Most states are encountering their largest deficits in more than 60 years. President Bush has ostensibly offered to help by lending them a temporary increase in federal support for state spending on Medicaid. But the President's offer will prove to be a Trojan horse. The states that accept it will get a little more federal money for Medicaid next year but stand to get considerably less in the long run. And they will allow Washington to walk away from its commitment to provide adequate health-care coverage to low-income Americans, leaving the states to solve the problem on their own. If the President's proposal is accepted, the states will face even larger budgetary crises in the future.
Medicaid is the largest health-insurance program in the U.S., covering more people and spending more money than Medicare. Unlike Medicare, Medicaid is primarily a means-tested program, limiting eligibility to low-income individuals who cannot afford private insurance. Medicaid beneficiaries are drawn from the nation's most vulnerable populations, including poor children, families of the working poor, the disabled, and low-income seniors who cannot pay their Medicare premiums or fill the gaps in their Medicare coverage from their own resources. Like Medicare, Medicaid is an entitlement program -- the government is committed to covering the costs of services to any individual meeting the program's eligibility criteria.
Washington shares the costs of the Medicaid entitlement with the states, with poorer states receiving larger contributions. Federal funding for each state grows automatically in proportion to the size of the eligible population and the growth in the costs of covered health-care services. It is precisely this federal entitlement arrangement that the Bush Administration hopes to abolish. In its place, the President pledges capped federal block grants to the states to help defray the costs of both Medicaid and the State Children's Health Insurance Program. The latter program dedicates $40 billion in federal funds to the states over 10 years to expand health-care coverage for children from families with incomes that are low, but not low enough to qualify for Medicaid. Since SCHIP began in 1997, the number of uninsured children in low-income households has declined sharply. Half of all the children in the U.S. live in families that meet the income eligibility requirements of either Medicaid or SCHIP.
Even with substantial federal sharing rates, ranging between 50% and 77%, Medicaid is the fastest-growing component of state spending. That's not because Medicaid's per-capita costs are out of control. In fact, Medicaid has been outperforming private health-care plans. In 2002, per-capita premiums for employer-based health care rose nearly 13% while per-capita Medicaid costs for a comparable population grew by 7%. Medicaid pays providers less than Medicare and enrolls many in managed-care arrangements.
Medicaid costs have surged in large measure because of rapid growth in the costs of providing care for the elderly and disabled beneficiaries of Medicare who are also eligible for Medicaid. Under federal law, Medicaid is required to pick up the tab for drug coverage, long-term care, and Medicare deductibles and premiums for low-income Medicare beneficiaries. Changes in medical practice favoring shorter hospital stays and more drug coverage have slowed the growth of Medicare spending but accelerated the growth of Medicaid spending. Reforming Medicare to add drug coverage and to increase Medicare premiums and deductibles for all seniors would mean even faster growth in future Medicaid.
Under the President's Medicaid plan, states would have to finance all Medicaid spending in excess of the block grant provided by the federal government. And they would be required to cover the Medicaid costs of Medicare services for groups mandated by federal law, even if those costs grew faster than block grant funding. In short, the states would be forced to honor ballooning federal entitlements for a rapidly growing elderly population without federal entitlement funding. How would the states respond? Most likely by slashing the successful SCHIP program.
President Bush is seeking to take advantage of the states' current fiscal desperation to achieve a long-standing Republican goal -- the elimination of the Medicaid entitlement, the only significant means-tested entitlement program of the federal government. If the President achieves this goal, an even larger number of America's poorest citizens will find themselves without adequate health care.
Fortunately, the states don't have to sign the President's pact with the devil. There is growing bipartisan support in Congress for a temporary increase of $10 billion in federal Medicaid matching funds for this fiscal year. Not only does this plan provide more short-term stimulus to the faltering economy, but it also reflects the aspiration of the majority of Americans to live in a nation where everyone gets basic health care regardless of income.
Laura D'Andrea Tyson is dean of London Business School.
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