Politics & Policy

The GOP Is Right: Medicaid Needs Fundamental Reform

(Photo: Christopher Nuzzaco/Dreamstime)
The Senate’s Medicaid reforms are not perfect — but they are an important step toward making the American health-care system affordable for taxpayers.

Democrats are pouncing on the Medicaid provisions of the Senate health-care bill, saying Republican “cuts” to the program would decimate the nation’s health-insurance safety net. These attacks are overblown. The Medicaid provisions of the bill are not perfect, but they point in the right direction.

The Senate bill, called the Better Care Reconciliation Act (BCRA), makes two main changes to Medicaid. First, it lowers the federal matching rate for the Affordable Care Act’s expansion population from the enhanced level of 90 percent to the regular, state-specific rates that apply to most Medicaid spending (the regular rates range from 50 percent for high-income states to about 75 percent for low-income states). States would be allowed to continue full Medicaid coverage of the expansion population, with very significant federal support. Second, the bill would impose new, per-person limits on the growth of Medicaid spending for five different program eligibility groups. This proposal has been around for more than two decades, and was endorsed by the Clinton administration in the 1990s.

There’s nothing in the Senate bill that would force states to drop coverage of low-income elderly and disabled persons, or poor women and children, as so many of the misleading attacks on the plan have implied.

Even with the changes to Medicaid contained in the Senate bill, which would be phased in very slowly, the program would remain a large and growing part of the federal budget. The Congressional Budget Office (CBO) projects that, under current law, the federal government will spend nearly $5.2 trillion over the next ten years on Medicaid. If the emerging GOP plan cuts federal funding by $0.9 trillion over a decade, which is possible, that will still mean the federal government will spend $4.3 trillion on the program over ten years. CBO estimates enrollment in Medicaid in 2026 would be about 71 million people under the House-passed Medicaid provisions (which are similar to those in the Senate bill), or 4 million more than were enrolled in the program in 2011.

Moreover, the Senate bill provides a new, refundable tax credit to anyone who has a low income or is poor and is not eligible for Medicaid. Under this provision, households with incomes below the federal poverty line (FPL) are guaranteed that they can enroll in an insurance plan with a premium that does not exceed 2 percent of their annual income. For a person with an income at the poverty level, this means his maximum premium for health coverage would be about $20 per month.

If, in response to the Medicaid provisions in the Senate bill, states choose to impose stricter rules for program eligibility, more people would become eligible for the federal tax credit, which would allow them to enroll in private health-insurance coverage. From this perspective, it can be argued that the Senate bill strengthens and expands the health-insurance safety net by providing a realistic option for insurance enrollment to millions of people who were left out of the ACA’s Medicaid expansion.

The Senate bill would impose a stricter growth limit on per capita spending than the House bill by indexing the caps, after 2024, to the full Consumer Price Index (CPI) rather than to the medical-care component of the CPI. The practical effect of tying the caps to general consumer inflation is to lower the growth rate in the per-person caps by about 1 or 1.5 percentage points each year.

Congressional Republicans are right to want to move away from today’s open-ended federal spending on Medicaid. Under current law, the federal government provides matching payments to states without any upper limit whatsoever. States have strong incentives to maximize the amount of federal money coming into their Medicaid programs. Moreover, the incentive to cut Medicaid at the state level is undermined in part by the requirement that about 60 percent of all savings must be returned to the federal treasury.

Congressional Republicans are right to want to move away from today’s open-ended federal spending on Medicaid.

Still, it is fair to wonder if the tighter caps proposed in the Senate bill will ever take effect, even if they were somehow enacted into law. There are many examples of tight budget restraints planned for future years that are delayed, modified, or repealed altogether before they go into effect. For instance, in 1997, Congress put in place the notorious “sustainable growth rate” formula for Medicare physician fees, which was delayed repeatedly beginning in 2002 and then ultimately repealed in 2015.

The Senate can also be criticized for its willingness to impose budget discipline on Medicaid, which serves low-income people, while doing nothing to reform Medicare and or employer-based health care. Federal subsidization of Medicare’s drug benefit and coverage of physician services is growing just as rapidly as Medicaid, and yet congressional Republicans are steering entirely away from changes in that program. Further, the Senate bill, like the House version, delays the implementation of the ACA’s “Cadillac” tax, which would impose a new fee on expensive employer-sponsored insurance plans. Senate Republicans would be more credible on Medicaid if they were proposing to replace the Cadillac tax with a better alternative rather than pushing back the date when it will be imposed.

Medicaid, along with Social Security and Medicare, is a primary reason that the federal government is running large budget deficits today and will run growing and unsustainable deficits in the future. Congress needs to proceed with significant reforms of all three major entitlement programs to lower the risk of a damaging fiscal and economic crisis. The reforms to Medicaid in the Senate bill are not perfect, and unlikely to be the final word on the subject. But they are a start, and are not inconsistent with the important goal of finding ways to increase the efficiency of the health system so that it is more affordable for future taxpayers.


The Good, the Bad, and the Senate Health-Care Bill

The Republican Health-Care Mistake

No Obamacare Repeal Will Not Kill Tens of Thousands

— James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.

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