Yes, Cut Medicaid – It Won’t Be As Painful As You Think (Guest Opinion)

May 05, 2011

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The budget blueprint passed last month by House Republicans would replace Washington's current Medicaid-funding system --which encourages waste, fraud and abuse -- with a block-grant system that encourages states to combat those problems.  Incredibly, President Barack Obama says that under that vision, "up to 50 million Americans have to lose their health insurance" -- as if Republicans had proposed eliminating Medicaid entirely.

The reality is that states could maintain or even expand their Medicaid programs under the GOP proposal because -- some critics seem to have forgotten this -- states do have the power to raise taxes.

Nevertheless, the GOP budget would encourage states to cut their Medicaid rolls. As it should: the evidence shows there are millions of people enrolling in Medicaid who don't need taxpayer subsidies to obtain coverage, and experience shows that Medicaid cuts will not be as painful as you might think.

Economists of all political stripes acknowledge that Medicaid crowds out private health insurance, which provides better access to medical care. Jonathan Gruber, a Massachusetts Institute of Technology health economist and sometime consultant to the Obama administration, has estimated that, in effect, as many as six out of every ten enrollees added to Medicaid and similar programs would otherwise have had private coverage. Put differently, these programs cover four uninsured Americans for the price of ten -- a lousy deal even by government standards.

Gruber's MIT colleague Amy Finkelstein finds that Medicaid also crowds out private long-term care insurance. For those who qualify, the value of Medicaid's nursing-home and related benefits is two-thirds that of a typical private long-term care policy.  Medicaid thereby reduces the marginal benefit of private insurance to just one third of the marginal cost. Consumers therefore choose, quite rationally, not to purchase private coverage.

President Obama elides the existence of crowd-out when he implies that every single senior receiving Medicaid's nursing-home benefits "wouldn't be able to afford nursing home care without Medicaid." That's simply not true. An entire cottage industry of elder-law attorneys has emerged to help seniors qualify for Medicaid without spending down their wealth.

All of which means that if states reduce eligibility for their highest-means enrollees, many will obtain private coverage themselves. These include the patients of a Louisiana ob-gyn who, The New York Times reports, have private coverage through an employer but enroll in Medicaid when pregnant to avoid the co-pays.

How many former Medicaid enrollees would obtain private coverage if states reduced their rolls? It depends. But consider two examples.

In 1996, Congress eliminated Medicaid eligibility for many non-citizen immigrants. Coverage among non-citizen immigrants actually increased -- the opposite of what one might expect -- because non-citizen immigrants responded to the cuts by obtaining jobs with health benefits.

In 2005, Missouri cut 100,000 people from its Medicaid rolls. The number of adults with health insurance fell, but by a smaller amount than the number cut from the Medicaid rolls, because private insurance filled part of the gap. With children, the news was even better. Missouri cut loose one fifth of all low-income children enrolled in Medicaid, yet the coverage rate among low-income children did not change. Private insurance filled the entire gap.

Private insurance may not fill as much of the gap today as it did when there were more jobs available. One step that could help spur job creation would be to repeal President Obama's health care law, which includes individual and employer mandates that are increasing the cost of private insurance at the same time they are reducing job opportunities for low-skilled workers. Repeal would also eliminate the government price controls that have destroyed the market for child-only health insurance in some 20 states; restoring those markets would fill even more of the gap.

Crucially, Medicaid block grants would also give states the flexibility to target their programs at the truly needy who can't obtain coverage on their own.

The president and the Republicans agree that balancing the federal budget is impossible without restraining Medicaid spending. That will be much easier, Mr. President, if we could stop pretending that every single Medicaid enrollee needs to be there. 

Michael F. Cannon (@mfcannon) is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It .