Sen. Harry Reid needs 60 Senate votes to pass his health-care bill and, as Jonathan Karl of ABC News reported last night, is attempting to bribe Sen. Mary Landrieu of Louisiana to be the 60th vote by shoveling money into her state. His bribe takes the form of an increased federal reimbursement of Louisiana’s Medicaid expenses.
Medicaid — the government health-insurance program for certain categories of the poor — is a state-federal partnership. States choose the amount of money to spend on Medicaid, and then federal taxpayers pick up a portion of the tab at a rate determined by the wealth of the state. Louisiana’s federal match has historically been around 70 percent, which means Louisiana spends only $30 of her own taxpayers’ money to garner $70 from the federal government.
The structure of Medicaid finance creates incentives for states to spend carelessly. While a state secures all the benefits from its Medicaid spending, federal taxpayers pick up at least half the cost. Economists refer to this as the “common pool” problem. Each state creates a Medicaid program that is larger than it would be if its own taxpayers had to pay the entire cost. When all states behave in this manner, massive waste and inefficiency is the result.
Nearly half of the federal funds that are disbursed to states are channeled through the Medicaid reimbursement. Medicaid is the fastest-growing component of state budgets, and this growth creates enormous fiscal strain on most state budgets. During the bailout mania in the early days of the Obama administration, one of the key bailouts was of state Medicaid programs. Through the American Recovery and Reinvestment Act, the federal government increased each state’s Medicaid reimbursement by at least 6.2 percentage points.
And now, Harry Reid is attempting to buy Ms. Landrieu’s vote by raising the reimbursement rate even higher in her state. What will be the result? In researching the impact of the federal reimbursement on state behavior, I found one prior example of a state receiving a radical increase in its Medicaid reimbursement.