In a series of papers, McKinsey’s Center for US Health System Reform has been exploring major changes to the US health system that may be on the horizon. The first report, The next imperatives for US healthcare, discussed the two steps—increasing healthcare-sector productivity and improving healthcare-market functioning—that can better balance the supply of and demand for health services. It also described these steps’ potential to produce sufficient savings to lower medical cost inflation to the rate of gross domestic product (GDP) growth.1 The second report, Potential impact of individual market reforms, explored a wide range of changes that have been proposed to stabilize the individual market and the effect some of these proposals could have on claims costs and enrollment by the uninsured.2
This paper, the third in the series, explores opportunities states could consider to improve their Medicaid programs. Recent debates surrounding proposals to transition to new Medicaid funding models have increased focus on those opportunities. Regardless of whether the Affordable Care Act is repealed and replaced, Medicaid will continue to represent a significant budget item for both federal and state governments. Many state leaders are considering options that could potentially bring cost growth in line with economic growth while also promoting other state objectives such as improving access and care quality. Furthermore, many state leaders are considering additional actions to enhance their Medicaid programs to take advantage of the additional flexibility being offered by the federal government.