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Manhattan Institute

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Address Medicaid Spending Before Trying to Reform Insurance

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Address Medicaid Spending Before Trying to Reform Insurance

The Hill April 19, 2017
Health PolicyMedicare/Medicaid

The GOP’s first attempt to replace the Affordable Care Act may have faltered, but they should not let the opportunity for healthcare reform go to waste. Instead of trying to construct a comprehensive agreement, they should instead handle it like the task of shifting a bulky piece of IKEA furniture through a narrow doorway – disassembling it into manageable pieces, and carrying each section through with the approach that suits it best. Although the budget reconciliation process is ill-suited to the task of fixing insurance regulations, it was specifically designed for entitlement reform, and offers Congress a chance to reform the Medicaid program. By doing so, the GOP could facilitate the cost-effective delivery of care to the neediest Americans, while improving the risk pool for those purchasing coverage on the exchange.

Medicaid is managed by states, with the federal government providing around $2 for every $1 that states spend on healthcare services to eligible adults. In theory this arrangement facilitates innovative service provision. In practice, as covered benefits, payment systems, and access to care vary widely between states, federal policymakers have only the vaguest idea of what services are being purchased. This makes it difficult to assess the appropriateness of resource allocations and to ensure that federal funds are spent where they are most needed.

By subsidizing states according to their ability to put in their own money , Medicaid now spends over twice as much per capita in the wealthiest states as it does in the poorest – an absurd arrangement for a program intended to support the poor. This leaves the poorest states struggling to meet the most basic care needs of children and the disabled, while allowing the richest to claim ever-greater subsidies from federal taxpayers to expand services for groups of able-bodied adults who already mostly had privately-funded health insurance.

Until 2014, Medicaid provided comprehensive healthcare services to low-income individuals who were either disabled, pregnant, under the age of 18, or parents of young children. As a result of the ACA, 31 states have expanded this coverage to low-income able-bodied childless adults. With states able to claim $9 from the federal government for each $1 they spend on the expansion group, this has complicated attempts to redress the inequitable distribution of subsidies between high-spending and low-spending states.

The House GOP proposal allows states to continue claiming matching funds for the expansion population, but phases the 9:1 subsidy ratio down to the normal rate for newly-eligible beneficiaries. This is a clever compromise that manages to be fair to expansion and non-expansion states alike. It prevents sudden disruption to state budgets, ensures no individual is suddenly thrown off their plan, and helps guide the program onto a more fiscally-responsible path where care is subsidized most when provided to the neediest. 

By shifting more able-bodied working-age adults to the exchange, these reforms would also help stabilize the risk pool and reduce costs for those seeking coverage there. Individuals earning over 100 percent of the federal poverty line (i.e. $11,770 – achievable by working more than 31 hours a week at the minimum wage of $7.25) would remain eligible for platinum plans at a 94 percent actuarial value with a $150 deductible, as they currently are in non-expansion states. Those under this level could still receive support from Medicaid, but states would no longer be paid more to provide services for able-bodied adults than they are for children, pregnant women, the disabled, or elderly. 

Still, though it has been highly controversial, the cost of expansion ($65bn in 2016) is a relatively small fraction of the overall Medicaid program, and therefore a bit of a distraction from the broader questions of restructuring the program to enhance accountability and fiscal sustainability.

Medicaid spending increased rapidly from $145bn in 1995 to $545bn in 2015 — making it now larger than the entire U.S. Department of Defense. The House GOP proposed to cap the per capita increase in Medicaid spending that each state can claim from the federal government every year. These limits are not irreversible, as future Congresses can be expected to revise the caps in the budget every year – but they would give federal taxpayers a chance to prevent states from unilaterally making sudden and unjustified increases in program expenditures. States would retain full flexibility to reallocate existing funds as they wish, but there would be an opportunity to prevent further expansions of Medicaid benefits in the wealthiest states that do not represent the best value for taxpayers nationwide.

By enacting the House GOP’s Medicaid proposals, the mandatory burdens of the program would therefore be somewhat lightened and states better-incentivized to channel funds efficiently according to unmet need. As a result, Medicaid would become a more cost-effective instrument for getting healthcare to those who need them most.

This piece originally appeared at The Hill

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Christopher Pope is a senior fellow at the Manhattan Institute.

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