Health Care

The Medicaid Nuclear Option

January 1, 2010

Michael Franc

The legislative process inevitably fathers unintended consequences. The more complex and ambitious the legislative endeavor, the more numerous are its by-blows.

Recently, Heritage Foundation analysts Dennis Smith (who ran the federal Medicaid program for seven years in the Bush administration) and Ed Haislmaier uncovered a doozy in the House's health-care-reform bill: a previously unnoticed unintended consequence that could hike federal spending by well over half a trillion dollars in just the first few years after its enactment. Buried amid the bill's technical gobbledygook are several provisions that, acting in concert, could induce many, if not most, states to terminate their Medicaid programs and stick Uncle Sam with the full cost of providing health care to some 60 million low-income Americans.

As Smith and Haislmaier explain, "Congress is about to set off a chain reaction that it has not planned for and will not be able to contain.

"The health-care legislation currently in Congress not only imposes new costs on states through expansion of the Medicaid program; it also preempts state authority in management of the program. Faced with becoming merely an agent of the federal government, states will likely take the rational and reasoned approach of simply ending the state-federal partnership known as Medicaid."

But hold on just a minute. States have long complained about Uncle Sam's heavy-handed role in Medicaid. Yet, to date, they've never pulled the trigger and opted out, and for a very understandable reason. Opting out would mean leaving literally billions of federal Medicaid matching dollars on the table and picking up the full cost of providing health services to their Medicaid populations. As burdensome as Medicaid mandates and other federal regulations may be, the trade-off (the advantage of being able to design more efficient state Medicaid programs vs. the burden of having to assume their full costs) has always convinced states to remain in the program. Better to stay hooked up to the federal cash spigot, the thinking goes, and endure all the burdens that accompany it.

But not under the House bill.

It creates a new entitlement to health benefits funded with generous federal subsidies. How generous? For those at the lowest income levels, these subsidies will be worth more than $20,000 a year for a family of four.

However, the 60 million U.S. citizens who currently receive health coverage under Medicaid-plus the 15 to 20 million additional individuals the states would be required to cover under the House bill-would be ineligible for these new subsidies. Why? Speaker Pelosi and her allies recognized that giving Medicaid patients unfettered access to these subsidies would bust the federal budget. The new federal subsidies, you see, will cover almost 100 percent of a low-income individual's health-care costs, considerably more than what Uncle Sam covers under Medicaid (typically ranging between 50 and 83 percent of costs). In addition, technical requirements, known in the trade as "maintenance of effort" provisions, would preclude states from offsetting the cost of these new federal mandates by scaling back their current Medicaid programs at the margins.

To review, then, here's the situation created by the House health bill:

1. It increases the fiscal burden on the states of remaining in Medicaid.

2. Its "maintenance of effort" requirements bar states from taking incremental steps to reduce their fiscal pain.

3. It creates new federal health subsidies for low-income people that are far more generous than Medicaid benefits but can't be given to anyone enrolled in Medicaid.

Put them all together and these provisions actively encourage states to exercise what we might dub the "Medicaid Nuclear Option"-opting out of Medicaid lock, stock, and barrel.

The option has no downside, either fiscal or moral. States can shift all their Medicaid costs to Washington and use the savings to balance their budgets, expand other services, or cut taxes. Plus, today's Medicaid recipients would be in a position to purchase the same private health plans as their middle-class neighbors.

If you are a governor trying to close gaping state budget holes, what's not to like about that deal?

Smith and Haislmaier conclude: "By piling billions of dollars in new costs onto states and imposing greater federal control over the states, Congress is recklessly increasing the likelihood that states will exert their own authority as sovereign units of government and end their participation in Medicaid entirely.

"The savings to state budgets are so enormous that failure to leave Medicaid might be viewed as irresponsible on the part of elected state officials. The federal government, however, would be left holding a trillion-dollar-plus tab."

Indeed, at least one Medicaid director, Washington state's Doug Porter, has already hinted that his state would jump ship. Porter said: "I can foresee a situation where states would say, ‘I don't have enough in general funds to put up my share of this new expanded Medicaid program, and I have to get out of the Medicaid program.'"

Smith and Haislmaier calculate that if all 50 states were to exercise the Medicaid Nuclear Option, between 2013 and 2019 states would shift up to $725 billion in spending to the feds. And because of the generosity of the proposed federal subsidies, the total cost to Washington, D.C., would be even greater, approaching $1 trillion. These costs, moreover, would continue to skyrocket in subsequent years.

California alone would be in a position to offload a cool $126 billion (its share of the current MediCal program over that period) to federal taxpayers. In Texas, the shift would total $60.7 billion; in Oklahoma, more than $2.7 billion. And so it goes.

This is but one more of the rapidly expanding number of unintended consequences latent in the massive health-care bills being conjured up by Congress. The Congressional Budget Office ignored-or, more likely, just plain missed-this one in estimating the cost of the House bill. But when the official scorekeeper on Capitol Hill can miss a $725-billion item hidden in the thousands of pages of dense legislative text, you can't help wondering what other ticking time bombs remain undiscovered.

Michael Franc (J.D., Georgetown University) is vice president for government relations at The Heritage Foundation.