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Medicaid Needs Surgery

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Medicaid Needs Surgery

February 14, 2005
Legal ReformOther

YOU DON'T PULL FEEDING tubes from people," exclaims a governor, objecting to Medicaid changes floated by the White House. At a December press conference, he continues: "You don't pull the wheelchair out from under the child with muscular dystrophy."

The Bush administration is considering giving states more flexibility to administer the federal-state health insurance program for the needy, with a tradeoff: Washington would cap its contribution in the form of a block grant. "I think it would be a mistake to go down that road," explains a senator. Another governor opposes the idea "in any form."

Health care issues are often divisive, but here's the surprise: All of the above quotations are from Republicans. Governor Mike Huckabee of Arkansas worries about feeding tubes and wheelchairs; Senator Olympia Snowe of Maine warns the administration against change. And the anti-spending-cap governor? Mike Leavitt made the comments when serving in Utah a few years ago--and now he's the secretary of health and human services.

With budget negotiations set to begin, Medicaid will almost surely be a major issue. Facing a large deficit, the administration is eager to find areas to cut--and budget sanity dictates that something be done with the 40-year-old program. But Medicaid needs more than a face-lift, and without careful thought the administration may miss a golden opportunity.

Medicaid was created as an afterthought. Wilbur Mills, then chairman of the House Ways and Means Committee, added provisions for the program to his 1965 Medicare bill, the legislation that launched the national health-insurance program for all seniors.

For decades, Medicaid was the poorer, smaller cousin of Medicare, covering only people on some form of welfare. But Congress loosened the eligibility requirements in 1986, and Medicaid started to grow.

Medicaid spending today bests $300 billion a year, up more than 50 percent in the past five years. Its total budget is larger than Medicare's, and it affects more Americans--some 50 million. Unless Medicaid is changed, the Congressional Budget Office projects it will cost nearly $600 billion a year by 2012.

If Washington frets about Medicaid spending, so do politicians in the states. New York's Republican governor, George Pataki, recently called for $1.1 billion in cuts to the program. His counterpart in Ohio, Bob Taft, gave a speech entitled "Medicaid: The Monster in the Middle of the Road." He's not joking--nationally, state spending on Medicaid exceeds state spending on K-12 education.

With so much political angst, great innovation would seem near. And yet, as we begin the most important political discussions about the program in its 40-year history, the prospects for significant change seem limited. In budget negotiations, the administration is likely to propose a cap on federal spending--exactly as it did a couple of years ago. Between state opposition and a lack of congressional enthusiasm for reform, Medicaid will probably remain unchanged.

Why the deadlock? The basic problem with Medicaid is that Washington foots the bulk of the bill, yet most of the administrative decisions are made at the state level. For poorer states, like Mississippi, 77 cents of every dollar spent comes from federal coffers; for wealthier states, it's closer to 50 cents. Overall, roughly 57 percent of Medicaid's budget is from Washington.

Thus, historically, expanding Medicaid has been a good deal for the states. For every three dollars' worth of new service they've provided their residents, Washington has picked up two. In the 1980s and '90s, states dramatically expanded the program's scope--and did so largely on Washington's dime.

Take Howard Dean's Vermont. The former presidential candidate expanded eligibility when serving as governor, allowing families with incomes up to $51,000 to qualify for some Medicaid benefits. He would have gone further--his office approached the Clinton administration about additional expansions, but the request was denied. Under Dean, Medicaid rolls doubled to include roughly 20 percent of Vermonters. Today, Vermont's Medicaid enrollment exceeds that of nearly every other state. By comparison, neighboring New Hampshire is last.

Yet Vermont is not exceptional. Tennessee embarked on a massive Medicaid expansion in 1994, sold as a "cost savings." Despite various reforms and restrictions, 1.3 million of Tennessee's 5.8 million citizens are still on the rolls, and TennCare consumes a third of the state budget. (Further reforms are tied up in federal court.) Over in New York, after years of activism under Cuomo and abdication under Pataki, the Empire State now spends more on Medicaid than Texas and California combined.

It's not just that governors have opened up eligibility. States have been liberal with benefits. If a doctor prescribes an aspirin or an antacid to a Tennessee Medicaid patient, Nashville pays for it. With 50 different types of state administration, there really isn't a single Medicaid program, but 50 of them. Many states cover non-emergency ambulance rides, brand-name prescription drugs (even when generics are available), and chiropractic services. Nelson Sabatini, Maryland's former secretary of health and mental hygiene, observes that for the majority of families covered by Medicaid in his state, it would be less expensive to buy private insurance on their behalf.

This is absurd. Still, given the financial incentives, it's not surprising that few governors are in any hurry to revamp the program. The easier approach is to lobby Washington.

"Even fiscal conservatives in the governor's houses are opposed to a block grant," comments Jim Frogue of the American Legislative Exchange Council. Frogue notes the strange situation: At a time when states openly oppose federal intrusion in other areas, they lobby against fewer federal restrictions on administering Medicaid.

Of course, with spiraling costs, the governors can't completely ignore the problem. But, to date, most reform efforts at the state level have been half-hearted. Rather than substantially rethink the Great Society program, states have cut corners. They have slashed reimbursement rates to physicians and hospitals, introduced bureaucratic controls (like requiring doctors to receive authorization before writing a prescription), cut eligibility, and raised taxes--typical command-and-control style changes. The results have been unsatisfactory. Consider that for one California study, a "patient" seeking care reimbursed by Medicaid contacted 50 orthopedic surgeons--and only 2 agreed to see him.

What's a way out? President Bush can start by looking to his family for advice, to Governor Jeb Bush of Florida.

Florida's Medicaid is more comprehensive than many private plans. Such generosity comes at a price. For the past six years, Medicaid spending has climbed 13 percent annually and now soaks up about a quarter of the state budget. And the worst is yet to come, with costs expected to rise to 35 percent of state revenue in the next four years. As a result, Governor Bush proposes something innovative: getting his state out of the business of micromanaging Medicaid.

Under his plan, those eligible for Medicaid would qualify for a set, need-based amount of money. With this money, recipients could pick a plan among competing insurance company offerings--from more comprehensive coverage to less comprehensive but at a lower premium, with part of the money saved going to a recipient's flexible spending account for out-of-pocket medical expenses. In addition, the state would offer incentives in the form of better benefits to those who live healthier lives.

The contrast between Florida's approach and that of other states couldn't be starker. At a time when state governments are developing more and more elaborate ways of controlling Medicaid, Jeb Bush envisions Tallahassee doing relatively little. Besides funding, Florida would ensure transparency of the private plans and counsel Medicaid recipients about their choices.

Governor Bush's plan offers a way out, overcoming the federal-state divide. It allows governors to give recipients more choice, yet rein in spending by increasing competition among insurance plans. It's an innovative approach that controls costs, particularly since it involves recipients more in their health decisions. Notes Frogue, "It's fiscally wise and pro-patient."

Of course, in the next few months, all eyes will be on Washington, not Tallahassee. But with the block grant idea already on political life support (indeed, it might not even make it into the budget proposal), the prognosis for the administration's remedy is bleak. Jeb Bush's initiative is a promising alternative--a health care reform well suited to his brother's ownership society.

The president has already stated that his second term will be defined by boldness on Social Security and tax reform. But Medicaid needs a dose of vision as well. Allowing Medicaid recipients ownership of their health care makes fiscal sense. It also means that Washington can push for change without anyone having to contemplate pulling feeding tubes or denying wheelchairs.