Lamar Alexander on Federalizing Medicaid

I was delighted to see Sen. Lamar Alexander make the case for a Grand Swap, an idea we’ve been championing for years at The Agenda. But Josh Barro offered a convincing case against a few weeks back:

Because Medicaid is means tested, you need to monitor participants for their continued eligibility. Medicaid beneficiaries also often have many simultaneous social services needs, and it’s helpful to have one caseworker handling them all together, especially when your goal is to get beneficiaries to a point where they don’t need welfare anymore.

In other words, Medicaid is about much more than making payments to doctors and hospitals. The federal government could build an apparatus to do this, but it would be duplicative, and you would lose the benefit of integration with other, state-run assistance programs.

It might make sense to federalize the aged and disabled components of Medicaid, which closely resemble Medicare and often serve the same beneficiaries. But for the portion of the program that serves low-income adults and children (a bit less than half its cost) we’re better off retaining the state-local structure and using a well-designed block grant to improve fiscal incentives.

It is also true, however, that the aged and disabled components of Medicaid are a very large part of the program. A number of policy analysts, including Donald Taylor, have called for federalizing at least these aspects of the program and transitioning part of Medicaid that covers pregnant woman and children onto the exchanges, if PPACA endures. On the right, John Hood has backed a related approach:

Policymakers should convert Medicaid coverage for low-income but healthy children and working-age adults into a system that subsidizes the payment of premiums for private health-insurance plans. For instance, a future Congress could convert Obamacare’s bewildering array of cash payments and tax credits into a universal tax credit, conferring what amounts to an exemption from income and payroll taxes for a fixed amount of household spending on (or saving for) health care.

The tax credit could take the place of the existing unlimited exemption for employer-based plans (as proposed by John McCain in his 2008 presidential campaign, and by several Republican members of Congress since). Such a fixed-dollar credit would be worth most to individuals with children and low incomes, reversing the current dynamic in which unlimited tax deductibility confers the greatest benefit on upper-income Americans and those who work for large employers. Families would be free to apply their tax credits to the purchase of health plans and toward health savings accounts (into which states should be allowed to contribute additional funds now earmarked for Medicaid to help lower-income people).

The key to a successful system of direct premium supports for jobless or low-income Americans and their families, however, is ensuring that it is thought of more as a welfare program than as a health-care program.

I take Josh’s essential point about the operational challenges involved in running what is essentially an anti-poverty program that is fundamentally about smart case management and local knowledge from Washington, D.C., which is why full federalization might indeed be difficult. But we can certainly move in that direction — and swap education (and, in my view, more transportation functions) back to the states

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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