The Politics of Federalizing Medicaid Dual Eligibles

The Wall Street Journal editorial page has published a sharp attack on the Medicaid expansion, which has met with determined opposition in a number of states:

Medicaid, the joint state-federal safety net intended for the poor, already covers more than one of five Americans and pays for two of five U.S. births. And that’s before ObamaCare dumps up to 20 million new dependents onto its rolls. Liberals are still somehow evoking Little Nell and the blacking factory because 26 Governors or legislatures or both are so far declining to expand. Their hysterics would benefit from a fact or two. …

The feds are dangling the promise of paying for all the costs of the new beneficiaries, at least for the next three years. This subsidy honeypot can’t last forever, and Governors are right to worry about taking on fiscal obligations that will increase 13% on average in 2014 under new Medicaid, according to a Kaiser Family Foundation state budget survey.

The Beltway boys and their allies in the hospital industry that are ravenous for more federal revenue are stunned that their bribery failed. So the new line of assault is to declare that the 26 conscientious objector states must hate poor people, or racial minorities, or Saint Peter and Christianity itself.

In reality, Medicaid is now mostly a middle-class entitlement for nursing homes. Almost two-thirds of Medicaid spending flows to the elderly, and 60% of people in long-term care institutions are on the program. [Emphasis added]

But the most sophisticated version of the “new line of assault” comes from the political scientist John Hudak, who has argued that because the Medicaid expansion disproportionately benefits Democratic-leaning constituencies, it’s hardly surprising that Democrats have tended to embrace it while Republicans have not, which seems reasonable in itself. 

As of 2010, 22 percent of Medicaid payments flowed to the aged (9 percent of Medicaid enrollees) while another 42 percent flowed to the disabled (15 percent of enrollees). Low-income adults account for 15 percent of spending (27 percent of enrollees) and children account for 21 percent of spending (49 percent of enrollees). Though it is certainly true that a great deal of Medicaid spending is devoted to dual eligibles, i.e., people who are eligible for Medicare as well as Medicaid, it’s not quite right to characterize it as “mostly a middle-class entitlement for nursing homes,” though long-term care does represent a large share of Medicaid expenditures (30.2 percent). The Kaiser Commission of Medicaid and the Uninsured recently released a report on the dual eligibles, which noted the following:

Over 9.6 million older Americans and younger persons with disabilities were covered under both the Medicare and Medicaid programs in FY 2010. Although these “dual eligible” beneficiaries accounted for only 14 percent of Medicaid enrollment in 2010, 36 percent of all Medicaid expenditures for medical services were made on their behalf. Dual eligible beneficiaries also accounted for 33 percent of Medicare spending in 2009.

Dual eligible beneficiaries as a share of total Medicaid enrollees ranged from a low of 9 percent in Utah to a high of 26 percent in Maine, due to demographic differences and policy preferences across the states. Similarly, spending on dual eligible beneficiaries as a percentage of total Medicaid spending ranged from a low of 20 percent in Arizona to a high of 55 percent in North Dakota.

Though I assume the architects of the health law thought deeply about the politics of Medicaid expansion, one wonders if advocates of coverage expansion made a mistake. Rather than convincing states to expand eligibility by promising to meet the cost of new beneficiaries, Congress might have proposed fully federalizing the costs associated with the dual eligible population. This would obviously have benefited some states (like North Dakota) much more than others (like Arizona), yet it would relieve all states of a fast-growing burden. And by consolidating responsibility for the dual eligible population, one assumes that the Medicare program could achieve efficiencies by eliminating the buck-passing dynamic, in which one system attempts to shunt off costs to another. (See Donald Taylor Jr.’s Balancing the Budget is a Progressive Priority.)

The downside of this approach, from the perspective of coverage expansion advocates, is that it wouldn’t in itself expand coverage. Freeing states of the burden of partially financing the care of dual eligibles would give them more fiscal room to expand coverage for low-income adults and children, to invest in education and infrastructure, or to cut taxes. Giving states this kind of freedom would be discomfiting for lawmakers who instinctively favor centralization. It would, however, have greatly expanded the coalition for health-system reform. If conservatives ever unite around a health-system reform proposal of their own, they ought to give serious consideration to full federalization of dual eligibles, as this would prove a powerful sweetener to Democrats in states burdened by high dual eligible costs. 

Moreover, federalization complements a strategy in which low-income adults and children are given access to subsidized private insurance coverage, as Taylor has argued. (The usual concern that’s raised about this step is that subsidized private insurance coverage is likely to be much more expensive than Medicaid, a subject to which we’ll return.)

Michael Greve, author of The Upside-Down Constitution, has argued that the problem with the Medicaid expansion is not so much that it is coercive as that it creates serious incentive problems:

Conditional grants programs, the Supreme Court says, are “in the nature of a contract.” They’re permissible on two key conditions: (1) states must have a choice to participate (they can’t be commandeered); and (2) the grant conditions must be cleared stated at the front end. That’s sensible as far as it goes, but it misses two incentive problems. First, all federal grant programs create a fiscal asymmetry: taxpayers in non-participating states will pay “their” share of the program one way or the other. The state as a state can say “no” only to the proceeds, not to its taxpayers’ contributions. Second, funding programs create powerful lock-in effects. Political and fiscal considerations make it well-nigh impossible to exit or even limit the programs. Every unspent or cut state dollar is a federal dollar (or some fraction or multiple thereof) left on the table. [Emphasis added]

To contain these incentive problems, Greve has recommended that taxpayers residing in states that choose to opt out of conditional grant programs, like Medicaid, should be spared some share of their federal tax burden, roughly commensurate with the share of federal expenditures devoted to the grant program in question. So if the federal government devotes 8 percent of its budget to Medicaid, states that choose not to participate in Medicaid should be spared 8 percent of the federal tax burden, and so on. 

Though it is difficult to imagine Democrats in Congress embracing Greve’s proposal, and though it would be difficult to implement in practice, federalizing the costs associated with the dual eligibles might have some of the beneficial effects of Greve’s opt-out clause. 

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

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