How to Fix Medicaid
A new report offers some good ideas, but doesn’t go far enough.


Avik Roy

Medicaid is, first and foremost, a humanitarian disaster. Studies have repeatedly shown that the program fails so badly that indigent patients fare no better than, and often worse than, those with no insurance at all.

But there is, of course, another Medicaid-driven crisis: the one in which skyrocketing spending on Medicaid is annihilating state budgets all across the country, a problem that Obamacare makes significantly worse.

The State of New York is a poster child for how decades of irresponsible management of Medicaid can drive a state treasury into a ditch. On Monday, New York lieutenant governor Richard Ravitch published a thoughtful and distressing report that details the depth of the problem. Medicaid is “the largest single driver of the State’s growing expenditures,” writes Ravitch. “The current State budget crisis,” in turn, “is threatening New York’s ability to handle the growth of this program without dramatically raising taxes or cutting other essential government services.”

Ravitch notes that nearly one-quarter of all New York state residents — 4.5 million people — are on Medicaid. In the 2010 fiscal year, local, state, and federal parties spent more than $50 billion on Medicaid in New York, far more than any other state in the union, and nearly 40 percent of New York’s 2010 budget of $132 billion. New York spends more on Medicaid per capita than any state — double that of neighboring New Jersey and Connecticut, and 2.3 times that of California, the second-largest state in total Medicaid expenditures.

But the near future makes 2010 seem paradisiacal by comparison. Over the next four years, as the federal bailout of spendthrift states expires, Albany expects its Medicaid spending to increase by 18 percent a year. Then, in 2014, Obamacare forces the state to increase the number of people who are eligible for Medicaid, expanding the state’s fiscal liabilities and constraining its latitude to institute needed reforms.

In his 17-page report, Ravitch traces the recent history of how New York’s Medicaid program came to this pass. Most important, New York has been one of the most aggressive states in taking advantage of federal matching funds in order to expand its Medicaid program, making it one of the most lavish in the country. Unfortunately, it has been politically easy to expand Medicaid during good times, but impossible to rein it in during bad times; indeed, during the financial crisis of 2008–09, the state actually expanded its Medicaid coverage, and Medicaid enrollment increased by 600,000.

Another problem, the transformation of Medicaid from a welfare program to an entitlement program, was a result of the passage of federal welfare reform in 1996. When Medicaid was first instituted in 1965, nearly everyone eligible for Medicaid was already on welfare: that is, they were receiving direct cash assistance. After 1996, New York’s welfare rolls shrank dramatically, while its Medicaid rolls continued to expand. “Today,” writes Ravitch, “only one out of six New York children and adults receiving Medicaid services also receives cash assistance,” because most people on Medicaid are employed, albeit with below-average incomes.

A third problem is that Medicaid provisions such as “spend-down” rules and the doctrine of “spousal refusal” allow higher-income individuals to game the system and gain Medicaid eligibility, by rearranging their assets. (John Hood discusses this problem in the Summer 2010 issue of National Affairs.)

A fourth problem is that New York’s methods of reimbursing doctors and hospitals for Medicaid services is specified line-by-line in state law. Ravitch writes:

For most areas of Medicaid payment in New York — in-patient hospital care, freestanding ambulatory care centers, home health agencies, nursing homes — the basic formulas for reimbursing Medicaid providers are set directly by the State legislature as part of the annual negotiations over the budget. Even minor adjustments require legislative action. As a result, the State has found it exceedingly difficult to control Medicaid costs by improving and updating payment methods.

For example, until recently the State was required by law to reimburse hospitals for most in-patient care under a complex inflation-adjusted formula devised in 1981. Since that time, there have been revolutions in hospital operations, staffing, and technology — changes for which the inflation rate is a grossly inadequate proxy. But because the formula was embedded in statute, it took almost 20 years, until 2009, for the methods to be updated.


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