Politics & Policy

The States Will Lose on Medicaid

LBJ signs Medicaid into law, July 30, 1965. (Lyndon Baines Johnson Library)
And it’s a good thing, too.

In its review of Obamacare’s constitutionality, the Supreme Court will examine two substantive parts of the law: the “individual mandate” that compels private citizens to purchase health insurance, and the statute’s massive expansion of Medicaid rolls. While the mandate question holds great constitutional interest, the outcome won’t greatly affect Obamacare’s operation one way or the other. The Medicaid question, in contrast, is crucial. The expanded program is expected to provide health coverage for an additional 16 million poor and near-poor, heretofore-uninsured individuals, at a cost of upwards of $500 billion between 2014 and 2019. In a brief filed earlier this week, the litigating states claim that the statute unduly “coerces” them into participating in the program, in violation of the constitutional federalism balance. Should they prevail, all of Obamacare will have to be renegotiated.

That renegotiation, of course, is the holy grail of conservative agitation. However, the states won’t prevail on their Medicaid claim. Nor should they. Conservatives’ vocal support for the states’ opportunistic position is incoherent as a matter of both policy and federalism theory.

Enacted in 1965, Medicaid is a “cooperative” federal-state program. If a state agrees to provide medical services for certain populations, the feds pay between 50 and 83 cents of each dollar spent on the service. The match, known as “FMAP,” depends on the state’s wealth, with poor states receiving higher matches. For participating states, coverage of certain populations and services is mandatory. However, states may voluntarily cover additional populations and services. All have done so, to varying degrees.

Obamacare builds on this regime. Beginning in 2014, it requires participating states to cover all individuals with incomes up to 133 percent of the federal poverty line. The federal government will pay 100 percent of the costs for these “newly enrolled” citizens. While the ratio will gradually decline to 90 percent by 2019, it will remain above — for most states, far above — the current FMAP. Texas, for example, the noisiest among the litigating states, will see its FMAP shoot up from the current 60 to almost 70 percent. What’s there not to like?

Constitutionally, the states’ brief hangs its opposition on a single sentence in the Supreme Court’s 1987 decision in South Dakota v. Dole, hinting that conditional-funding statutes may encourage but not coerce states to participate. While no federal court has ever followed that suggestion, the states argue that Obamacare crosses the threshold at which fiscal inducement ends and compulsion begins. In the great majority of states, Medicaid consumes well north of 20 percent of the state budget. No state could possibly replace the federal matching funds that would be “lost” if the state were to opt out. Moreover, because federal Medicaid expenditures are paid from general revenues, a withdrawing state’s taxpayers would still be on the hook. Their tax payments would remain unchanged — and be distributed to all other states and their Medicaid programs.

All this is true, but it doesn’t help the states’ case. All federal funding statutes provide money that the states think they cannot afford to lose (else they’d opt out), and all are cross-subsidized from general revenues, in addition to the funding from FICA taxes. A few conservative theorists have suggested that all those statutes are unconstitutionally coercive. However, the litigating states wisely disavow that position, knowing that the justices are not remotely inclined to entertain it.

Perhaps some funding statutes are impermissibly coercive — but which, and why? The “coercion” theory seems most plausible when a tiny tail of federal funding wags a large dog of federal compliance mandates and regulations (as, say, with No Child Left Behind, which provides around ten cents of each dollar in mandated spending, rather than Medicaid’s 50-plus, let alone 100). This is what the Supreme Court had in mind in South Dakota v. Dole, and what states mean when they protest “unfunded mandates.” Their complaint now is just the opposite: Supposedly, Obamacare is unconstitutionally coercive because it makes Medicaid, already the biggest and among the most generous of all federal funding mandates, yet bigger and more generous. How dare the feds fund state-run programs at 100 percent, the states seem to suggest: Have they no decency and respect for the federalist balance?

Why did 26 states join this implausible campaign? The decline of the funding ratio from 100 percent in 2014 to 90 percent in 2019 is an unlikely explanation. The costs — at most 3 percent over what the states would wind up paying in any event — are too incremental and too far in the future to concern current state politicians. What dominates their calculus is Obamacare’s requirement that states continue to provide all currently provided services to all currently covered populations, or opt out of Medicaid altogether.

This “Maintenance of Effort” provision does have very severe — if you will, “coercive” — consequences. With or without Obamacare, the states’ obligations are simply unsustainable. However, the states do not come to the table with clean hands. In large measure, Medicaid costs have exploded not on account of federal mandates but because, over the years, states voluntarily opted to cover many additional, “optional” services — usually with the purpose, and always with the effect, of maximizing federal funds.

Naturally, state politicians resent being held to the bargain. They would prefer a regime that allowed them to ditch the optional populations and services on Day One and reenroll everyone on Day Two, with yet-bigger benefits, under Obamacare’s 100 percent formula. This is the real gravamen of the states’ complaint.

While the states’ claim lacks any legal merit, at least it makes sense in terms of their political incentives. Not even that much can be said about conservatives’ eager embrace, in earlier amicus briefs and in the blogosphere, of the states’ position. On their theory, minimally funded but onerous federal programs are okay: The greater the difference in funding, the easier it is to say “no” to a federal program. This is a very odd position for a political camp that has for decades inveighed against “unfunded mandates.” Similarly, the states’ rank opportunism and their complicity in the fiscal disaster that is Medicaid should make conservatives think twice about the wisdom of “block-granting” the program (as envisioned, for example, in Rep. Paul Ryan’s otherwise-thoughtful budget plan). Yet more local discretion to manipulate the federal funding system and spend federal dollars for short-term advantage — but long-term ruin — is the last thing the country or, for that matter, a state, needs.

In any version, the “coercion” theory is a harmful distraction. The combination of central taxation and local spending authority is inherently destructive of fiscal and political responsibility — regardless of the mix of funds and obligations, and regardless of any imagined federal-state “balance.” It cannot be conservatism’s agenda to arrange these toxic programs to the temporary satisfaction of state officeholders. The only agenda that makes fiscal, political, and constitutional sense is to disentangle “cooperative” state and local programs. Nationalize Medicaid — and give the money to the poor, not politicians; to people, not places or providers.

Conservatism may have become too lazy and besotted with states’-rights cant to arrive at that conclusion. It is to be hoped that the impending Supreme Court drubbing will prompt sober second thought.

— Michael S. Greve is the John G. Searle Scholar at the American Enterprise Institute and co-editor, with Richard A. Epstein, of Federal Preemption (AEI, 2007). His new book, The Upside Down Constitution (Harvard University Press), will be available in February 2012.


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