Suzy Khimm, guest-posting at Ezra Klein’s blog, has written a post on states withdrawing from the federal Medicaid program. We’ve discussed the misalignment of incentives in Medicaid, which is one reason why at least some left-of-center policy thinkers, like Greg Anrig, have called for federalizing the program, as Khimm notes in her post. Here is Anrig:
Medicaid has always been plagued by inequities, inefficiencies, and scattershot effectiveness, largely because its dual federal-state character diffuses accountability and some state governments simply don’t care much about the poor. Those problems will no doubt impede the legislation’s goal of expanding the program’s enrollment from today’s 60 million to 84 million by 2019. But the good news is that the new law takes important steps toward moving Medicaid down a path toward full nationalization, with the federal government bearing 96 percent of the cost of the program’s expansion over the next 10 years. The next major medical care reforms should carry that centralizing shift in control over Medicaid to its logical conclusion, which would greatly enhance both the health of the American population and of the nation’s system of federalism. [Emphasis added.]
It won’t surprise you to learn that conservatives, like Avik Roy and John Hood, advocate a more decentralized approach. There was a time when I was more sympathetic to Anrig’s view, but I’ve been convinced that the nature of the Medicaid program suggests that a state-based approach makes more sense, on the assumption, which could be wrong I should stress, that case management tends to work best at the local level. (This is the same reason I favor narrow banking.)
Regardless, Anrig’s core point is beyond dispute: the program really has been plagued by “inequities, inefficiencies, and scattershot effectiveness,” though I think the idea that “some state governments simply don’t care much about the poor” is both pointlessly polemical and false. A more pressing problem is profligacy in at least some of the states, as Daniel DiSalvo and Josh Barro recently suggested:
New York accounts for 14% of the country’s Medicaid spending, despite being home to just 6.4% of people and 8.7% of Medicaid recipients. We spend 25% more on Medicaid than California, even though California’s program has twice as many participants.
Just closing half the gap between New York’s per-enrollee Medicaid costs and the national average would save $5 billion a year – enough to close half the budget gap.
Excessive Medicaid spending is driven by the Service Employee International Union’s (SEIU) local affiliate 1199, the health care employees union, which has cut deals in Albany with Republicans and Democrats alike. High Medicaid spending benefits the union’s members, so the union can be counted on to fight any cuts tooth and nail.
It could be that New York’s state government cares more about the vulnerable than other state governments. But it seems slightly more plausible, to me at least, that New York’s state legislators care more about members of SEIU and various other medical providers than legislators in other states.
This leads me back to Suzy Khimm’s post. She begins by describing how various governors have been complaining about the extraordinary fiscal burden that PPACA has created for the states; roughly half of the coverage expansion under the law derives from Medicaid expansion, and, though the federal government will cover the bulk of the cost, this will require a massive infusion of new money from the states for a program widely seen as badly broken. Hence at least some state legislators are backing withdrawal from Medicaid:
Conservative state lawmakers are now demanding that the state drop out of the program altogether to alleviate the state’s $25 billion shortfall. If Texas went ahead with such a plan, it’s unlikely that the Medicaid program would entirely disappear, but its reimbursement rates would fall so low without state support that almost no one provider would accept the coverage, as Mike Tomasky explains.
I followed Mike Tomasky’s post, and it seems that Tomasky is operating under a basic misapprehension:
If Texas followed through and opted out of Medicaid, I doubt it would mean that no poor person in Texas could get treatment. What it would mean is that without the state’s contributions, reimbursement rates would fall even lower, and presumably many more doctors and hospitals would stop treating poor people for all but the most basic-maintenance conditions.
The force of Tomasky’s argument, and also Suzy Khimm’s argument, derives from the odd view that it’s Medicaid or nothing. That is, without Medicaid, poor Texans will have to rely on emergency room care. But the states that opt out of Medicaid could, and presumably would, create new programs, perhaps modeled on Indiana’s subsidized HSA program.
Indeed, experimenting with new models for providing the poor with cost-effective insurance coverage has been a subject of great interest in right-of-center policy circles for some time. Efforts to reform Medicaid to give the states more autonomy are one big step in this direction, but PPACA’s primary contribution to Medicaid has been to sharply curtail state autonomy, hence the frustration among state-level reformers.
So why would Tomasky and Khimm suggest that it really is a matter of Medicaid or nothing? I think they misunderstand the underlying rationale for withdrawing from the Medicaid program.
Suzy Kimm writes:
What would justify such a move? The New York Times cites one veteran GOP state representative who’s pushing the idea: “We need to get out of it. And with the budget shortfall we’re anticipating, we may have to act this year.”
The underlying rationale is that sacrificing the health coverage of poor people would be a worthwhile move if it solves the state’s budget crisis. If you’re a purist in opposing the welfare state — even at significant human cost to the most vulnerable — it’s a logical argument to make. But even if we all agree the goal is fiscal solvency, there’s also a chance that gutting Medicaid could end up backfiring.
This doesn’t strike me as a fair characterization. Rather, many conservative policymakers believe that finding new ways to deliver quality coverage to poor people at low cost would be easier if the Medicaid program were reformed to allow more autonomy for states, and indeed if the incentives were better-aligned by making coverage for the poor an exclusive responsibility of state or the federal government.
To get a sense of how we might approach this issue, I recommend checking out a Heritage Foundation report by Dennis Smith and Edmund Haislmeier published late last year:
How individuals, employers, and others would react to the new health care legislation is unpredictable enough, but how state governments would cope has been largely overlooked by Congress.
Also overlooked is the fact that state participation in Medicaid is entirely voluntary. Medicaid is fundamentally “a cooperative federal-state program through which the federal government provides financial assistance to states so they may furnish medical care to needy individuals. … [P]articipation in the program is voluntary.” States opted into Medicaid, and they can opt out.
Congress clearly fears that with the creation of the new entitlement, states would respond by lowering Medicaid eligibility. Hence, both the House and Senate attempt to prevent such state action by imposing “maintenance of effort” (MOE) requirements on the states.
If all states withdraw from Medicaid, their collective savings would be $725 billion over the 2013–2019 period, but they would exceed $1 trillion over 10 years. This assumes that states will continue to spend at least 90 percent of what they spend now on Medicaid long-term care services with state-only dollars. On a state-by-state basis, every state except North Dakota would come out ahead financially by leaving Medicaid but continuing long-term care spending with state-only dollars. Of course, if North Dakota reduced its long-term care spending, it too would come out ahead.
The cost to the federal government to replace the state share of Medicaid, however, would be greater than $1 trillion as the entire Medicaid population would become eligible for the new, more expensive federal subsidies for premiums and cost-sharing. Moreover, the states would no longer pay for Medicare cost-sharing or the state “clawback” for Medicare prescription drugs. [Emphasis added.]
Say the states did withdraw from the Medicaid program and “saved” $1 trillion. Let’s say, for the sake of argument, that the federal government chose not to spend more than $1 trillion to shoulder the resulting burden, i.e., say we’re not living in a PPACA world. The states could then collectively spend somewhere between $0 and $1 trillion to meet this obligation through a wide array of different strategies. Some states would presumably find better, more cost-effective ways to deliver high-quality coverage, and these models would spread. Or perhaps different states would tailor programs to their distinctive local populations and priorities.
I don’t find this to be a frightening prospect. Rather, I think it could be a win-win. And I think progressives and conservatives should appreciate that state governments aren’t just decorative.