#255: The Failure that Is Medicaid

Published January 18, 2011

The recent letter from 33 governors to President Barack Obama and Health and Human Services Secretary Kathleen Sebelius is notable not merely for its frank language–it claims “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,” and rightly so–but also for the broader questions involved in the problems of the Medicaid program.

Medicaid is, as you probably know, a disaster. As Avik Roy has pointed out in the past, it is important to note that it is a humanitarian disaster first, before you even get into the budgeting damage the program has wrought. It’s a program with terrible results not just for the bottom line but for the people who use it–a safety net which more often functions as a Medicaid ghetto, trapping a disproportionate number of members of minority communities in a system that is unlikely to heal or care for them properly.

As a study by the University of Virginia found earlier this year, being a Medicaid patient correlates with the longest adjusted length of stay and the largest total costs. Medicaid patients who require surgery are 13 percent more likely to die than those who are uninsured, and they are 97 percent more likely to die than patients with private insurance.

Much of this terrible picture has to do with the population in question, and an unwillingness to seek preventive care when it is needed. Pair the low quality of care Medicaid patients receive with the lack of an ability to see medical professionals in a timely manner, and this looks like a program ill-prepared to handle the 16 to 18 million Americans who will be jammed into its system under President Obama’s law. And to add insult to injury, Medicaid is already the largest budget expense for the states, accounting for nearly 22 percent of total spending in FY 2010, and as you’ll see in the stories linked below, it stands to increase dramatically in the coming years.

Something has to change, and change soon–otherwise, states will soon be bankrupted by a system with dramatic levels of fraud that provides unacceptable health care to the neediest members of society.

– Benjamin Domenech



The Cato Institute’s Jagadeesh Gokhale presented a report recently, prepared at the behest of the Texas Public Policy Foundation, which outlines the true budgetary impact on the states of Obama’s law and the expected increase in Medicaid enrollment. He also has a working paper which includes Florida, Illinois, California, and New York in his calculations.

The numbers Gokhale finds–basing his calculations from Medicaid enrollment expectations, population growth, and expectations regarding federal matching rates–show that the 10-year post-2014 increased Medicaid costs represent as much as a 39 percent cost increase for Illinois, a 36.3 percent increase for New York, a 50 percent increase for Florida, and a 59.5 percent increase for Texas. California has a relatively modest 32.1 percent cost increase, only because so many of its citizens are already on Medicaid–Gokhale finds they ought to expect a 22.6 percent increase in enrollment over pre-Obamacare expectations by 2030, as opposed to Florida’s 57.6 percent increase.

These percentages symbolize billions of dollars in new spending for the states. I encourage you to contact Gokhale if you wish for him to run the numbers for your state to gain a better picture of how much pain your budgets are about to bear.


Avik Roy cites a report from Democratic New York Lt. Gov. Richard Ravitch in this extensive piece on Medicaid’s disastrous effect in New York.

“The State of New York is a poster child for how decades of irresponsible management of Medicaid can drive a state treasury into a ditch. … [N]early one-quarter of all New York state residents–4.5 million people–are on Medicaid. In the 2010 fiscal year, local, state, and federal parties spent more than $50 billion on Medicaid in New York, far more than any other state in the union, and nearly 40 percent of New York’s 2010 budget of $132 billion. New York spends more on Medicaid per capita than any state–double that of neighboring New Jersey and Connecticut, and 2.3 times that of California, the second-largest state in total Medicaid expenditures.”


In the course of writing about the governors’ letter, founding editor of Health Affairs John K. Iglehart notes Florida, where newly elected Gov. Rick Scott is already pushing a voucher-based solution, may soon provide an example of reform that could be replicated across the country.

Scott, a hard-driving entrepreneur who once headed the private hospital chain Columbia/HCA, has proposed giving Medicaid recipients vouchers to purchase private health insurance. He has not publicly detailed his plans for reducing Florida’s Medicaid expenditures, but he has pledged to scale back state and local government spending to 2004 levels. The state would need a federal waiver to make the change, but it’s likely Scott would have little trouble winning the support of the overwhelmingly Republican Florida legislature.


Gary Alexander, most recently Rhode Island’s secretary of Health and Human Services (and currently in line for a position in Pennsylvania), joined many of us on a conference call where he provided insight into his uniquely positive experience with a global Medicaid waiver, obtained on the last day of the George W. Bush administration. As Alexander writes in his piece:

“The centerpiece of Rhode Island’s waiver is that it provides budgetary certainty for the state–a cap of $12.075 billion through 2013. The cap forces Rhode Island to create cost containment strategies and medical models in the right place and right setting, whereas the traditional Medicaid spending plan is open-ended and encourages states to spend as much as they can in order to gain additional federal money. The Rhode Island Compact is the most comprehensive attempt to fundamentally change the Medicaid system. It ends the existing form of entitlement and crafts a new system designed to engage consumers in their own health care and use taxpayer dollars wisely.”

Alexander’s solution may not fit every state, but it’s one that’s worthy of being considered as states look for increased flexibility. While it’s likely Secretary Sebelius would let this item gather dust on her desk, political pressure–such as the letter mentioned earlier–could cause this waiver-based solution to seem more attractive to the administration than more confrontation.


James C. Capretta of the Ethics and Public Policy Center and Tom Miller of the American Enterprise Institute presented the case for a move to a defined contribution model in their latest column for Kaiser Health News:

“Medicaid remains separate and not equal to the rest of the insurance system for working-age Americans. Its current structure provides no coordination or transition between Medicaid coverage and private health insurance. A move to replace both traditional Medicaid assistance and the tax preference for employer-paid health insurance with defined contribution payments would open up new possibilities for more beneficial coordination between both types of coverage. Integrating coverage options for the poorest Americans into the choices available to those with higher incomes will not be easy, in light of broader fiscal and political constraints, but it should proceed with all deliberate speed.

“Moving toward defined contributions across Medicare and Medicaid, as well as employer-based plans, involves a complex transition well beyond just hitting new budgetary targets. … Nevertheless, it’s clear that taking the defined contribution route to health reform would create tremendous competitive pressure on the entire health sector to deliver more for less. Any player that did not step up would risk losing market share. That’s the way to slow rising costs while also improving, not compromising, quality.”

In the context of recommending that Republicans generally avoid tackling the entitlement reform issue, National Review‘s Ramesh Ponnuru writes in the New York Times that Medicaid is the exception to that rule:

“Medicaid is wrecking state budgets and is set to expand thanks to the Democrats’ new health care law. It is also more politically vulnerable than Social Security or Medicare, which offer benefits to everyone who reaches old age. As they try to undo the health care law, Republicans might also consider capping Medicaid’s growth and sending the savings back to the states.”

We’ll soon see what the new politicians at the federal and state level are willing to do, and how many arrows they’re willing to dodge, to bring reform to a program which so desperately requires it.