Block-granting Medicaid is the best way to deliver better, cost-effective care to the most vulnerable Americans.

Medicaid, America’s safety-net program for more than 62 million low-income uninsured Americans, is broken. It’s broken at the state level, where program costs are swamping state budgets. It’s broken for federal taxpayers, as Medicaid waste, fraud and abuse drain tens of billions of dollars from federal coffers every year. And, most important, it’s broken for the millions of families who can’t find doctors willing to accept Medicaid’s rock-bottom reimbursements.

Fixing the Medicaid safety net must be a priority of the next administration and Congress.

The best hope for Medicaid reforms that can improve care for low-income enrollees, reduce fraud, and put the program on a sustainable trajectory is to cap federal spending to the states by using block grants. Block grants would offer states a predictable source of federal funding in return for broad state flexibility in Medicaid administration, benefits and copays.

We know that well-designed block grants can work and attract bipartisan support. The best example is the successful 1996 Temporary Assistance for Needy Families program for welfare reform, which helped move millions of women and children out of poverty and into the workforce.

Critics of Medicaid block grants argue that they would leave insufficient funds to cover new state expenses, creating a “race to the bottom” as states slashed funding on services for the poor. But such objections were also raised about block-granting welfare, and they turned out to be wrong.

Medicaid’s pay-as-you-go, fragmented financing system—split 60/40, on average, between the states and the feds—has made the program a magnet for fraud. The Government Accountability Office estimates that fraud, waste and abuse take close to 10% of annual program spending (over $428 billion in 2011). That’s over $34 billion annually. Other experts suggest the rate is 20% or even 30%.

Medicaid spending at the state level is rising much faster than tax revenues, crowding out other programs and bringing the prospect of large state-budget cuts or tax increases, or both. Since the main way states can control this spending is by slashing reimbursements to physicians and other providers, Medicaid pays physicians only about 60% of what private insurers do. This means that millions of enrollees have trouble finding doctors who accept Medicaid. A recent Health Affairs study found that more than 30% of doctors nationwide wouldn’t accept any new Medicaid patients.

Early Medicaid-reform experiments in some states suggest that block grants or similar reforms can improve access to care and lower Medicaid spending. In 2009, Rhode Island accepted a five-year cap on combined state and federal Medicaid spending as part of a waiver from the federal government. The allotment was based on historical and projected spending trends.

The waiver gave the state administrative flexibility—allowing it to change health-care delivery systems to improve care and lower costs. It also made it easier for the state to get answers to questions or permission to make program changes, promising federal responses within 45 days. The state is responsible for any spending above its cap (as under a block grant).

To date, Rhode Island projects that by various new measures—focusing on community-based care that keeps seniors out of expensive nursing homes, for instance, and medical supervision that can keep children and adults out of emergency rooms—the state has saved $100 million. The flexibility to plan care has also helped reduce its projected Medicaid spending rate to 3% from 8% annually.

Under Gov. Andrew Cuomo, New York has imposed a cap on a substantial fraction of its Medicaid expenditures (the cap excludes spending on disabled Medicaid recipients and on mental-health and addiction-related services). Providers are beginning to enjoy increased flexibility in how they reduce costs—for instance, by curbing unnecessary testing and making better use of coordinators so patients get more efficient care.

The cap will increase at 4% annually—still significantly below historical growth rates. New York continues to seek a comprehensive federal waiver to move more patients (such as the disabled) into managed care, recognizing the need to test new reforms to control costs and improve outcomes.

Here the lessons from welfare reform should guide Medicaid block grants. Under Temporary Assistance for Needy Families, any activity that can (reasonably) meet any of four federal goals is permissible for the states. Policy makers should follow this model and establish Medicaid-specific goals, including streamlined reporting focused on health outcomes, and set broad goals that include enhancing access to primary care and moving recipients into high-quality private insurance.

Allowed to figure out what works for their own Medicaid populations, states could design coverage and care arrangements tailored to specific groups—including different options for the healthy, disabled and those in long-term care, and different benefit, premium and copay designs. A block grant would encourage states to coordinate and deliver health care in the most cost-effective way, with an emphasis on prevention and wellness. The grant should also base federal support on a state’s population of low-income and disabled residents, adjusted for cost of living, and allow funding to be adjusted for downturns in the economy.

Finally, a block grant would give states latitude to wrap other medical and nonmedical services—such as supportive housing for the mentally-ill homeless and public-health programs to prevent chronic and costly diseases—around Medicaid funding. This would encourage the best and most efficient delivery of services, and encourage rehabilitation where possible. Currently this can only be done through a cumbersome and complex waiver request.

When GOP vice presidential candidate Paul Ryan first proposed block-granting Medicaid in 2010, President Obama attacked the plan ruthlessly, claiming it would leave the poor and autistic children without access to health care. Mr. Obama created a politically convenient straw man, but he has not offered any serious proposals for dealing with the cost and access problems afflicting Medicaid. If serious proposals like block grants are not discussed, the inevitable tax increases and cuts to Medicaid will leave poor Americans struggling with bad health care in a bad economy.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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