In his State of the Union address last week, President Obama conceded that the “biggest driver of our long-term debt is the rising cost of health care for an aging population.” However, he offered only a few token examples of “modest” reforms to Medicare that he would accept in order to constrain spending.
Left unmentioned was Medicaid, the nation’s second-most-expensive health-care program, aimed at low-income and disabled Americans. This oversight was undoubtedly intentional: Gene Sperling, director of the president’s National Economic Council, recently said that Medicaid is “walled off” from deficit and debt negotiations with Republicans.
Ironically, as recently as in his 2012 budget proposal, the president recommended a few sensible Medicaid reforms of his own, including reducing the myriad federal matching rates (officially called Federal Medical Assistance Percentages) for Medicaid to one national blended rate. The president’s proposal on FMAP alone would have saved about $18 billion over ten years, according to the Congressional Budget Office.
So why the about-face now? There are at least two explanations.
First, politics. Seniors voted heavily for Mitt Romney (56 to 44 percent). Younger voters, aged 18 to 29, voted by an even greater margin (60 to 37 percent) for President Obama. Lower-income voters (those making under $50,000 annually) also voted overwhelmingly for the president — 60 to 38 percent.
The administration’s health-care law, the Affordable Care Act — commonly known as Obamacare — expands Medicaid eligibility in ways heavily tilted toward the demographics that got the president reelected: Single adults and families making up to 133 percent of the Federal Poverty Level (slightly over $26,000 for a family of three in 2012, according to the Kaiser Family Foundation) will qualify for expanded Medicaid coverage under the ACA. And more than half of all low-income adults are between the ages of 19 and 34.
In short, the president doesn’t want to be seen as weakening a benefit for a Democratic core constituency before it even goes into effect, and with the 2014 midterm elections looming on the horizon.
Second, and perhaps just as important, Obamacare’s private-insurance expansion is looking a bit shaky. Some large multi-state insurers have indicated that they may choose not to offer highly regulated packages with generous benefits — which offer slim profit margins — in some state or federal insurance exchanges.
In addition, 25 states have indicated that they’re not interested in running state-based insurance exchanges, leaving that responsibility — along with the blame, if things go badly — to the feds.
The administration’s concern is that significant numbers of young and healthy uninsured Americans will look at the costly insurance available on the exchanges and decide that it’s not a good deal, especially since they can pay a modest penalty for not having coverage ($95 in 2014) and get the same insurance later if they become sick — potentially saving hundreds or thousands of dollars a year in premiums.
If that happens, the Medicaid expansion will turn out to be an even bigger part of Obamacare’s coverage than it is already expected to be. (Today, about 60 million Americans — or roughly one in five — are enrolled in Medicaid. The CBO’s projection of Obamacare’s Medicaid expansion have fluctuated. After last summer’s Supreme Court ruling limited the federal government’s ability to coerce states into expanding their Medicaid programs, the CBO pared its earlier expansion estimate from 17 million to 11 million. In the CBO’s February 2013 budget baseline, it increased that estimate to 12 million.). Thus the president and other Democrats would need to defend the program at all costs. That’s why we’re hearing the “walled off” language.
But is declaring Medicaid off-limits really good for millions of low-income Americans? Or for cash-strapped states?
The truth is that protecting the Medicaid status quo is bad for the poor, bad for the states, and bad health policy.
The way Medicaid — along with other means-tested programs — is structured creates perverse incentives for low-income Americans. They get penalized for earning any additional income that would push them out of Medicaid. Economists refer to a “reservation wage” — the minimum wage level that someone requires to make work worthwhile. In general, means-tested programs raise the reservation wage.
Medicaid spending is also strangling state budgets, crowding out spending on everything from education to infrastructure. Those investments — offering the prospect of better jobs, better schools, and improved public transportation — might do more to improve the lives of the poor in the long term than Medicaid will. But that discussion isn’t even happening.
Finally, states from California to Illinois have responded to rising Medicaid costs by cutting reimbursements to providers, creating the prospect of rich Medicaid coverage on paper but restricted access to doctors in practice. Giving states more flexibility to tailor things like co-pays and benefits to distinct Medicaid populations would help lower costs without resorting to blunt tools like slashing rates across the board.
The liberal response to these concerns is to advocate raising taxes on “the rich” even further. But there aren’t enough rich people in America to cover current entitlement spending, let alone expanded Medicaid spending — at least without crashing the economy.
Politics may keep serious Medicaid reforms off the table for the time being. But one modest but important Medicaid reform that could gain traction with governors of both parties is an expedited federal waiver process that would give states the flexibility to make changes to their Medicaid programs without protracted negotiations with federal regulators. The Simpson-Bowles Commission, which the president at least pays lip service to, supported this reform.
The Obama administration seems intent on building a wall around the Medicaid program. Conservatives need to point out that this wall is actually a trap for the working poor, a prison for state budgets, and a barrier to reforms that would improve health care for low-income Americans.
Mr. President, tear down this wall.
― Paul Howard is a Manhattan Institute senior fellow and director of the Institute’s Center for Medical Progress.