Commentary

HSAs Are No Solution for Medicaid

This article appeared in the Myrtle Beach Sun News on August 28, 2005.
With Congress and a federal commission trying to figure out what to do about rising costs and poor quality in Medicaid, many Republican governors think they have found the answer in vouchers and health savings accounts (HSAs). They should think again. Once all the costs imposed by Medicaid are taken into account, it becomes clear these reforms will not reduce overall Medicaid costs, and could increase them.

Medicaid has ballooned from an effort to provide medical care to the poor into the most likely vehicle for a government take-over of the health care system. In 2003, there were 36 million Americans living in poverty, but 52 million on Medicaid. The states, which administer the program, have seen Medicaid become the largest item in their budgets, even larger than elementary and secondary education.

Medicaid is also notorious for providing low-quality care. Recipients have little choice of providers, and typically receive a much lower level of care from nursing homes compared to other patients. The Urban Institute has found that low-income adults who are eligible for Medicaid but have private coverage have fewer unmet medical needs than eligible adults who are enrolled in Medicaid.

A number of Republican governors believe they have struck upon a solution to both problems: improve quality by giving recipients more choices, and control costs by giving recipients a share of the savings.

They propose to give Medicaid recipients a voucher to purchase a health plan of their choice and/or to deposit money into an HSA for the recipients to manage. The idea is that insurers and providers will be more responsive to customers who can shop around, and recipients will help contain costs if they can keep whatever is left over in their HSA.

These approaches have an undeniable appeal to those who prefer the private sector to public programs. Thus they have attracted the support of Republican governors such as Jeb Bush (Fla.), Mark Sanford (S.C.), and Bill Owens (Colo.), as well as any number of market-oriented health policy groups.

Personally, I support HSAs and believe they should be expanded in the private sector. But that does not mean that they or vouchers are the solution to Medicaid’s problems. If we look at all the costs Medicaid imposes on society, it becomes clear that vouchers and HSAs could make Medicaid’s problems worse.

The key point is that Medicaid is a welfare program. Like all welfare programs, it encourages dependence and discourages self-reliance.

Nowadays, everyone understands that a welfare check can trap people in poverty by discouraging work, saving, etc. That’s why Congress reformed welfare in 1996. Yet Medicaid provides average benefits twice as valuable as those available under that reformed federal cash assistance program – and to 10 times as many recipients. It’s no wonder that scholars have found Medicaid also increases dependence and discourages self-reliance.

Which is why HSAs and vouchers spell trouble for Medicaid. Though they may improve the quality of care, they would do so at the cost of greater dependence and higher taxes.

Only two-thirds of Medicaid-eligible individuals are actually enrolled at a given time. With HSAs and vouchers making Medicaid benefits more attractive, we can expect something closer to full enrollment (read: higher taxes). Once enrolled, recipients will be even less eager to give up those now-more-valuable benefits (read: more dependence).

And what happens when seriously ill Medicaid patients face gaps in coverage after they have depleted their HSAs? Given the politics of health care, it is likely that states will cover those expenses too, which would make any budgetary savings evaporate.

There is a better solution, but it involves more political courage than making Medicaid benefits more attractive. There are credible indications that a sizable chunk of Medicaid enrollees do not belong there, including many who substitute Medicaid for private coverage or who feign poverty so that Medicaid will pay for their nursing home care.

Medicaid does not exist for these people. States should rededicate the program to the truly needy by disenrolling those recipients most likely to land on their feet. Ironically, that may actually increase overall coverage, as it did for non-citizen immigrants when Congress blocked them from the Medicaid rolls in 1996. Some states, led by Democratic Gov. Phil Bredesen (Tenn.), are taking this road, but they need more help.

Congress could provide that help by reforming Medicaid as it reformed welfare in 1996: cap federal funding, but give states broad flexibility to target the truly needy and reduce dependence. Doing that would reduce the overall cost of Medicaid, as it did for that other type of welfare.

Michael F. Cannon is director of health policy studies at the Cato Institute, and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (Cato Institute, forthcoming).