Mitch Daniels' Medicaid Reforms: The Perfect Vs. The Good

Michael Cannon and Grace-Marie Turner (aided and abetted by Robert Goldberg) have started a real dispute on the effectiveness of Indiana governor Mitch Daniels’s Medicaid reform.

I think that this is really a proxy war over Obamacare. Like me, Cannon encourages absolute non-collaboration with Obamacare, so that its roots cannot grow into the soil before it can credibly be overturned. Because Governor Daniels has been shaky on this front (as I’ve already described), Cannon’s arguments against the Healthy Indiana Plan (HIP) and against Governor Daniels’s accepting federal Obamacare grants have blurred together into an almost ad hominem criticism of Daniels. Turner, on the other hand, not only supports HIP but has made the unfortunate decision to advise governors to establish bare-bones Health Benefits Exchanges, an approach that I have long believed jeopardizes the defeat of Obamacare.

But this has nothing to do with HIP, which launched in January 2008. When it comes to HIP, I lean more towards Turner’s conclusions than Cannon’s.

Cannon notes that Governor Daniels has roped more people than necessary into Medicaid by raising eligibility to 200 percent of the federal poverty level (FPL). However, he dramatically overstates the consequences of this. Yes, between the launch of the Healthy Indiana Program in January 2008 and the end of June 2010, Medicaid enrollment grew 21 percent in Indiana, versus only 18 percent in the rest of the United States. However, if one examines the previous 30-month period (June 2005 through December 2007), as I have done here, one sees that Medicaid enrollment in Indiana grew 5 percent, versus only 1 percent in the rest of the country. This trend indicates that there are other reasons for extraordinary Medicaid growth in Indiana than HIP.

It’s also important to remember the history of HIP. Governor Daniels did not just wake up one morning with a clever new way to dupe the federal government into throwing more dollars his way. He took advantage of an opportunity offered through President Bush’s Affordable Choices program, which offered waivers to states that attempted to move federal safety-net dollars from providers, especially hospitals, to patients. It didn’t spend more federal dollars, but redirected money that was already allocated. Perfect? Certainly not, but subsidising poor people’s demand for health care, instead of rich hospitals’ supply of health care, is clearly a positive marginal reform.

One of the critical consumer-directed elements of HIP is its POWER accounts, whereby taxpayers and the HIP beneficiary fund an account out of which the beneficiary pays for the first $1,100 of health spending every year. Importantly, any balance left at the end of the year rolls over. This has led to a significantly higher retention of beneficiaries than in traditional Medicaid. Turner thinks this is a feature; Cannon thinks it’s a bug.

One of the problems with traditional Medicaid is that people enroll when they’re sick and drop out when they become healthy. But beneficiaries who remain enrolled in order to keep their POWER balances do not cost taxpayers much, because they are healthy. Plus, HIP habituates them to a system where they continuously own a long-term policy for catastrophic health expenses (to which they submit claims infrequently) alongside a personal account to pay for most of their health spending. Those of us trapped in the employer-monopoly system should be so fortunate!

Cannon does not think that Medicaid beneficiaries should be happy with the program, because satisfaction breeds dependence. In other words, my friend thinks that Medicaid should be a crappy program because we don’t like Medicaid. Well, I support school choice, but I don’t think we should encourage public schools to hire crappy teachers in order to increase the demand for school choice. (Nor do I expect to see politicians successfully campaign on such a platform.)

HIP contains another important characteristic that I would have expected Cannon to cheer a little: sliding-scale subsidies to POWER accounts. Sliding-scale subsidies are not perfect, but they mitigate the problem of income-tax-rate “cliffs” as people’s incomes rise above the eligibility level for a benefit. If, for example, Medicaid eligibility is cut off completely at 100 percent of FPL, dependents approaching that income level have a disincentive to increase their incomes. Cannon himself has written a sterling analysis of such “poverty traps” in Obamacare.

Finally, we are making a mountain out of a molehill. At the end of 2009, HIP had 45,460 members, and it’s now got a waiting list (probably because the Affordable Choices waiver prevents it from drawing down more federal dollars). Indiana Medicaid overall had almost a million beneficiaries.

Faced with a federal government whose position on consumer-driven health care has veered between lukewarm (mostly rhetorical) support and outright hostility, Governor Daniels has succeeded in introducing a margin of consumer direction into health care in his state. In doing so, he has overcome significant bureaucratic odds and deserves congratulations. Now all he has to do is stop accepting Obamacare grant money!

(Crossposted to National Review Online.)