What should we do about Medicaid?

Is switching the program to one that gives a block grant to states, as Paul Ryan suggests -- which would allow them the leeway to then govern benefits and eligibility levels -- and then tie the grant increase amount to the general inflation rather than medical inflation rate, an appropriate answer?

Moreover, is this a necessary step to avoid fiscal apocalypse? 

This post analyzes our options, using an MMT-inspired framework that accepts a consolidated Fed/Treasury world-view. 

First, an overview of the problem.

Growth in total Medicaid spending (state and federal) has dramatically outpaced not only the general inflation rate, but also the 4% or so average medical inflation rate over the past decade (Kaiser suggests Medicaid spending has grown about 6% a year).  

Unsurprisingly, as Medicaid is a countercyclical program for which enrollment and thus spending increases as income falls, this trend seems to be accelerating due the Great Recession. 

In 2010, total Medicaid spending was .389 trillion or about 2.7% of overall GDP. Without drastic reform, that percent will continue to increase even before considering the effects of the Medicaid expansion under the Affordable Care Act. While perhaps blunted by the Supreme Court’s decision that forcing states to expand Medicaid is coercion, this change is still likely to further increase spending with the federal government picking up most of the tab.

Through a proper understanding of Modern Monetary Theory, however, we know, however, that the federal government is not at risk of being bankrupted by Medicaid spending, as it is a currency issuer. Instead, the real risk is to federal government deficit from Medicaid spending is that it will accelerate to the point that it drives unacceptable levels of inflation. 

This is definitely a risk in the long term, and for that reason, once a sufficient enrollment threshold is met  (i.e. perhaps the point where there are few uninsured ineligibles and the pro-cyclical effects of rising income promotes disenrollment in favor of private plans), I would recommend tying benefits levels to medical inflation to avoid rationing of new medical technologies. But, in the present economic environment, I see no reason for the federal government to worry about Medicaid driving inflation in the short term -- instead, it is a potential source of stimulus.

So, everything seems fine?

 Nope.

While bankruptcy is not a fear at the federal level, the opposite is true for states.

Like a household, they must tax in order to generate funding for their portion of Medicaid programs. Once more, this is required spending amount that increases when revenues decrease during recessions. Thus, in the current system, states are forced to make draconian cuts to balance a budget because  growing Medicaid spending is eating up an ever greater percent of decreasing revenues.  In this way, the state Medicaid obligation contains a pro-cyclical force promoting public sector job losses – exactly what we don’t want to happen!

Under a block grant tied to inflation, states very well could reduce Medicaid spending but they would do this by likely restricting eligibility or benefits for poor residents. This solution thus results in a deplorable loss of coverage for children, families and poor people in general. Also significant is the fact that  it removes an important counter-cyclical automatic stabilizer fighting unemployment.

The correct response seems obvious enough: the federal government should cover less than 100% of Medicaid but not much less than that -- that is, enough to keep some skin for states in the game without compromising their overall budget in any real way. Thus, federal Medicaid obligations will immediately exceed 2.5% or so of GDP. In the long run, measures will have to be put in place to control the inflationary bias of this program. In the short run, the focus should be, however, on its simulative effect.

In a broader sense, it makes more sense to me at least for our government – if it is not going to provide universal healthcare -- to be in business of providing children and families’ healthcare at least, instead of the elderly as pediatric healthcare is cheaper and a produces more years of healthy future workers per dollar. Sadly, it is exactly this population that will face medical rationing if current policy suggestions go into effect.

Unless we overcome the collective delusion that we have no funds to pay for healthcare entitlements, it will be our children rather than our grandchildren who suffer.