The Corner

How to Save Medicaid

That was the issue tackled by New York Times’s Room for Debate yesterday. The main question seems to be how to make Medicaid less expensive than it is now. Interestingly, Austin Frakt argues that it is wrong to assume that savings could come from getting rid of inefficiencies, because everything that needed to or could be done on that front has already been done.

There is plenty of waste and inefficiency in health care, but most of it is found in private insurance and Medicare, not in Medicaid.

I’ve heard that argument before. It does indeed seem that Medicaid delivers its services at a cheaper price than a visit to the emergency room. However, Frakt also argues that “Reducing eligibility would throw more families into crisis.” While I understand that people become dependent on government payment, it seems that one of Medicaid’s main problems is the fact that over the years, the program has moved away from its original mission, which was to provide health care for the poorest members of society. As Matt Mitchell of the Mercatus Center shows in this piece, the main driver of the explosion in Medicaid spending is dramatically expanded eligibility:

From 2000 to 2007, The rate of Medicaid enrollment grew four times as fast as the general population. Once the recession hit, enrollment growth jumped to 8.5 percent in fiscal year 2010.

Enrollment is up because many have lost their jobs or have had their incomes cut. But enrollment is also up because states have expanded eligibility. Before the recession began, from 2000 to 2008, 24 states expanded their Medicaid eligibility requirements. According to researchers at the Urban Institute, “higher-income parents and childless adults have been the two major expansion groups.”

Of course, the underlying variable in that trend is the funding formula:

The program’s funding formula encourages this: Medicaid is financed by a federal matching grant. This means that for each dollar a state adds to its Medicaid budget, the federal government will kick in from 1 to 3 additional dollars. This gives states an incentive to expand beyond the point where additional costs begin to exceed benefits.

Why not spend more money, when most of the cost is paid for by the federal government?

Unfortunately, this type of behavior has backfired and the states now have to deal with the problem. There are reform ideas out there — for instance, economist Alice Rivlin and Rep. Paul Ryan recently came up with a plan to convert the program into a block grant rather than this open-ended formula, giving states more flexibility in how to deliver the service, which in the past has led to innovations.

The whole debate is way worth reading, here.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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