How Federal Health “Reform” Will Devastate California’s Budget

How Federal Health “Reform” Will Devastate California’s Budget

Last June California politicians claimed to have “fixed” the budget but according to a November 18 report from the non-partisan Legislative Analyst’s Office (LAO) California now faces a budget deficit of $20.7 billion from the present until 2010-2011. Unfortunately, something’s coming down the pike that will make today’s budget shenanigans look like small potatoes. That something is the federal government takeover of Americans’ access to medical services, falsely labeled “health reform.”

The biggest challenge to getting state spending under control has been Medi-Cal, California’s health-care program for low-income residents, partially funded by the federal government’s Medicaid budget. Since 1965, when the federal government first bailed out Medi-Cal’s predecessor, taxpayers have been subject to a vicious cycle of taxation, borrowing, and spending to finance a rapid increase in government dependency for medical care.

The fundamental dysfunction is the way the federal government subsidizes states through the Federal Medical Assistance Percentage (FMAP). The FMAP for California has traditionally been 50 percent. If the state spends 50 cents of its own taxpayers’ money on Medi-Cal, the federal government kicks in another 50 cents. This has caused a “death spiral” of states competing against each other to raid the federal treasury.

In 2006, 29 percent of California’s residents were dependent on Medi-Cal – the highest proportion of any state. A full 6.5 million residents were enrolled in June 2008, 18 percent more than in June 2001. Total Medi-Cal spending (state and federal), however, was $36 billion in 2007, versus $23 billion in 2001, an increase of 56 percent. During the same period, the national Consumer Price Index (CPI) increased 17 percent and the medical-care cost index (a component of the CPI) went up 23 percent.

Clearly, Medi-Cal is completely out of control, and it got significantly worse when President Obama signed the mislabeled “stimulus” bill last February. The “stimulus” is one reason why the last budget “fix” has proven to be fictional. It created incentives that made it all but impossible for the state to balance its books.

First, it increased the FMAP for California from 50 percent to almost 62 percent, fueling the fire of federal dependency. Now, when California spends 50 cents on Medi-Cal, it attracts 82 cents from Washington DC instead of just another 50 cents. The “stimulus” also forced states to enroll more people into Medicaid.

As a result, Medi-Cal spending from the general fund will be $900 million higher than budgeted in July. The LAO also forecasts that the state’s spending on Medi-Cal, currently $12 billion (8 percent more than appropriated), will increase by 8.1 percent annually through 2014-2015.

The juiced-up FMAP is supposed to be temporary. If Congress extends it, the federal government will make up $2.5 billion of the 2010-2011 shortfall and $5 billion of the 2011-2012 shortfall in both Medi-Cal and Temporary Assistance to Needy Families (TANF). Of course, state politicians are crying for more. Alongside the terrible incentives to overspend, federal law basically makes it impossible for states to impose any meaningful cost control. A federal judge recently blocked a 10 percent reduction in Medi-Cal payments to 21 California hospitals.

This federal dependency is set to get worse under either the Senate or the House health “reform” bill. The Senate bill proposes to subsidize expansion of Medicaid by increasing the FMAP by 30 percentage points or more! The House bill proposes to fund Medicaid expansion fully with federal dollars until 2014, and then step down to 91 percent. In this case, a state increasing Medicaid spending by 50 cents will attract more than five federal dollars!

The Senate bill further expands Medicaid eligibility to all households which earn up to 133 percent of the Federal Poverty Level (FPL) and the House bill takes it up to 150 percent of the FPL. These are floors, not ceilings. States have always received waivers to cover more people at higher income levels, and this will continue. We can expect the rising tide to lift many more Californians to the trough of government dependency.

The proposed federal takeover of access to medical care will not be good news for the U.S. deficit and if not stopped will certainly devastate California’s already troubled budget. The Golden State can serve as an example for the shrinking numbers of people who believe more government is the solution for health care.

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.