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No. 548

August 18, 2005

Routing

Medicaid's Unseen Costs

by Michael F. Cannon

Executive Summary

ing self-sufficiency and encouraging dependence

Medicaid occupies a special place among gov-

among beneficiaries. Medicaid also imposes costs

ernment programs for the poor. Public support

that stem from overuse of medical care, increasing

for Medicaid is broader and deeper than for

costs for private payers, and giving patients poorer-

other safety net programs because the conse-

quality care than they could obtain with private

quences of inadequate medical care can be much

coverage.

more immediate and severe than those of a lack

As it did with federal cash assistance, Congress

of money or even food.

should: (1) cap federal Medicaid spending, (2)

That may be one reason voters have hereto-

block grant federal funds to the states, and (3)

fore accepted the rapidly growing tax burden

allow states full flexibility to define eligibility and

Medicaid imposes. Medicaid is now larger than

benefits under their Medicaid programs. States

Medicare (the federal health program for the

should use that flexibility to target Medicaid assis-

elderly and disabled) and is the single largest

tance to the truly needy, reduce dependence,

item in state budgets, even larger than elemen-

reduce crowd-out of private effort, and promote

tary and secondary education.

competitive private markets for medical care and

To curb this growing financial burden, states

insurance. That means withdrawing assistance

(led by Tennessee) are dropping hundreds of thou-

from those who are most able to obtain coverage

sands of eligible individuals from their programs.

elsewhere and deregulating health care and health

Congress has resolved to reduce federal Medicaid

insurance markets so they can meet that need.

spending by nearly 1 percent over the coming five

Providing efficient medical care to the poor

years and has created a commission to recommend

without fostering dependence is a delicate bal-

short-term savings and long-term structural

ancing act, and many of the costs incurred by

reforms.

getting it wrong don't get a line item in the fed-

Yet Medicaid imposes additional hidden costs.

eral budget. Reforming Medicaid along the lines

Like all means-tested government programs,

of the 1996 welfare law would allow the states to

Medicaid discourages work and charitable effort

strike a better balance for all involved.

among the taxpayers who fund it, while discourag-

_____________________________________________________________________________________________________

Michael F. Cannon is director of health policy studies at the Cato Institute. This study is adapted from his upcoming

book, Healthy Competition: What's Holding Back Health Care, and How to Free It (Cato Institute,

2005), coauthored with Michael D. Tanner.