This commentary originally appeared in RealClear Health on February 20, 2017.
Most people have heard the aphorism, “if it sounds too good to be true, it probably is.” Referring to the GOP’s cure for Medicaid, “If it sounds too good to be true, it might be true; but guaranteed, it won’t be good.”
A Feb. 6, 2017 report on Medicaid makes this point perfectly. The GOP commissioned a study by Avalere Health, a health care consulting group, to assess the fiscal impact of federal block grants to state Medicaid programs. They evaluated two funding approaches: a lump sum to be negotiated and a per capita, i.e., per enrollee, formula.
Their study showed that block grants could save Washington between $110 billion and $150 billion over five years depending on which formula was used. Roughly half the states would get a small increase in their federal contribution and half would get less, sometimes a lot less. The biggest loser, Arizona Medicaid, would receive 62 percent less than it is currently receiving from Washington.
With the present Medicaid state-federal matching scheme, the more a state spends, the more money it gets from Washington. This produces a classic perverse incentive: rewarding the outcome you don’t want. We want states to reduce spending, yet Washington rewards them—with federal dollars—when they spend more! With a block grant, this perverse incentive goes away. This is a good thing.
Medicaid block grants could save $110-150 billion and would eliminate the perverse incentive. Sounds like a great idea. It makes wonderful sound bytes, and the GOP seems to want to run with it.
There is just one teeny, tiny problem with block grants as proposed: no health care.
The federal government can, and in recent years does, spend more than it takes in as tax revenue. The federal government is able to do this because Washington has the option to issue debt and finance it by printing dollars through the Federal Reserve’s open market operations. States cannot, print money that is. Because states must live within their means, Medicaid programs will have to cut services to patients in order to balance their budgets.
For a specific example, simple financial arithmetic shows that the GOP plan for block grants to Medicaid will reduce access to care.
Whether a lump sum or per capita contribution, the block grant approach gives a fixed amount to the state. That is the state’s Medicaid income from Washington. Federally mandated spending—the state’s Medicaid cost—is constantly increasing and exceeds available funds.
Between 2011 and 2015, spending on Texas Medicaid increased from $27.7 billion to $30.4 billion. That is a 13.5 percent increase in the state’s cost compared with only an 11.8 percent increase in population growth plus inflation. Texas, just like other states, cannot spend more money than it takes in. Unlike most other states, Texas has had a robust economy and was able to compensate for its yearly Medicaid shortfalls by routinely passing supplemental spending bills.
States such as Illinois, Connecticut, and Massachusetts that flirt with bankruptcy cannot do this. What occurred in New Mexico, another cash-strapped state, demonstrates the effect of Washington’s spending mandates on the state’s Medicaid program.
New Mexico expanded its Medicaid program and received an additional $3 billion from the federal government. However, the Land of Enchantment was required by federal law to spend $417 million more on insurance benefits and bureaucracy in 2017 than the state had in its bank account. Without the luxury of Texas’ exuberant economy, New Mexico had to cut spending somewhere while remaining compliant with federal regulations. Thus, they cut reimbursements to providers.
Now think about all those states—26 of them and the District of Columbia according to the Ayalere study—that will receive less money under the GOP block grant scheme. They will still have to spend according to federal mandates. And just like New Mexico, they will be forced to cut services in order to balance their budgets. Half of the nation will be filled with Medicaid-insured patients who expect to get the care they need but can’t get it, for lack of doctors.
Apparently, the GOP can’t do simple fiscal arithmetic. Enamored with their fundamentally flawed, one-size-fits-all block grant, they will cut costs, and cut care without fundamental health care reform to focus on improving patient care.
There is a way to make this work. Along with block grants, repeal the federal Medicaid mandates. That would put control of spending where it belongs—at the state level, closer to patients. Administrative processes could be streamlined. Resources would be apportioned more closely in accordance with local needs. Healthcare dollars could actually be spent on health care.
We can fix Medicaid using block grants, but only by giving control of both income and spending to the states.