Medicaid: Who pays, and how?

The vast expansion of Medicaid in the 2010 healthcare reform law put Washington on a collision course with cash-strapped state governments, which have been scrambling to reduce the cost of the joint federal-state insurance program for the poor and disabled. That conflict reaches the Supreme Court on Wednesday, when lawyers for 24 states will seek to bar Congress from adding millions of Americans to the program’s rolls. Meanwhile, the House is considering a Republican budget proposal that would cap Medicaid spending and hand over control to the states. Neither approach, however, would solve the program’s budget problems, which mirror those faced by the entire healthcare system.

To help reduce the number of uninsured Americans, the Patient Protection and Affordable Care Act expanded Medicaid to include legal residents with incomes up to 33% above the federal poverty line. Although Washington will pick up at least 90% of the cost of the new enrollees, the expansion will still cost states tens of millions of dollars annually. The states’ lawsuit against the act contends that they are being coerced to do something that Congress doesn’t have the power to order them to do. Yet the law didn’t create any new hurdles to states dropping out of the program and providing for the poor and disabled on their own. The fact that they don’t want to is testament to how good a deal Medicaid remains for states, even with the expanded eligibility.

The House GOP’s latest budget proposal offers an alternate approach: giving states Medicaid dollars as block grants, with much more freedom to set their own rules. The amount of aid to states, however, would rise only as fast as inflation and population growth, regardless of healthcare inflation or the poverty rate. That’s much less than the program’s current growth rate.

The new formula might solve Washington’s budget problems, but not the states’. And capping aid without regard to the number of people in poverty would make it that much harder for states to make ends meet during recessions, when the growing ranks of the poor drive up Medicaid costs.

Granted, the program creates a perverse incentive for states to expand Medicaid in order to collect more federal matching dollars. And states need more freedom to innovate, although that doesn’t require Congress to hand them a blank check. Ultimately, the challenges are the same as in the rest of the healthcare system: A small percentage of the beneficiaries rack up most of the bills. That means states must continue to search for ways to deliver care more efficiently, and to save money through higher quality, better coordinated care. Those are the goals of the Affordable Care Act, which is part of the solution, not the problem.