Congress Should Get Serious About Medicaid

Report Health Care Reform

Congress Should Get Serious About Medicaid

March 30, 2005 8 min read
Nina Owcharenko Schaefer
Director, Center for Health and Welfare Policy
Nina Owcharenko Schaefer is well known as a champion of patient choice and robust competition in America’s health insurance markets.

In his FY 2006 budget, President George W. Bush offered a modest proposal to weed out inefficiency in the Medicaid program. The Senate, however, has put even this minor reform effort at risk. As the House and Senate work to reach an agreement on the budget, Congress should adopt the practical changes put forth by the President as a first step toward securing fiscal sanity in Medicaid. The President's proposed changes would help to lay the foundation for future Medicaid reform.


Explosive Spending

Medicaid, the joint federal-state health program for the poor and indigent, is a fiscal disaster. Like Social Security and Medicare, Medicaid consumes an ever-growing portion of the federal budget: Today, these three programs account for 44 percent of all federal spending,[1] and Medicaid alone accounted for 13 percent of mandatory spending in 2004.[2] In future years, Medicaid and other entitlement costs will explode.


Medicaid provides care for approximately 46 million persons. In terms of total spending, it has surpassed Medicare as the nation's largest health care program, reflecting its steady growth over time. In 1993, Medicaid spending was approximately $132 billion.[3] Ten years later, the program had more than doubled, and it is expected to cost $5 trillion over the next 10 years.[4] From 2000 to 2003, Medicaid spending grew at an average rate of 10 percent annually.[5] The Office of Management and Budget (OMB) projects that Medicaid will "grow more rapidly than the economy over the next several decades and…add substantially to the overall budget deficit."[6]


Such growth is fiscally unsustainable, both for the federal government and for the states, and puts other major priorities at risk. In most states, Medicaid spending has already surpassed education as the largest portion of the state budget.[7]


President Bush's Proposal

In recognizing the long-term fiscal consequences of these programs, the President's FY 2006 budget proposes several small steps to improve the accountability and efficiency of both Medicaid and State Children's Health Insurance Programs. Two important features include:[8]

  • Reducing financing gimmicks. Some state officials employ a variety of tactics to leverage federal matching funds. Some overpay government providers to gain additional federal dollars or impose excessive fees in order to leverage their matching share. Some officials divert federal Medicaid payments to non-intended purposes. These examples and others have been under scrutiny and are clearly inappropriate.[9] The Bush Administration merely seeks to put an end to such activities.
  • Tightening enforcement rules for asset transfers. With clever estate planning, individuals can shelter their assets and still qualify for long-term care services financed by the taxpayers under Medicaid without delay or penalty. The Bush Administration wants stricter enforcement in closing the existing loopholes in order to preserve Medicaid for those who truly need it.[10]

The package of reforms put forth by the President would save Medicaid $12.8 billion by FY 2010 and $44.6 billion by FY 2015, resulting in a minor reduction in Medicaid's projected growth from 7.4 percent to 7.2 percent.[11]


While the Bush proposals are modest, they are critically important. They will restore some accountability and efficiency to the program. These small changes also open the opportunity to evaluate the Medicaid program as a whole and explore how the program can better serve those who depend on it.


Congressional Action

TheHouse of Representatives and the Senate have passed budgets that differ significantly with respect to Medicaid funding. The House budget calls for the House Energy and Commerce Committee to reduce spending by $20 billion by FY 2010.[12] It is expected that most of these savings will come from the Medicaid program and likely reflect the recommendations put forth by the President.


The Senate's original budget proposal, as passed by the Senate Budget Committee, was similar to the House bill and the President's budget. It required the Senate Finance Committee to trim $14 billion of spending by FY 2010, with most of the reductions expected to come from changes in Medicaid.[13]


During the Senate floor debate, however, Senator Gordon Smith (R-OR) successfully offered an amendment that stripped the Senate Budget Committee's minor Medicaid changes and replaced that provision with one that would create a government commission to study the issue.[14] This would delay any serious action and further undermine progress on Medicaid, including eliminating inappropriate and inefficient spending.



Medicaid will be a contentious issue in the House-Senate budget conference. If Congress wants to get serious about controlling federal spending, it must begin to address entitlement spending. The Bush Administration's Medicaid recommendations are just one small step that direction.


Preferably, Congress should go far beyond the President's modest proposals. Lawmakers should work to improve Medicaid's overall quality and delivery of care. This would include working with state officials to create consumer-based structural reforms in the program, as well as mainstreaming low-income Americans into the private health care system that serves most Americans. This could be done with refundable health care tax credits and by bringing consumer-directed and innovative care management to populations that must depend on Medicaid.


Without serious action, however, Medicaid's financial condition will continue to worsen and its quality of care will continue to decline.


Nina Owcharenko is Senior Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.

[1]Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006, p. 208, at /static/reportimages/541DC3FF39F0E09B69E4FF15C91EAC16.pdf.

[2]Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2006 to 2015, January 2005, p. 57, at /static/reportimages/D368B88CE47C65456A1614BA9CF9667E.pdf.

[3]The Honorable Thomas Scully, Administrator, Center for Medicare and Medicaid, U.S. Department of Health and Human Services, "Challenges Facing the Medicaid Program in the 21st Century," testimony before the Committee on Energy and Commerce, U.S. House of Representatives, October 8, 2003, at

[4]The total reflects both federal and state spending. The Honorable Michael Leavitt, Secretary, U.S. Department of Health and Human Services, "President's FY 2006 Budget for the Department of Health and Human Services," testimony before the Committee on Energy and Commerce, U.S. House of Representatives, February 17, 2005, at

[5]John Holahan and Arunabh Ghosh, "Understanding the Recent Growth in Medicaid Spending, 2000-2003," Web Exclusive, Health Affairs, January 26, 2005, at

[6]OMB, Analytical Perspectives, p. 208.

[7]Vernon K. Smith and Greg Moody, "Medicaid in 2005: Principles and Proposals for Reform," prepared for the National Governors Association by Health Management Associates, February 2005, p. 12.

[8]Office of Management and Budget, Budget of the United States Government, Fiscal Year 2006, Department of Health and Human Services, pp. 143-144, at

[9]See U.S. General Accounting Office, Improved Federal Oversight of State Financing Schemes Is Needed, Report to the Committee on Finance, U.S. Senate, February 2004; George Reeb, Assistant Inspector General, Centers for Medicare and Medicaid Audits, U.S. Department of Health and Human Services, Office of Inspector General, " Inter-governmental Transfers: Violation of the Federal-State Partnership or Legitimate State Tools," testimony before the Committee on Energy and Commerce, U.S. House of Representatives, March 18, 2004; and James Frogue, "Medicaid's Perverse Incentives," The State Factor, American Legislative Exchange Council, July 2004, at

[10]For a more in-depth look at the issues facing Medicaid and long-term care, see Stephen A. Moses et al., "The Realist's Guide to Medicaid and Long Term Care," Center for Long Term Care Financing, September 7, 2004, at /static/reportimages/EDF793E478166C561E328668AB193319.pdf.

[11]Analysis of the President's Budget for Fiscal Year 2006, Majority Staff, Committee on the Budget, U.S. House of Representatives, February 10, 2005, p. 65, at /static/reportimages/42A6C4E4A2D9F947BA576F15733F9CC3.pdf.

[12]House Budget Resolution, March 25, 2005, pp. 26-27, at /static/reportimages/646E3C8374BEDBD071B8C635466B7F6B.pdf.

[14]See Senate Amendment 204 to S. Con. Res. 18 at


Nina Owcharenko Schaefer
Nina Owcharenko Schaefer

Director, Center for Health and Welfare Policy