Suzy Khimm on Medicaid and the Utah Solution

by Reihan Salam

Suzy Khimm kindly responded to my response to her post on states withdrawing from Medicaid:

Salam is correct that states that completely withdrew from Medicaid could conceivably set up their own state-based programs to cover the poor. But state governments would be stretching their resources awfully thin if they branched out on their own, as they’d be forgoing federal matching funds. The federal government currently covers 56 percent of states’ Medicaid costs, on average — and 60 percent of coverage in Texas. States could design the programs however they’d like, but without the federal matching funds, even the most innovative, cost-effective coverage could go only so far.

“It’s hard to do anything with less than half the money. You do less with less,” says Anthony Wright, executive director of Health Access, a Sacramento-based advocacy group that has supported the Medicaid expansion. In fact, California had been struggling to fund its owncounty-based health-care program for poor residents not covered by Medicaid — prompting the state to embrace the federal health law’s expansion as soon as possible, as I explained on Thursday.

States could certainly try using their own money to fill in the gaps if they opted out of Medicaid entirely. But the massive loss of federal matching funds would almost certainly result in scaled-back coverage, which is why Iargued that hospital ERs “would likely become the de facto safety net” under such a reality.

This is one reason why conservatives have long called for reforming Medicaid through the use of block grants. The Cato Institute offers a summary of efforts since 1982, including a 2004 effort by the Bush White House:

In his 2004 budget, President George W. Bush proposed Medicaid block grant reforms. His proposal would have allowed states to receive their Medicaid funds in the usual structure or in the form of a block grant with the inducement of more flexibility and higher initial funding levels. The plan would have been a step forward, but the administration did not push it very hard and it was quickly forgotten.

In arguing for a Medicaid block grant, the Bush administration pointed to common complaints that the “complex array of Medicaid laws, regulations, and administrative guidance is confusing, overly burdensome, and serves to stifle state innovation and flexibility.” Block granting would be a way to reduce the enormous bureaucratic structures that are needed to administer the current program.

The Congressional Budget Office has examined the cost savings of turning the acute care portion of Medicaid into a block grant. Acute care includes hospital care, doctor visits, and drug costs, which together accounts for about two-thirds of overall Medicaid spending. Block granting acute care and allowing federal funding to grow by the general inflation rate would save federal taxpayers $625 billion over the 10-year period from 2010–2019, including about $125 billion by 2019. [Emphasis added.]

Also, it’s worth noting that at least one state, Louisiana, has a centralized system of care for the indigent centered on public hospitals and a decent amount of post-Katrina public funds that could allow it to craft a more cost-effective program than Medicaid. Even so, it is certainly true that the federal government has made withdrawing from Medicaid a difficult and expensive proposition. One possibility I raised in my post was that PPACA would pick up the tab. As Peter Suderman notes, however, it’s not clear this would work:

There’s some pushback to the idea that, if states did drop out of the program, many would-be Medicaid recipients could take health insurance subsidies through the exchanges. Some independent experts (who have been supportive of the PPACA) argue that those subsidies wouldn’t be available to folks under the poverty line. The Department of Health and Human Services says it isn’t sure. If HHS decides that lower-income folks aren’t eligible for those subsidies, that will make it very tough for states to justify dropping out of the program, politically, unless they can come up with some other way to cover those low-income individuals. [Emphasis added.]

Two Utah state legislators, Michael G. Waddoups and David Clark, offered a way out of this tangle back in February:

Let’s select a few programs — say, education, transportation and Medicaid — that are managed mostly by Utah’s government, but with significant federal dollars and a plethora of onerous federal interventions and regulations.


Let Utah take over these programs entirely. But let us keep in our state the portion of federal taxes Utah residents pay for these programs. The amount would not be difficult to determine. Rather than send this money through the federal bureaucracy, we would retain it and would take full responsibility for education, transportation and Medicaid — minus all federal oversight and regulation.

We recognize that, financially, this is not the best deal for Utah. We would not receive our share of debt revenue used in these programs, and Utah taxpayers would continue to pay our share of the interest on the national debt used for these programs in other states.

Even so, we believe we can operate these programs more efficiently and productively without federal strings and mandates.

This is much like Gov. John Kitzhaber’s original vision for his Oregon Health Plan, from the other end of the political spectrum, and it strikes me as promising. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.