For decades, the Medicaid program has experienced periodic threats as federal policymakers have proposed to make major budget cuts, create state block grants, split up the program and so on.   In addition, every several years, some state officials announce they are about to pull out of the program (though none has ever done so).  Medicaid has been castigated as a failure, a budget buster and worse.     Although Medicaid serves both children and the elderly, it has never been as popular with the public or politicians as Medicare, Social Security or the Children’s Health Insurance Program.

Even so, Medicaid has proved surprisingly resilient and today provides health insurance coverage to almost 70 million Americans, from newborns to the oldest old, all across the nation.  Medicaid’s ability to survive, even bloom, in an often hostile environment is a testament to its critical mission and unexpected structural strengths.

Medicaid serves the nation’s neediest and sickest patients: low-income children and mothers, the elderly, people with permanent disabilities and the poorest of adults.  Despite periodic calls to privatize Medicaid, in reality it serves a population that private health insurance was not designed to serve and probably does not want to cover.  What private insurance system is willing to pay for long-term care for low-income elderly or disabled people, whether through home- and community-based care or in nursing homes?  What private firm is eager to cover families and children who are typically too poor to afford insurance premiums?

Contrary to the claims that Medicaid is a bloated budget buster, the reality is that Medicaid costs much less than private insurance on a per capita basis and its per capita costs have grown more slowly than private insurance premiums.  Medicaid is extremely thrifty.

While some bemoan that Medicaid is an “onerous one-size-fits-all” burden, the program is astonishingly diverse and flexible.   States have been able to pioneer virtually every health policy innovation through Medicaid, including prospective payment and performance-based payment systems, a spectrum of managed care arrangements, quality measurement, patient-centered medical homes, home and community-based care, and so on.

A key aspect of Medicaid’s structural strength is the design of shared federal-state financing and administration.  Under the matching rate system, neither the federal government nor the states bear the full program expenses, but both have a powerful incentive to hold down costs.  Both have a stake in the structure, operations and effectiveness of the program.   But this power-sharing arrangement also engenders persistent friction.  States complain that they are hamstrung by federal rules, while the federal government often believes states are not managing the program as effectively as they should be.  The federal government feels states abuse the matching system using upper payment limit arrangements or intergovernmental transfers, while states say they are victimized by arrangements like the Medicare drug clawback payments.

Over a decade ago, I gave a speech about federal-state relations to the Council of Governments entitled “Medicaid: Is Divorce Inevitable or Will Therapy Be Enough?”  I argued then, and still believe today, that — while a little therapy might help — both partners need to learn tolerance, recognize their interdependence, listen constructively and periodically acknowledge and appreciate their partner’s contributions.

Finally, Medicaid’s entitlement status helps protect it.  As such, proposals to cut (or to expand) the program must have transparency and indicate what changes will be made and who will be affected.  For example, a proposed cut must effectively explain which frail elderly people or children will not receive care or that clinics will lose 10 percent of their Medicaid revenue.  In this regard, entitlements are placed on equal footing with tax policies:  when tax increases are proposed, the proposal must indicate who will have to pay more.  This transparency makes decisions to cut entitlements or to raise taxes more difficult.  In comparison, proposals to cut grant-based programs are not as transparent; one can simply claim savings will be achieved through greater “efficiencies” without explaining what will change.

Once More Unto the Breach

We are, once again, in the midst of a major debate over the fate of Medicaid and the stakes are higher today than ever before.  On one hand, House Republicans are supporting a budget proposal from Budget Committee Chairman Paul Ryan to cut Medicaid expenditures by $1.4 trillion (yes, trillion with a “t”) over the next decade and to block grant the program.  (It is not clear, but it looks like the plan would also terminate the Children’s Health Insurance Program.)  His overall budget plan would cut about $6 trillion in budget expenditures, although most of those savings would be used to extend tax cuts for wealthy Americans and cut taxes for many other groups.

This block grant aspect appears to be supported by a number of Republican governors, even if they are not so supportive about the depth of the proposed cuts.  Ryan’s proposal would both cancel the expansion of Medicaid for low-income adults enacted under the Affordable Care Act, as well as slice $771 billion out of the remaining Medicaid program.  It is not completely clear how many Republican governors support the overall proposal, however.  Many realize that if there are deep cuts in Medicaid funding, governors will ultimately be responsible for making difficult decisions and executing the changes that would force millions to lose insurance coverage, slash benefits like prescription drugs or nursing home care, further cut payments to health care providers and/or substantially hike the amount poor participants must pay for care.  In addition, many governors like the prospect of earning 100 percent federal matching funds for newly eligible adults under Affordable Care Act, even if the matching rate eventually declines to “just” 90 percent.

Ryan’s proposal avoids trying to make quick cuts in Medicare, although it would substantially cut support in the long run through its plan for privatization.  He recognizes that cutting Medicare, like Social Security, is considered tantamount to touching the “third rail” of politics.  It instead puts Medicaid in the bull’s eye, even though Medicaid has far lower federal costs and serves a poorer population.  It remains to be seen, however, whether the public will support such severe cuts.  The Kaiser Family Foundation recently released poll findings that 47 percent of Americans oppose cuts to Medicaid and only 13 percent support major cuts to the program; these statistics are quite similar to the levels of support expressed for Medicare.

President Obama has just outlined an alternative budget vision in a speech at the George Washington University.  He proposes a more balanced approach of targeted cuts in domestic and defense programs, coupled with the expiration of tax cuts for the wealthy.  Not surprisingly, the President’s proposal does not call for terminating the Affordable Care Act and its Medicaid expansions.  It proposes adjusting the current federal Medicaid matching rate, although the details are not clear.  The proposal calls for a new matching rate formula for both Medicaid and CHIP that “rewards states for efficiency and automatically increases if a recession forces enrollment and state costs to rise.”

The latter part of the President’s proposal acknowledges Medicaid’s countercyclical role, in which program outlays must grow when states’ economies weaken, the number of people in need rises and states’ revenues flag.  To a great extent, the serious Medicaid budget problem that states are now facing has been caused by the premature termination of Medicaid fiscal relief enacted via the economic recovery act.  This increased federal Medicaid matching rates on a targeted basis, depending on the level of unemployment in each state.  That relief expires at the end of June 2011, even though states are still having serious budget problems.

The Government Accountability Office recently released a report assessing the Medicaid fiscal relief effort and how it successfully targeted high-need states.  The report noted that such a system could be developed on a permanent basis, with automatic triggers to help states when their economies have problems.  Such an automatic trigger system already exists within the Supplemental Nutrition Assistance Program (formerly the Food Stamp Program), another countercyclical program.

The plan also proposes working with the National Governors Association to develop approaches to strengthen Medicaid.  Obama’s proposal also acknowledges what health policy experts have said for a long time.  The most expensive part of Medicaid is the care for a small fraction of beneficiaries with serious health problems, whether the result of old age, disability or chronic diseases.  To be ultimately successful in containing Medicaid costs, Medicaid programs must manage care for these patients more effectively and efficiently.  But this cannot be done overnight; it will take planning, investments in new care coordination approaches and careful innovation and investigation.  States, as well as the new Innovation Center at the Centers for Medicare and Medicaid and the Medicaid and CHIP Payment and Access Commission, can contribute to these efforts.

Other budget proposals will certainly be forthcoming.  The “Gang of Six” bipartisan group of Senators are trying to forge a bipartisan compromise, which might be modeled on the bipartisan plan outlined by the Simpson-Bowles Fiscal Commission late last year.  However, the Gang of Six plan has not been unveiled yet. It seems likely that many other groups and pundits will also offer up plans in which Medicaid and Medicare are featured prominently.

The Urgency of the Upcoming Budget Debates

A sword of Damocles hangs over these budget debates and both raises the stakes and accelerates the timing of the debate: the federal debt ceiling.  Early this summer, the federal government will reach the limits of federal debt that are authorized and the debt ceiling must be lifted in order to borrow more.  Without an increase, the federal government will be unable to borrow money and eventually grind to a halt.  Interest rates could rocket up and international financial markets, long assured of America’s creditworthiness, could be turned topsy turvy.  Because the debt ceiling must be raised, the House, Senate and President must reach a compromise in the near future.  Many House Republicans are signalling that unless major budget cuts, along the lines of the Ryan budget proposal, are made, they will not support an increase of the debt ceiling, regardless of the consequences.  The tension and policy conflicts in these upcoming budget fights are likely to dwarf the just-completed struggle over the Continuing Resolution for 2011.

At the beginning of this blog, I mentioned how Medicaid has managed to steer clear of major cutbacks or restructuring in years past, despite repeated threats.  As a result, the nation has managed to continue to provide health coverage and care to millions of low-income Americans, protecting their health as well as their financial well-being.  This year might be different.  I hope that we are prepared to engage in the upcoming budget and policy struggle.