Commentary

A Cure for What Ails Medicaid

Sacramento is struggling with the rising tax burden of Medi-Cal, the federal-state program (called Medicaid elsewhere) created to provide medical care for the truly needy. However, that numbers game is only half the picture. Medi-Cal and Medicaid carry other costs that don’t show up on a spreadsheet. In fact, a body of literature suggests that the program exacerbates the problems of poverty and high health-care costs and points to a counterintuitive solution.

Public support for Medicaid is broader and deeper than for other safety-net programs because the consequences of inadequate medical care can be much more immediate and severe than those of a lack of money or even food. That may be one reason voters have heretofore accepted the rapidly growing tax burden Medicaid imposes. Medicaid is now the largest means-tested government program in the United States and imposes a per-capita tax burden of more than $1,000. It is larger than Medicare (the federal program for the elderly and disabled) and is the single largest item in state budgets, even surpassing elementary and secondary education, according to a 2003 report from the National Association of State Budget Officers.

Those are the visible costs. Medicaid also imposes hidden costs. Like other means-tested government programs, Medicaid discourages self-sufficiency and induces dependence. It is now accepted that a welfare check does so. Yet according to the Congressional Budget Office, Medicaid provides nonelderly recipients average benefits twice as valuable as the average welfare check under the Temporary Assistance for Needy Families program — and provides those benefits to 10 times as many people. MIT and UCLA economists found that Medicaid reduces — by thousands of dollars per household — the kind of asset accumulation (e.g., savings or purchasing a car) that helps people escape poverty.

Medicaid also increases the cost of private care and gives recipients poorer-quality care than they could obtain with private coverage. A study by the National Bureau of Economic Research found that Medicaid increases the cost of prescription drugs by 13 percent for private payers. The Urban Institute reports that adults who are eligible for Medicaid but have private coverage have fewer unmet medical needs than similar adults in Medicaid.

Finally, Medicaid’s funding scheme rewards states for increasing dependence. Matching federal funds mean that most states can double their money — and some can quintuple it — by expanding Medicaid. So it’s no surprise that all states have expanded Medicaid beyond its mission of helping the truly needy. In 2003, California had 4.6 million people living in poverty, but 6.4 million on Medi-Cal (nationwide figures are 36 million and 52 million, respectively). The Urban Institute reports that 20 percent of those eligible for Medicaid actually have private coverage — which indicates that the eligibility rules for Medicaid have been stretched beyond the program’s original mission. Some of the most costly Medicaid recipients are well-to-do seniors who could pay for their own nursing-home care, but who feign poverty, so taxpayers cover those costs (as reported by syndicated columnist Jane Bryant Quinn and others.)

Washington used to reward states for making people dependent on welfare checks, too. But in 1996, Congress took a step that some considered cruel: It eliminated that reward, pared back federal cash assistance, and gave states broad flexibility to administer those programs. The results confounded the critics. Poverty plummeted and remains lower than any point during the 17 years prior to welfare reform.

Medicaid does no one any favors — least of all the truly needy — by inducing dependence or enrolling people who could obtain coverage elsewhere. As it did with welfare checks, Congress should: (1) cap federal Medicaid funding; (2) block grant federal funds to the states; and (3) allow states full flexibility to define eligibility and benefits under their Medicaid programs. States should use that flexibility to reduce dependence and target Medicaid assistance to the truly needy. That means withdrawing assistance from those most able to obtain private coverage. A Harvard study found that when Congress withdrew Medicaid assistance from noncitizen immigrants, the subsequent increase in private coverage overwhelmed the loss of Medicaid coverage, so that overall coverage in that group increased. (The study found that result could not be explained by the strong economy of the 1990s.)

It also means deregulating health care to make private options affordable. America’s biggest health-policy concern is the uninsured, yet the Golden State requires all carriers to cover 49 different types of services, including coverage for alcoholism, in vitro fertilization, contraception, acupuncturists, chiropractors and other treatments whose providers have effective lobbying organizations. Most Californians would appreciate the option of lowering their premiums by declining coverage they don’t want. Sacramento should give consumers that choice, either by repealing those laws, or by letting consumers purchase health insurance licensed by another state.

Providing medical care to the poor without fostering dependence is a delicate balancing act, and many of the costs incurred by getting it wrong don’t show up on a spreadsheet. Reforming Medicaid along the lines of the 1996 welfare law and deregulating health-care markets would strike a better balance for all involved.

Michael F. Cannon, director of health-policy studies at the Cato Institute, is co-author of the book Healthy Competition: What’s Holding Back Health Care and How to Free It, to be released by Cato this month.