One of the arguments in favor of the GOP plan to institute per-capita caps, or limits of federal funding, on the Medicaid program is that “states need to be on a budget” and states should have more “skin in the game.” Medicaid is perceived by proponents of the proposed reforms as an open ended entitlement that gives states the incentive to foolishly spend money on things like “disabled children.” Unlike many other arguments for this policy that espouse the virtue of federalism and push for “flexibility” to allow states to design their programs as they see fit, this argument places little trust in states to be fiscal stewards of taxpayers’ money. In fact, this point borders on making an argument that states are mismanaging the programs they are running. While no actors in politics are perfect, it is far from accurate to critique states for excessive spending in Medicaid. States already have a strong incentive to keep Medicaid on a budget.
States are already operating financially lean and benefit robust Medicaid programs. Medicaid has been often criticized and shown to spend less than private insurance and Medicare. However, this may mean that there is little waste or overpayment for services and that most beneficiaries on Medicaid spend less than other comparable insured beneficiaries.
States see pressure to reduce spending under the current federal reimbursement framework because of state budgets. State revenue is limited. Many states require balanced budgets or limits on year-to-year spending which limits the amount that they can spend annually on Medicaid. Additionally, states and politicians have competing priorities. A state cannot spend their entire, limited budget on Medicaid because schools, roads, prisons, and higher education are all competing for this money in addition to Medicaid. This means that a state has the incentive to reduce their spending on Medicaid and to enact innovative approaches to saving on medical expenditures. For example, states have been innovative by instituting delivery system reforms and applying for waivers to test new models of delivering care. Most Medicaid patients are in managed care plans intended to keep costs minimal.
It is also true that states have some incentive to spend money. Medicaid is a driver of state revenue under a Keynesian economic theory. When people require Medicaid’s medical financing assistance they spend state money at hospitals and primary care facilities. This employs the hospital staff and doctors as well as the construction of new medical centers and other auxiliary professions that are funded by the medical industry. In turn, these professional buy things, pay taxes, and invest in further jobs and economic development. In addition, because the federal government contributes more than half of the amount spent, a state will see a better return on their investment than if they were to make their investment alone. However, the incentive to spend more on Medicaid to boost the economic counter-cyclical revenue generation is far smaller than the other incentives to keep Medicaid costs down.
More perplexing, is that it is often argued that Medicaid should pay doctors higher rates, in other words that it doesn’t spend enough money. It is also argued that no expense should be too much for providing care to kids and that costs should not be used to limit treatment for government programs. Limiting state spending is not going to solve the problems of states not spending enough on Medicaid. The debate that should be playing out is over what kind of care is the right care and where more money should be spent. Instead, we are engaged in a confusing argument that at times critiques states for spending too much and at other times critiques states for spending too little. It is no wonder that states are nearly universally opposed to the changes in the Senate bill.