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Cuts Without Tears
Setting Medicaid reform aside makes zero sense.


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Michael F. Cannon

EDITOR’S NOTE: This is part II of two. The first can be read here.

Unfortunately, the body politic’s grasp of Medicaid lags about 20 years behind its understanding of welfare. The Left launches a fusillade at any mention of such heresies as applying the lessons of welfare reform to Medicaid. The New Republic’s Jonathan Cohn calls such an approach “heartless” and says that “rolling back Medicaid means the poor and disabled will have to confront medical bills alone. The bankruptcies will pile up, emergency rooms will get even more crowded, and, yes, some people will die.”

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Rip van Welfare

One wonders whether Cohn and others slept through the last ten years. During the welfare-reform debate, the Left predicted that scaling back federal cash assistance to the poor would be similarly disastrous. The most hysterical predictions were that one million children would be thrown into poverty and that the poor would be starving in the streets.

Welfare reform produced exactly the opposite of what the Left expected. Caseloads plummeted and poverty decreased–often dramatically–for every racial category and age, including children. Poverty remains lower today than at any point prior to welfare reform, going back to 1979. Many who opposed the 1996 law have since admitted that it accomplished a large measure of good. And evidence stemming from part of that law suggests that with regard to Medicaid, the Left is again misreading the tea leaves.

Though wholesale Medicaid reform was thrown overboard in 1996, the welfare-reform law contained a little-noticed provision that eliminated Medicaid eligibility for non-citizen immigrants. One person who did notice was Harvard economist George Borjas. He discovered that the result of this “draconian” measure was exactly the opposite of what many would predict: coverage among non-citizen immigrants increased.

Borjas explains, “The immigrants most likely to be adversely affected by the new restrictions significantly increased their labor supply, thereby raising their probability of being covered by employer-sponsored insurance. In fact, this increase in the probability of coverage through employer-sponsored insurance was large enough to completely offset the Medicaid cutbacks.”

The robust economy of the late 1990s cannot explain these results, Borjas argues, because states that offered coverage to those cut from the Medicaid rolls saw coverage levels for this group decrease, while states that did not saw coverage levels increase. As author Jason DeParle has written, “When welfare was there for the taking, they got on the bus and took it; when it wasn’t, they made other plans.”

Borjas notes that immigrants responded not just to the Medicaid cuts, but to all the changes in the 1996 law. Nonetheless, a natural experiment has demonstrated that Medicaid cuts produced exactly the opposite of what opponents would predict, and that–by at least one measure–the cuts were more compassionate than the program’s previous (supposed) generosity.

The Status Quo Prevails

With these successes pointing the way, one might think Republicans would be eager to mount an all-out assault on Medicaid’s vicious cycle of inflating health-care costs and promoting dependency. Not so.

In its proposed budget for fiscal year 2006, the Bush administration backed away from its earlier reform proposals, which themselves were a watered-down version of what Republicans offered in 1995. Indeed, the budget laments that states have not done enough to expand Medicaid. It proposes additional state flexibility, but mostly in the service of such expansions. The CBO estimates the administration’s proposed reductions in future spending would amount to one half of one percent of Medicaid spending over the next ten years. Projected Medicaid spending fell by as much due to technical adjustments that CBO made in March to its baseline projections. The administration’s budget boasts that Medicaid “will continue to grow at a robust rate.”

The picture is no less bleak at the other end of Pennsylvania Avenue. After a tough negotiating session–with themselves–congressional Republicans have just agreed to a budget that reduces future federal Medicaid spending by less than one percent. Lest anyone think this constitutes a cut, instead of growing 41 percent by 2010, federal Medicaid spending will now grow by 39 percent–again, about the same as the change wrought by the CBO’s technical adjustments.

Some Republican governors, notably Florida’s Jeb Bush and South Carolina’s Mark Sanford, have proposed restructuring Medicaid benefits with health savings accounts (HSAs). Beneficiaries would receive money in an HSA to use toward copayments and deductibles, and could keep what they don’t spend. The idea is to give beneficiaries an incentive to be prudent consumers, and it builds on what seem to be successful “cash and counseling” programs in Florida, Arkansas, and New Jersey.

Yet this approach may trade one set of problems for another. Beneficiaries should be more careful shoppers if they share in the savings. However, the lure of cash benefits may lead to higher enrollment (only about half of Medicaid-eligible individuals are enrolled), longer enrollments (many beneficiaries only use Medicaid for brief periods), greater utilization of all available benefits, and greater dependency.

Real Medicaid Reform

States should experiment with HSAs and other approaches, including different rules for different types of beneficiaries. Far more important than restructuring benefits, however, is reducing the reach of Medicaid’s perverse and harmful incentives.

First, Congress should stop encouraging Medicaid expansions by freezing payments to states at the 2005 amount, just as welfare reform froze payments to states at the 1995 amount. According to Congressional Budget Office figures, freezing federal Medicaid spending at 2005 levels would produce $941 billion in savings by 2015, or enough to wipe out 96 percent of the cumulative ten-year federal deficit.

Second, Congress should give states maximum flexibility to use federal funds to meet a few broad goals, as it did with AFDC’s replacement, the Temporary Assistance for Needy Families (TANF) program. Those goals should include:

targeting medical assistance to the truly needy;
reducing dependency;
reducing crowd-out of private effort, including charitable care; and
promoting competitive private markets for medical care and insurance.

A necessary first step toward allowing states to focus resources on the truly needy would be eliminating the federal entitlement to Medicaid benefits, just as Congress eliminated the federal entitlement to cash assistance under TANF.

By themselves, these reforms would not alter a single state’s program. Each state would have the power to keep its program running (and growing) just as it would under current law. However, states likely will experiment with ways of providing efficient care to those who truly need assistance and encouraging private charitable care, without encouraging dependency, increasing health-care costs, or imposing a crushing burden on taxpayers.

To state plainly what it means to focus resources on the truly needy, states should use this new flexibility to remove from the Medicaid rolls all those who could obtain coverage elsewhere. To do otherwise robs taxpayers and diverts assistance away from those who need it more.

Opponents will argue that those who move from Medicaid to private insurance may end up with less coverage. But as important as how much coverage people have is how they obtain it. When people work and become more productive, both they and society benefit. Offering people Medicaid in lieu of (allegedly) inferior private coverage, on the other hand, tells them that the way to get more is by doing less: work less, save less, cultivate less self-reliance. That is a recipe for dependency.

Like welfare, Medicaid must be reformed for the sake of its recipients. The likelihood that anyone will soon offer this type of assistance brings to mind a passage from Charles Murray’s 1984 book Losing Ground, which is credited with sparking the welfare reform movement: “The real contest about the direction of social policy is not between people who want to cut budgets and people who want to help. When reforms finally do occur, they will happen not because stingy people have won, but because generous people have stopped kidding themselves.”

Setting Medicaid reform aside might have made political sense in 1996. It makes zero sense today. The Left may be forgiven for missing or misinterpreting the lessons of welfare reform, or the effects of Medicaid. Republicans, however, have little excuse. Republicans and moderate Democrats need to take stock of this program, take stock of themselves, and finish the job of welfare reform.

Michael F. Cannon is director of health-policy studies at the Cato Institute. Parts I & II of this article are adapted from his upcoming book, Healthy Competition: What’s Holding Back Health Care and How to Free It, co-authored with Michael D. Tanner (Cato Institute, forthcoming).



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