Click to read Block Grants Were THE Solution to Welfare Reform

Why Block-Granting Medicaid to the States Will Result in Better Health Care for the Poor

This column by Avik Roy was published September 30, 2012 on

Mitt Romney and Paul Ryan have proposed an important reform of the Medicaid program: giving federal Medicaid funds directly to states in the form of block grants, and giving the states broad autonomy in how they run those programs. It's the formula that a Republican Congress and a Democratic President used in 1996 in the landmark welfare reform law of that year. But just as they were then, liberals today are up in arms about block grants, arguing that they will harm the poor. A new paper by my Manhattan Institute colleague Paul Howard proves the opposite: block grants will drive dramatic improvements in Medicaid's ability to provide quality health care to the poor.

(DISCLOSURE: I am an outside adviser to the Romney campaign on health care issues. The opinions contained herein are mine alone, and do not necessarily correspond to those of the campaign.)

I've written often of the very serious problems with the Medicaid program. People on Medicaid have far worse health outcomes than those with private insurance, and in many cases those with no insurance at all. The main cause of Medicaid's poor outcomes is that it's very difficult for Medicaid patients to get doctors' appointments, even for urgent medical problems. This poor access to care, in turn, is caused by the fact that Medicaid severely underpays doctors to care for Medicaid patients. In New York, for example, Medicaid pays 29 percent of what private insurers pay.

There are, in essence, two approaches to making Medicaid better. One would be to leave the program as is, unreformed, but throw more money at it, in order to pay doctors more. The other would be to reform the program, so as to make sure Medicaid dollars are directed toward actual health care, instead of waste, fraud, and abuse.

Doing nothing will worsen Medicaid patients' access to care

There's a third approach, the approach taken by Obamacare: shove 12 to 18 million more people into the existing Medicaid program, with all of its well-known problems, and otherwise standing pat. But that means consigning the poor to even worse health care in coming years.

In July, the State Budget Crisis Task Force--led by Paul Volcker and Richard Ravitch--released an important study, showing how inexorable growth in Medicaid spending is driving states bankrupt, and preventing them from funding other commitments, especially K-12 education. Because of all the constraints and red tape that the federal government places on the Medicaid program, states have one primary option for reducing their Medicaid spending: cutting provider reimbursements even further.

States are very restricted in what else they can do. The 1965 Medicaid law severely restricts the ability of states to reform their Medicaid programs in other ways, such as modifying enrollment criteria, or changing the structure of the Medicaid insurance benefit. So they do the one thing they can: pay doctors less.

An annual 50-state survey conducted by the Kaiser Family Foundation, published last October, put it this way: "As in previous years, provider rate restrictions were the commonly reported cost containment strategy...A total of 39 states restricted provider rates in FY 2011 and 46 states reported plans to do so in FY 2012." In other words, things are going to get worse for Medicaid patients, leading to even worse health outcomes.

Block grants will allow states to dramatically improve Medicaid's efficiency

Imagine two people, Jack and Jill. I give Jack 100 dollars to buy food, and let him buy that food from wherever he wants. I give Jill the same $100, but only on the condition that Jill buy her food from Zagat-rated sushi restaurants in New York City. I've given Jack and Jill an equal amount of money. But Jack will be able to buy a lot more food with the money I've given him.

This is precisely the principle that block grants provide to Medicaid. Currently, the federal Medicaid law does the equivalent of giving the $100 to Jill and micromanaging her food consumption. We gave that same $100 to Jack, but he could buy a lot more food with the same money. Indeed, we could give Jack $90, and he would still be able to buy more food than Jill with her salmon sashimi.

Critics of block grants presume, for reasons that aren't clear, that $100 spent in the current Medicaid program is equivalent to $100 spent by states in a more decentralized way. But as the story of Jack and Jill shows, there are, in theory, substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success.

As Paul points out in his excellent paper, block grants have been around for a long time. A government commission recommended them as early as 1949. In 1981, "Congress consolidated 50 federal aid programs into nine consolidated block grants" under the Omnibus Budget Reconciliation Act of that year. People in both parties have supported them as a way to put more money under the Jack model than the Jill one.

Three states are showing how block grants could improve Medicaid

Paul reviews how three states--Rhode Island, Indiana, and New York--have taken advantage of more flexibility to save money while delivering better care. (I've written previously about the Rhode Island and Indiana experiences.)

At the tail end of the George W. Bush administration, Rhode Island was granted a waiver by the federal government that, in effect, was a block grant: the state was assigned a five-year cap on Medicaid spending of $12.075 billion, in exchange for substantial flexibility to make changes to the program.

The program was a smashing success. Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn't before: shifting more Medicaid patients from nursing homes to home- and community-based services; automatically enrolling children with special needs and adults with disabilities into care-management programs; etc.

The best part is that, under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices. Indiana, for example, took advantage of a waiver to introduce subsidized health-savings accounts into its Medicaid program, a reform that has been very popular with Medicaid enrollees--one survey showed a 94 percent satisfaction rate--and given Medicaid patients more control over their own health dollars. In theory, HSAs could allow Medicaid enrollees to pay market rates for needed care, improving access and health outcomes.

Bill Clinton's idea for refining block grants with per-capita caps

Given our trillion-dollar deficits and Obamacare's huge new spending commitments, we don't have extra money available to put into the Medicaid program. That's why Obamacare expanded Medicaid instead of putting all of those newly-subsidized patients onto the law's more costly insurance exchanges.

There are ways to refine the block grant idea. One idea that Bill Clinton came up with in the late 1990s was subjecting Medicaid block grants to a per-capita cap. Think of it as a block grant devolved to the individual, rather than the state, level. Under Clinton's concept, federal Medicaid spending would be given to states based on the number of Medicaid enrollees in those states, and per-capita Medicaid spending would grow at an indexed rate (GDP plus one percent in his proposal).

Rep. Bill Cassidy (R., La.), one of the rising stars in the House of Representatives, proposed a version of the Clinton concept in August, in a new bill called the Medicaid Accountability and Care Act.

The principal advantage of per-capita caps is that they don't reward profligate states, like New York, that have ratcheted up Medicaid spending on extraneous things in order to get more money from Washington. Instead, the money follows the actual Medicaid patient, wherever he lives. Furthermore, per-capita caps are countercyclical; if the economy is bad, and more people become poor, the federal government would spend more.

"A per capita cap policy would encourage states to manage their programs efficiently," wrote John Holahan, Joshua Wiener, and David Liska in a 1997 analysis of Clinton's proposal for the Urban Institute. "The enhanced flexibility proposed by the administration would further aid them in controlling Medicaid expenditures," and eliminate incentives that states have today to game the system.

Per-capita caps aren't problem-free. Without other fiscal controls, states might enroll an unexpectedly high number of people into Medicaid, further straining the budget. In addition, Medicaid patients are highly heterogeneous, with the elderly and disabled costing more money than, say, children. The Urban Institute researchers noted that "a single aggregate cap would create incentives to add low-cost enrollees such as children," and that even dividing patients into broad categories could lead to gaming.

Progressive critics should come up with their own solutions

Block-granting Medicaid would lead to a health care policy revolution. We'd finally be able to test out different ways to provide health care to the poor, and focus our energies on replicating the work of those states that did the best job. That flexibility, in turn, could help us improve the way government runs Medicare and other public programs.

Simply throwing more money onto a broken system is fiscally impossible, and doesn't change the structural incentives that cause Medicaid to deliver such low-quality health care. Personally, I wouldn't be opposed to a combination of increasing Medicaid's reimbursements and block-granting the program, though those increased payments would have to be offset by reduced health spending elsewhere.

If progressives have plausible ideas as to how to make Medicaid more efficient, we should take them into account. Clinton's per-capita cap may be one such idea. But anyone who claims to care about the poor, and accepts the status quo, is consigning the poor to even worse health care than they get today.