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STATEMENT of

Jenifer Zeigler
Welfare Policy Analyst
Cato Institute

before the

Missouri Medicaid Reform Commission of the Missouri General Assembly

June 28, 2005

My name is Jenifer Zeigler and I am a welfare policy analyst at the Cato Institute in Washington, DC, a libertarian organization committed to limited government and free markets. I am testifying today because I study means-tested entitlement programs, and Medicaid represents half of the federal, state, and local spending on means-tested programs.1 Additionally, I have focused much of my research on welfare reform and the resulting Temporary Assistance for Needy Families program (the traditional cash assistance program), which provides an important comparison and relevant model for the Medicaid reform debate. Finally, I am a former and potentially future Missouri resident. Therefore, I am extremely interested in seeing Missouri succeed in fixing its health care system.

As I mentioned, the Medicaid crisis mirrors welfare reform in many ways. They share the same history, the same structure, the same effects on society, and the same solutions:

1) The Same History

Forty years ago, President Johnson declared his War on Poverty. What followed were decades of expanded social programs and an increase in dependency on those programs. As history has shown time and time again, when the government tries to "do good" there are always unintended consequences. In the case of entitlement programs, the consequence was dependency. People began to make lifestyle choices influenced by available assistance. Our society saw an increase in the type of lifestyle government was subsidizing: namely, single, impoverished motherhood.

By the 1990s, welfare caseloads and out-of-wedlock births were at historic highs2, and the federal government showed no signs of bringing the situation under control. Thus, states took matters into their own hands by applying for waivers to allow for flexibility in administrative and funding decisions. States realized that they could better serve their needy population by directing aid on a more local level, and by implementing programs that encourage personal responsibility with a goal of self-sufficiency.

We are seeing the same situation with Medicaid. Spending is out of control, surpassing elementary and secondary education as the largest line item in state budgets.3 States need, once again, to take matters into their own hands and begin reforming their Medicaid programs. Tennessee, Florida, and South Carolina have already moved in that direction, and Missouri needs to be a part of this pioneering class.

It is important to understand that this is not a funding issue or even an administrative issue-it is an ideological issue.Don't let this become a debate about funding. Many people are going to testify over the next several months about why their funding must be protected. Everyone is demanding his share of the pie, and it is tempting to resort to lobbying the federal government for a bigger pie. But fixing what you have is NOT an option. Missouri's Medicaid program cannot be mended or "tweaked." It must be completely restructured from the ground up, approaching the delivery of health care to the poor from an entirely different direction. I admire the General Assembly and the Missouri Medicaid Reform Commission for accepting this enormous challenge and taking the initial steps to completely restructure the system.

2) Same Structure

Entitlement
Means-tested government aid is often considered an entitlement, meaning that it is given the status of a property right and bears the same due process obligations. Prior to welfare reform, TANF's cash assistance predecessor (Aid to Families with Dependent Children) was an entitlement and therefore lacked the flexibility to be limited or sanctioned. Anyone who met the income qualification received the benefit, just as with Medicaid today.

Rewarding Higher Caseloads/Spending
Another similarity between the old welfare program and the current Medicaid structure is the contradictory funding scheme. The more a state participates (i.e., greater welfare caseloads or more Medicaid spending), the more it receives from the federal government. There was no incentive to curb the size of either program. This negative incentive is even more prevalent with Medicaid, because the federal match rate means that, on average, states only pick up 43 percent of the Medicaid tab.4 So if a state spends a dollar on Medicaid, the federal government will match it with $1.30. Thus, for every dollar states spend on Medicaid, they receive $2.30 in benefits. This has caused an expansion of the program beyond its original intent of helping those with no other means of acquiring health care. The Urban Institute, a left-of-center policy organization, found 21 percent of adults and 27 percent of children who qualified for Medicaid had private insurance. Almost a quarter of Medicaid-eligible recipients actually had private coverage.5 Clearly the safety net has been cast too wide.

Federal Control
And with all of that federal money comes federal control. While many of the causes of poverty are state-specific, the solutions are too often prescribed from DC-and one big, federal Band-Aid does not cover all of the regional issues or provide for greater accountability. It was not until welfare reform's block grant funding and the removal of its legal entitlement that states had the flexibility in funding and administration to significantly reduce caseloads.

3) Same Effects

Discourages Work/Creates Dependency
When the government offers a benefit contingent on a certain pattern of behavior, a portion of society responds by behaving in that manner. When a program pays benefits to the unemployed, it provides an incentive to remain unemployed. Government-sponsored assistance discourages work and creates dependency. It happened with welfare, and it is happening with Medicaid.

Cliff Effect
As low-income families climb their way out of poverty, they experience a "cliff effect." As an individual increases her income, she suddenly reaches a sharp drop-off point where she is no longer eligible for a majority of government assistance. There is a point when the cash value of the welfare benefits that she loses exceeds her increase in income, and if that difference is significant, it is tempting to hover at an income level just at the edge of that cliff. The only way to overcome such a cliff effect is to make a large enough jump in wage to meet or exceed the aggregate loss of benefits.

Along the same line as the "cliff effect" is welfare's discouraging affect on asset building among the poor. Just as families know how much they can earn before losing benefits, they also know how little little they can own to qualify for assistance. Thus, families are hesitant to accrue wealth or put a lot in savings, because it represents that much more "wealth" they have to spend down to qualify for benefits they may need in the future. If a family is near the poverty line, it is very discouraging to struggle to escape poverty only to end up back where they started due to some life event (such as a divorce, job loss, medical emergency, etc.). Many ask why they should work so hard to save up for goods, such as a reliable automobile, when they are just going to have to sell it off during their next period of hardship so that their assets do not exceed the means-test for assistance? Eventually, savings and investment is replaced by consumption, completely frustrating any possibility of self-sufficiency.

Crowd-Out
When the government begins to deliver a service, it crowds-out private-sector alternatives. When this nation had a minimal government safety net, civil society used to provide the bulk of social services. Historian David Beito documents the role of fraternal organizations and mutual aid societies in our country's early years. By 1920, 1 in 3 males was a member of such an organization.6 These entities provided a type of social insurance, and sometimes health care, against unexpected periods of hardship and need. However, as the government expanded its safety net, civil society responded to the shrinking demand by reducing its role in serving the poor.

Not only has the government crowded out charitable and low-income health care assistance by the non profit sector, it has also encroached onto the private sector. The Robert Wood Johnson Foundation reviewed the conclusions of 22 leading studies on the issue and reported that more than half the studies found expansion of public coverage was accompanied by reduction in private coverage.7

In the specific area of health care, private employers have little incentive to provide coverage to low-income workers. If an employee at a certain paygrade will automatically qualify for Medicaid, why would an employer offer expensive health insurance on his own? The employee often doesn't care where the health care coverage comes from, as long as he is covered. A practical example of this dynamic is found in a recent study by George Borjas, an economist at Harvard. He wanted to analyze what happened to the immigrant population when they were denied government benefits. The 1996 welfare reform created a five-year moratorium on TANF benefits for all new immigrants. In many states, Medicaid eligibility is tied to TANF eligibility, thereby denying government-funded health care as well. So what happened? Insurance coverage of immigrants increased. When forced to find coverage in the private sector, workers sought employment that provided for health care. Private insurance more than made up for the loss in government benefits.8

Over-Utilization
Another common byproduct of government services, such as welfare and Medicaid, is overuse. When someone places little or no value on a good or service, she will use more of it than necessary. In fact, a recipient cannot see any reason not to overuse a benefit. If an individual qualifies for cash assistance, the instinct is to take and use all that she can. There doesn't appear to be a cost associated with the welfare check, it just comes from "somewhere in Washington." Plus, if she qualifies for the benefit, she is entitled to it, right? So she will use the benefit as long as it is worth more to her than the effort it takes to go down to the welfare office.

This problem is exacerbated with Medicaid. Health care costs have skyrocketed, and it can be debated whether the overuse of health care services (enabled by Medicaid and Medicare) has caused the increase, or whether the increased costs caused greater dependency on Medicaid and Medicare, resulting in overconsumption. It is "the-chicken-or-the-egg" argument. Either way, it is certain that the cycle will continue until health care is eventually tied back to the free market. Until the price of a service reflects the value recipients place on it, health care costs will remain skewed.

To emphasize the problem of overuse, a RAND Health Insurance Group study found removing price-sensitivity induces patients to consume more medical care by as much as 43 percent.9 A study by Dartmouth faculty estimated that 20 percent of Medicare expenditures were excess use of health care, providing no benefit to the recipient.10

This overconsumption is coupled with the government's below-market reimbursement for services. The government decides what a health care service should cost, and then reimburses at that rate-no matter the actual cost to the physician or what other patients pay. Medicare notoriously sets its rates below market, and by 1998 Medicaid was only reimbursing around 62 percent of the Medicare rate.11

Cost Shifting
So what happens when an excessive number of participants are overusing services at below-market rates? Cost shifting occurs. Doctors are forced to pass along the costs to someone else. A study by Yale University and the University of Maryland found Medicaid causes an increased price of non-Medicaid Rx by 13.3 percent (meaning out of $1000 of privately-paid medication, $110 is because of cost shifting resulting from Medicaid).12

Effect on Nonrecipients
When the government casts too broad a safety net, the only way to pay for all of the government welfare is an increase in taxes. However, such a tax increase could disproportionately harm those it is supposed to help. The temptation of government assistance and the aforementioned cliff effect of welfare benefits can discourage self-help among the working poor. Additionally, the working poor are already near the tipping point, sitting precariously close to the poverty line. A higher tax burden could be what actually pushes a family into poverty. And if the tax increase is on the state level, it is likely in the form of an increased sales tax (one-third of state revenue)13, which disproportionately burdens the poor.

4.) Same Solution?

Welfare and Medicaid share similar histories, structures, and negative effects. Do they share the same solutions? Yes. Following in the steps of welfare reform, state Medicaid programs would benefit from federal waivers, block grants, devolution, and ending the legal entitlement. States need to continue in the waiver tradition. Obviously, the federal-sized Band-Aid is not working, so states need to begin innovating and trying new solutions to the health care system failures. As a state, you need to push for block grant funding from the federal government, allowing you the flexibility to spend health care money in the manner that most directly helps the uninsured obtain health care. Devolving administration to the state level and ending the legal entitlement to Medicaid will allow Missouri's ingenuity to prevail and true program changes to occur.

Medicaid serves three very different groups, and each category of beneficiary needs a different set of health care options. In brief, Medicaid serves the nonelderly poor, the disabled, and long-term care patients/elderly. The nonelderly poor are the largest group when comparing participants (75 percent of the caseload) but consume only 30 percent of Medicaid spending.14 This group could greatly benefit from Health Savings Accounts, which states such as Florida and South Carolina have begun to try. HSAs return market effects to health care, because benefits deposited into an account mean the account-holder will make economical decisions: instead of calling an ambulance to take him to a doctor's appointment, he'll call a cab; instead of heading to the doctor at the first sniffle during allergy season, he'll take an antihistamine and see if he feels better. HSAs follow the principle of an ownership society-when someone has an ownership interest in a good, he takes better care of that property.

The disabled have a different set of medical needs and would be well-served by flexibility, including alternative coverage and treatment options. For example, some states require institutionalized care, when minor adjustments to a recipient's home coupled with in-home assistance would be cheaper and provide a great quality of life.

The elderly and long-term care recipients represent, by far, the highest level of consumption of health care services. Although they are only 25 percent of participants, they represent 70 percent of the spending.15 And until we, as a nation, tackle the problem of long-term care, there is little relief in sight. Presently, there are massive exemptions in determining Medicaid eligibility, such as a home and all contiguous property exemptions, and a business exemption including capital and cash flow.16 Thus, very wealthy individuals are qualifying for a program that is meant to serve those without the means for health care. Additionally, we lack a robust market for private and long-term care insurance that would allow individuals to prepare for potentially expensive, long-term care. Unfortunately, as long as Medicaid remains the permanent safety net for those who spend down or disperse their assets and exhaust Medicare options, there will be no personal responsibility in the area of long-term health care planning. A study by the University of Illinois and the National Bureau of Economic Research found that Medicaid discourages 66 percent to 90 percent of seniors from purchasing long-term health care insurance.17 Just as our society promotes life insurance in case you die too early, markets need to be just as vigorous with annuities and long-term health care insurance in case you live "too long."

It is impossible to solve the problems of health care delivery to the poor when our health care system remains so flawed. Health care must be returned to the market as government regulation will only continue to distort prices, delivery, and quality of care. For the public majority, replacing traditional, comprehensive insurance policies with HSAs would return market influences to the industry and encourage account-holders to become informed health care consumers. Deregulation of the insurance industry would provide a variety of insurance alternatives with varying degrees of prices and coverage, creating health insurance options for low-income families. Finally, we must advocate on the national level an overall shift away from employer-based and government-sponsored health insurance (a reduction in third party payers), which would remove the greatest degree of distortion in the health care market. As consumers become informed and make decisions based on value and quality of service, health care will become more efficient and affordable, thereby reducing the need for programs like Medicaid.

Needless to say, the Missouri Medicaid Reform Commission has a substantial task ahead. Yet you have a unique opportunity to lay the groundwork and provide a model for the Medicaid reform that is so desperately needed among other states and on the national level. Do not let the naysayers call the shots; rather, remember all of the critics of welfare reform that were proven wrong by its success. If Missouri focuses on the similarities between Medicaid and welfare reform, and has the courage to make the tough changes, then these programs will share an additional similarity-success.18

Endnotes

1. Author's calculations, based on CRS RL32233, "Cash and Noncash Benefits for Persons with Limited Income: Eligibility Rules, Recipient and Expenditure Data, FY2000-FY2002," (November 25, 2003).

2. At the peak year, 1994, the birth rate for unmarried women aged 15-44 was 46.9 per 1,000 unmarried women aged 15-44 years women. Joyce A. Martin, Brady E. Hamilton, and Stephanie J. Ventura, "Births: Preliminary Data for 2000." National Vital Statistics Report, Vol. 49, No. 5, (July 24, 2001).

3. National Governors Association and National Association of State Budget Officers, "Fiscal Survey of the States," June 2005, p. 1.

4. Kaiser Commission on Medicaid and the Uninsured, "The Medicaid Program at a Glance: Key Facts," January 2005, p. 1.

5. Amy J. Davidoff, Bowen Garrett, and Alshadye Yemane, "Medicaid- Eligible Adults Who are not Enrolled: Who Are They and Do They Get the Care They Need?" Urban Institute Policy Brief, series A, no. A-84, October 1, 2001, p. 2; and Amy J. Davidoff, Bowen Garrett, and Matthew Shirmer, "Children Eligible for Medicaid but Not Enrolled: How Great a Policy Concern?" Urban Institute Policy Brief, series A, no. A-41, September 1, 2000, pp. 1-2.

6. David T. Beito, From Mutual Aid to Welfare State: Fraternal Societies and Social Services, 1890-1967 (Chapel Hill: University of North Carolina Press, 2000), p. 2.

7. Gestur Davidson et al., "Public program crowd-out of private coverage: what are the Issues?" Robert Wood Johnson Foundation Research Synthesis Report no. 5 June 2004.

8. George J. Borjas, "Welfare Reform, Labor Supply, and Health Insurance in the Immigrant Population," Journal of Health Economics 22, no. 6, (November 2003): 956-57.

9. Cannon, Michael F. and Michael O. Tanner, Healthy Competition: What's Holding Back Health Care and How to Free It (Washington, Cato 2005) p. 53, based on Joseph P. Newhouse and the Insurance Experiment Group, Free for All? Lessons from the RAND Health Insurance Experiment (Cambridge, MA: Harvard University Press, 1996), pp., 338- 39.

10. Jonathan Skinner, Elliott S. Fisher, and John E. Wennberg, "The Efficiency of Medicare," NBER Working Paper no. 8395, Cambridge, MA: National Bureau of Economic Research, 2001.

11. Stephen Zuckerman, Joshua McFeeters, Peter Cunningham, and Len Nichols, "Changes In Medicaid Physician Fees, 1998-2003: Implications for Physician Participation," Health Affairs Web Exclusive, June 23, 2004, p. W40374.

12. Mark Duggan and Fiona Scott Morton, "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Paper no. 10930, November 2004, p. 5.

13. U.S. Census Bureau, "State and Local Government Finances, 2002 Census of Governments."

14. Expenditure distribution based spending only on services and excludes DSH, supplemental provider payments, vaccines for children, administration. Health Management Associates estimates based on CBO Medicaid Baseline, March 2005.

15. Ibid.

16. Stephen A. Moses, "How to Save Medicaid $20 Billion per Year and Improve the Program in the Process," Center for Long-Term Care Financing, January 5, 2005, p. 2.

17. Jeffrey R. Brown and Amy Finkelstein, "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," NBER Working Paper no. 10989, December 2004, p. 1.

18. For more information on specific reforms, I encourage you to visit Cato's website and review our own work on health policy studies.