Transitioning Medicaid from an unlimited entitlement program to limited block grants could save U.S. taxpayers more than $100 billion, or $803 per household, over the next five years, according to a study from the healthcare innovation research company Avalere.
Block grants of fixed amounts to states would save $150 billion by 2022, the February analysis found. A per-capita block grant, which would increase or decrease with enrollment, would cut federal spending by $110 billion.
In December 2016, the Congressional Budget Office (CBO) estimated block grants would reduce federal Medicaid expenditures by $709 billion between 2019 and 2026 and per-capita block grants would save between $393 billion and $598 billion over the same period.
The American Health Care Act, an Obamacare replacement bill for which House Republicans failed to recruit adequate support, would have converted Medicaid to per-capita block grants. The change would have reduced federal Medicaid outlays by $880 billion by 2026, or $7,063 per household, CBO estimated in a report released on March 13.
Medicaid Expansion Costs
Dr. Robert Graboyes, a senior research fellow at the Mercatus Center at George Mason University and author of Fortress and Frontier in American Health Care, says Obamacare increased the financial burden Medicaid places on states.
“Medicaid is a joint federal-state endeavor, and it is likely the biggest fiscal threat to state governments,” Graboyes said. “Medicaid enrollment has risen rapidly since the passage of the Affordable Care Act.”
Federal taxpayers pay 90–100 percent of the costs of enrollees made newly eligible by their state’s Medicaid expansion under ACA. States remain responsible for a greater share of the costs of new enrollees who were eligible before Medicaid expansion.
Obamacare is effectively an advertisement urging previously eligible enrollees to sign up for Medicaid, increasing costs for states, Graboyes says.
“Originally, that rise was expected to result directly from the law, in which case the bulk of the increase would have fallen on the federal government,” Graboyes said. “More recent evidence, however, indicates that a large percentage of the increase was via the ‘woodwork effect.’ The ACA motivated people who were eligible for Medicaid before the ACA to sign up.”
Runaway Medicaid Spending
Medicaid spending spiked during the Obama presidency, rising from $373.9 billion in 2009 to $545.1 billion in 2015, according to the Centers for Medicare and Medicaid Services (CMS). Medicaid costs will increase by 6 percent each year from 2018 to 2020, CMS forecasts. Medicaid expenditures have grown faster than the country’s gross domestic product and faster than overall national health expenditures, during the first decade of the twenty-first century, according to a 2011 report from the Henry J. Kaiser Family Foundation.
Peter Ferrara, a senior fellow for entitlement and budget policy at The Heartland Institute, which publishes Health Care News, says capping federal Medicaid expenditures with block grants would remove the perverse incentive Obamacare gave states to increase their Medicaid enrollment and costs.
“Medicaid should be sent back to the states through block grants in the same way Aid to Families with Dependent Children [now Temporary Assistance for Needy Families], was in 1996, to enormous success,” Ferrara said. “Before the block grants, federal assistance to the states was based on a matching federal financing formula: The more the states spent on AFDC, the more federal funds were sent to the states. It was effectively like the feds paying the states to spend more on welfare.”
The 1996 welfare reforms prove capping entitlement expenditures with block grants motivates states to run more efficient programs, Ferrara says.
“Under the fixed, federal block grant reforms states that increased federal spending more had to pay for the increased federal spending out of their own pockets,” Ferrara said. “But states that spent less, or grew their spending on the program more slowly, were free under the fixed, finite block grants to keep the savings. That reversed the incentives.”
Try, Try Again
Congressional Republicans approved a plan to transition Medicaid to fixed-amount block grants in December 1995, but President Bill Clinton vetoed the bill, saying he favored a per-capita block grant. Neither provision was incorporated in the bill Clinton signed.
Ferrara says block grants would give the poor better care while reducing the federal budget and regulation.
“States pay so little to doctors and hospitals serving the poor that the poor, under Medicaid, face grave difficulty finding timely and effective health care,” Ferrara said. “In one case, a boy in Maryland died of a toothache when the infection of his tooth spread to his brain before his mother could find suitable health care to save his life.”
Devolution to States
Disentangling the federal government from managing state Medicaid programs would unleash innovation and patient choice, Ferrara says.
“States can provide more assured health care for the poor with greater control over Medicaid,” Ferrara said. “They could allow the poor to choose private health insurance vouchers, which would help them purchase the same health insurance as the middle class. Medicaid block grants would greatly benefit the poor while saving substantial sums for taxpayers, another win-win result.”
Graboyes says successful Medicaid reform will require state legislators to use block grants effectively.
“Shifting decision-making to the state makes sense,” Graboyes said. “States can immediately impact the supply of health care resources, without federal approval, via changes to professional licensure, non-physician scope of practice, hospital certificate of need, telemedicine, direct primary care, taxation, corporate practice of medicine rules, and so forth. States—red and blue—have not been great on these issues.”
By Ben Johnson
This article was published as part of a co-operative venture with The Heartland Institute, a free-market think tank and national nonprofit research and education organization based in Arlington Heights, Illinois. Its mission is to discover, develop, and promote free-market solutions to social and economic problems.