One particularly disturbing feature has emerged from the
closed-door negotiations on health care legislation: a massive
expansion of Medicaid, the nation's largest welfare program.
It is now clear that roughly half of the projected reduction in
the uninsured will be due to putting more than 14 million
individuals into Medicaid. Congressional liberals' passion for
Medicaid expansion may be puzzling to those who view health care
reform as a means to improve the quality of care and achieve
superior medical outcomes. But it does find support among certain
health policy analysts. For example, in a recent article for the
New England Journal of Medicine, Professor Sara Rosenbaum of
George Washington University, a highly respected and prominent
health policy analyst, laid out her case as to why much of health
care reform should be built on Medicaid. Curiously, Rosenbaum's views
of Medicaid and its enrollees reinforce well-entrenched
The Low-Cost Myth
Rosenbaum states that "despite its broader coverage for a
population that is markedly less healthy than average, Medicaid
costs less. According to the CBO's [Congressional Budget Office]
estimates for the House bill, per capita federal costs in 2019
would be $5,926 for coverage through an exchange, as compared with
$1,826 for coverage through a Medicaid expansion."
However, Medicaid costs are often understated because only the
federal cost is cited, not the total cost, which includes the state
share of Medicaid. Moreover, the Medicaid average cost is lower
because most non-disabled adults on Medicaid do not stay on
Medicaid for the entire year.
But this argument--that Medicaid is better because costs are
lower despite serving a population that is "less healthy than
average"--is irrelevant if the program is expanded. With a Medicaid
expansion to a projected 150 percent of the federal poverty level,
for example, there will be millions of young, healthy adults age
18-24 who would be on Medicaid but are clearly not "less healthy
Rosenbaum argues that Medicaid is cheaper than private insurance
because it "generally pays providers less than commercial insurers
do." But this under-reimbursement is not good for Medicaid
recipients, who often cannot find doctors who accept it. Rosenbaum
acknowledges this fact and calls for higher reimbursement
But this of course undermines her argument that Medicaid is
cheaper than private insurance. For if Medicaid pays providers as
much as private insurers do, then it will have similar costs as
When California considered its own version of health care reform
recently, Governor Arnold Schwarzenegger argued that low rates for
Medi-Cal (California's Medicaid program) were unfairly shifting
costs to the private sector. The Medicaid cost-shift is something to be
fixed, not exploited.
Absence of Profit?
Rosenbaum argues that providers make no profit from the program.
In fact, however, dozens of managed care companies, including many
that are publicly traded, have substantial Medicaid business.
"Public" hospitals and nursing homes, including those still owned
by state and local governments, opposed Bush Administration efforts
to limit Medicaid reimbursement to 100 percent of costs.
If an entity receives more than 100 percent of the cost of
providing a service, what is that called if not profit? Likewise,
are pharmacists dispensing Medicaid-purchased drugs for no more
than their cost? Of course not.
Lower Administrative Costs?
Rosenbaum does not provide data to support her proposition that
Medicaid "has lower administrative overhead costs than do private
insurers." However, in 2010, the administrative cost of Medicaid is
projected to exceed $20 billion, an amount that exceeds the cash
benefits provided by the Temporary Assistance to Needy Families
The House and Senate bills contain a provision to let California
continue a family planning waiver in which waiver applicants bypass
the normal Medi-Cal eligibility process. California justified this
unique exemption because processing an application is too
expensive. But even some liberal groups say that Medicaid's
administrative costs are too low. The Texas Center for
Budget and Policy Priorities, for instance, argues that there needs
to be even greater investment in "broken" eligibility systems.
The House and Senate bills contain provisions on the use of
"presumptive eligibility," meaning that individuals seeking
Medicaid coverage would be presumed eligible--and be able to
receive coverage--while their applications are pending. The
rationale for presumptive eligibility is that, under the normal
course of business, the 45-day window that states have to determine
an individual's Medicaid eligibility is too long.
The problem with presumptive eligibility, though, is that it
often covers people who are not eligible for Medicaid, including
illegal immigrants. Furthermore, presumptive eligibility trusts the
applicant to submit a completed and satisfactory application, which
often does not happen. But Medicaid pays for their treatment
The delay in determining eligibility should be fixed through
investing in technology that could determine a person's eligibility
in less than 45 minutes. Instead, Congress would take an approach
that would open the system up to even more waste, fraud, and abuse
and is not accepted in Medicare or any other government assistance
Rosenbaum characterizes Medicaid enrollees as a "poor, isolated,
and high-risk population." In fact, themajority of individuals on
Medicaid are children who are not in poor health. West Virginia
recently surveyed its non-disabled adults on Medicaid. The
majority believed they would be on Medicaid only temporarily. Over
half of adults on the Basic Plan expected to be on Medicaid for
less than two years, and 80 percent expected to be on Medicaid for
less than five years. Of those on the Basic Plan, less than 10
percent rated their health status as "poor," and even among those
on the Enhanced Plan, only 21 percent rated their health status as
If the congressional leadership is successful in expanding
Medicaid, the new population that will be swept into Medicaid
coverage will include millions of young adults age 18-24 who no
longer live at home but are in college, graduate school, or work
only part-time or part of the year and thus have income below 150
percent of the federal poverty level ($16,245 for an
Cheaper, but Not Better
Rosenbaum states, "Medicaid's original goal was to 'mainstream'
the poor into the health care system. Although the program has had
a profound effect on access to care, the health care system in many
parts of the country remains segregated, with low-income
communities heavily reliant on a health care safety net consisting
of community health centers, public and children's hospitals and
other hospitals that treat a disproportionate number of poor
people, and local health agencies."
Curiously, the Baucus bill cuts nearly $45 billion from Medicare
and Medicaid payments to those safety net hospitals. This is, of
course, precisely how government entitlement programs control
costs: cut reimbursements to providers. But lower payments mean
that fewer of these hospitals and clinics could stay in business,
which undercuts the safety net that Rosenbaum seeks to protect.
Making the Problem Bigger
A serious effort to mainstream the poor into the health care
system would include the creation of a voucher system or a system
of premium support that would enable Medicaid beneficiaries to have
access to private coverage, just like their fellow citizens.
In the meantime, there is sound evidence that Medicaid
beneficiaries have relatively weak access to physicians. Compared
to private coverage, Medicaid has comparatively poor outcomes for
patients in cancer and cardiac care. The response from the
congressional leadership is not to fix the current problems in
Medicaid but rather to add another 14 million to the program. This
approach will not solve Medicaid's problems but only exacerbate
Smith is Senior Fellow in the Center for Health Policy Studies
at The Heritage Foundation.