Reforming Medicaid.

• Author: Goodman, John C.
• Position: ECONOMIC OBSERVER

MEDICAID IS THE LARGEST single expenditure state governments face today. The country as a whole spends more on Medicaid than on primary and secondary education. We also spend more on Medicaid (for the poor) than on Medicare (for the elderly--and at the rate the program is growing; it is on a course to consume the entire budgets of state governments in just a few decades.

The Bush Administration's budget proposes to reduce projected spending by $10,000,000,000 over the next five years, and some members of Congress want a commission to recommend additional reforms. The nation's governors are preparing their own proposal.

Medicaid is a complex system of Federal matching funds with special pots of money limited to specific uses. This often results in wasteful spending. Currently, states are required to cover certain populations, such as the disabled and pregnant mothers. States can receive additional matching funds to cover other segments as well--for example, children in families who earn too much to qualify for Medicaid. Although coverage for some services is mandated, others, including prescription drags, are optional. Yet, about two-thirds of Medicaid spending is on optional populations and benefits

The biggest problem is that, for every 40 cents spent by the states, the Federal government chips in 60 cents. Thus, states are tempted to go for the matching funds even when they know the spending is wasteful. The matching scheme also is a bad deal for taxpayers. The average cost per Medicaid beneficiary nationwide is about $7,500. However, since New York offers almost all optional benefits to all optional enrollees, it spends almost double the national average. Mississippi, which has a less generous benefit package and confines coverage mostly to the "mandatory" poor, spends just about half the national average. The result is that New York receives about twice as much Federal money per enrollee as Mississippi, where the need is much greater.

The practice of matching grants coupled with wasteful regulations has to end. States instead should request block grants covering all Medicaid costs, State Children's Health Insurance Program expenses, and disproportionate share hospital funds. States should have complete discretion, provided they spend the funds on indigent care.

Private health plans are a much more efficient way to provide care than traditional Medicaid. Yet, Federal payment schemes can discourage their use. For example, Texas has...