The case for federalizing Medicaid

If Donald Trump ever moves on from bickering over the size of his inauguration crowd to actually governing, one of the first orders of business will be churning out a promised “terrific” Obamacare replacement plan. While we don’t yet know the exact details of Trumpcare, Trump adviser Kellyanne Conway confirmed this week that block granting the Medicaid program to the states will be a big part of it.

This isn’t a surprise. Republicans like Speaker Paul Ryan and health secretary nominee Rep. Tom Price have called for kicking Medicaid down to the states for years. Unfortunately, it’s the exact wrong direction we should be going toward.

Medicaid provides health insurance to nearly one hundred million people, including children, pregnant women, nursing home residents, people with disabilities, and low-income Americans. For over fifty years, the program has been managed jointly by the federal government and the states. Washington finances at least half of the program’s costs, and often substantially more in poorer states. Obamacare expanded Medicaid to cover those just above the poverty line, and even offered to pick up the entire tab for the first years of the expansion. Still, nineteen conservative-led states turned down free money, causing a Medicaid “coverage gap” currently ensnaring 2.5 million people that would have otherwise gained insurance.

Conservatives in Washington want to drastically change this arrangement by simply cutting a check to the states and letting them run Medicaid. Conservatives like this idea for a few reasons. For one, a block grant creates more predictable (and lower) costs for the federal government. It gets the federal government off the hook for covering a share of whatever costs program enrollees incur, and instead just subsidizes state Medicaid programs. A block grant transfers most of the commitment of insuring vulnerable populations from the federal government to the states.

The problem, of course, is that this is a barely-concealed way of cutting healthcare funding for the poor. The only way for block grants to save the federal government money is to systematically lowball the amount of the grant. For example, the block grant plan pushed by Price and other House Republicans would slash Medicaid spending by $1 trillion — nearly 25 percent — over the next decade. A similar plan offered by Paul Ryan in 2012 would have caused up to 20 million Americans to lose their coverage.

This leaves it to individual states to pick up the slack, but it’s far from guaranteed that they are willing or able to do so. Medicaid is already one of the costliest expenditures for states, consuming on average nearly 20 percent of their budgets (second only to K-12 education). Making up for a $1 trillion funding gap would be a stretch even during relatively good economic times. But during a recession, block granting would be a disaster. While the federal government can take on debt to finance deficit spending, almost every state is required to keep a balanced budget. When revenues dry up during a downturn, states take an axe to social spending to make up the difference. These cuts inevitably come disproportionately from low-income programs. So the end result of block-granting means Medicaid will get cut to the bone just when more and more people will need it.

Block-grant proponents want to give states more of a role to experiment with Medicaid. But just as some states may seize on new flexibility to experiment upward with better, more generous programs, others will ratchet Medicaid downward by providing stingier benefits. Those nineteen states refusing the federal Medicaid expansion in particular have political cultures deeply hostile to insuring the needy. In Texas, for example, childless adults are ineligible for Medicaid regardless of how poor they are, and even parents are “too rich” for coverage if they earn more than 18 percent of the poverty line — $2,118 a year.

Even though national Republicans package Medicaid block granting as an exercise in states’ rights, it’s not clear how many states want the privilege of taking the primary lead in running Medicaid. Even some Republican governors worry that block grants will reduce the effectiveness of their safety nets. Medicaid block grants could easily follow the pattern of welfare reform — another safety net program devolved to the states during years of economic growth that has since shriveled away due to chronic underfunding.

Instead of block-granting Medicaid to the states, a better course is to do the exact opposite: have the federal government assume full responsibility for Medicaid. This would eliminate harsh state-based eligibility restrictions like in Texas, and would guarantee coverage for all who qualify. Because the federal government can run budget deficits, it is better situated to protect the program during economic downturns. And federalizing Medicaid would relieve the states of a massive fiscal burden, freeing up money for education, infrastructure, tax cuts, and other state projects.

Putting Medicaid entirely in the hands of the federal government may also better tame the program’s costs. As Greg Anrig of the Century Foundations writes, “taking 50 separate state bureaucracies out of the picture would be a meaningful step in the direction of reducing confusion and wastefulness.” Congress and federal agencies would also be better able to experiment with cost-containment strategies without the states in the mix.

Federalizing Medicaid could also yield tax relief for low- and middle-income Americans. While new federal revenues would need to be raised, the states would be free to cut taxes. And because the federal tax code is more progressive than the states’, most of the new financing for Medicaid would come from the wealthy. The net result would likely mean lower taxes for most Americans.

Federalization is not a new idea, nor a partisan one. As Anrig points out, Ronald Reagan proposed federalizing Medicaid in 1982 in exchange for giving the states over other safety net programs. Even earlier, in 1979 Jimmy Carter proposed federalizing Medicaid as part of his health reform pitch.

On the campaign trail, Donald Trump promised that he would not cut Medicaid. That’s a promise he cannot keep while also block-granting the program. Instead of pawning Medicaid off on the states, the federal government should lift it off of their shoulders entirely. That would give the states real flexibility.

Note: This post is cross-posted at Medium.

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