Medicaid’s Unseen Costs

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Medicaid occupies a special place among governmentprograms for the poor. Public supportfor Medicaid is broader and deeper than forother safety net programs because the consequencesof inadequate medical care can be muchmore immediate and severe than those of a lackof money or even food.

That may be one reason voters have heretoforeaccepted the rapidly growing tax burdenMedicaid imposes. Medicaid is now larger thanMedicare (the federal health program for theelderly and disabled) and is the single largestitem in state budgets, even larger than elementaryand secondary education.

To curb this growing financial burden, states(led by Tennessee) are dropping hundreds of thousandsof eligible individuals from their programs.Congress has resolved to reduce federal Medicaidspending by nearly 1 percent over the coming fiveyears and has created a commission to recommendshort‐​term savings and long‐​term structuralreforms.

Yet Medicaid imposes additional hidden costs.Like all means‐​tested government programs,Medicaid discourages work and charitable effortamong the taxpayers who fund it, while discouragingself‐​sufficiency and encouraging dependenceamong beneficiaries. Medicaid also imposes coststhat stem from overuse of medical care, increasingcosts for private payers, and giving patients poorerqualitycare than they could obtain with privatecoverage.

As it did with federal cash assistance, Congressshould: (1) cap federal Medicaid spending, (2)block grant federal funds to the states, and (3)allow states full flexibility to define eligibility andbenefits under their Medicaid programs. Statesshould use that flexibility to target Medicaid assistanceto the truly needy, reduce dependence,reduce crowd‐​out of private effort, and promotecompetitive private markets for medical care andinsurance. That means withdrawing assistancefrom those who are most able to obtain coverageelsewhere and deregulating health care and healthinsurance markets so they can meet that need.

Providing efficient medical care to the poorwithout fostering dependence is a delicate balancingact, and many of the costs incurred bygetting it wrong don’t get a line item in the federalbudget. Reforming Medicaid along the linesof the 1996 welfare law would allow the states tostrike a better balance for all involved.

Michael F. Cannon

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.