Real Health Care Reform- Part 7: Medicaid

Medicaid was established in 1965 to address the health care needs of those in poverty. Unlike Medicare-which is a federal program- Medicaid is run by the states. Today, it is available to those whose household income is at or below 133% of the federal poverty level (FPL). Funding is achieved from dedicated federal and state general fund expenditures. In 2008, the federal government spent $208 billion plus another $300 billion from the states. In fact, Medicaid eats up about 17% of federal budget outlays and is, at the aggregate $508 billion, a larger program than Medicare. The problem is that the funding scheme at the federal level is perverse where the more the states spend on Medicaid, the greater the amount the federal government kicks in. It has created considerable discrepancies in outlays. For example, New York state accounts for 7.9% of all Americans in poverty while Texas accounts for 10.3%. Yet, New York receives 13% of that $208 billion while Texas gets only 6%. The justification is that New York prices are higher than those in Texas.

The alternative is block grants based upon a percentage of predetermined budgeted outlays which reflect the percentage of Americans living within specific states regardless of the cost of living in any state. If implemented, states like Maine, Vermont and Alaska would see their federal dollars halved while Nevada would see an increase. Compare New York with Alabama. New York spends $6,390 per person living in poverty while Alabama spends $1,252 per person. Yet, New York receives considerably more matching funds although Alabama is a “poorer” state than New York. Even under the current scheme, if we adjust for the cost of living, New York would still receive double the amount Alabama would receive.

Hence, the system needs to be revised to get the funds to where they are most needed. First, the government would budget a certain sum- lets say $200 billion to start with. I would further stipulate that as GDP grows, thus meaning a better economy with lower unemployment and hopefully higher wages, that the budgeted amounts be decreased thus forcing states into reforms. Any “savings” should be diverted to debt reduction. Under this plan, if 10.3% of all Americans in poverty lived in Texas, they would get 10.3% of that $200 billion, or $20.6 billion while New York would get $15.8 billion. Even if any state were responsible for 1% of the total number of people in poverty, they would be guaranteed $2 billion in federal funds- nothing to sneeze at. This would then allow states to make necessary reforms and adjustments and innovations to decrease costs without federal regulatory strings attached. This is actually the model used under the popular 1996 welfare reform efforts. I ran an analysis of this proposal and found the following: of the 26 states that are 0-10% above or below national median income would receive average increases from the federal government of 4.75%. Of the five states 11-20% above national median income, they would see average decreases of 8.4%, of the 3 states 21-30% above national median income would see a 21.7% decrease and the four richest states would see an average decrease of 42.3% below current levels. Of the 10 states that are 11-20% below the national median income, they would see average federal increases of 10.6%. In short, this new funding formula would remove disparities and get federal dollars to where they were most needed.

Since 2005, ten states have undertaken great reforms at the state level to decrease Medicaid costs. In Kentucky, their system varies benefits by population by adding limits on certain services, creates incentives to opt out of Medicaid and converts their SCHIP program to stand-alone status. In Florida, they are writing risk-adjusted premiums for catastrophic, comprehensive and enhanced services while freezing rates paid to hospitals. South Carolina requires the use of Personal Health Accounts with Medicaid covering only major medical issues. California is expanding managed care programs while Iowa is restricting access to 200% FPL. Like- minded reforms have occurred in Ohio, Indiana, Georgia and Texas. If the new funding formula was adopted, these states would receive an average 10% increase in federal funding over current levels. Also, these states have Medicaid inflation rates considerably below the national average. Four of them would see their anticipated budget deficits decreased considerably. For example, Florida would realize a surplus while California would be infused with an additional $4 billion in funds using the new funding formula.

But this is just a beginning. By reforming Medicaid, the goal is not to perpetuate a cycle of poverty. There must be a federal cap regarding their contribution per person qualifying under this plan. Current federal spending averages $4,930 per person. Starting at this level and allowing for adjustments based on core inflation would be a start. For example, without a cap, Alabama would be entitled to $3.524 billion, but with a cap they would get $3.515 billion. This saves the federal government $9 million in Alabama alone and that money could be made up by the state through taxes (not preferred) or reform (preferred).

One way to achieve less STATE bureaucratic control is to “give” recipients vouchers or refundable tax credits to purchase their own insurance. Again, lets use the Alabama example. The federal government allots $3.515 billion while Alabama kicks in their usual $1.321 billion creating a fund of $4.836 billion to cover 713,000 Alabama residents in poverty. Under this scenario, each would receive a voucher of $6,870 to be used towards the purchase of insurance. This would fundamentally transform Medicaid into a system where people could purchase their own insurance based on personal choice and centered around their needs. Additionally, the federal reforms of breaking the link between employer-based insurance would create additional federal subsidies for the working poor, thus putting more money in the pockets of consumers to purchase health care insurance. Consumer choice would place downward pressure on overall health care costs through (1) expansion of the insurance pool and (2) increasing competition for these “new” customers. And all of this could be achieved without a mandate. The policies would also be portable and by instituting co-pays and deductibles into the system, costs can be defrayed while saving the government money.

Florida froze or cut disbursements to hospitals while not decreasing overall spending. Instead, they diverted these outlays to physicians in outpatient settings because it is cheaper than hospitalization. In fact, we see this trend everywhere expenditures are diverted to physicians over hospitals. Today’s Medicaid disbursement schedules are based on bureaucratic formulas instead of market factors. At $508 billion, states have tremendous bargaining power with providers and things have been out of whack with respect to hospital payments versus physician payments. Any program that favors the doctor-patient relationship over hospitalization should be encouraged.

As was stated earlier, Medicaid applies to people at at least 133% of FPL, or roughly a household income of $28,000 or less for a family of four. Some states, like New York, dictate higher percentages again using the their higher cost of living as a justification. Obamacare would dictate coverage at up to 400% FPL, or $84,000 with the federal government picking up the majority of the cost of higher expenditures in any state. As I have shown earlier, the consensus amount to purchase adequate insurance is a household income of $50,000. Any amount below that starts to have hardships on family expenses. Why households with income as high as $84,000 should be eligible for a program dedicated to people in poverty challenges logical thought. Put another way, this is a way for Obama to push universal health care in a stealth manner.

Medicaid was designed as a safety net for those in or slightly above the poverty level. It was never intended to cover people making $84,000 a year no matter where they lived. There should be a social safety net; the views of some on the opposite side of that argument are cold-hearted. But, there is no mistake that Medicaid, like Medicare, has been used to game the system and that politicians have also gamed the system. The politicization of the less fortunate is the biggest tragedy in this whole debate. Reforms aim to help these people out of poverty while the opposite- the liberals, the Democrats, and those yelling for universal health care- aim to keep people subservient to the largesse of the federal and state treasury.

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