Medicaid: America's undisputed boondoggle champion: its costs--both seen and unseen--are enormous, as the 40-year-old Federal initiative "now is bigger than Medicare (the Federal health program for the elderly and disabled) and is the single largest item in state budgets, even more so than elementary and secondary education.".

• Author: Cannon, Michael F.
• Position: National Affairs

MEDICAID IS THE largest means-tested government program in the U.S. Enacted in 1965, it provides medical care to tens of millions of low-income Americans. Supporters praise the program for making essential care available to those who otherwise could not afford it. Many argue that millions more Americans find health insurance unaffordable and therefore should be brought under Medicaid's umbrella. However, a body of literature supports the opposite view--that Medicaid actually exacerbates the problems of poverty and the lack of affordable medical care.

Medicaid occupies a special place among government programs for the poor. Public support for it is broader and deeper than for other safety net programs because the consequences of inadequate medical care can be much more immediate and severe than those of a lack of money or even food. That may be one reason voters have heretofore accepted the rapidly growing tax burden Medicaid imposes. Medicaid now is bigger than Medicare (the Federal health program for the elderly and disabled) and is the single largest item in state budgets, even more so than elementary and secondary education.

Medicaid subsidizes health care for low-income Americans. The Federal, state, and territorial governments jointly administer the program--or, more precisely, 56 separate Medicaid programs. Although participation is ostensibly voluntary for states, all of them participate.

Each state's Medicaid program must provide a Federally defined set of benefits to a defined population of eligible individuals. States, however, can expand eligibility and benefits beyond the minimum requirements. In 1997, the Federal government created the State Children's Health Insurance Program, which allows states either to expand their Medicaid programs to include children in families with slightly higher incomes or to enact a parallel and more flexible program for such youngsters.

Each state receives funds in proportion to what it spends. The more a state spends on its Medicaid program, the more it receives. The ratio of Federal to state contributions, or "match," changes from state to state and is determined according to a state's relative wealth. High-income states receive a dollar-for-dollar match. Some poorer ones receive as many as three dollars for each dollar they put forward. On average, 57% of Medicaid funding comes through the Federal government, 43% through states.

For beneficiaries, Medicaid is an entitlement. As long as an individual meets the eligibility criteria, he or she has a legally enforceable right to benefits. Medicaid typically offers services to beneficiaries free of charge. The program primarily serves four low-income groups: mothers and their children, the disabled, the elderly, and those needing long-term care. In 2004, Medicaid subsidized health care for more than 50,000,000 Americans, including some 38,000,000 low-income children and their parents and 12,000,000 elderly and disabled beneficiaries.

In addition to benefits provided to those enrolled in the program, Medicaid's disproportionate share hospital (DSH) program gives added Federal funding to hospitals that treat a disproportionate share of uninsured patients.

Although the vast majority of Medicaid beneficiaries are low-income children and their families, an overwhelming amount of spending goes for the elderly and disabled, who use far more care than their younger counterparts. In 2002, Medicaid spent $1,475 per covered child, compared to an average of $11,468 per disabled beneficiary and $12,764 per elderly beneficiary. The elderly and disabled account for about 70% of Medicaid spending. Medicaid provides supplemental subsidies for approximately 6,000,000 Medicare beneficiaries, who account for 40% of spending. Medicaid finances nearly half of all nursing home care in the U.S.

Medicaid pays for covered services according to fixed prices that are set administratively. Medicaid payments to providers typically are lower than those made under Medicare, which also uses administrative pricing that is well below payments from private payers. Providers participate in Medicaid on a voluntary basis.

By its fifth year of operation, Medicaid already was stretching its budget, as spending had reached double the official projections. A number of factors are responsible. A large share comes from recent expansions of state Medicaid programs. Encouraged by Federal State Children's Health Insurance Program funds and overflowing tax coffers, states greatly expanded optional benefits in the 1990s. Another source is the rising cost of medical care. Many observers argue that the elevating expense of private health insurance and the resulting spike in the number of Americans without it lead to greater Medicaid enrollment and spending. Finally, as the population ages and longevity increases, more Americans are relying on Medicaid to provide nursing home and other long-term care.

Taxes and shortfalls

When the economy slowed in 2001, a drop in tax revenues left states unable to meet the commitments they had made. According to the National Association of State Budget Officers: "Twenty-three states experienced Medicaid shortfalls in Fiscal 2003 and 18 states anticipated shortfalls in Fiscal 2004. The shortfalls as a percentage of the total Medicaid program in Fiscal 2003 reached as nigh as 16.4% of program costs. The combined amount of the shortfalls in Fiscal 2003 and Fiscal 2004 totaled nearly $7,000,000,000."

In response, all 50 states have taken steps to contain Medicaid spending, including restricting access to prescription drugs, freezing payments to providers, reducing eligibility and benefits, and increasing patient...