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Blocked Off

In trying to duck their Medicaid responsibilities, Republican governors could be rushing into disaster.

Republican governors came to Washington recently with a pretty clear message on Medicaid: Cut the program or, better still, let us cut it on our own.

At first glance, their arguments seem compelling. Medicaid, the joint federal-state program that provides health insurance for low-income and disabled Americans, costs states a lot of money. The poor economy creates new demands on Medicaid at the precise moment that states face the weakest revenues to support such programs. And, while the economy will eventually improve, the Affordable Care Act requires states, as of 2014, to provide coverage to even more people. (The federal government will pay virtually the entire cost of those made newly-eligible, but policies such as the individual mandate will bring many others onto the Medicaid rolls.)

Suppose the federal government responded to these challenges by saying “OK.” Suppose states were granted much greater latitude in running Medicaid, and (implicitly or explicitly) to cut the program. Would these Republican governors—and, more important, their constituents—really benefit? I don’t believe that they would.

Consider what would happen if Texas governor Rick Perry, who has mused about dropping Medicaid entirely, could do what he wanted. Talking about dropping Medicaid might attract attention for Perry’s new book. Actually doing so would be ludicrous, both as policy and politics. Most Texas Medicaid dollars go to the elderly and the disabled. Millions of middle-class Americans—in Texas and everyplace else—rely on Medicaid to protect them if they or a loved one requires costly medical services or long-term care. Few politicians would risk damaging services to these groups.

Medicaid’s rules and procedures are also encoded in the DNA of every state’s medical and social service systems. Withdrawing from the program would be an administrative nightmare that would likely deeply anger patients, not to mention the well-organized network of providers who provide Medicaid-funded services.

Moreover, the federal government picks up more than 60 percent of Texas’s Medicaid tab. I doubt Texas would turn down more than $15 billion annually from the federal government, just as I doubt it will forego additional federal funds which finance virtually the entire cost of expanded Medicaid under ACA. (Recent analysis indicates that Texas will also receive billions of dollars in new subsidies for individuals and for state services under the new health reform law.)

And what about the less extreme proposals that several governors have endorsed in Washington—for instance, transforming Medicaid into a “block grant” program? Under this kind of arrangement, the federal government would provide grants to states to support public health insurance coverage, but do so with fewer strings attached than currently accompany Medicaid. As Wisconsin Governor Scott Walker puts things, “I’d like to have a block grant so we could make adaptations, state by state, as we see fit.” In theory, a block grant would allow states to streamline Medicaid and to match local needs.

In practice, states already enjoy great flexibility, with the Obama administration sending many signals that it is willing to grant more. Across the nation, states are cutting provider reimbursement rates, curbing eligibility, and restricting or dropping coverage of optional services such as dental care and even (notoriously) organ transplants. While a block-granted program would give states more freedom and more incentive to make deeper cuts, this freedom poses serious long-term risks and costs.

Although we rarely think about things this way, Medicaid’s current structure doesn’t merely protect individual recipients. It also protects states by forcing the federal government to bear part of the Medicaid burden. Under Medicaid’s current structure, states are legally guaranteed federal matching funds for every new person that becomes eligible for the program. Block grants would end this guarantee, providing the federal government with much greater discretion to erode financial subsidies to the states—and much greater ability to evade political accountability when local services are cut.

As Edwin Park and Matt Broaddus observe in an excellent recent report, states face especially serious risks during economic downturns, Medicaid enrollment increased by nearly 6 million between December 2007 and December 2009. Medicaid enrollment increases were even greater in the last recession, between December 2000 and December 2003. Had Medicaid been funded through a block grant, the current state budget crisis would probably have been even worse.

In the short-run, some states might appear to benefit from a block-grant structure. Governors bent on imposing deep Medicaid cuts might come out ahead, especially if federal funding were pegged to the levels of peak enrollment in the current recession. Roughly speaking, this was the history of our last big block-grant experiment: the 1996 welfare reform, which converted traditional welfare—Aid to Families with Dependent Children (AFDC) —into Temporary Assistance for Needy Families (TANF), a block-granted program. Welfare reform resulted in sharply lower caseloads. It also ranked among the most popular policy reforms ever.

Governors may hope to repeat this successful experience. But that’s unlikely. In almost every particular, block-granting Medicaid would be much more difficult and much more risky. At the most basic level, TANF is a relatively cheap and controllable item in state budgets. Welfare reform was specifically designed to reduce caseloads—which it did with a vengeance. In 1996, 12.3 million Americans received AFDC assistance. Today, only 4.3 million Americans receive TANF. Moreover, caseloads have stayed low despite the most serious recession in decades. TANF benefits have also been allowed to erode with inflation. For a family of three, TANF benefits now provide less than half of the poverty line in every state.

Such caseload and benefit declines were politically feasible because TANF supports a small and politically marginal group. In contrast, most Medicaid dollars go to a politically organized medical and social service providers who serve critical constituencies. States also spend about ten times as much on Medicaid as they do on TANF. Medicaid costs are growing. This growth is driven by rising overall healthcare costs, by the unraveling of private insurance coverage, and by the increasingly challenging demographics of the elderly and the disabled population. These trends show little sign of abating. None is really within the control of an individual state. Block-granting Medicaid is precisely the wrong strategy to address these huge and inherently uncontrollable threats to state finances over time.

But wait: Couldn’t states, left to their own devices, figure out ways of providing health care a lot more cheaply than Medicaid does? No—because, person for person, the program is actually quite cheap. Over the past quarter-century, per-beneficiary Medicaid spending has risen more slowly than have costs in Medicare or in the rest of the health care system. Although health reform will insure millions more people, combined federal spending on Medicaid, CHIP, and the new health insurance exchanges is still projected to remain below 4 percent of GDP by 2035. Medicare’s projected cost growth is genuinely scary. Medicaid, not so much.

In fact, by some sensible measures, Medicaid actually spends too little. It pays far less to doctors and hospitals than Medicare and private insurance do. As a result, many specialists won’t take Medicaid. States are also curtailing many important ancillary services such as vision and dental coverage.

Are there ways to make the program more efficient? Of course. Better management of chronic disease and better fraud controls would be two obvious places to start. Yet overall, Medicaid is pretty lean. There’s no way to spend substantially less on it unless you want to serve far fewer people, provide recipients with far less financial protection, or underpay medical providers even more aggressively than Medicaid does now.

To be fair, states have a real problem right now: They lack the money to finance Medicaid properly. Many also lack the will or the administrative capacity to run Medicaid well. The ideal solution is to infuse greater federal resources. As Greg Anrig emphasizes, federalizing the program, or at least raising federal matching rates would be much more helpful. Barring that, enrolling some Medicaid recipients into the Affordable Care Act’s newly created insurance exchanges is a possibility, though such proposals bring complications and dangers of their own.

These options deserve their own, separate discussion—preferably when lawmakers are ready to accept their responsibility to help poor people get medical care. Right now, many governors seem determined to duck these responsibilities. In their haste to do so, they may rush into something that they—or more likely their successors—will eventually regret.

Harold Pollack is a professor at the University of Chicago School of Social Service Administration.

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