Critical Condition

NRO’s health-care blog.

Medicaid Reform in One Easy Step


Stimulated by the comments of reader Joe C., I went back and looked at the Medicaid numbers. From 2010-2017, here are the Congressional Budget Office’s pre-Obamacare projections for the number of people covered by Medicaid and CHIP, and the Medicaid Actuary’s 2008 projections for federal and state spending on Medicaid:

Year (pre-PPACA)
Covered lives (millions)
Federal expenditures ($bn)
  Federal share
  State share
Cost per covered life
  Growth rate

As you can see, we currently spend almost $10,000 per Medicaid beneficiary, a number that will exceed $19,000 in 2017. The growth of per-beneficiary expenditures is not only well above conventional inflation, but also health care inflation. This is why Medicaid is annihilating state budgets.

What does the average individual health plan cost in the private sector, you ask? According to the Commonwealth Fund, the average private-sector individual health plan in 2008 cost $4,386. If we assume that premiums increased by 6% in 2009 and 2010, we get to a 2010 average of $4,928. In other words, the government is spending twice per Medicaid enrollee than middle-class Americans spend on their own insurance. And this is the system that PPACA wants to expand by nearly 50%.

Austin Frakt asks us to choose between two options: being uninsured, or accepting Medicaid. He posits that most people given that choice would accept Medicaid, despite its problems, and so the solution is to spend more money on the program. But this is a false choice, for two reasons.

The first is, as I’ve discussed elsewhere, a large proportion of the uninsured are not poor. These people are uninsured by choice. (In Massachusetts, instead of responding to the individual mandate, as Austin and others suggest they have, such people will game the system by claiming they have insurance when they don’t.) There are definite advantages to being uninsured over being on Medicaid, if you can pay the bills. The most significant of these is that nearly any doctor will take an appointment with someone who is willing to pay out-of-pocket.

The second of these, and the most important, is: why on earth are we spending twice as much on people with Medicaid as we do on private insurance for middle-class Americans, only to get substantially worse medical outcomes? People on Medicaid have poorer access to care (for reasons I have discussed elsewhere), and have more health problems in general. Let’s generously say that their health care should cost 50% more than that of the average American.

So here’s a modest proposal: Instead of spending $400 billion on Medicaid in 2010, let’s spend $300 billion, but instead of spending it on Medicaid, or even on vouchers, let’s write checks to the poor. Instead of filtering $9,815 per Medicaid enrollee through a cascade of government employees, let’s send $7,361 in cash into the mailboxes of impoverished individuals, to spend on whatever is most important to them and their families. It achieves more efficient wealth redistribution than does Medicaid, and allows the poor to afford high-quality, private-sector health insurance. If they are healthy, they can buy inexpensive insurance and save the extra cash; if they are sick, they can use the entire amount for insurance. This approach would not only save money, and appeal to the poor, but it would align Medicaid inflation with health inflation, saving trillions of dollars over time. Indeed, if healthy Medicaid beneficiaries choose less-expensive, consumer-driven plans, such a reform could actually bring Medicaid inflation below overall health inflation.

I can already hear an objection: what if they spend the cash on bad things, like alcohol, instead of good things, like health insurance? I would argue that the enormous efficiencies of a direct transfer payment outweigh that risk. At any rate, vouchers are designed to address exactly that concern. But those who wish to better control how the poor spend taxpayers’ money are perfectly able to do so without my encouragement.

Avik Roy is an equity research analyst at Monness, Crespi, Hardt & Co., and blogs on healthcare policy at The Apothecary.


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