Real Medicaid Reform
Health economists Thomas Grannemann and Mark Pauly offer a blueprint.


If Obamacare passes, Democrats will celebrate it as a monumental victory for the uninsured. The office of Richard Foster, chief actuary of the Centers for Medicare & Medicaid Services, estimates that the Senate bill — the bill that House members may soon be voting on — would reduce the number of people without health insurance by 34 million as of 2019. However, more than half (18 million) of those 34 million newly insured would be primary Medicaid beneficiaries. In other words, most of the gains would be achieved through a program that has consistently failed patients, health-care providers, and taxpayers. Meanwhile, the program’s deep structural flaws would remain uncorrected.

Putting Medicaid on steroids is not real reform. Unfortunately, efforts to tackle its core defects have repeatedly been postponed. In their new book, Medicaid Everyone Can Count On (AEI Press), health economists Thomas Grannemann and Mark Pauly offer a blueprint for fixing the program’s inequities and inefficiencies. They address their book to “the national health policy realist” and describe their proposed Medicaid overhaul as “an intermediate step” in the broader process of revamping America’s health-care system.

Medicaid, which was enacted in 1965 as a federal-state initiative to serve the health needs of the poor, is staggeringly complex, but the Grannemann-Pauly proposals concentrate on two clear objectives: to change how the program is funded and to change how providers are compensated. The current system is littered with perverse incentives that have distorted state benefit levels, made it increasingly hard for Medicaid patients to get the care they need, and produced an ocean of waste.

As it stands now, the more a state spends on Medicaid, the more Medicaid dollars it receives from the federal government. The precise matching rate, known as the federal medical assistance percentage (FMAP), differs from state to state, based on per capita income. If a state’s FMAP is 60 percent, then every $1 it spends on Medicaid is matched by $1.50 from Washington. Until recently, the average FMAP was typically about 57 percent, but it is significantly higher today, thanks to the 2009 economic-stimulus package.

The present framework for Medicaid funding has yielded a grossly unequal distribution of resources across states. Even after adjusting the data for variations in overall cost of living and in health-care costs specifically, Grannemann and Pauly still find yawning disparities. They calculate that in fiscal year 2007, real Medicaid payments per person living below 125 percent of the cost-of-living-adjusted federal poverty line were $3,120 in Nevada, $4,659 in Georgia, $4,697 in Montana, $4,769 in Mississippi, $5,270 in Arizona, $5,509 in South Carolina, $8,283 in Vermont, $8,342 in New Hampshire, $8,418 in Massachusetts, $8,500 in New York, $9,408 in Rhode Island, and $9,718 in Minnesota.

Medicaid spending fluctuates far more from state to state than does Medicare spending. But Grannemann and Pauly show that “there is no logical, cost-based explanation for the differences in spending among states.” Those differences are apparently related to taxpayer income, aggregate fiscal capacity (or revenue-raising ability), and poverty. The steepest Medicaid benefits per poor person can be found “in states (many in the Northeast) with higher-income taxpayers and relatively few poor persons.” These states are better equipped to provide generous benefits than are lower-income states with higher poverty levels and fewer rich taxpayers.