PERSPECTIVE

Putting Medicaid at Risk
By Alan Weil

President Bush has proposed converting Medicaid into a block grant to states. He wants to free the state-run program from close federal supervision and give states substantial programmatic flexibility if they agree to take a predetermined lump sum instead of receiving matching federal funds for each dollar they spend. This radical proposal represents a fundamental transformation of Medicaid that jeopardizes the health of the most vulnerable Americans.

Medicaid is complex and multifaceted. In 2002, it covered 47 million poor and disabled Americans at a cost of $256 billion. Half of Medicaid enrollees are children, 20 percent are their parents, and the other 30 percent-who account for two-thirds of the program's expenditures-include the severely mentally ill, the disabled, and the frail elderly. Medicaid also directly funds hospitals and clinics that serve the uninsured.

Why has Bush resurrected a block grant proposal? First, block grants provide the federal government with budgetary certainty, unlike the current program, which experienced annual cost increases ranging from zero to 30 percent during the 1990s. Second, block grants give states flexibility that some hope will improve innovation and efficiency.

Block grants would alleviate some other problems as well. States now have strong incentives to bring spending under the Medicaid umbrella, shifting billions of dollars of costs to the federal government. Although many such shifts free up state resources for more health coverage, others simply give the states fiscal relief at the expense of federal taxpayers. Medicaid's terms also encourage states to deliver social services using the more costly and sometimes less appropriate resources of the health care system as a way of getting the federal government to share the cost.

But block grants also increase risks to states and program recipients. The federal government, with its broad tax base and ability to incur a deficit, is better positioned than states to handle economic cycles or respond to epidemics. Fixed grants eliminate current incentives to expand insurance coverage, jeopardizing progress on meeting the needs of the more than 40 million uninsured Americans. When the federal government matches state spending, it is easier for states to cover new groups, offer more benefits, and pay health care providers better. History also shows that block grants are readily cut when the federal budget is tight.

As for the claim that block grants will generate program efficiencies substantial enough to offset the possibility of cuts, this seems wildly optimistic. States already have broad authority to define who they will cover and what benefits they will provide. The new policies states could adopt under a block grant-many of which increase the burden on recipients-would save only modest amounts.

Medicaid does face a major challenge: the cost of meeting the acute and long-term health care needs of the poor, aged, and disabled is growing faster than current tax revenues. Real reforms would emphasize making the health care delivery system more cost-effective and the allocation of financial and programmatic responsibility across employers, families, states, localities, and the federal government more rational. The president's plan does neither.

Rather, the president proposes to put Medicaid on a different philosophical foundation. The current Medicaid program is an entitlement-a politically loaded term that simply means anyone who meets the program's eligibility criteria is guaranteed benefits under federal law. An entitlement reflects consensus that meeting the needs of the population is a top priority, even if other priorities must be adjusted to pay for it. By contrast, a block grant reflects the proposition that we are willing to pay only a fixed amount to meet this need, and will adjust who is covered and what they receive to fit the budget. Either set of values is defensible, but the differences between them have dramatic consequences for program recipients.

A proposal to fundamentally alter the legal and philosophical footing of the nation's largest health care program-one that serves the most vulnerable Americans-should be considered only after an open debate about the implications of such a change. A shift in financing and risk should not be allowed to masquerade as true reform.

This essay appears in the May-June 2003 issue of the Hastings Center Report.