Block Grants to States Give Medicaid New Hope

The House of Representatives is now considering a piece of legislation that would fundamentally improve Medicaid — the health insurance program for low-income Americans jointly funded by the federal government and the states — and help this country avoid fiscal apocalypse.

Medicaid is on the front-burner in Washington, as the Supreme Court just heard oral arguments regarding whether Obamacare’s expansion of the program represents an unconstitutional coercive action by the federal government against the states.

The State Health Flexibility Act — introduced by Rep. Todd Rokita (R-Ind.) and officially known as H.R. 4160 — would pool the federal funds for Medicaid and CHIP (the Children’s Health Insurance Program) and, starting in 2013, dole out lump block grants from this reserve to every state. The total funding for these programs would be set at current levels for the next decade — but decisions about how to spend these dollars would devolve to the states.

The chief advantage of the grant program is right there in the bill’s name — flexibility. If state officials directly control Medicaid’s finances, they can better design the program to fit the particular health needs and financial challenges of their residents.

Today, we have a one-size-fits-all model. Federal bureaucrats decide the essential details of the program, like eligibility standards, benefit packages, and provider reimbursement rates. States looking to make even minor variations to their programs often have to wait several years before getting federal approval.

This set-up stifles innovation. States have no room to experiment to find ways of cutting costs and improving benefits. Switching to a block-grant program would provide them substantially more autonomy — and ultimately result in better-quality care for Medicaid beneficiaries.

Block grants are also the only viable way to keep Medicaid’s finances from falling apart.

The program’s current cost trajectory is unsustainable. Between 1995 and 2010, the slice of the average state budget consumed by Medicaid jumped from 15 to 25 percent. States already spend more on Medicaid than any other initiative in their budgets, including K-12 education.

The Deloitte Center for Health Solutions predicts that within two decade the share of state budgets devoted to Medicaid could exceed 35 percent. At that point, states will be forced to choose “between meeting their federal Medicaid spending requirements and firing police, teachers, and other state employees,” as the Center puts it.

This year, Medicaid will cover 60 million people at a cost of $427 billion. By 2022, the Congressional Budget Office predicts that costs will soar to about $800 billion — and total federal and state spending on Medicaid will more than double. That’s in large part thanks to Obamacare, which requires states to offer Medicaid to 17-25 million more people at a cost to them of nearly $120 billion.

That’s a bleak future. But Medicaid’s cost trends aren’t an inevitability — they’re the natural byproduct of the pernicious incentives laid out by the federal government.

States get matching funds from Washington to run Medicaid. For every dollar a state spends on the program, the federal government kicks in between $1 and $3.25.

As a result, states aren’t bearing anywhere near the full fiscal consequences of their Medicaid programs. The formula encourages them to expand their programs to the hilt — and gives them little reason to improve program efficiency or combat fraud. After all, if Medicaid costs balloon, the feds will have to shoulder most of the burden.

When Medicaid costs do swell, government officials don’t look for cost-saving efficiencies within the program or consider whether enrollment is too big. They simply slash the rates they pay the doctors and hospitals that treat Medicaid patients.

Medicaid pays just 58 percent of what the privately insured pay for the same service. Between 2000 and 2009, Medicaid’s total underpayments increased nearly tenfold — from $3.8 billion to an astonishing $36.5 billion.

When healthcare providers get stiffed by Medicaid, they compensate by raising prices for privately insured patients. Low reimbursements by the likes of Medicare and Medicaid have driven up annual insurance premiums for the average family by over $1,500.

By discouraging states from expanding their underpaying Medicaid programs willy-nilly, the House’s block grant proposal would help arrest this cost-shifting phenomenon.

The block grants would assign states the responsibility of making sure that their Medicaid programs operate efficiently, without fraud or abuse. No longer would the federal government bail out states’ mismanagement of Medicaid with matching dollars.

The time to transform Medicaid is now. The program’s fiscal outlook couldn’t be more dire. Transforming its funding plan from open-ended federal matching to block grants would spur innovation, cut costs, and improve enrollee benefits.


Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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