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Medicaid Block Grants: You Can Put Lipstick on a Pig, But...

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When you work for state government, as I did in the Texas legislature and later for the governor, lieutenant governor and speaker in the Texas Office of State-Federal Relations, the words "state flexibility" coupled with "block grant" seem to have some sort of strange magical powers associated with them that can blind even the most astute governor.

Texas Governor Ann Richards used to say, "My mama doesn't know the difference between a block grant and a city block, but she knows a bad deal when she sees it." Unfortunately, when it comes to some governors, they fail to read the fine print often associated with block grants.

In the case of House Budget Committee Chairman and Vice Presidential Candidate Paul Ryan's proposal to block grant the Medicaid program, he claims it will:

Secure the Medicaid benefit by converting the federal share of Medicaid spending into a block grant tailored to meet each state's needs. This reform ends the misguided one-size-fits-all approach that has tied the hands of so many state governments. States will no longer be shackled by federally determined program requirements and enrollment criteria. Instead, they will have the freedom and flexibility to tailor a Medicaid program that fits the needs of their unique populations.

The allure of "state flexibility" to governors is incredibly strong. Governors Rick Perry (Texas), Bob McDonnell (Va.), Haley Barbour (Miss.), and Chris Christie (N.J.) were quick to announce their support for it. In their letter of support, they wrote:

Medicaid reform is welcome and [we] overwhelmingly support the creation of a Medicaid block grant program. This well established approach will give states the freedom to innovate, share best practices, and create cost-effective ways to deliver quality health care to our most vulnerable populations.

But, before falling into the trance, the governors apparently failed to do the arithmetic and comprehend Chairman Ryan's proposal would reduce the federal contribution to states to run Medicaid by $810 billion over 10 years. In fact, according to the non-partisan Congressional Budget Office (CBO): "Under the proposal, CBO estimates, federal spending for Medicaid would be 35 percent lower in 2022 and 49 percent lower in 2030 than currently projected federal spending..."

In other words, federal support for our nation's most vulnerable children, people with disabilities, and low-income seniors would be cut in nearly half by 2030. CBO argues that they would have enormous consequences. As the agency's analysis reads:

... Because of the magnitude of the reduction in federal Medicaid spending under the proposal... states would face significant challenges in achieving sufficient cost savings through efficiencies to mitigate the loss of federal funding. To maintain current service levels in the Medicaid program, states would probably need to consider additional changes, such as reducing their spending on other programs or raising additional revenues.

In other words, to cope with the loss of $810 billion in federal support, states would either have to slash current services or decimate spending in other state budget areas such as education or law enforcement or raises taxes.

And for those of us concerned about what might actually happen to the health coverage of low-income children, people with disabilities, and senior citizens, CBO continues:

Alternatively, states could reduce the size of their Medicaid programs by cutting payment rates for doctors, hospitals, or nursing homes; reducing the scope of benefits coverage; or limiting eligibility.

However, according to Governor Scott Walker (Wis.), that is exactly what he hopes to get out of a block grant. In his New York Times op-ed in support of Ryan's block grant proposal, he writes:

...some state officials oppose block grants because capped financing would bring the fiscal discipline they try desperately to avoid. But this discipline is precisely what is necessary to slow the rate of growth in health care costs. It is unlikely that doctors and hospitals will support authentic cost-saving measures as long as they believe there is more money coming from somewhere.

He effectively argues for a block grant and massive budget cuts in order to force price negotiations or what some would consider rationing in Medicaid. That is somewhat surprising in light of the fact conservatives have long argued against "health care price and cost controls," or what they call "government-run health care."

There is also the underlying problem in Medicaid that payment rates are already low and so savings are elusive -- even if hospitals and doctors are forced into price negotiations. In fact, Chairman Ryan argued that very point in his budget proposal and pointed out that further reductions in such payments could shift more costs to non-Medicaid patients and make health care more unaffordable. According to Ryan:

Many doctors are refusing to treat Medicaid patients, because states have reduced their reimbursements below what it costs to treat them. Doctors who still see Medicaid patients at below-market reimbursement rates are forced to shift their loss to non-Medicaid patients, contributing in effect to the health cost inflation that is currently putting quality, affordable health coverage out-of-reach for an increasing number of Americans.

Therefore, cutting hundreds of billions of dollars out of Medicaid will obviously make the problem far worse. As CBO says:

Given that payment rates for providers under Medicaid are already lower than they are under Medicare and private insurance, if states lowered payment rates even further, providers might be less willing to treat Medicaid enrollees. As a result, Medicaid enrollees could face more limited access to care. If states reduced benefits or eligibility levels, beneficiaries could face higher out-of-pocket costs, and providers could face uncompensated care as beneficiaries lost coverage for certain benefits or lost coverage altogether.

For those concerned that Medicaid is already underpaying providers, it is nonsensical to argue that cutting $810 billion out of the program might solve that problem unless you somehow have bought into the hypnotic effect that the words "block grants" and "state flexibility" seem to have on otherwise very cogent and smart policymakers.

Fortunately, not all governors have become so transfixed. They recognize the allure of "state flexibility" accompanied with the loss of $810 billion in federal support leaves them holding the bag.

As former Republican Governor and Senator John Chafee (R.I.) said in opposition to a Medicaid block grant proposal from House Speaker Newt Gingrich in 1995:

As states are forced to ration finite resources under a block grant, governors and legislators would be forced to choose among three very compelling groups of beneficiaries.

Who are they? Children, the elderly, and the disabled. They are the groups that primarily they would have to choose amongst. Unfortunately, I suspect that children would be the ones that would lose out.

And last year, Governors Martin O'Malley (Md.), Deval Patrick (Mass.), Mark Dayton (Minn.) and 14 others joined together in opposition to the Ryan block grant proposal:

We strongly oppose a congressionally-mandated block grant of federal Medicaid spending, which would shift costs and risks to states. Such a cost shift would severely undercut our ability to provide health care to our residents and adequately pay providers.

The governors add:

A Medicaid block grant imposed unilaterally by Congress on all states that would cap the federal government's share of costs and provide annual funding below the projected growth of program costs is simply unacceptable. The inadequacy of funding would grow over time and would be exacerbated by unanticipated increases in health care costs or enrollment. The costs of population increases, aging populations, economic downturns, natural disasters, new diseases or epidemics would all be shouldered by states. States would be forced to bear all costs after hitting the annual cap just as the 'baby boom' generation is entering their retirement years with a likely steep increase in their health care and long term care costs over the next few decades. The ensuing funding shortfall would leave states with an untenable choice between increasing taxes, cutting other state programs, or cutting eligibility, benefits, or provider payments.

Unfortunately, there has been little attention to this critically important issue, until President Bill Clinton took the stage at the Democratic National Convention and spoke passionately on the issue. As he said:

They also want to block-grant Medicaid, and cut it by a third over the coming 10 years.

Of course, that's going to really hurt a lot of poor kids [and] a lot of middle-class families whose kids have Down's syndrome or autism or other severe conditions. And honestly, let's think about it, if that happens, I don't know what those families are going to do.

So I know what I'm going to do. I'm going to do everything I can to see that it doesn't happen. We can't let it happen. We can't.

With President Clinton's spotlight on Medicaid, the program might finally be stepping out from Medicare's shadow and receive the full attention it deserves. But, will voters understand the issue better than some of the politicians they elect to represent them?

Hopefully, like Ann Richards's mama, the American people will recognize a bad deal when they see it. As Governor Richards would likely have said about the Ryan Medicaid proposal: "You can put lipstick on a pig, but it is still a pig."