Make Medicaid Federal

Medicaid was left to the states in 1965 for bad reasons. Correcting that would pay huge social dividends.

By Merrill Goozner

Tagged InequalityMedicaidTaxes

Editor’s Note: In the wake of the Republicans’ passage of their tax plan in both houses of Congress, we decided to ask a number of progressive policy experts and thinkers a simple question: When the day comes that the Democrats have control of the White House and Congress, what kind of major tax reform should they pass and why?

Click here to read the rest of the essays from our series on “The Tax Reform of Our Dreams.” Today, Merrill Goozner, editor emeritus of Modern Healthcare, weighs in.

Looking for a tax reform plan that can win popular and political support in red and blue states alike? Federalize Medicaid.

That’s right. Let the states off the hook. Make the feds pay for it all, or at least pay for the part of the program that delivers health care to low-income adults and children. (We might want to consider long-term care for the indigent elderly and the disabled separately, since most of those expenses are for nursing homes and home-based assistance, not hospital or physician care.)

Federalizing Medicaid would provide as much as $200 billion in sales and income tax relief to the states. A quarter of state budgets on average now go to pay for their share of the program. Freeing them from that burden will dramatically enhance their capacity to invest in education, transportation, housing, and employment training. Systematic underinvestment in these basic social services continues to be one of the major drivers of ill health in our society, and helps explain why the United States spends so much more money than other advanced industrial countries on caring for sick people.

Medicaid and Medicare were created by the same 1965 law, but their structures are very different. The architects of the senior citizen program insisted on universal coverage with uniform benefits and automatic enrollment. It is run and funded entirely by the federal government.

Medicaid, on the other hand, paralleled the 1960 Kerr-Mills Act, which had provided health care for poor seniors and had been widely panned as inadequate. Arkansas Democrat Wilbur Mills, who chaired the House Ways and Means Committee, initially feared that making Medicare universal and federally funded would open the door to compulsory health insurance for everyone. So Mills’s Medicaid design, like the failed Kerr-Mills plan for Medicare, had the feds pick up 50 percent to 80 percent of state outlays, with poorer states like his getting more support. He left the states in charge, giving them broad discretion to decide whom to cover and what benefits to provide. Even today, despite years of fruitless lobbying by Medicaid advocates, states that didn’t expand Medicaid under the Affordable Care Act routinely deny coverage to adults who earn under the federal poverty level. Alabama and Texas lead in this race to the bottom by setting its earnings maximum at 18 percent of the FPL ($3,675) to qualify.

Imagine two handymen who do odd jobs, one in San Antonio, one in Boston. They each earn under $15,000 a year, and don’t have employer-sponsored coverage. If they both fall from ladders, break some bones and require long rehab, the Texan will be treated in the emergency room (uncompensated to the hospital) and will be sent home without follow-up care. The Bostonian, on the other hand, will get both his hospital visit and his rehab paid for. How fair is that?

Federalizing Medicaid would reverse this flawed approach. It would also open the possibility of vastly simplifying the half of the national health-care system that is government funded. By federalizing Medicaid and folding it into Medicare, we could create a unified federal program that covers the nearly 40 percent of the population that doesn’t get its health insurance through employers – people on Medicare, Medicaid or the Children’s Health Insurance Program.

There’s no shortage of good ideas on how to fund it—a broad-based value-added tax that includes business services or a carbon tax, for instance. But here’s the back-of-the-envelope math. In 2015, the states spent slightly more than $200 billion on Medicaid, covering about 37 percent of the overall program. States fund their share largely with sales and income taxes (which, it must be noted, are far less progressive than the federal income tax).

Since Medicaid is a lousy payer–offering about 85 percent, on average, of hospital and physician costs—grossing Medicaid up to Medicare rates would cost an additional $100 billion a year, according to one former Maryland official, where they have the nation’s only “all payer” system (where Medicare, Medicaid, and private insurers all pay the same rates). This would have the side benefit of eliminating cost-shifting, where business health insurance rates rise to cover the cost of underpaid and uncompensated care. The exchange-based system for individuals without employer-based coverage would also be folded into the newly enlarged federal program.

Progressives will have to sacrifice a few sacred cows to win legislative backing for the program. Premiums could be means tested (with a zero lower bound for the very poor), just as Medicare Part B, Medicaid, and Affordable Care Act coverage are already means tested. The program could also be managed by well-regulated private insurers, just as one-third of Medicare, 70 percent of Medicaid, and Germany’s national program now are.

The combined $300 billion it would cost to federalize and gross up Medicaid is the equivalent of about a 5 percent VAT tax (see this Congressional Budget Office study). In turn, most states should be able to lower their sales taxes by that much if freed from the burden of supporting Medicaid. Or, they could invest in schools, infrastructure, or other programs where local decision-making about priorities makes the most sense.

Local decision-making on Medicaid as it stands, on the other hand, makes no sense at all. There should be one standard for all Americans when it comes to health care: Everyone should get a standardized benefit package that provides high quality care at an affordable price. That can be best achieved with a government program that is common to all who otherwise cannot afford health insurance—the old, the poor, the disabled, as well as those people in jobs where the employer does not provide coverage. Federalizing Medicaid will move us one step closer to achieving that common standard.

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Merrill Goozner a long-time business and economics journalist, is editor emeritus and columnist for Modern Healthcare, a trade journal that he edited from 2012 to 2017.

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