States Should Opt Out of Medicaid — All The Way Out

With over a dozen conservative states leaning against expanding Medicaid to cover poor workers without health insurance, perhaps it is time to resuscitate an idea embraced by President Ronald Reagan. Let the federal government take over Medicaid lock, stock and barrel.

In 1982 the president who ushered in the modern conservative era offered to assume federal responsibility for the program that now consumes over 22 percent of state government budgets in exchange for states taking over welfare. His offer built on a series of recommendations going back to 1969 by the U.S. Advisory Commission on Intergovernmental Relations, which called for a federal takeover of all public assistance programs.

President Obama’s health care reform law, if it survives the final hurdle of next November’s election, could give that idea new life. Under the Affordable Care Act, states are responsible for creating insurance exchanges where individuals and businesses can buy individual or group health plans.

Anyone not on Medicaid but earning more than 133 percent of the federal poverty level will be required to purchase a plan or pay a small tax.

People who work at jobs that don’t provide coverage but earn less than 133 percent of the poverty line will be eligible for fully subsidized coverage under an expanded Medicaid, with the federal government picking up 100 percent of the tab in the first two years and 90 percent thereafter. State spending of $21 billion between 2014 and 2019 on these newly eligible Medicaid beneficiaries will be dwarfed by the $444 billion picked up by the federal government, a study by the Kaiser Commission on Medicaid and the Uninsured showed.

In states that opt out, though, these low-income workers will be in limbo – the only people in the U.S. without access to affordable coverage. Since virtually all of the cost of providing them with insurance is already included in the reform law, why not cut out the middleman and let the federal government subsidize them directly?

The federal government could give eligible people vouchers to buy insurance on the state-based exchanges, which would still give the states the final say-so over the shape of the plans as long as they meet the minimal criteria established by the ACA. The Medicaid options would also include joining the private sector managed care plans that already insure more than half the Medicaid recipients in the 48 states that have turned to private insurers to help manage their programs.

But why stop there? State and local governments already picked up $131.9 billion of the $401.4 billion spent on the nation’s 67 million Medicaid beneficiaries in 2010. That money comes largely from state sales and income taxes.

Since the states that want to opt out believe that adding another 16 million low-wage workers and their families to the rolls will eventually drive taxes higher, why not relieve them of the entire burden? The federal government would have to raise taxes, of course, but individuals and families would get tax relief at the state level.

Given the likelihood of a  sweeping federal tax overhaul next year, a Medicaid switch could be built into the reform package. The federal government in collaboration with the states could replace regressive state sales taxes that are getting more difficult to collect because of Internet retail sales with a restructured and fairer federal income tax with far fewer tax expenditures and loopholes.

The federal government could then use the money to subsidize all people on Medicaid when they shop for health insurance plans just like anyone else who goes to the exchanges. “That is the vision – a single point of entry to the insurance system with a subsidy program for all those that need it,” said Sara Rosenbaum, a professor of health law and policy at George Washington University. “What if we completely federalized the non-disabled population under 65? Let them all get federal subsidies if they need it and be done with it.”

The idea would open numerous cans of worms, however. Many states – often the same ones that oppose the Medicaid expansion – insure a relatively low proportion of their Medicaid-eligible residents by doing a poor job of outreach. Advocates sometimes accuse these states of deliberately trying to hold down their own costs at the expense of the poor.

A federalized Medicaid program that successfully reached into all corners of the country like Medicare would come much closer to providing universal coverage than what even Obamacare contemplates. But it would cost a lot more, too.

Medicaid providers are also severely underpaid in most parts of the country, often receiving as little as two-thirds of the fees paid by private insurers. Some of those costs are picked up by taxpayers, who support safety net like hospitals and clinics to serve the poor on Medicaid. The rest is picked up by privately-insured patients, whose costs are inflated to make up for underpayment by public sector programs. Paying the full cost of services for the Medicaid recipients who purchase their policies on the exchanges would require some form of oversight of  Medicaid providers to ensure the increased taxpayer burden was passed along to private employers in the form of  reduced premiums and not turn into a windfall.

Then there’s the problem of politics. A federalized Medicaid flies in the face of modern conservatism’s push for states’ rights and a limited federal presence in daily life. It also relies on private insurance companies and delivery system reforms to hold down health care costs, just as Obamacare does for Medicare. And  it would probably be anathema to budget hawks, who want to cap government contributions to entitlement program and move people into defined contribution plans. In health care, that means placing the ultimate financial risk for rising costs on individuals and their families.

Clearly the obstacles to federalizing Medicaid are formidable. But if a number of states opt out of expanding the program, it could become the liberal rejoinder. No more Medicaid match? It might be the offer that even the most conservative governor couldn’t refuse.

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect, The Washington Post and The Fiscal Times. You can read more pieces by him at GoozNews.

3 replies »

  1. haha, you seem to have read an awful lot into that one little statement by MD as Hell. i’m sure the motive is more of a “self-reliance” mentality rather than an insensitive total lack of care.

    for example, i have a conservative(religious) friend that believes in free markets and against redistribution, but he is more generous to charities that help the poor than my more progressive friends.

    but i understand that the statement is a vast generalization and not accurate to describe our current civilization and role of govt.

  2. Government never does simply take money from one person and give to another “MD as HELL” in the complex civilization and economy of the year 2012 in the United States. Even if you got what I logically conclude would be your wish and all the poor people were locked out of the hospitals and left to die in the streets, somebody would have to dispose of their dead bodies. Oh hold on! I’m sure the private sector would figure that out — collecting the growing number of dead human beings, selling their parts for various medical solutions, and turning remaining fat into soap, etc. Nevermind.

  3. Government should never take money from one person and simply give it to another, ever.