The Agenda

Paul Howard on Medicaid Block Grants

Paul Howard, a senior fellow at the Manhattan Institute, has a new paper making the case for Medicaid block grants. Early on, Howard notes an important quirk of Medicaid’s funding formula:

The current Medicaid financing structure is fundamentally regressive, in that wealthier states capture far more federal Medicaid funds than poor states because they can afford to spend more. Perversely, this means that Medicaid benefits (and health-care access) for poor recipients can vary widely, based on where they live.

For instance, while New York has only 7 percent of the national population, it accounts for about 14 percent of all national Medicaid spending (projected at $54.1 billion and growing in the 2012–13 fiscal year). New York spends 60 percent more per Medicaid enrollee than the national average and spends more across every category of Medicaid enrollee (see chart below). In 2009, New York spent 46 percent more per adult enrollee ($4,277 vs. $2,926) than the national average, 94 percent more per disabled enrollee ($30,000 vs. $15,453), and 70 percent more per elderly enrollee ($22,494 vs. $13,186), according to the Kaiser Family Foundation. Spending on children was comparatively modest: New York spent only about 8 percent more than the national average ($2,505 vs. $2,313).

Higher spending, however, does not automatically equate to better health outcomes. Despite lavish spending, New York’s health-care outcomes generally range from poor to average (and New York ranks last in avoidable hospital admissions). Indeed, New York policymakers have been quick to admit that the state’s program offers poor value for program recipients as well as for state taxpayers.

Howard goes on to observe that a number of states, including Rhode Island, Indiana, and New York, have embraced encouraging Medicaid reforms that could be spurred along by a well-designed block grant.

It is worth noting, however, that Howard’s Medicaid block grant proposal is quite different from that of House Budget Chairman Paul Ryan, the latter of which has been criticized for, among other things, failing to accommodate future business cycle fluctuations:

This approach—block-granting federal Medicaid funding based on state poverty rates with adjustments for care acuity and cost of living (and perhaps a modest adjustment for geographic variation in the cost of care)—would also have the advantage of ending the fiscal shell games that states play with the program today and would reduce Medicaid fraud, waste, and abuse. The initial block grant should be created to hold states financially “harmless” for current Medicaid funding levels, while ramping down the rate of spending over time to sustainable levels.

A block grant would allow states full latitude to wrap other social but nonmedical services—such as supportive housing for the mentally ill homeless—around Medicaid funding to encourage the best and most efficient delivery of services to these populations and to encourage rehabilitation where possible.

Medicaid should be explicitly countercyclical, with federal assistance growing in the event of a prolonged recession but subsequently falling back to previous levels. States could be required to use at least a portion of program savings from reduced Medicaid spending to create a rainy-day fund as a backstop against an economic downturn. …

The goal of Medicaid reform would be to move as many recipients as possible from public support to private, portable health insurance; but for practical and political reasons, states should be allowed to continue their current fee-for-service Medicaid programs, or adopt other, more centralized (i.e., single payer) health-care arrangements. They should be allowed to offer additional benefits or expand subsidized coverage up the income ladder with purely state funds.

One assumes that Howard’s proposal would yield lower savings than the Ryan proposal, yet Howard’s proposal is far more likely to pass political muster. 

There is a broader political economy question regarding the wisdom of block grants. Earlier this month, Michael Greve of George Mason University gave a lecture at Emory University on “Constitutional Moments,” a video recording of which is available via YouTube. Greve identifies Medicaid as a paradigmatic example of the “fiscal illusions” fostered by programs that require intergovernmental cooperation, and that thus diffuse responsibility across different layers of government:

Because the federal government pays between 50 and 80 percent of state Medicaid expenses, those services look very cheap to a state’s citizens, so they demand more of them. Each state will expand the services to maximize federal dollars. Along the way, Medicaid crowded out other, non-funded programs. When a fiscal crisis hits, Medicaid can no longer be cut, because that would mean leaving federal money on the table. And states cannot opt out, because their citizens would pay the federal taxes for the program in any event. All the states can do is what their voters will ask them to do: demand yet more favorable terms. The institutional arrangements drive the demand for government.

This is the essential problem identified by many advocates of block grants. Yet Greve is skeptical about block grants, and he sketches out a root-and-branch alternative:

We would declare surrender in the fifty-year campaign to get the institutional incentives in the intergovernmental blob just right. We would stop migrating from block grants to categorical grants and back again and instead acknowledge and act on the obvious fact: no good can come from authorizing one government to tax and another to spend the proceeds. We would align taxes and spending and hand Medicaid, education, and most everything else to one or the other level of government but not both, on the principle that undergirds the Founders’ Constitution: one problem, one sovereign. 

The classic defense of Medicaid’s joint structure is two-fold. Josh Barro, writing for, acknowledged the potential fiscal benefits of federalizing the Medicaid problem while identifying potential operational challenges:

There’s a reason that social welfare programs are often funded in part by the federal government, but operated by state and local governments: states and localities have a social services apparatus in place, and the federal government does not.

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.

This roughly describes my current view: we should federalize Medicaid for dual eligibles while embracing Howard-style block grants for purposes to meeting the needs of other Medicaid beneficiaries. Though I find Greve’s reasoning compelling, the implicit solution from the perspective of “one problem, one sovereign” would either be that state governments should take over Medicaid, thus creating a huge problem during economic downturns as state governments are as a general rule forbidden from running explicit fiscal deficits, or that the federal government should take over the program and build a duplicative social services apparatus. 

I imagine that there is a case for building this duplicative apparatus. That is, building it would actually be cheaper than continuing to indulge the fiscal illusions Greve describes. But federalizing dual eligibles would be a good intermediate step. Consider the following from a recent report on dual eligibles from the Kaiser Commission on Medicaid and the Uninsured:

Over 9.1 million older Americans and younger persons with disabilities are covered under both the Medicare and Medicaid programs in Federal Fiscal Year (FFY) 2008.  Although these “dual eligibles” accounted for only 15 percent of Medicaid enrollment in 2008, 39 percent of all Medicaid expenditures for medical services were made on their behalf.  Dual eligibles also accounted for 31 percent of Medicare spending in 2008. 

That is, we could address much of the spending problem by designating one sovereign for dual eligibles. 


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