Orszag vs. Medicaid

Peter Orszag, former director of the White House Office of Management and Budget, has landed a gig as a contributing editor to the New York Times. On Sunday, he had an interesting article arguing that Medicaid funding was raiding public finances that should go to higher education.

I generally rely on Prof. Richard Vedder for my understanding of the economics of public universities, so I’m not going to accept Orszag’s assumption that the government should be giving more funding for higher education. Nevertheless, if a welfare program like Medicaid is devouring public funds that would have otherwise gone to education, Orszag has done a public service bringing our attention to it.

Unfortunately, his article errs in describing Medicaid. He asserts that Medicaid costs have increased so much because health costs have increased a lot faster than other costs in our society. That’s only part of the story: Medicaid spending per beneficiary has increased much faster than private health spending per beneficiary. Secondly, Medicaid spending grows in good times and bad: It is not an “automatic stabilizer” that kicks in when recession hits and unemployment increases.

So, Orszag’s conclusion (from a 2003 study) that states rob universities to fund Medicaid during recessions, and shift dollars back when the economy recovers, cannot be quite right. But the shocker is Orszag’s proposed solution: Increased federal funding for Medicaid, which he believes would allow states to direct more funding for higher education!

Medicaid is already a joint state-federal program in which the federal government pays over half the costs. This has fueled spending, not contained it.

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