News Release

August 17, 2005

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Setting Serious Goals for Medicaid
New study recommends freezing federal payments

WASHINGTON -- Congress and many states are ignoring the most important costs imposed by Medicaid a new study by the Cato Institute finds. In "Medicaid's Unseen Costs," Michael F. Cannon, director of health policy studies at the Cato Institute, shows that reforms such as health savings accounts, vouchers, and small reductions in outlays are unlikely to reduce the overall cost of the program.

Instead, Cannon argues that Congress should reform Medicaid, the federal program subsidizing health care for low-income Americans, the same way it reformed aid to families with dependent children in 1996.

Cannon shows how Medicaid has grown from a health care program for the truly needy to one that covers many who could obtain coverage elsewhere. Medicaid also encourages dependence and discourages work and saving: "Because eligibility depends on one's income and assets...the prospect of losing Medicaid benefits can deter individuals from entering the workforce or increase their earning." Likewise, Cannon continues, "individuals who are not poor may allow themselves to fall into poverty to obtain medical subsidies."

Unfortunately, Congress is focused on small reductions in Medicaid outlays, and governors such as Florida's Jeb Bush and South Carolina's Mark Sanford are pushing reforms -- such as health savings accounts in Medicaid -- that could increase dependence and outlays.

Cannon argues that Congress should stop encouraging Medicaid expansions by freezing payments to states at the 2005 amount, just as welfare reform froze payments to states at the 1995 amount. "According to Congressional Budget Office figures, that would erase 96 percent of the cumulative 10-year federal deficit," he contends.

Second, Congress should give states flexibility to use Medicaid funds to meet a few broad goals, such as targeting medical assistance to the truly needy, reducing dependency and promoting competitive private markets for medical care and insurance.

Cannon cites historical evidence in which cutting Medicaid benefits for immigrants in 1996 actually led to higher health coverage levels among that group.

Policy Analysis no. 548