Stealth entitlement reform

Rep. Ryan's budget proposal called for changes in the fundamental nature of both Medicare and Medicaid.  Since that time, the Republicans have been getting an earful from a lot of writers in the media, and from voters, about the proposed Medicare changes.  Must less has been written about Medicaid, even though it appears that we are approaching a "perfect storm" situation that may make conversion of Medicaid from an entitlement to a block grant program a much easier fight.

Medicaid is a slow-motion budget disaster for the states.  Almost all states have reached the political limits on their tax rates, and Medicaid expenses are growing faster than their economies and revenues.  As a result, Medicaid spending has begun to crowd out spending on state programs with a longer history: depending on the state, all of roads, K-12 education, and higher education have taken larger percentage hits than Medicaid.  The recession accelerated the problem, but did not cause it; the train wreck has been relatively clear in the numbers since at least the mid-1990s.

Two recent developments are in the process of locking the states into this disaster mode.  First, the federal Affordable Care Act blocked states from tightening their eligibility standards.  From the perspective of the Democrats at a national level, this is a feature and not a bug: much of the expansion of insurance coverage provided by the ACA is due to increased Medicaid eligibility, some of which is threatened if states tighten things up.  Second, the Medicaid statute puts a floor under the coverage (that is, which things must be covered), and includes language that puts an implicit floor under provider reimbursements.  Beneficiaries and providers are currently attempting to sue over state violations of that reimbursement floor; the NYTimes published a piece last Saturday that summarizes the current status.

The floor on spending, the rate of growth of that floor, and the practical limits on states' ability to raise revenue puts the states in a very difficult position.  Extended into the not-to-distant future, the numbers suggest states could be in a position where they are literally having to choose whether to continue with Medicaid or to completely drop their support of, for example, higher education.  It seems possible that at least some will choose to withdraw from Medicaid instead of dropping those other programs, despite the consequences.

It appears that it may be possible to put together a coalition of interests that could pass a Medicaid reform package.  Converting the program to a block grant program would, in particular, allow a number of parties to claim victory.  In particular:

• Congressional Republicans could claim a victory on entitlement reform
• Senate Democrats from conservative states could claim -- assuming that required state maintenance of effort spending is less than current spending, which seems likely -- to have relieved some of the pressure on state budgets
• States would be freer to explore alternative approaches for delivering health care to the poor
• The Obama administration could claim delivery of "bipartisan" legislation

Interestingly, the Obama administration filed a friend-of-the-court brief in the Supreme Court case arguing that individuals are not allowed to sue over reimbursement rates, and that the decision is solely in the hands of the federal executive.  A possible implication of the brief is that the administration will not be enforcing the statutory requirements.  Such a decision would have important ramifications.  There are already parts of the United States where low reimbursement rates have made it difficult for clients to find providers who will accept new Medicaid patients.  Health insurance -- and Medicaid typically functions as insurance with the state in the role of insurer -- that is not accepted by providers is little better than no insurance at all.  At least to me, that suggests that the administration is willing to forgo the role of Medicaid in the ACA.