told they need to go to the local office and do it all over again; that’s an ugly way to do things.

Subscribers are encouraged to sign up for Medicaid HMOs in those counties that have multiples, but they’re also told that they can drop it at any time and sign up with another one. That’s an ugly process as well, as it takes a lot of manpower hours switching people all the time. And when it comes to authorizing services, it can get uglier still.

There’s more detail I could get into, but I’ll stop here. This should be enough information to have a basic understanding of why Medicaid programs might be in trouble. What could states do? I’ll offer only this one bit of advice; standardize the process and have fewer outside offices, which will reduce the number of people needed to do everything, and potentially reduce the amount of paperwork. States have to be willing to move Medicaid services into the 21st century.