Time to Get Serious about Medicaid

by Brian Blase

No wonder the White House sharply criticized Rep. Paul Ryan’s Medicaid budget proposal. Judging from the policy outline administration officials released last week, they seem to be unaware of the national Medicaid crisis — or unserious about addressing it.

This crisis is driven by several factors: unsustainable spending growth at the federal and state levels, the massive crowd-out of private coverage, perverse incentives that discourage work and retirement planning, and cost-control mechanisms such as low provider-payment rates that limit access for enrollees and contribute to Medicaid’s low quality of care.

Here’s a point-by-point diagnosis of the White House’s Medicaid proposal:

First, the proposal would replace the current federal matching formulas for Medicaid and the Children’s Health Insurance Program (a Medicaid offshoot) with “a single matching rate for all program spending that rewards states for efficiency and automatically increases if a recession forces enrollment and state costs to rise.”

Reaction: The White House offered no specifics on whether the federal match will increase or decrease, or whether it will incorporate all new enrollees that Obamacare brings into the program. This obscures the fundamental problem of the open-ended federal reimbursement for state Medicaid spending, which is at least 50 percent for every state and around 75 percent for the poorest states. As a result, states pass most of the cost of their programs to taxpayers in other states and create inefficiently large programs.

Rewarding states for efficiency is a nice phrase that means nothing without specifics. Moreover, fixed federal allotments (a central element in Ryan’s plan) are the best tool to promote efficiency in Medicaid, as it would encourage states to be much more cost-conscious than they are now.

Second, the White House proposal “would clamp down on states’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid.”

Reaction: The Medicaid provider tax is perhaps the only tax where the payer (hospitals and nursing homes) actually wants to be taxed. The reason: the state taxes the provider and then spends the original tax revenue on the provider. Meanwhile, the state can leverage the amount spent on the provider for additional federal matching funds. This means the state can increase spending on Medicaid solely at the expense of federal, but not state, taxpayers.

So the provider tax allows states to spend more on Medicaid than they would spend if states banned these taxes. And this makes the White House condemnation of the provider tax logically irreconcilable with its opposition to reforming the open-ended reimbursement.

The provider tax is just a symptom of the way the federal financing of Medicaid plays out. If states received fixed allotments for their programs, they would not have any reason to institute these absurd provider taxes.

Third, “[T]he President has called on the National Governors Association (NGA) to make recommendations for ways to reform and strengthen Medicaid, and the framework will consider the ideas that its Task Force produces.”

Reaction: Finding what governors want is easy; in most cases they want more federal money and more flexibility to redesign their programs free from federal rules and mandates. Washington’s role is to make appropriate trade-offs between the governors’ wishes and the interests of Medicaid enrollees and federal taxpayers.

President Obama will likely oppose any efforts to repeal the Obamacare Medicaid expansion, and he opposes changing the open-ended federal Medicaid reimbursement. That leaves him with no room to propose meaningful reform that will put Medicaid on a sustainable footing.

Fourth, “The President also supports reform of Medicaid to incentivize more efficient, higher quality care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare.”

Reaction: Everyone supports this. It’s a platitude, not a proposal. How does the White House envision achieving these goals and creating better coordination between Medicare and Medicaid?

The fundamental structure of the programs makes coordination difficult, and the Obama administration seems unserious about tackling real entitlement reform. Currently, incentives to better coordinate care between Medicare and Medicaid are lacking, since taxpayer bailouts are an all-too-easy fix for poor management.

Despite its current problems, Medicaid would have been better off without Obamacare and its enormous expansion of the program. In 2014, states must enroll every individual who resides in a household below 138 percent of the federal poverty level into Medicaid. Analysts at both the Congressional Budget Office and the Centers for Medicare and Medicaid Services estimate that this will increase annual spending on the program by around $100 billion.

This expansion will massively expand the welfare state by up to 25 million non-disabled adults. The vast majority (82 percent, a recent economics paper estimates) of working adults eligible for the expansion currently have private coverage and will simply replace it with Medicaid. And states will have very little incentive to pursue cost-effective methods for the expansion population, since federal taxpayers will pick up 100 percent of the costs in 2014-2016 and at least 90 percent thereafter.

In contrast, Rep. Ryan, with support from numerous governors, has laid out a commonsense plan for comprehensive Medicaid reform. His plan replaces the current open-ended federal reimbursement of state Medicaid spending with a fixed allotment to each state. This will prevent states from passing the bill of unsustainable Medicaid spending to future generations through increased federal borrowing. To help states better manage their programs and tailor them to their individual state characteristics, Ryan’s plan also allows states greater flexibility from federal mandates and more freedom from federal oversight.

Since Obamacare worsens Medicaid’s problems, real Medicaid reform begins with repealing Obamacare. While repealing Obamacare’s Medicaid expansion will prevent the current Medicaid crisis from worsening, policymakers must also adopt reforms to make the program better for enrollees and taxpayers. So far, Ryan’s proposal is the only serious one on the table.

Brian Blase is a policy analyst at the Heritage Foundation’s Center for Health Policy Studies.

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