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The Medicaid-Expansion Distraction
Throwing money at a program that harms the poor is no way to reform health care.


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Across the country, states are debating whether to expand Medicaid and pull down billions more in federal funding from Obamacare. But an even more important issue is being neglected. The current Medicaid program is almost irreversibly broken and needs to be replaced.

The most glaring problem is exploding costs. Medicaid is now the single largest and fastest-growing program in most state budgets, consuming about a quarter of all state spending. The Congressional Budget Office announced last month that Medicaid spending is projected to more than double over the next decade, rising from $258 billion in 2012 to $622 billion in 2022.

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Even President Obama admitted in a 2009 letter to Senate Democratic leaders that “the ever-increasing cost of Medicare and Medicaid are among the main drivers of enormous budget deficits.”

The president also cited the need to reduce the cost of Medicaid: “I am committed to working with the Congress to fully offset the cost of health care reform by reducing Medicare and Medicaid spending by another $200 to $300 billion over the next 10 years.” The president didn’t follow through on his commitment (or even try to), but he at least took a step toward acknowledging the problem.

The other big problem is the program itself. In its current form, Medicaid has far worse health outcomes than private insurance, and in some cases it’s worse than having no insurance at all. The root cause is poor access to care. A Medicaid enrollee can’t just go to any doctor. In many states, only a minority of doctors — in New Jersey, for example, only 40 percent of office-based physicians — will accept Medicaid patients. The result is that enrollees skip routine doctor visits, illnesses and chronic conditions worsen, and patients end up seeking care the only place they can get it — in an emergency room.

Physicians don’t want to take Medicaid patients because reimbursement rates in most states are so low that they don’t even cover the cost of providing care. Although states set provider rates, that’s about all they have the authority to do under byzantine federal rules. Meanwhile, Medicaid remains an all-or-nothing entitlement. If you qualify, you get all the benefits whether you need them or not (even if you can’t find a doctor). You also don’t have to contribute anything more than a few dollars to the cost of your care (or even see the true cost), and you have no incentive to seek care in, say, an outpatient clinic instead of an ER.

Obamacare’s Independent Payment Advisory Board, the 15-person committee charged with reducing Medicare spending, takes this problem to a new level. According to the law, the board cannot “raise revenues or Medicare beneficiary premiums . . . increase Medicare beneficiary costsharing (including deductibles, coinsurance, and copayments), or otherwise restrict benefits or modify eligibility criteria.” In other words, the only thing the board can do to reduce Medicare spending is cut provider rates.

That’s exactly the situation states find themselves in with Medicaid. Bound by almost identical federal prohibitions on charging copays and deductibles, lawmakers are forced to use the only tool that will have a substantive effect on spending growth: cutting provider rates. Little wonder, then, that states have gradually been cutting them (with the White House’s approval) in order to control cost growth. There’s not much else they can do.

The only way out of this mess is to disentangle state and federal funding streams and give states the freedom to completely redesign the program. The Texas Public Policy Foundation recently proposed a way to accomplish this through a block grant, structured in a way that stabilizes federal funding, loosens restrictions on how states can spend Medicaid dollars, and allows for the amount of the block grant to grow with population, medical inflation, and changes in the number of people below the federal poverty limit.

In this context, the primary purpose of a block grant is not to cap funding but to gain flexibility. States will achieve long-term cost containment not by slashing their Medicaid budgets but by employing market-based tools that slow the rate of the program’s growth and create the right incentives.

For detractors, it’s easy to dismiss block grants — but only by distorting the concept and pretending that fundamental Medicaid reform will harm the poor. The reality is that Medicaid as it is now harms the poor. Scoffing at substantive changes will do nothing to help the millions who are currently on Medicaid and need the program to be sustainable over the long term.

The Left’s big idea about Medicaid is to throw more money at it and hope for the best. That’s what they’ve been doing for decades, and that’s what they hope to do with expansion under Obamacare. It’s time to do something different.

— John Daniel Davidson is a health-care-policy analyst at the Texas Public Policy Foundation.



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