The inequality at the heart of Medicaid
Over the past few months, Democrats have hammered Republican health care reform proposals as dangerous and devastating for the poor. Sen. Elizabeth Warren exclaimed, “These cuts are blood money. People will die,” while others have suggested that they are the “real death panels.”

Over the past few months, Democrats have hammered Republican health care reform proposals as dangerous and devastating for the poor. Sen. Elizabeth Warren exclaimed, “These cuts are blood money. People will die,” while others have suggested that they are the “real death panels.” These attacks have only the loosest relationship with the facts, but Democrats have a point when they argue that the GOP’s Medicaid reforms don’t simply reinstitute the pre-Obamacare status quo.

Critics frame this as a bad thing and warn that the changes “would end Medicaid as we know it.” But Medicaid has already changed greatly from its authors’ original design. While often failing to secure essential services for the neediest beneficiaries in the poorest states, the program allocates a disproportionate and ever-increasing amount of money to the richest states, whose representatives now boast of it as a “middle-class program.” The program’s lopsided growth has left it poorly focused on its core mission—and needing reform to get back on track.

Enacted along with Medicare in 1965, Medicaid was designed by a moderate Southern Democrat, Rep. Wilbur Mills (D-Ark.), to help states fund essential medical services for individuals on welfare who could not be expected to work for reasons of age, disability, or family responsibilities. Over the past half-century, able-bodied adults have increasingly been made eligible and the array of services covered under the program greatly expanded. As a result, enrollment has increased from 22 million in 1975 to 69 million in 2017, while total spending has soared from $16 billion in 1975 to $545 billion in 2015.

The federal government currently distributes Medicaid funds to states according to how much they themselves spend on services for eligible beneficiaries. The system was intended to offer the most help to the poorest states: providing $3 for every $1 that Mississippi spends, compared with $1 for every $1 that New York spends. But in practice the wealthiest states have been able to put up more of their own money, and have therefore received the lion’s share of funds. As eligibility restrictions have been loosened, this has resulted in enormous disparities: Connecticut, for example, received $12,240 in federal Medicaid funds per resident under the poverty line in 2015, while Alabama was able to claim only $4,070.

To take this escalating inequity in federal Medicaid spending off autopilot, the House GOP has proposed to cap the annual increase in payments that each state is able to claim per enrollee. For adult and child enrollees, the suggested cap increases at the rate of medical inflation, while for the elderly and disabled it increases at the rate of medical inflation plus 1 percent. Future Congresses could adjust these caps every year, but it would prevent the highest-spending states from automatically claiming additional funds without federal taxpayers getting a say.

Democrats have argued that Medicaid costs will increase faster than the rate of inflation, forcing all states to contend with ever-steeper cuts over time. But, per enrollee Medicaid costs grew at an average annual rate of only 2 percent from 2000 to 2015, while the rate of medical inflation has increased by 3.7 percent. A recent report from the liberal Urban Institute suggested that the per-capita caps proposed by the House GOP would actually become more modest over time — reducing spending on the traditional Medicaid population by only $0.4 billion in 2028, a rounding error on the program’s total projected cost of $559 billion. The Senate bill therefore amended the House proposal, from 2025, to link the cap to the general rate of inflation, which has increased at 2.2 percent per year.

In addition, the Senate bill includes a provision specifically designed to narrow the disparities between poor and rich states. It allows the secretary of Health and Human Services to adjust the caps up or down by 0.5 to 2 percent depending on states’ spending relative to the national average. This would help states with little fat in the system, and ensure any cuts are concentrated on the most expensive programs. Congress could further improve this provision by allowing this equity adjustment to compound over time, and amending it to constrain inflated enrollments.

Opponents of per-capita caps have argued that it would prevent a flexible response to sudden spikes in medical needs. But, the current system of open-ended matching funds has fared poorly in allocating resources in response to these challenges. While 39 percent of Medicaid beneficiaries with hepatitis C in Hawaii received prescriptions for Sovaldi, a new drug that costs an average of $84,000 for a course of treatment, in the first quarter of 2014, only 1 percent of those in West Virginia did. In Canada, where the federal government provides a fixed allocation of funds to support health care in each province, unanticipated spikes in health care needs have been met with ad hoc supplemental appropriations. This incremental approach allows a better-targeted response to new challenges than reliance on a system of matching funds, of which many states are unable to take advantage.

Medicaid now costs more every year than the entire U.S. Department of Defense, but its basic services often remain inadequate in the poorest states. We need a fairer way to allocate funds between states to ensure that the neediest Americans have access to essential care, without busting the federal budget. A system of per-capita caps is a good first step to move us in that direction.

Chris Pope is a senior fellow at the Manhattan Institute and author of “How Per-Capita Spending Caps Can Help Advance Equity in Medicaid.”

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