Why Medicaid Should Be Easier to Fix Than Entitlements

Congress remains gridlocked on many important issues but not every politician is afraid to challenge the unsustainable growth of Medicaid. Consider S. 1031, by U.S. Senator Tom Coburn.

This measure would increase local control over Medicaid spending and improve the incentives that have led politicians to trap ever more low-income citizens in poverty and the poor access to care that characterizes this top-heavy system.

Medicaid is often described as an “entitlement,” but that is wrongheaded. Medicaid is welfare, targeted at low-income Americans. And Medicaid should be easier to fix, politically, than two other troublesome programs.

The politicians who invented Social Security and Medicare asserted that these programs would be funded by payroll taxes in order to foster the illusion of entitlement. We pay for the benefits in our working years, and the benefits arrive after we’ve retired. It’s all nonsense of course.

The taxes we pay do not go into accounts that belong to us. Rather, they pay current retirees and fund other government programs. Nevertheless, it is exceedingly difficult to convince people of the truth that we have not paid for our Social Security or Medicare. But Medicaid spending, to which nobody is “entitled,” is now greater than Medicare spending.

This has occurred because Medicaid's funding formula incentivizes the political class to overspend. For every dollar a state politician spends on Medicaid, the federal government pitches in at least one dollar – or even more, as a result of the misnamed “stimulus” of 2009 – via the Federal Medical Assistance Percentage (FMAP). The federal government actually rewards states for making more residents dependent on Medicaid.

S.1031 would transform the federal government’s funding for Medicaid, but it would transform it into a “capped allotment.” This was the model of the successful welfare reform of 1996, which reformed Aid to Families with Dependent Children (AFDC) into Temporary Assistance to Needy Families (TANF).

The number of average monthly recipients dropped from more than 12 million in 1996 to fewer than 4 million in 2008 – and low-income Americans faced better incentives to seek productive work. We have recently experienced a successful example of a reform in this direction.

Rhode Island received a waiver on the last day of the Bush administration that capped its total (state and federal) Medicaid spending at $12.075 billion through 2013. At the current rate, it looks like the actual spending will be about $9.3 billion – with no evidence of reduced access to care. And Rhode Island’s waiver preserved the flawed FMAP.

Coburn’s S.1031 introduces even better incentives, from which all states and taxpayers will benefit. It gives states more control over their program dollars to get rid of waste, fraud, and abuse. It encourages states to make Medicaid providers accountable to the neediest patients in their communities, instead of remote federal bureaucracies. Finally, it will protect taxpayers from politicians’ worst impulses to spend unaccountably.

It is generally recognized that TANF, which passed with bipartisan support, produced positive outcomes. It is long past time to introduce similar reforms to Medicaid. The current stalemate on the debt limit should not prevent Congress from taking up S.1031 at the earliest convenience.

(This article is also available in PRI's Capital Ideas series, here.)