Published: Wednesday, May 20, 2009
Big plans by government come at some very big costs
The Obama domestic reform trifecta of health care, climate change and higher taxes on the rich continues apace, stalled only slightly by a persistently sluggish economy. The agenda profoundly affects state governments. As in the early days of the Clinton administration, politics here reverberate in sympathetic resonance with the president's proposals.
Daniel Burnham, the architect whose 1909 plan for Chicago forever shaped that city's development, famously said, "Make no little plans, they have no magic to stir men's blood." That axiom has inspired more market-meddling mischief than magic over the years. With few exceptions -- interstate highways, maybe -- government's big plans generally entail higher costs, greater regulation and, consequently, reduced innovation, choice and competition.
With this in mind, it's timely to reflect on how Medicaid, one of the Great Society's big plans, has played out. In a new Washington Policy Center report, Dr. Roger Stark, a health care policy analyst and retired heart surgeon, takes a close look at it. Launched in 1965, Medicaid began as a federal-state partnership to provide health care to children in low-income families, adults caring for eligible children, and the blind, disabled and elderly not receiving certain other benefits. The entitlement rapidly expanded as a result of faulty assumptions and an undisguised desire to use it as a way station on the road to national health care.
Projected initially to cost $500 million, the actual 1965 cost outlay was twice that, $1 billion. By 1970, costs had escalated to $5 billion, skyrocketing to $336 billion in 2007.
Medicaid costs continue to rise faster than state revenues, squeezing funding for education and other social service programs. The program now consumes nearly a quarter of the average state budget. In Washington, Medicaid spending will total about $4.3 billion in 2009, with state taxpayers paying 48 percent. The federal stimulus package gives Washington about $2 billion to prop up Medicaid. When that goes, we're back to shortfalls.
As Stark notes, the partnership contributed to cost escalation. Congressional sponsors, astonishingly in retrospect, thought the required state match would restrain legislatures. Legislators, however, saw the match as a way to double their money, leveraging $1 of state funds for another from the feds. Political governance of health care cannot help but yield to the inevitable demands to expand benefits and increase enrollment by relaxing eligibility criteria.
As State Legislatures magazine reports, "Coverage expansions have become the centerpiece of some states' health care reform efforts…" Count Washington among them, as the Legislature approved moving Medicaid available to children in families earning up to three times the federal poverty level, $53,500 for a family of four. It doesn't cost much to add children. They represent 51 percent of the Medicaid caseload, but a small fraction of the cost. The disabled and elderly, just 25 percent of the caseload, account for 87 percent of Medicaid spending. Costs will escalate rapidly as the elderly population grows and newly unionized homecare workers lobby successfully for higher pay.
As eligibility expands, Medicaid crowds out private insurance. Stark writes that more than 20 percent of adults and 27 percent of children on Medicaid had private insurance when they enrolled, suggesting that families make a rational choice to save money by joining the program.
For all its generosity to recipients, the program is downright stingy to providers, paying doctors 27 percent less than Medicare does and 47 percent less than private insurers. Many doctors no longer accept new Medicaid patients. Four out of five hospitals lose money on it. That's not cost containment; it's cost shifting. Providers try to cover their losses by padding the bill of patients with private coverage, driving up premiums and making insurance increasingly unaffordable.
Stark looks to the successful Clinton-era welfare reform as a model for changing Medicaid. He recommends increasing individual responsibility with health savings accounts, tightening eligibility standards, and using block grants to encourage state innovation. Little plans, perhaps, but plans that control costs while preserving the program for those who need it most.
Polling on health care reform is mixed. The public appears to like the idea of universal coverage, but doesn't like the price tag. The Medicaid experience is unlikely to inspire confidence.
Richard S. Davis writes on public policy, economics and politics. His e-mail address is richardsdavis@gmail.com.
Daniel Burnham, the architect whose 1909 plan for Chicago forever shaped that city's development, famously said, "Make no little plans, they have no magic to stir men's blood." That axiom has inspired more market-meddling mischief than magic over the years. With few exceptions -- interstate highways, maybe -- government's big plans generally entail higher costs, greater regulation and, consequently, reduced innovation, choice and competition.
With this in mind, it's timely to reflect on how Medicaid, one of the Great Society's big plans, has played out. In a new Washington Policy Center report, Dr. Roger Stark, a health care policy analyst and retired heart surgeon, takes a close look at it. Launched in 1965, Medicaid began as a federal-state partnership to provide health care to children in low-income families, adults caring for eligible children, and the blind, disabled and elderly not receiving certain other benefits. The entitlement rapidly expanded as a result of faulty assumptions and an undisguised desire to use it as a way station on the road to national health care.
Projected initially to cost $500 million, the actual 1965 cost outlay was twice that, $1 billion. By 1970, costs had escalated to $5 billion, skyrocketing to $336 billion in 2007.
Medicaid costs continue to rise faster than state revenues, squeezing funding for education and other social service programs. The program now consumes nearly a quarter of the average state budget. In Washington, Medicaid spending will total about $4.3 billion in 2009, with state taxpayers paying 48 percent. The federal stimulus package gives Washington about $2 billion to prop up Medicaid. When that goes, we're back to shortfalls.
As Stark notes, the partnership contributed to cost escalation. Congressional sponsors, astonishingly in retrospect, thought the required state match would restrain legislatures. Legislators, however, saw the match as a way to double their money, leveraging $1 of state funds for another from the feds. Political governance of health care cannot help but yield to the inevitable demands to expand benefits and increase enrollment by relaxing eligibility criteria.
As State Legislatures magazine reports, "Coverage expansions have become the centerpiece of some states' health care reform efforts…" Count Washington among them, as the Legislature approved moving Medicaid available to children in families earning up to three times the federal poverty level, $53,500 for a family of four. It doesn't cost much to add children. They represent 51 percent of the Medicaid caseload, but a small fraction of the cost. The disabled and elderly, just 25 percent of the caseload, account for 87 percent of Medicaid spending. Costs will escalate rapidly as the elderly population grows and newly unionized homecare workers lobby successfully for higher pay.
As eligibility expands, Medicaid crowds out private insurance. Stark writes that more than 20 percent of adults and 27 percent of children on Medicaid had private insurance when they enrolled, suggesting that families make a rational choice to save money by joining the program.
For all its generosity to recipients, the program is downright stingy to providers, paying doctors 27 percent less than Medicare does and 47 percent less than private insurers. Many doctors no longer accept new Medicaid patients. Four out of five hospitals lose money on it. That's not cost containment; it's cost shifting. Providers try to cover their losses by padding the bill of patients with private coverage, driving up premiums and making insurance increasingly unaffordable.
Stark looks to the successful Clinton-era welfare reform as a model for changing Medicaid. He recommends increasing individual responsibility with health savings accounts, tightening eligibility standards, and using block grants to encourage state innovation. Little plans, perhaps, but plans that control costs while preserving the program for those who need it most.
Polling on health care reform is mixed. The public appears to like the idea of universal coverage, but doesn't like the price tag. The Medicaid experience is unlikely to inspire confidence.
Richard S. Davis writes on public policy, economics and politics. His e-mail address is richardsdavis@gmail.com.
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