In the early weeks of 2009, with the U.S. economy still on the brink of a potential depression, White House Chief of Staff Rahm Emanuel provocatively pronounced that “You never want a serious crisis to go to waste. And what I mean by that,” he elaborated “is an opportunity to do things you think you could not do before.”

Two years later, we have not run out of crises, despite early signs of economic recovery. Two years of high unemployment and low tax revenues have left many state budgets in disrepair. Forced to balance their budgets, and lacking the political will to raise tax revenues, many states are looking for ways to trim expenses, expenses many have already trimmed significantly in the past two years.

So states have turned their attention to Medicaid.

Medicaid costs have been growing of course for years. Health care inflation, as readers of this blog know all too well, is a relentless beast, fueled by new technology, consumer demand, and an aging population. Medicaid budgets have risen on this wave of more general health care inflation. To make matters much worse, however, Medicaid costs have also risen in the last couple of years as they inevitably do whenever the economy struggles, because the number of people qualifying for Medicaid rises with the unemployment rate.

If Medicaid were a federal program (a topic for another post!), this countercyclical situation would not be so dire. The federal government could spend more on Medicaid while the economy was down, and less when it was up, alternating (at least in theory) between deficit spending and deficit reduction. As a combined federal and state program, however, Medicaid is restricted by state balanced budget requirements. And now that federal stimulus money is almost spent, states are on their own to cover their part of rising Medicaid expenses.

Arizona has halted funding for transplants (déjà vu all over again for those of us who followed the Oregon rationing plan in the late 80s and early 90s). California is limiting payments for nonurgent doctor appointments and medications. Georgia has stopped paying for dental, vision, and podiatry care. South Carolina – and this one is painful to mention – is halting funding for hospice care.

All of these approaches feel rushed and desperate, understandable given the hectic back-and-forth that characterizes political budget negotiations. Understandable, but not necessarily forgivable. These crises have been looming for decades, since at least the time of the Oregon rationing plan. Good economic times helped push off the need to contain Medicaid costs. But experts have known for a long time that Medicaid budgets – indeed health care budgets more generally – were growing at unsustainable rates. We have known that someone, someday, would need to make difficult decisions.

That day is clearly upon us now. But we weren’t ready for it, so now states are tossing out a random-seeming assortment of policy options.

Is there any way we can take advantage of this crisis, to point the way towards better methods of controlling health care costs? Here are a few possible approaches.

1. The fallout approach: when Oregon halted funding for transplants in its Medicaid program, a young child with leukemia was denied a bone marrow transplant, triggering a media firestorm. People were aghast at the state’s callousness. The immediate consequence of this firestorm was that Oregon reinstituted transplant funding for Medicaid enrollees, without reducing Medicaid eligibility requirements. The longer term consequence was that Oregon spent a couple years and developed one of the most thorough, rational, and deliberative priority lists in the history of modern medicine. The politics and culture of Oregon, of course, are different than most other states. But it is still worth remembering that even Oregon didn’t “get it right” until forced to reckon with the fallout from its earlier, poorly managed cost-control efforts. 

One approach, then, is to let states do whatever they want to do, and let the fallout force them to go back to the drawing board to develop better ways of controlling costs.

2. The laboratory of the states: Not every state, of course, is going to make the kind of cuts (transplants for little kids?) that create public outcry. The public, after all, rarely gets upset about policies that cause poor people to suffer. Therefore, most of the Medicaid cuts being proposed by states now will not lead to Oregon-like retooling. The federal government should make sure, then, as it gives waivers to states to try different ways of controlling costs, that it puts money into measuring the impact each of these approaches has on Medicaid enrollees. Good data might help us determine which policies are the best, so that more states can adopt them in the future.

3. Re-stimulate: The dire crisis we now face would have come much sooner if the federal government hadn’t given billions of dollars in aid to the states over the past two years. There is little chance that the feds will step in once again, as a new stimulus plan will not likely get past the Republican majority in the House. However, a deal could potentially be brokered. Perhaps Republicans could be brought to the table to provide one or two years of assistance to states on the condition that states use part of that money to develop a better plan for how to control costs in future years.

4. Time for a federal priority list: As long as Medicaid remains a hybrid state/federal program, states will want flexibility in how they manage their programs. But the federal government could still help states out, by appointing a priorities commission assigned with the task of determining which services are of greatest importance for Medicaid populations to receive. The federal government already has a list of required services and optional services, but this list is not one that has been rigorously developed. The federal government could do much more to provide a real guidance to states on where they ought to spend money, when money is tight.

It has long been difficult to generate serious discussions about health care priorities in the U.S., because so many people believe we don’t need to set limits. The crises many states are now facing with their Medicaid programs have proven this to be wrong.

If we won’t discuss priorities starting now, we will have let an opportunity – in the form of a crisis – pass us by. That is a recipe for a lot more crises.

Peter Ubel, MD, is the Jack O. Blackburn Professor of Marketing at Duke University’s Fuqua School of Business and a professor of public policy at Duke’s Sanford School of Public Policy. He is the author of Free Market Madness: Why Human Nature is at Odds with Economics – and Why it Matters (Harvard Business Press, 2009).peter.​ubel@​duke.​edu; 919–660-7700.