The Magazine

Medicaid Needs Surgery

From the February 14 / February 21, 2005 issue: And Jeb Bush's Florida shows how to do it.

Feb 14, 2005, Vol. 10, No. 21 • By DAVID GRATZER
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"YOU DON'T PULL FEEDING tubes from people," exclaims a governor, objecting to Medicaid changes floated by the White House. At a December press conference, he continues: "You don't pull the wheelchair out from under the child with muscular dystrophy."

The Bush administration is considering giving states more flexibility to administer the federal-state health insurance program for the needy, with a tradeoff: Washington would cap its contribution in the form of a block grant. "I think it would be a mistake to go down that road," explains a senator. Another governor opposes the idea "in any form."

Health care issues are often divisive, but here's the surprise: All of the above quotations are from Republicans. Governor Mike Huckabee of Arkansas worries about feeding tubes and wheelchairs; Senator Olympia Snowe of Maine warns the administration against change. And the anti-spending-cap governor? Mike Leavitt made the comments when serving in Utah a few years ago--and now he's the secretary of health and human services.

With budget negotiations set to begin, Medicaid will almost surely be a major issue. Facing a large deficit, the administration is eager to find areas to cut--and budget sanity dictates that something be done with the 40-year-old program. But Medicaid needs more than a face-lift, and without careful thought the administration may miss a golden opportunity.

Medicaid was created as an afterthought. Wilbur Mills, then chairman of the House Ways and Means Committee, added provisions for the program to his 1965 Medicare bill, the legislation that launched the national health-insurance program for all seniors. For decades, Medicaid was the poorer, smaller cousin of Medicare, covering only people on some form of welfare. But Congress loosened the eligibility requirements in 1986, and Medicaid started to grow.

Medicaid spending today bests $300 billion a year, up more than 50 percent in the past five years. Its total budget is larger than Medicare's, and it affects more Americans--some 50 million. Unless Medicaid is changed, the Congressional Budget Office projects it will cost nearly $600 billion a year by 2012.

If Washington frets about Medicaid spending, so do politicians in the states. New York's Republican governor, George Pataki, recently called for $1.1 billion in cuts to the program. His counterpart in Ohio, Bob Taft, gave a speech entitled "Medicaid: The Monster in the Middle of the Road." He's not joking--nationally, state spending on Medicaid exceeds state spending on K-12 education.

With so much political angst, great innovation would seem near. And yet, as we begin the most important political discussions about the program in its 40-year history, the prospects for significant change seem limited. In budget negotiations, the administration is likely to propose a cap on federal spending--exactly as it did a couple of years ago. Between state opposition and a lack of congressional enthusiasm for reform, Medicaid will probably remain unchanged.

Why the deadlock? The basic problem with Medicaid is that Washington foots the bulk of the bill, yet most of the administrative decisions are made at the state level. For poorer states, like Mississippi, 77 cents of every dollar spent comes from federal coffers; for wealthier states, it's closer to 50 cents. Overall, roughly 57 percent of Medicaid's budget is from Washington.

Thus, historically, expanding Medicaid has been a good deal for the states. For every three dollars' worth of new service they've provided their residents, Washington has picked up two. In the 1980s and '90s, states dramatically expanded the program's scope--and did so largely on Washington's dime.

Take Howard Dean's Vermont. The former presidential candidate expanded eligibility when serving as governor, allowing families with incomes up to $51,000 to qualify for some Medicaid benefits. He would have gone further--his office approached the Clinton administration about additional expansions, but the request was denied. Under Dean, Medicaid rolls doubled to include roughly 20 percent of Vermonters. Today, Vermont's Medicaid enrollment exceeds that of nearly every other state. By comparison, neighboring New Hampshire is last.

Yet Vermont is not exceptional. Tennessee embarked on a massive Medicaid expansion in 1994, sold as a "cost savings." Despite various reforms and restrictions, 1.3 million of Tennessee's 5.8 million citizens are still on the rolls, and TennCare consumes a third of the state budget. (Further reforms are tied up in federal court.) Over in New York, after years of activism under Cuomo and abdication under Pataki, the Empire State now spends more on Medicaid than Texas and California combined.