What's Wrong with the Obama Administration's Cuts to Medicaid

It's true that Medicaid costs are increasing, but that's not because Medicaid has done a poor job of controlling health care costs.
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While the public debate about the Republican budget focused on the sharp reactions against Paul Ryan's Medicare privatization scheme, the other big "M" in health care, Medicaid, hasn't received the attention it deserves. As a result, the Obama administration has proposed cuts in Medicaid. These will undermine the achievements of its own historic health care law and harm access to health care for tens of millions of women, children and seniors.

Unlike Medicare, our national health insurance program for seniors and the disabled, Medicaid comprises 51 different state programs (including Washington DC) operating under a set of federal rules, financed by both the federal and state governments. As a result, it's much harder for the feds to control Medicaid costs through policy changes. The Ryan/Republican budget doesn't even try; it simply limits the amount that the federal government will spend on Medicaid and shifts the rest of the costs to the states, while weakening the rules so that states can dump people out of the program.

Unfortunately, most of the proposals that have been made by President Obama in the debt-ceiling negotiations are a kinder and gentler version of the same wrong-headed policy of shifting costs to states, and through them to American families, rather than dealing with the underlying reasons that Medicaid costs are rising.

It's true that Medicaid costs are increasing, but that's not because Medicaid has done a poor job of controlling health care costs, at least compared with the rest of the nation's health care system. For example, from 2000 to 2009 private health insurance companies spending per person increased by 7.7% each year while Medicaid spending on acute care health services -- doctor, hospital, prescriptions, tests, mental health -- increased by 5.6% a year. Medicaid did an even better job controlling spending on long term care, which went up an average of just 3% a year per beneficiary, the same rate at which the economy grew and lower that the overall rate of medical inflation (4.1%).

To really see where Medicaid spends it money, you only need to look at the 5% of Medicaid beneficiaries who are responsible for more than 50% of the costs. These are people with very serious, chronic health conditions and serious disabilities. President Obama knows this -- in fact, he raised the issue at the National Governor's Association in February.

The other major factor in Medicaid spending is increased enrollment -- particularly when the economy tanks. For example, enrollment of families was flat from 2004-2007 but spiked sharply once the recession began. Enrollment jumped by three million from June 2008 to June 2009 alone, the biggest increase since the early day of the program.

Rather than dealing with the root causes of high Medicaid spending, the Obama administration proposes to cut $100 billion from Medicaid over the next decade, mostly by changing the way it pays states for the program. The biggest change would be to reimburse states at the same rate for all their Medicaid patients, unlike now, where states get a different rate for different populations, such as children or seniors. The new so-called "blended rate" would be set at a lower amount than current health spending. Like the Ryan plan, the proposal is simply a cut to states, albeit a much smaller one than Ryan proposed and without the loosening of rules on who and what to cover included in the Republican budget. States would still cut back on who and what it covers, if only to the extent allowed within the current rules. States would also cut payments to providers, which in many cases -- particularly physicians, dentists and hospitals in some states -- would make it harder for patients to get needed medical care.

The "blended rate" proposal also strikes a blow at the Affordable Care Act, which is counting on Medicaid to provide care to more than half of the 33 million uninsured who will be covered under the new law. Under the Affordable Care Act, the federal government will reimburse states 100% of the cost of these new enrollees for the first three years and gradually reduce that to 90%. Compare that to the average 57% now that the federal government pays as its share of Medicaid. The blended rate would result in states having to pay a lot more for people who become eligible for Medicaid under the Affordable Care Act. As a result, states will throw up more barriers to enroll these working families and will scream more loudly about how the ACA is hurting their budgets. That later charge has almost no basis in fact now, but will become true under the blended rate proposal.

A second Obama administration proposal would close off one source that states now use to finance Medicaid, taxes on health care providers. Since states would be reluctant to replace these taxes with other taxes, they would also cut their spending on Medicaid, lowering federal spending.

In fact, only 10% to 15% of the cuts in Medicaid spending in the Obama proposal would come from rational savings in the system -- increased efficiencies in providing medical equipment and prescription drugs -- as opposed to simply giving states less money and making it harder for them to raise money for Medicaid.

The Affordable Care Act was a huge step toward a more rational health system, but the Obama proposals for Medicaid in the budget take us backward. Instead, the President should accelerate reforms that focus on the handful of high cost patients that drive most of the costs, by requiring states to implement care coordination programs which provide systems and incentives for health care providers to improve the care of the chronically.

Early this June, Senator Jay Rockefeller announced that 41 Democrats had pledged to "stand united against any efforts to slash Medicaid." Their action was aimed at the debt-ceiling and budget talks. Unfortunately, their resolve will be tested soon, in the Medicaid proposal made by their Democratic President.

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, whose book on the campaign to win reform will be published in 2012. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform. This post has been re-posted from newdeal20.org.

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