11/07/2008 05:12 am ET Updated May 25, 2011

Cutting Medicare and Medicaid to Fund Regressive Tax Cuts: Haven't We Heard This Before?

Are you baffled by Team McCain's behavior in recent weeks? I certainly am. I'm not talking about the candidate himself. His irresponsible selection of Governor Palin and his bailout grandstanding reduced the prospects for surprise. I mean the adults around him, people I had presumed might know better. What's the deal with them?

One moment, a key advisor is telling reporters -- telling reporters! -- "We are looking forward to turning a page on this financial crisis and getting back to discussing Mr. Obama's aggressively liberal record and how he will be too risky for Americans." Another says -- on the record -- "If we keep talking about the economic crisis, we're going to lose." As the stock market drops another 500 points, this seems pretty likely.

Then in yesterday's Wall Street Journal, the McCain folks pivot from Herbert Hoover to Newt Gingrich. Top economic advisor Douglas Holz-Eakin says that McCain would cut $1.3 trillion from Medicare and Medicaid over the next decade to keep McCain's health plan "budget neutral."

Does that figure, $1.3 trillion, sound familiar? It should. That's almost exactly the nonpartisan Tax Policy Center's estimate of the McCain tax plan's contribution, over and above Obama's, to the federal debt over the same period. This $1.3 trillion flows directly from continued and further tax cuts for people with annual incomes over $250,000. Financing regressive tax cuts by cutting Medicare and Medicaid: Do they pledge to shut down the government, too?

At one level, such comments highlight the folly of critiquing McCain's healthcare plan. I guess he needed window dressing called a healthcare plan. It's increasingly clear that this plan will never come to pass.

Its main pillar -- taxing employer-based health coverage -- is politically radioactive. Unions hate this idea. The Congress hates this idea. This morning's New York Times tells us that even Republican-leaning business groups are cool to this idea and don't want further erosion in employer-based coverage. Maybe the accountants will favor this, since they would assess a whole bunch of complicated health benefits for tax purposes that are now off the table.

Now we have these latest astonishing comments by Holz-Eakin. What makes anyone think year-2008 American voters want to cut Medicare and Medicaid to finance Bush-era tax cuts? Holtz-Eakin didn't specify what the cuts would be. According to the Journal, "He said the savings would come from eliminating Medicare fraud and by reforming payment policies to lower the overall cost of care." If any expert believes $1.3 trillion is waiting to be painlessly trimmed, I've never met her.

Leave aside the self-immolating political implications of the proposed Medicare cuts in Florida, Ohio, and western Pennsylvania. Given my day job, I'm more focused on Medicaid. There are only four ways to cut this program -- none of which makes acceptable social policy.

1. Medicaid can reduce payments to doctors and hospitals.
Medicaid already pays below-market reimbursement rates. All over the country, thousands of doctors and many of the best hospitals turn Medicaid recipients away. Try finding a dentist or an orthopedic surgeon who takes Medicaid. One of my recent postings notes that 94% of long-term care facilities are being cited for violations of federal health and safety rules. Low Medicaid reimbursement rates are key drivers of these problems, leading to overworked, underpaid staff who cannot provide the care we all know they should. These cuts are especially insidious because they are largely invisible to the public.

2. Medicaid can cover fewer people
States can establish waiting lists for low-income children who need SCHIP, tighten eligibility requirements, or hassle families with paperwork to bring down the rolls. The Bush administration moved to tighten Medicaid asset verification requirements, and to limit the home equity families could transfer to a disabled child who receives Medicaid. They've tried to clamp down on Medicaid eligibility in long-term-care. Such moves save money, but they undermine Medicaid's basic mission and increase the ranks of the uninsured.

3. Medicaid can cover fewer services
The Bush administration has tussled with states over educational services for children with special health needs. President Bush's 2008 budget proposed to cut Medicaid funding of school-based medical and social services by $3.6 billion. It also proposed to cut $2.3 billion in community-based rehabilitation services. No doubt, Sarah Palin will protect children with special health care needs from facing these cuts. Somehow I feel safer knowing that such proposals are dead on arrival in Congress.

4. The federal government can shift burdens onto states and localities that can't carry this load
This is already happening. Safety-net providers are financially bleeding, as they face the twin burden of caring for millions of uninsured people and facing below-market Medicaid reimbursement rates. Right now, urban hospitals and emergency departments are closing. More will follow if Medicaid imposes further cuts. In large part due to Medicaid, dozens of states face budgetary shortfalls. Many lack the tax capacity, and in some cases the legal authority to raise needed revenue. Forced by law or politics to run a balanced budget, many sates cut vital services during recessions, precisely when these services, along with fiscal stimulus, are most essential.

Holz-Eakin's comments reflect the widely-shared but misguided belief that Medicaid spending must be curbed. I disagree. Sure, Medicaid has long-term financial problems that must be addressed. These reflect three things outside of the program's purview: general medical inflation, the rising numbers of uninsured, and a rickety state-federal partnership that was fine in 1965 but that doesn't work anymore, now that healthcare consumes 17 percent of GDP.

Medicaid is the safety valve we use to address every failure in our healthcare system. Medicaid spending is rapidly growing because the rest of our healthcare system is failing to carry the load. Cutting Medicaid without addressing these underlying issues will only exacerbate the glaring health access and public health problems we face.

These issues are especially important as the economy heads into serious recession, and as we assume new burdens due to the bailout. Should Senator Obama win, many people will whisper: this is the wrong time to curb tax giveaways to the wealthy; this is not the time to push ambitious health reforms; this is a time to reign in federal healthcare expenditure.

I disagree on all counts. The fiscal impact of the bailout is less burdensome than some make out. Moreover, as we pivot to address heightened social needs, we can kill regressive Bush-era tax giveaways to stay out of fiscal trouble. Recession will lead millions of people to lose health coverage. It will reduce state and local tax receipts precisely when millions of additional people will turn to states and localities for help. Recession will also concentrate the minds of officials in Washington, raising the political prospects for movement towards universal coverage.

Sometimes in life, a headwind helps you get where you need to go.