For states struggling with the burgeoning costs of Medicaid, neither of the 2 likely postelection scenarios is attractive. If Obama is reelected, the Medicaid elements of the Affordable Care Act (ACA) survive the Supreme Court, and Republicans can’t turn back the legislation, an estimated 16 million more Americans will be added to the federal-state program. True, the debt-ridden federal government will cover the additional costs for the first 10 years, but after that the states will face an avalanche of new costs.
On the other hand, congressional Republicans, along with candidate Romney, want to turn Medicaid into a block grant to the states with greater flexibility for state houses to modify the program. That’s a step in the right direction, but it still fails to address Medicaid’s inherent weaknesses. Medicaid’s underlying problem is that it tries to address different populations with quite different needs and doesn’t serve any of them well. It’s time to break up the program and start over.
Medicaid now pays for hospital and physician services to certain households (primarily those with dependent children) headed by an able-bodied but low-income adult, and the ACA sharply increases the number of eligible households by allowing a higher income threshold. But Medicaid also provides services for lower-income disabled Americans who do not qualify for Medicare. And it also pays for nursing home services for elderly low-income individuals.
Rather than a single federal-state program for 3 quite different groups, it would make more sense to transfer the disabled and elderly into a revamped Medicaid program that is run by the states with a federal allotment or block grant and much greater state flexibility. Because health care services for these US patients need to be integrated with a range of government and community-based services at the local level, it makes much more sense for those to be organized at the state and local levels without a plethora of federal rules.
For elderly and disabled individuals, however, the federal role is not to just write a check to the state and wave goodbye. Unlike a “pure” block grant, the right approach for this part of Medicaid would be to combine state flexibility and innovation with federal policies to expand personal freedom, choice, and dignity. Welfare reform in the 1990s combined flexibility with principles based on American values, specifically work requirements for benefits and the goal of independence rather than perpetual welfare. Likewise, Medicaid reform needs to go beyond block grants.
The federal policy role should be 2-fold. First, it should establish general objectives and measurable outcomes for the states—but not micromanage how states seek to achieve results. And second, it should explicitly provide greater choice and empowerment for beneficiaries, encouraging states through additional waivers where necessary to pursue approaches like the Cash & Counseling program for disabled Americans, or the “urban village” movement for the elderly, each of which makes it easier for people to remain in their own homes while reducing program costs.
Households headed by an able-bodied working-age adult require a different approach. Here the need is for regular private health insurance coverage, not Medicaid. So rather than continuing or expanding Medicaid for these Americans, they should be mainstreamed out of government-organized Medicaid and into a system of premium support, where households receive financial assistance to offset part or almost all the cost of private coverage. Instead of low-income working-age households in 1 system (Medicaid) and moderate- and upper-income households in another (private coverage), we can and should have a seamless system for both.
Achieving Medicaid Reform
Two elements are needed to achieve this reform. The first is to phase down and eventually eliminate the tax exclusion for employer-provided insurance, which is a boon to the affluent in high tax brackets but of little help to working households with low incomes, and replace it with a tax credit for people to buy health coverage—in effect, premium support. Some version of that reform has been embraced by many Republicans, such as Sen Tom Coburn (R, Okla) and Rep Paul Ryan (R, Wis), and over the years has been supported by many health analysts aligned with each party. Regrettably, some Republicans continue to embrace the idea of a health insurance deduction for all. It is not clear exactly where Romney will come down on this. But the problem with a deduction is that it would provide little or no help to lower-income households. A credit would give far more help to lower-paid households.
The second element is to “cash out” the federal portion of Medicaid for households with nondisabled working-age adults and their children and turn it into income-adjusted premium support for households that do not pay taxes and thus could not claim a tax credit. Some modest-income working households would be eligible for a small tax credit “topped up” with some premium support assistance. If they chose, states could decide to supplement this assistance.
Medicaid is a classic example of ill-considered mission creep. The program tries to help Americans who are very different in their needs. And its strongest advocates seem to be determined to expand it in all directions, despite its chronic financial and structural problems. It’s time for a serious Medicaid makeover.
About the author: Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.
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