Yes, We Should Block-Grant Medicaid

The Senate’s Better Care Reconciliation Act is effectively dead following the 57–43 no vote on July 25. Majority Leader Mitch McConnell also did not have the votes to pass the Obamacare-repeal bill that Congress passed in 2015 but President Obama vetoed; it was rejected the next day, 55–45. That’s mainly because all 48 Senate Democrats and a handful of moderate Republicans oppose McConnell’s plan to reform Medicaid, the joint federal-state health-insurance system for the poor that will celebrate its 52nd birthday at the end of July.

Currently, the federal government pays at least half of every state’s Medicaid tab, no matter how high. Most Senate Republicans wanted to nix this open-ended commitment and instead give states fixed, per-capita grants or straight block grants. Democrats were aghast. Hillary Clinton responded by deeming the GOP the “death party.” Senator Dianne Feinstein (D., Calif.) called the reform “indefensible” and “outrageous.”

This criticism is a bit rich. After all, the Clinton White House proposed to convert Medicaid to a per-capita grant scheme in 1995 and 1997. Senator Feinstein spoke in favor of it then.

It was a good idea in the Nineties, and it’s a good idea now. Congress will have to reform the program soon, as Medicaid’s ballooning costs are unsustainable. And the program delivers subpar care. Putting Medicaid on a budget via per capita grants — or better yet, lump-sum “block” grants — would relieve taxpayers and offer better care to beneficiaries.

In addition, regarding the 31 states (plus D.C.) that expanded their Medicaid programs under Obamacare, the BCRA would have kept the current funding for three years and then commenced a phase-down for the next three. Medicaid was originally intended for low-income children, pregnant women, seniors, and people with disabilities. Starting in 2014, Obamacare allowed states to add able-bodied, childless adults earning up to 138 percent of the federal poverty level to the program.

Under the ACA, the Obama administration tried to entice states to expand Medicaid by paying 100 percent of new enrollees’ expenses from 2014 through 2016. Over the following four years, the rate would ratchet down to 90 percent, where it would stay perpetuity. (By contrast, the federal government covers about 50 to 80 percent of states’ traditional Medicaid costs, depending on the state.)

Obama-administration officials hoped that the Medicaid expansion would reduce overall health spending by stopping previously uninsured people from seeking routine care in expensive emergency rooms, which are required by law to treat everyone regardless of ability to pay. Give the uninsured a Medicaid card, the thinking went, and they’d seek treatment in a doctor’s office, where costs are lower.

But these fresh enrollees flooded ERs. In California, ER visits skyrocketed 75 percent between 2012 and 2016. In 2015, 75 percent of ER doctors nationwide reported that visits surged after the expansion went into effect.

Many enrollees go to the ER because they can’t find doctors who will see them. Medicaid reimburses doctors just 56 percent of what private insurance pays. Some physicians lose money on every Medicaid patient they treat. That’s why fewer than half of doctors in major cities accept Medicaid.

Despite these rigid price controls, the expansion is still on track to raid the federal treasury. According to the Centers for Medicare and Medicaid Services, new enrollees have cost 49 percent more per person than predicted. If Obamacare stays in place, federal spending on Medicaid will increase from $393 billion this year to $624 billion in 2026.

Today, Medicaid accounts for roughly 10 percent of the federal budget — nearly double its share under President Clinton 23 years ago.

Giving states per capita grants or block grants would force them to spend their money more efficiently.

Giving states per capita grants or block grants would force them to spend their money more efficiently. Right now, states have little incentive to rein in spending, since the federal government picks up most of the tab.

The Senate’s BCRA, if passed, would have switched Medicaid to a per capita grant system in fiscal year 2021. Grants would have increased at the rate of medical inflation until 2025, when they’d track regular inflation. And federal spending on Medicaid would have increased from $393 billion this year to $464 billion in 2026.

It is unclear what will happen as Congress continues its debate on repeal and replace, but if it does take up Medicaid reform in the future, an even better solution would be to give states fixed sums of money and eliminate regulations governing how that money must be spent. States could use these block grants, along with whatever additional funds they wanted to kick in, to devise the most effective ways to care for the poor.

That’s what Rhode Island has done. In 2009, the state chose to receive federal Medicaid funding as a block grant. Officials implemented various cost-saving reforms, like moving seniors from nursing homes to less expensive community-care settings. In just three years, Rhode Island saved $100 million. The state hasn’t scaled back medical services or eligibility yet has managed to cut per-beneficiary costs by 0.5 percent annually for the past five years.

Americans would benefit from putting Medicaid on a budget. It would force states to adopt cost-effective reforms like these — and put the program on secure enough financial footing to be available for those who truly need it.

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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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