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March 21, 2011

Health-Care Law Expands Flawed Medicaid Program

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The Patient Protection and Affordable Care Act is certainly bad public policy. One of the law's worst provisions is a $100 billion annual increase in Medicaid spending. Medicaid was meant to be a small safety-net program. But now, nearly one in five Americans enroll in Medicaid at some point in a given year, which exacerbates dependence upon government and places an unsustainable burden on taxpayers. At the same time, Medicaid both crowds out private insurance coverage and often pays for lackluster care.

Medicaid, a joint federal-state program, is available to certain Americans, such as low-income mothers and children, as well as most nursing-home residents. Within federal guidelines, states determine eligibility thresholds, benefit packages and provider payment rates for their Medicaid programs. The federal government then reimburses a share of a state's Medicaid spending, from 50 percent in the wealthiest states to 75 percent in the poorest states.

National Medicaid spending has shot up fivefold over the past two decades, largely from states leveraging additional dollars through federal Medicaid reimbursement. This is a big reason state budgets are in crisis from explosive Medicaid growth. According to 2008 numbers, Ohio spent more than $13billion on Medicaid. That is 3.9 percent of nationwide Medicaid spending.

Despite the massive increase in spending, many physicians don't participate in the program because of low payment rates and a frustrating amount of paperwork. This causes many Medicaid beneficiaries to use hospital emergency rooms to receive basic care. Plus, Medicaid beneficiaries tend to receive a lower quality of care. A recent University of Virginia study found that Medicaid patients have worse surgical outcomes than uninsured Americans, even controlling for a multitude of personal characteristics.

Instead of pursuing a structural reform of Medicaid, the health-care law expands Medicaid enrollment by a third. Medicaid eligibility is extended to Americans with income at 138 percent or less of the federal poverty level (about $33,000 a year for a family of four, excluding the value of any welfare benefits). States are going along with this broad entitlement growth because federal taxpayers pick up 100 percent of the tab for covering newly eligible recipients from 2014 until 2016. The federal reimbursement declines until 2020, when the federal share stays at 90 percent.

States will shoulder their traditional share for Medicaid enrollees who sign up and were eligible under previous criteria. Currently, an estimated 12 million Americans are eligible for Medicaid but are not enrolled in the program. They will be more likely to enroll as a result of the media firestorm surrounding the health-care law and its individual mandate. Additionally, the taxpayer bill will increase even more as several million Americans are swept into Medicaid from the increased eligibility thresholds.

The law further backs states into a corner with Medicaid by requiring them to maintain their current eligibility levels until the expansion takes effect in 2014. If a state does not, it will lose all its federal support for the program. This means all federal tax contributions that state taxpayers send to Washington, which eventually return to the state in the form of Medicaid reimbursement, would be lost.

Thirty-three Republican governors and governors-elect have recently sent a letter to the White House and Congress asking them to repeal the Medicaid provision.

"States are unable to afford the current Medicaid program, yet our hands are tied by the maintenance of effort (MOE) requirements," the governors wrote. "The effect of the federal requirements is unconscionable; the federal requirements force governors to cut other critical state programs, such as education, in order to fund a 'one-size-fits-all' approach to Medicaid. Again, we ask you to lift the MOE requirements so that states may make difficult budget decisions in ways that reflect the needs of their residents."

States are forced to keep eligibility at an unsustainable level while increasing payments to primary-care doctors. But hitting states with a higher physician-payment rate, absent substantive reform, won't solve the problem. While the federal government sweetened the deal by agreeing to pay for the higher physician-payment rates, federal funding for the requirement to raise rates will expire after two years. This sets the stage for a serious funding battle in the states.

Instead of drastic Medicaid expansion, Washington should consider major structural reform for this troubled program. To start, the open-ended federal reimbursement of state Medicaid spending, which creates perverse incentives for states to grow their programs unsustainably, must be reformed. Then taxpayer-financed assistance should be targeted to truly deserving American families, using market-based principles that better align the interests of health-care providers, Medicaid patients, states and taxpayers. This is the path to put Medicaid spending on a more sustainable course.

Brian Blase is a health policy analyst within the Center for Health Policy Studies at The Heritage Foundation.

First appeared in The Colombus Dispatch

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