Commentary

Medicaid Encourages Dependency

In the 40 years since it was created to provide medical care to the needy, Medicaid has metastasized beyond this narrow purpose.

According to the National Association of State Budget Officers, in 2004 Medicaid surpassed elementary and secondary education as the largest item in state budgets, consuming an estimated $309 billion of tax revenue.

This would be less of a problem but for the significant portion of its budget that provides coverage to those who could obtain it elsewhere.

The problem is not merely [or even principally] fiscal. Like other components of the old welfare system, Medicaid harms many it purports to help by lulling them into dependency. And it constantly draws more Americans toward dependency through an ever-increasing tax burden and higher health-care costs.

For the sake of the truly needy and everyone else, Congress and the states should pare this behemoth down to a flexible program focused solely on those who cannot help themselves.

The Left’s predictable response presents only a minor obstacle to reform.

The real obstacles to reform are Republicans who are willing to accept the status quo. Medicaid operates much like other components of the old welfare system, notably the now-repealed Aid to Families with Dependent Children cash-assistance program.

In each program, Congress created: a legal entitlement to benefits for anyone who meets the eligibility criteria; a scheme where the more money a state spends, the more it receives from Washington; and centralized control over how states run their programs.

Each feature creates perverse incentives that increase Medicaid spending, overall health-care costs, and dependency on government. Medicaid typically offers services to beneficiaries free of charge, which creates the program’s first perverse incentive: encouraging beneficiaries to consume medical care without regard to cost.

Requiring the truly destitute to contribute to the cost of their care is of course impossible, not to mention undesirable. Yet allowing 50 million Americans to consume care as if it were free brings its own raft of undesirable consequences.

Though few data exist for Medicaid, leading researchers at Dartmouth College estimate that 20 percent of Medicare expenditures purchase care that provides no clinical value.

Medicaid’s second perverse incentive is that it discourages private efforts that provide for those who are eligible. Anyone who meets federal eligibility criteria [regarding age, income, assets, etc.], or a particular state’s broadened criteria, is entitled to benefits, which encourages many to enroll even when they could obtain care and coverage elsewhere.

Researchers at the Robert Wood Johnson Foundation surveyed 22 leading studies on whether “free” government coverage crowds out privat

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 (2005).