Last night in the State of the Union address, President Obama stated that “the only way to tackle our deficit is to cut excessive spending wherever we find it—in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes. This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit. Health insurance reform will slow these rising costs.”
Is it possible that the President has already forgotten that the health care law included a massive expansion of the broken Medicaid entitlement? According to projected national health expenditures from the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS), Medicaid spending in 2019 will be $896.2 billion. Without the health care law, CMS projects that the amount would have been $802.4 billion.
This means that the President’s health care law will increase Medicaid spending by 12 percent or about $100 billion annually. The extra spending comes from the additional 18 million or so individuals—mostly non-disabled and non-elderly adults without children—who will now have taxpayers paying their health care bills through the Medicaid program.
Two central components of the law expand eligibility to the government-run Medicaid program and offer costly subsidies to an estimated 20 million individuals to purchase health insurance. With an increasing amount of health care subsidization, taxes will increase, but so will the demand for health care services. This problem is exacerbated because there is very limited out-of-pocket payment for Medicaid. The subsidies and the increased third-party payment will cause health spending to grow, not slow.
Medicaid is a broken program for many reasons. First, national spending on Medicaid has more than quintupled over the past two decades, and about 16 percent of the population is currently enrolled. A primary reason state budgets are out of whack is this explosive Medicaid growth and states’ responsibility to finance a portion of its programs costs.
Despite the massive increase in spending, many physicians fail to participate in the program because of low payment rates and a frustrating amount of paperwork. This causes many Medicaid beneficiaries to receive basic care services in the emergency room.
There is evidence that Medicaid provides beneficiaries with a low quality of care. A recent study from the University of Virginia found that Medicaid patients have worse surgical outcomes than individuals without insurance, even controlling for a multitude of personal characteristics.
Instead of doubling down on Medicaid and its existing structure, Washington should consider major structural reform for this troubled program. To start, the open-ended federal reimbursement of state Medicaid spending, which creates perverse incentives for states to grow their programs unsustainably, must be reformed. Then, taxpayer-financed assistance should be targeted to truly deserving individuals using market-based principles that better align incentives of providers, recipients, states, and taxpayers. This is the path to put Medicaid spending on a more sustainable course.
The President should re-read his law if he believes its passage either improved Medicaid for those on it or reduced Medicaid spending growth.
John Carney takes a stab at answering my question about why we have a debt ceiling, saying that it “helps raise public awareness about the costs of government”:
Lawmakers must go on record as approving an increase in the debt limit in order to enable the government to borrow to fund the spending the lawmakers have approved. They must confront, in a very public manner, the costs of the programs they have enacted.
I’m not at all sure this is the actual reason why we have a debt ceiling; at best it’s a behavioral reason not to abolish it. But it’s not a good reason.
Let’s take a personal-finance analogy here. A credit card company comes along and offers you a card with a $200,000 credit limit—much more than you should ever borrow. But you know that if the money is there for the spending, you’ll be more likely to spend it. So you phone up the credit card company and do a deal with them. You set the limit very low—$1,000, say—and then, any time you want to go over that limit, you have to phone up the credit card company and get them to raise it.
You know in advance that the credit card company will say yes: after all, they’ve already told you that as far as they’re concerned they’re happy to lend you $200,000. But being forced to phone them up and ask for a credit-line increase helps to drive home the consequences of your spending decisions, in a way that simply whipping your card out at the Apple Store doesn’t.
So far so good. But what if you were using your card not only to buy iPads, but also to make rent? And what if there were possible glitches with the system whereby you phoned up and asked for a credit-limit increase, so that you couldn’t be sure it would always work? And what if a single late rent payment could be catastrophic, ending up with you thrown out of your home? At that point, your clever system would stop seeming so clever, and start seeming downright risky.
And that’s the problem with the debt ceiling. It might have interesting and possibly even beneficial behavioral second-order effects, although there’s precious little evidence for that. But getting those beneficial effects means playing with fiscal high explosives, which run the risk of blowing up in the economy’s face and causing major damage. It simply isn’t worth it.
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