How States Use Medicaid to Bilk Taxpayers in Other States

Today, the Government Accountability Office (GAO) testified before Congress on the many ways that states use the Medicaid program to defraud (my word) taxpayers in other states.  The following is an excerpt from GAO’s prepared testimony:

GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county-operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished…[Such] financing arrangements effectively increase the federal Medicaid share above what is established by law…

Supplemental payments involving government providers have resulted in billions of excess federal dollars for states, yet accountability for these payments—assurances that they are retained by providers of Medicaid services to Medicaid beneficiaries—has been lacking. CMS has taken important steps in recent years to improve its financial management of Medicaid, yet more can be done.

Yes, more should be done.  Congress should reform Medicaid and the State Children’s Health Insurance Program the same way it reformed welfare: eliminate the federal entitlement to benefits, and replace those programs’ matching grants with lump-sum block grants.  That would eliminate many perverse incentives created by those programs, including the incentive to cheat taxpayers in other states.

Those reforms would also be a nice stepping stone toward giving the states full responsibility for maintaining those programs, and getting the federal government out of the business of providing medical care to the poor entirely.

Sentence of the Day

Mandarin of the Washington Establishment, Joe Klein of Time magazine appears to have had just about enough of Fred Kagan’s writing on Iraq:

On the day that John Yoo’s remarkable torture memo is released, this foolishness is a reminder that none of these people–none of the vicious, mendacious, naive, simplistic, unapologetic, neo-colonialist ideologues who promulgated this disaster–should have even the vaguest claim on the time or tolerance of fair-minded people.

Back story on the abominable green-lighting of torture is here. Kagan article on which Klein was commenting here.

Oil Subsidies in the Dock

Yesterday, Congress summoned the heads of BP, Shell, Chevron, ConocoPhilips, and ExxonMobil to defend the prices they’re charging at the pump and the subsidies they are receiving from the federal government. The former issue is of less interest to me than the latter.

The main issue is the so-called Section 199 tax credit passed in 2005. The credit is available to all domestic manufacturers - not just to oil and gas companies - and it allows the oil industry to write-off $13.6 billion over ten years that might otherwise be sent to the federal treasury. While a good case could be made to get rid of Section 199 in toto – the feds shouldn’t be in the business of artificially making some business activities more economically attractive than others – limiting that deduction for oil and gas companies and oil and gas companies only will compound the underlying economic distortion and encourage investors to put relatively less money in oil and gas production and more money in other industrial sectors. How is that a good thing with oil prices topping $100 a barrel?

Oil companies are already paying a staggering tax bill. In 2006, for instance, big-bad ExxonMobil faced an effective tax rate of 44 percent on a profit margin of around 11 percent, a figure that actually understates things because corporate revenues sooner or later find their way to oil company employees, contractors, shareholders, and those who do business with the same, and that revenue is taxed again via the personal income tax.

“So what?” you ask? Well, the more you tax “Big Oil,” the less return investors will get on money plowed into oil production. The less return on investment, the less investment there will be. Less investment equals less production, and less production equals higher prices. This is fact, not theory. Analysts at the Congressional Research Service report that the 1980 Crude Oil Windfall Profits tax reduced domestic oil production by 3-6 percent and increased oil imports by 8-16 percent for exactly that reason.

If the Congress were really interested in ending oil and gas subsidies, it could eliminate preferential tax treatment afforded intangible domestic drilling expenses, increase the amortization period for geological and geophysical expenditures from five years to seven, end preferential expensing for equipment used to refine liquid fuels, close the exemption from passive loss limitations for owners of working interests in oil and gas properties, and eliminate accelerated depreciation allowances for small oil producers, natural-gas distribution pipeline investments, and expenditures on dry holes. Such a plan would reduce – rather than compound – economic distortions produced by the tax code and deliver about $8.3 billion for the Treasury over 10 years. Congress is presumably less inclined to offer such a plan because those subsidies are far more important to “Little Oil” than they are to their “Big” brethren, and it’s the former – not the latter – that has most of the political clout in Washington.

Regardless, if getting rid of subsidies is such a good thing, then why does Congress propose to take those subsidies away with one hand but to reallocate them to the renewable energy business with the other? If renewable energy is economically competitive, it doesn’t need the subsidy, and if it’s not economically competitive now – with energy prices setting records across the board – then what makes anyone think that federal subsidies will make any difference? After all, they never have in the past. Ethanol has been lavished with government subsidy for 30 years, yet ethanol is still about $1.20 per gallon more expensive than conventional gasoline on wholesale markets last week after we adjust for the differential in energy content between the two. Nuclear energy has lived off a plethora of federal subsidies for five decades now, yet rather than being “too cheap to meter,” it’s still more expensive than any other conventional source of electricity once we account for the cost associated with building the reactor. Examples of similar subsidy boondoggles are legion.

Getting rid of energy subsidies is a fine thing, and Democrats are right to argue that those subsidies are even less warranted at a time when energy prices – and thus, energy profits – are relatively high. Too bad they aren’t serious about translating their rhetoric into legislative reality.

The Global Warming Panic That Isn’t

August, 2005 - Hurricane Katrina blows into the Gulf of Mexico and blasts New Orleans to smithereens. Environmentalists quickly blame the storm on global warming – or at the very least, claim that warming will inevitably lead to more Katrina-like hurricanes. Although there is no clear scientific consensus on what impact a warming world might have on the frequency of big Gulf hurricanes, it’s enough to move public opinion significantly on the question of whether federal, state, and local governments ought to do something about climate change.

May, 2006 - Al Gore’s An Inconvenient Truth opens in New York and Los Angeles. The companion book becomes the #1 paperback non-fiction book on the New York Times bestseller list in July. The movie goes on to become the fourth highest grossing documentary in U.S. history and wins an Academy Award.

July, 2007 - Live Earth concerts to save the planet feature 150 top musical acts in 11 cities around the world. While it’s unclear how many people actually watched those concerts, Live Earth set a record for on-line entertainment with over 15 million video streams during the live concerts alone.

October, 2007 - Al Gore and the Intergovernmental Panel on Climate Change win the Nobel Peace Prize.

March, 2008 - The Heartland Institute sponsors a conference in New York City to showcase scientific skepticism about the seriousness of climate change. The event is received with uncharacteristically loud derision by the mainstream media.

Now, with all of that in mind, wouldn’t you think that the public would be growing more – not less – worried about climate change? You might,  but you would be wrong. According to today’s Energy & Environment Daily (subscription required), a new poll conducted by Princeton Survey Research Associates and released by the John Brademas Center for the Study of Congress at New York University finds that Americans are less worried about climate change than they were a couple of years ago.

E&E Daily reports that the survey’s margin of error was +/- 3 percent. Here are the highlights:

The percentage of Americans who said global warming requires immediate attention declined from 77 in 2006 to 69 percent today.

The percentage of Americans who said they were “very worried” about global warming increased from 31 percent in 2006 to 39 percent in 2008. But that’s misleading; everyone gets “more worried” about everything in a presidential election year. What’s striking to me is that the rise in the number of those “very worried” about global warming was less than the rise in the number of those “very worried” about the four other issues surveyed by Brademas Center (Medicare, Social Security, and energy).

The declining number of those who said they were “somewhat worried” about global warming more than offset the increase of those who reported being “very worried.”

There are several possible explanations for this data. My guess is that it’s a little of each of the following.

Explanation #1 – The public has only limited patience for “end of the world” prognostications. If the world isn’t visibly ending from whatever boogey man is said to menace said world, most of us begin to lose interest. We’re all well aware that Earth has been sentenced to doom hundreds of times over by activists of various stripes but has somehow gained a reprieve time and time again.

Explanation #2 – The time horizon of most voters is very, very short. Getting people to voluntarily sacrifice for “the grandkids” or whomever is a near-impossible task. It would probably take a Katrina-a-year … and even then, that might not be enough. The mathematical certainty regarding the economic train wreck about to be visited upon “the grandkids” as a consequence of the trillions of dollars of unfunded liabilities for present federal health care and retirement programs does not engender sacrifice. It engenders shrugs and accelerated wealth transfers from the future to the present.

Explanation #3 – Global warming, if it plays out as the IPCC suspects, will be a slow-moving event. Panic over climate change has to compete with panic over Islamic terrorism, panic over housing markets, panic over globalization, panic over energy prices, panic over immigration, and episodic panic over dozens of other (usually dubious) worries. Simply put, global warming has a hard time competing with all of the other items on the policy agenda.

So conservatives, take heart. Enviros, take a valium.

All You Ever Needed to Know About the Surge

A while back, I characterized the Bush administration’s approach to Iraq as “buy time and pray for a miracle.” Now White House politics-of-Iraq guru Peter Feaver has a piece in Commentary lifting the veil from the White House machinations of surge planning. In the piece, Feaver reveals that the planners’ objective was basically to toss the Iraqi hot potato into the lap of the next administration, dust off their hands, and declare victory:

The challenge…was to develop and implement a workable strategy that could be handed over to Bush’s successor. Although important progress could be made on that strategy during Bush’s watch, ultimately it would be carried through by the next President….

This new and different strategy, now called the “surge” but at one point called by insiders the “bridge,” emerged out of a growing recognition over 2006 that our critics were right about one thing: our Iraq policy was not working…

As a political matter, this has a pretty airtight logic to it. Rather than admitting that theirs was the first U.S. administration to start and lose a war of aggression on their watch (bad for the legacy!), this way it comes out heads-we-win-tails-you-lose. If, by the grace of God, some subsequent U.S. president can manage to extricate us from the Iraqi quagmire without a total meltdown, the Bushies will clap each other on the back, declaring themselves visionaries. If, on the other hand, Iraq flames out entirely on the watch of a subsequent administration, the Bushies can play the Dolchstoss card and explain how The Surge Was Working and would have continued working were it not for the fecklessness of the Obama/Clinton/McCain administration.

Don’t Do Something, Just Stand There

In the Washington Post Shankar Vedantam discusses “the action bias, or the desire to do something rather than nothing when you have just been through a terrible experience.” He cites evidence that both individuals and politicians often prefer to do something rather than nothing, even if “nothing” would be the wiser course.

When people suffer losses and confront the possibility of even greater reverses – it doesn’t matter if you are talking about a terrorist attack or a meltdown in retirement savings – it is psychologically difficult to do nothing, to hold course. This is true even when the action you contemplate produces an outcome that leaves you demonstrably worse than you were in the first place….

Economist Ofer Azar recently came up with a novel way to study the insidious nature of the action bias. He examined whether soccer goalies were more likely to stop penalty kicks when they dived to the left, dived to the right or stayed in the center of the goal. In a study of 286 penalty kicks faced by elite Israeli goalkeepers, Azar found that goalies had the best chance of stopping a kick when they remained in the center – partly because when they dived to one side, they left themselves with no chance of stopping a kick aimed at the other side or a kick aimed dead center. And even when they correctly guessed the direction of the kick, they still had only a 1-in-4 chance of stopping a goal.

Despite the clarity of the evidence, Azar found that goalies dived to one side or the other 93 percent of the time.

And of course it’s not just goalies. Vedantam suggests that “the Iraq war might be Exhibit A for the action bias”–noting Hillary Clinton’s statement in 2002: “In balancing the risks of action versus inaction, I think New Yorkers who have gone through the fires of hell may be more attuned to the risk of not acting. I know that I am.”

Good point. And he might go on to discuss the current rush to regulation in the wake of the subprime crisis and the Bear Stearns collapse. Voters expect politicians to “do something!” Regulators don’t want to look unresponsive. So everybody has a plan for more money, more regulation, or some sort of action. And of course it’s a recurring problem. Enron failed, and politicians panicked right into the Sarbanes-Oxley Act, whose costs will be with us long after we’ve forgotten what Enron was.

The bias toward action is one good reason for constitutional and procedural constraints on government actions. Constitutional limits on what government can legislate, bicameral legislatures, supermajorities, the filibuster, the presidential veto–all are designed to prevent hasty action, whether from popular delusions, demagogic campaigns, or the simple desire to be seen doing something rather than prudently refraining from misguided actions.

An Argentine Mess

The decision of Argentina’s president Cristina Fernández to raise the export taxes on grain producers has sparked protests all over the country, putting the country once again in international headlines. But punishing exporters is not the main story, it’s the economic mess that the last two administrations have created in that beautiful country.

The previous government of Nestor Kirchner–Fernandez’s husband–thought that he could devalue his way out of the crisis of 2001. Since that year, the Central Bank of Argentina has consistently applied a weak peso policy, which along with a massive increase in public spending, has resulted in runaway inflation. Last year, the Argentine peso was the only Latin American currency that didn’t appreciate against the U.S. dollar; in fact it depreciated slightly. The weak peso thus served as a subsidy to exporters, including the farmers now protesting the tax hike.

So we actually have the Argentine government subsidizing and confiscating agricultural exporters at the same time, while creating inflation (which has led to price controls, bans on exports, and other economic beauties). And now, in response to the protests, the Fernández administration has announced new subsidies to farmers.

Only in Argentina.