Summary: Below, excerpts from a policy brief written by Greg Anrig Century Foundation vice-president for policy and programs, for the New America Foundation's Next Social Contract Initiative and the Century Foundation. In this paper, Anrig proposes turning Medicaid into a federal program. While this might sound radical, this is in fact not a new idea. As he notes, “In 1969, 1977, and again in 1981, the U.S. Advisory Commission on Intergovernmental Relations, which comprised officials in all levels of government, had recommended that the federal government assume full financial responsibility for all public assistance programs, including Medicaid. The Commission argued that its ideas would greatly improve an intergovernmental system that had grown more pervasive, more intrusive, more unmanageable, more ineffective, more costly and above all, more unaccountable.”
And, in 1982, Ronald Reagan, of all people, “proposed a grand bargain: the federal government would become entirely responsible for financing Medicaid in exchange for giving states responsibility for more than 40 other federal programs, including Aid to Families with Dependent Children – the primary welfare program that President Clinton and Congress would radically reform 14 years later.” The idea never gained traction at the time.
But now, as we expand Medicaid, it makes great sense to revisit the idea. As Anrig points out “One of the fundamental reforms in this year’ s Patient Protection and Affordable Care Act is its commitment to enroll in Medicaid all non-elderly Americans with incomes up to 133 percent of the poverty line. That new national obligation for a program that has embraced an enormous degree of state discretion since its inception in 1965 has already aroused the ire of much of the South, parts of the West, and a handful of Republican attorneys general from northern states. Twenty states have joined in a lawsuit led by Florida Attorney General Bill McCollum protesting the legislation as “an unprecedented encroachment on the liberty of the individuals living in the Plaintiffs’ respective states.”
But the good news is that the new law takes important steps toward moving Medicaid down a path toward full nationalization, with the federal government bearing 96 percent of the cost of the program’s expansion over the next 10 years. Anrig argues that “The next major medical care reforms should carry that centralizing shift in control over Medicaid to its logical conclusion.
Converting Medicaid into a national program like Medicare model, “which covers virtually all of America’s elderly through rules and payment schemes that are consistent throughout the country, would relieve state governments of what has genuinely become an unmanageable financial burden.” Anrig observes: “Soaring Medicaid costs, driven by rising enrollments and many of the same forces escalating inflation throughout the health care sector, have ensnared most populous states in a chronic budget squeeze that relentlessly forces cuts in education, social services, and other essential state-level functions. Even after the effects of the severe recession abate, forecasts show that most states can expect to remain austere indefinitely as they comply with balanced budget requirements that don’t apply at the federal level.”
“The howls of protest over the largely imaginary new state financial obligations in the legislation are unfounded,” he writes, explaining that Most states suing the national government will receive a disproportionate share of new federal money to cover a higher portion of their populations, with their minimal new Medicaid obligations outweighed by money they no longer will have to spend to subsidize uncompensated care for the poor.” Nevertheless, looking into the future, Medicaid really does threaten to crush state budgets throughout the country unless responsibility for it is shifted to the federal government–where it belongs.
I would add that reform legislation takes another step in the right direction by raising fees for primary care doctors who treat Medicaid patients to Medicare levels. At present these physicians are reimbursed roughly 15% less to treat poorer patients than they are paid to treat older patients for no reasons except that, as Anrig notes, when Medicare and Medicaid legislation was passed, southern senators resisted the idea of the two programs paying the same fees for the same services.
Finally, today, since Medicare does not pay for long-term care, much of that care is funded by Medicaid. Over time, as the population ages, and more Americans die of chronic diseases like Alzheimer’s, long-term care will inevitably become more and more expensive as the process of dying stretches out over a longer period of time. As Anrig observes, if Medicare becomes a federal program the federal government would have much greater leverage to attack the underlying structural problems that create waste in our fragmented system, making U.S. health care so expensive. The federal government also would enjoy economies of scale that could help bring down the cost of that care. To fund long-term care, Anrig proposes a very small progress payroll tax, much like the voluntary long-term care tax(CLASS) already included in the Affordable Care Act..
Politically, state-level unhappiness over both the mandated Medicaid changes in the health care legislation and the program’s central role in the chronic state fiscal quagmire has the potential to unite red and blue state leaders in a push for federalization. With enrollment in Medicaid expected to climb to more than one-fourth of the non-elderly population over the next 10 years – and over 133 percent as many beneficiaries as Medicare will have — the program’s myriad shortcomings can be expected to attract greater public attention and scrutiny than in the past. While it has long been apparent to most policy analysts that those flaws largely derive from Medicaid’s bifurcated federal-state status, Medicaid’s centrality to the health reform bill may well lead a critical mass of political constituencies to recognize that the unavoidable next step for reform is federalization. Statess’ rights advocates may come to see that shedding Medicaid obligations through federalization would liberate state governments to pursue their own goals more freely while cutting state taxes. Even some deficit hawks worried about the rising federal debt, who can be expected to be the strongest opponents of federalization, may be persuaded that Congress can better constrain Medicaid’s costs when it fully controls the program. . . .
Bring an End to Disparities and Reduce Administrative Costs
Federalization would end the wide disparities among states in the share of the cost they owe per beneficiary relative to the federal contribution – a longstanding historical artifact without logical justification. Although the reform legislation attempts to minimize disparate fiscal impacts among states as they implement the law, large variations will remain in the state share of the cost per Medicaid recipient. Complex administrative difficulties will arise as a consequence of new federal matching payment schemes, which full nationalization could ultimately eliminate. In addition, transferring Medicaid’s financial burden and administrative responsibilities from states to the federal level would create major new opportunities for controlling medical costs while enabling a greater share of lower-income Americans to receive better care. And because the federal income tax is much more progressive than state revenue systems, federalization would move a higher portion of Medicaid’s costs onto Americans who can better afford to bear them while reducing administrative costs through economies of scale.
How Medicaid Became a State Program
The health care legislation’s heavy reliance on states to carry out reforms to cover the uninsured, including the creation of state-based insurance exchanges along with the Medicaid expansion, perpetuates the nation’s long history of decentralized support for the disadvantaged. Before the New Deal, domestic federal spending was only about 20 percent of state and local outlays. Only the old age pension provisions of the 1935 Social Security Act devised an entirely federal system, while funding and implementation responsibilities were shared between the national and state governments with respect to unemployment insurance and supports for needy women, children, and the elderly. Race loomed large in the Congressional debates leading up to the creation of America’s social insurance system, with representatives of southern states largely winning their demands to retain control over determining eligibility and benefit levels to prevent interference in how they addressed ‘the Negro question. . .’
Arkansas Democrat Wilbur Mills, the fiscally conservative chairman of the House Ways and Means Committee, designed Medicaid to be both independent of Medicare and administered through a joint federal-system in part to prevent Medicare from becoming the “entering wedge” for a nationwide “compulsory’ system of health insurance for everyone.
The upshot is that the least populous and economically poorest states, which are apt to be most disdainful toward the federal government, also receive a disproportionate share of national support for Medicaid. . . .
What Reform Means for Medicaid
Under the health care bill, the federal government will pay the entire freight from 2014 to 2016 for individuals who become newly eligible for Medicaid under the mandated standard of 133 percent of the federal poverty level, almost all of whom will be childless adults. That matching rate gradually ratchets down to 90 percent by 2020, where it will remain thereafter. The law also includes provisions providing some financial relief to relatively generous states that already allowed low-income adults without children to enroll in Medicaid. Otherwise, they would essentially be punished for their past generosity with much lower federal matching rates for existing beneficiaries than states that never covered childless adults will receive. At least seven states – Arizona, Delaware, Hawaii, Maine, Massachusetts, New York, and Vermont – will receive enhanced matching rates for childless adults who had been enrolled in Medicaid as of December 1, 2009. (In addition, beginning in October of 2015, states will receive an increase of 23 percentage points — up to a maximum of 100 percent — in their Childrens’ Health Insurance Program match rate.)
While it’s laudable that the health care legislation’s much higher matching federal rates for new enrollees includes some supplemental assistance for states that paved the way to reform, the wide assortment of payment levels both among and within states, and from one year to the next, defies any sane non-political justification and poses all kinds of costly administrative headaches.
Why, say, should the federal government pay the full ct of a newly eligible 35-year-old man in Georgia earning 125% of the poverty level while requiring California to foot half the bill for a pregnant woman with the same income? Greatly compounding the confusion is the fact that many individuals who were already eligible for Medicaid under a state’s existing rules but who only sign up later as a result of health legislation’s individual mandate, new outreach measures, or some other factor, won’t receive the higher federal matching rate. . .
In manipulating the federal matching formulas to induce much higher Medicaid enrollments and cooperation from states, Congress has twisted the system’s always problematic payment scheme into contortions that may no longer be workable. One undeniable argument for complete federalization is that it would in one fell swoop eradicate the impossible-to-defend, difficult-to-implement variations in state financial responsibility for Medicaid enrollees across the country. That the health care bill initially provides full federal funding for new enrollees in order to maximize state cooperation and recruit as many beneficiaries as possible in its own right suggests that eliminating the state financing obligation altogether is the path toward making the entire system work better.
In addition to Medicaid’s wide variations in matching rates and eligibility criteria, the program has long been plagued by other shortcomings that the health care legislation attempts to redress to some extent, but which would much more effectively be resolved under full federalization. Those problems include states failing to enroll residents who are eligible for coverage, constraints that limit the access of Medicaid beneficiaries to decent care, rapidly rising costs that are the single biggest cause of chronic state budget shortfalls, and poor coordination of services for high-cost individuals covered by both Medicare and Medicaid. Briefly, here’s why building on the health care reform act to move further toward full federalization would be even more effective at overcoming those problems:
Before welfare reform in 1996, eligibility for Medicaid was linked to qualifying for Aid to Families with Dependent Children, which stigmatized Medicaid and connected it to an enormously cumbersome application process and hostile bureaucratic culture. Although some states have made great strides since then in streamlining Medicaid’s sign-up procedures and reaching out to enroll eligible low-income pregnant women and children, a large proportion of those who qualify for coverage remain uninsured. A 2008 study by the National Institute for Health Care Management Foundation concluded that about one in four non-elderly Americans without health coverage, or about 12 million people, were eligible for Medicaid or CHIP but not enrolled in them. Another report by the Kaiser Commission on Medicaid and the Uninsured, which focused on 13 states, found wide variation in enrollment rates among them, with Mississippi at the low end covering only 36 percent of residents eligible even under its very limited criteria.
The primary political challenge will be to convince deficit hawks that federalization is one of the most promising strategies for controlling health care costs.
The Road to Federalizing Medicaid
Unfortunately, debates over America’s fiscal condition invariably focus on the outlook for the federal budget while neglecting how any sensible accounting of governmental revenues, outlays, and debt ought to integrate states and localities as well. In America’s highly decentralized system of government, federal and state budgets are inextricably intertwined in myriad complex ways. But one basic reality is quite simple: the central fiscal problem confronting both the federal government and the states is the prospect of a continuation of rapidly rising health care costs. Viewing that challenge through the rarely used lens of federalism rather quickly clarifies that one of the most promising strategies for controlling those costs in ways that would ultimately strengthen the fiscal condition of both levels of government would be to federalize Medicaid. For the states, relieving them of the number one obligation causing their financial distress would enable them to regain the capacity to function much more effectively. For the federal government, taking over Medicaid would entail large new outlays, but it would also create much greater leverage in directly confronting the underlying problem of soaring medical inflation. In the process, the cost of providing health care to lower-income Americans would shift toward those who can most afford it under the federal government’s more progressive tax structure. Not incidentally, more citizens would be likely to receive better care in good times and bad regardless of what state they live in.
The content of this year’s health care legislation, which pushed Medicaid in the direction of federalization across the broad array of fronts summarized in this brief, demonstrates that there is political support to at least move in that direction. And the opposition of southern states to the bill’s Medicaid mandates suggests that at least some conservatives might be persuathat, from a state’s rights perspective, complete federalization would be preferable to more mandates. The primary political challenge will be to convince deficit hawks that federalization is one of the most promising strategies for controlling health care costs, which in turn is far and away the best way to improve the long-term fiscal outlook at all governmental levels. In that context, a politically acceptable approach for financing the added federal costs would need to be agreed upon, as it was for the health care bill with its higher taxes on investment income and costly employee health insurance plans. Part of that sales job will include emphasizing the corresponding reductions in state taxes relative to what they would otherwise need to be.
Logistically, there are two primary approaches that should be pursued to phase in federalization of Medicaid. One entails federal assumption of the full cost of dual-eligible Medicaid and Medicare beneficiaries, and the other involves ratcheting up federal matching payments for Medicaid and CHIP until the 100 percent threshold is reached. . . .
[When it comes to assuming the cost of dual-eligibles ] researchers from the Urban Institute and the Kaiser Commission on Medicaid and the Uninsured recently calculated that fully transferring the cost of dual-eligibles to the federal government would shift $46.8 billion in annual spending away from the states, based on 2005 figures. The lion’s share of that figure, $33.5 billion, is attributable to long-term care services. . .
As a share of all state Medicaid spending, dual-eligible outlays amount to about 41 percent. States that spent half or more of their Medicaid dollars on dual-eligibles include North Dakota (59 percent), Connecticut (58 percent), New Hampshire (55 percent), Wisconsin (54 percent), Pennsylvania (50 percent), and Nebraska (50 percent). . . .
Federalizing only the dual-eligible population would provide substantial financial relief to the states while greatly enhancing opportunities to improve coordination of the care of these especially unhealthy and poor individuals. . . . Implementing cost-effectiveness strategies nationwide – especially with respect to long-term services – could help to make a significant dent in overall health care inflation. . .
[Next the federal government should ratchet up matching rates.]The health care reform bill’s full federal funding for newly eligible Medicaid beneficiaries from 2014 through 2016 puts a foot in the federalization door that the Obama administration and Congress should try to walk through with the next round of reforms. Instead of implementing the slight reduction in federal support for those individuals beginning in 2017, the 100 percent rate for newly eligible enrollees should be made permanent. And to rationalize Medicaid’s jerry-rigged payment system at long last, matching rates for everyone else should also be increased over time so that ultimately the federal government pays full freight for everyone.
One way to do that would be to first retain the higher matching rates under the stimulus bill for a period of time, and then gradually add 5 or 10 percentage points a year until every state’s beneficiaries were fully covered by the federal government. Increasing the existing baseline rates across the board by the same number of points would help to minimize infighting among the states. . . .
Although states are projected to spend about $1.6 trillion on Medicaid from 2014 through 2019, the price tag of federalization could be reduced significantly below that figure by gradually phasing in the changes beginning in that period and extending into the next decade. Still, the cost to the federal government will be significant, just as the savings will be to the states.
How to Finance the Transition
Financing the transition to Medicaid’s federalization and then sustaining a sufficient level of support going forward should probably entail some combination of an additional source of revenue deriving from upper income taxpayers coupled with a modest payroll tax increase on all workers that would be earmarked for services provided to current dual-eligibles. Because taxing income from investments at the same rate as income from work would enhance both the fairness and simplicity of the tax code, and would emulate changes made under President Reagan in 1986, that reform would be sensible policy in its own right and would go a long way toward financing the transition to Medicaid federalization.
Although raising the existing Medicare payroll tax to help finance the transition to Medicaid federalization would be an arduous sell politically, targeting an increase to pay for long-term care services would be more plausible than a hike to cover the broader Medicaid population. Since literally anyone can end up near destitution due to a disease like Alzheimer’s or other severe disabilities, the rationale for requiring all workers to pay into the long-term care protections in the social insurance system is similar to that underlying the universal coverage of Social Security and Medicare. A payroll tax rate increase of about 0.5 percent would be roughly sufficient to cover the costs of merging dual-eligibles into Medicare, which in turn is a little less than half the cost of full federalization of Medicaid.
The health care bill includes a meaningful step in this direction with a voluntary contributory insurance program for workers — the Community Living Assistance and Social Support (CLASS) Act — to address problems of disability. If you participate and become disabled, you can receive a cash benefit that can be used to build a ramp into your house or hire a home health care aid. While there’s obviously a big difference between a voluntary scheme like CLASS and a mandatory payroll tax increase, the legislation at least lays the foundation for self-financed national insurance coverage targeted toward long-term care needs. . . .
Federalizing Medicaid would by no means be sufficient to repair all that ails America’s health care system, which will remain deeply flawed even after the new legislation is fully implemented. But it’s an essential next step to further move toward reducing the fragmentation that lies at the heart of the dysfunction. If Medicaid were to be federalized, that would create new possibilities for later merging it with Medicare, or a new public insurance plan that would be made available to everyone on the state insurance exchanges, which in turn could become federalized as well. Reducing the isolation of Medicaid’s stigmatized population by integrating them into a system that serves the non-poor as well has the potential to improve their health and overall cost-efficiency even more. . .
It’s long past time to discard the fractious mindset and tactics that motivated Wilbur Mills, and act boldly by pursuing one of Ronald Reagan’s best ideas.