Time to Federalize Medicaid

The federal government is in turmoil as politicians from both parties fight over the best way to reduce record-setting budget deficits. Meanwhile, most states are facing budget problems of their own, with balanced budget amendments and anti-tax sentiment forcing legislators to find places to trim budgets that have already been trimmed several years in a row.

At the center of these budget problems is health care. Medicaid expenditures place a strain on both federal and state budgets, but states feel the pinch even more strongly. Medicaid accounts for a far larger portion of state expenditures than federal, and the states are forced to balance budgets in ways the federal government is not.

So Medicaid has become a huge problem for most states. But fortunately there is a solution. It is time to federalize Medicaid. In the short run, this move will exacerbate federal budget problems. But federalization is the only way to provide fair and adequate health care coverage to the neediest members of our great country. And in the long run, the federal government will have no choice but to find a way to control Medicaid costs, and is likely to do so in ways that are fairer than the states would do on their own.

Here are half a dozen reasons why I think we should federalize Medicaid.

1. It will save state budgets.

Most states have a very difficult time controlling Medicaid costs. For starters, the biggest driver of Medicaid costs is the number of people who qualify for coverage, a factor that depends on economic forces beyond government control. When the economy turns south, the number of poor people inevitably rises. In addition, the Affordable Care Act now requires all states to offer Medicaid to anyone at or below 133% of the federal poverty limit. That means states can’t trim their budgets by adjusting Medicaid eligibility requirements. If Medicaid were federalized, the entire costs of the program would eventually be borne by the federal government, and state budgets would no longer have to be balanced on the backs of poor people with serious illness.

2. Saving state budgets is good policy.

States play a crucial role in many of the most popular and important government services, like schooling, firefighting, and police work. Medicaid expenditures have put huge pressure on all these services, to the point where many localities are cutting them. Take schools for example. In most states, teacher/student ratios are declining rapidly and funding for things like school sports is dropping at the same time as our children’s waistlines are expanding. Not a good combination.

3. Federalization will promote fairness.

Forced to balance their budgets, states are scrambling to identify services they can trim from their Medicaid budgets. Some states (as I wrote about here) are cutting dental coverage for Medicaid enrollees. Others are cutting hospice care or transplant services. This variation in coverage has created a situation in which a Medicaid enrollee’s chance of surviving a serious illness, or of dying in comfort, will depend less on medical circumstance than on geography. This variation is morally indefensible.

This variation could be eliminated by having the federal government tighten its requirements about what services states are obligated to offer to their Medicaid enrollees. At that point, however, the federal government would have not only mandated which people states must cover, but also what services they should cover. This would fall short of federalizing Medicaid in the worst possible way – it would force states to spend more without offering them financial assistance. States with greater needs would thereby suffer disproportionately, while lacking the flexibility to control their expenses.

Full federalization of Medicaid would smooth out inequities not only in Medicaid coverage – in what services Medicaid enrollees could expect to receive – but also in the financial burden that each state would face in offering coverage to needy people within their borders.

4. Federalization would allow for countercyclical spending.

In bad economic times, states receive fewer tax revenues while facing increased Medicaid expenses. The same would be true if Medicaid was federalized, of course. But, unlike most states, the federal government is not constrained by balanced budget amendments. This lack of constraint allows the federal government to increase deficit spending during economic downturns. While such spending is controversial, most economists agree that it helps counter recessionary forces. In the long term the federal government needs to find a way to keep its budget in order, but it is still a good thing that the federal government retains flexibility to prime the economic pump, so to speak, in times of need.

5. Federalization would push us to control health care costs.

The current federal budget deficit is forcing our nation, finally, to begin a serious discussion of Medicare spending. This discussion is clearly only beginning, and has hardly reached an adult level yet. But adding Medicaid to the federal coffers, because it would aggravate current budget problems, might also focus more serious attention on health care costs. It might force our nation to come up with a serious plan (or two, or three) for controlling costs. Moreover, it would create pressure to develop plans that work not only to control Medicare costs, but also Medicaid. Consequently, we might end up treating enrollees in both programs more similarly. If we do so, we will have addressed an important injustice. It isn’t right that we offer better health care coverage to elderly people than to poor people.

6. Federalization might even be politically feasible.

Ok, I know that sounds crazy. Republicans are in no mood to federalize anything. And adding Medicaid to the federal budget would further increase budget deficits, also not a popular proposition.

But bear with me for a second. Keep in mind, for example, that the majority of governors right now are Republican. These governors would love, yes love, to be relieved of their Medicaid burden. Republican governors are a natural constituency to help promote federalization of Medicaid. I could imagine, for example, a 10– or 20-year federalization plan that allows state Medicaid expenditures to shrink each year over the course of that time, thereby giving governors more flexibility about how to balance their budgets. What Republican governor wouldn’t like that?

I am not suggesting that this would be easy. But federalizing Medicaid is the right thing to do. It is unconscionable that we live in a country that allows needy people to receive health insurance that is often so inadequate that they are turned away by the majority of health care providers.

Let’s bring Medicaid enrollees into the federal system and then work to find a sustainable plan for controlling health care costs – for both Medicare and Medicaid enrollees – while providing necessary health care services to our citizens.

Peter Ubel, M.D., 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 author of Free Market Madness: Why Human Nature is at Odds with Economics—and Why it Matters (Harvard Business Press, 2009). His blog is www​.PeterUbel​.com; 919–660‑7700.

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  1. […] Here is a new post I’ve got up at the Health Care Cost Monitor, in which I try to convince folks that even Republicans should be in favor of federalizing Medicaid. I’d love your feedback, as I’m still developing this idea. […]

  2. Richard L Heaton MD says:

    You do not understand the problem. The mandates on states by the federal government to receive the federal portions of the money used for the medicaid system in each state prevents flexibility and state innovation to try to drive down cost. The federal government has never done a good job of controlling cost in any program that it runs with its one size fits all cram it down your throat whether you like it or not policies. It would be far better if the systems were kept at a sate level with no federal constraints on the medicaid money except that it be used to provide health care for the poor. This would allow fifty different states to act as laboratories to find the most efficient way to provide care instead of turning it over to a federal government that has a history of inefficiency and cost over runs in almost any program(if not all) that they run. I was the chief of a OB GYN department in the army for a short time and was responsible for the department budget. I turned in a rather modest budget and was told by my commander that I had to spend all the money allocated to my department or our budget and therefore his would be cut so of course I did as told and found ways to spend the money.This is not a problem isolated to that hospital or to the army this is the ethos that runs through out the federal government and all its programs. That is why the feds have a 14 trillion dollar deficit. Turning this over to them will simply insure more expensive and less efficient care and in the end less care. As our founding fathers understood and you apparently do not the government that governs the best is that that is closest to home where the individual has some ability to be heard and effect the course of events not in Washington where only lobbyist bureaucrats politicians and lawyers are heard but never the people. Perhaps you want America to become Greece but hopefully you are in the minority.

  3. […] you think? Can States afford this? Should they find a way to afford this? Is it time, as I’ve urged before, to nationalize […]

  4. JDa says:

    Dr Heaton I believe Medicaid needs to be Federalized. Where were you when President Nixon decided after so many Americans thought how unfair all the state disability programs were and he got congress together and placed all State disability programs under the Social Security Administration. Social Security Disability Program of today is very fair. Dr Heaton wants schools to close. He wants roads to crumble like a earthquake even though a earthquake didn’t happen

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2 Trackbacks

  1. By Federalizing Medicaid | Peter Ubel on June 13, 2011 at 11:25 am

    […] Here is a new post I’ve got up at the Health Care Cost Monitor, in which I try to convince folks that even Republicans should be in favor of federalizing Medicaid. I’d love your feedback, as I’m still developing this idea. […]

  2. […] you think? Can States afford this? Should they find a way to afford this? Is it time, as I’ve urged before, to nationalize […]

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