Part 2: Thinking About Reform

Yesterday’s post made two points: (1) Medicaid is hopelessly unsustainable, regardless of the outcome of the Supreme Court litigation. (2) The brawl over ObamaCare’s Medicaid expansion isn’t a conflict between an imperious federal government and virtuous states; it is a conflict that pits the profligate states that have historically driven Medicaid’s  expansion (and are defending ObamaCare in the Supreme Court) against the more cost-conscious plaintiff states. In conjunction, these points suggest an urgent need for a political reform strategy—one that builds on Medicaid’s actual dynamics, as opposed to federalism and “devolution” tropes; not the perennial non-starter of “block-granting” Medicaid, but something like a “free state” solution.

Past as Prologue

Block granting is the standard conservative “solution” to Medicaid. The Gingrich Congress proposed that strategy in 1995 (when it foundered on President Clinton’s veto). The Bush Administration proposed it (under it different name) in 2002-2003. Republican governors, candidates, and operatives propose it once a week. This week, House Republicans have introduced a “State Health Flexibility Act” (SHFA) that would replace Medicaid and the Children’s Health Insurance Program (CHIP) with a block grant to the states. The bill would repeal ObamaCare in toto; liberate states to serve their Medicaid populations as they see fit; and, by freezing federal transfer payments at 2012 levels, save $1.8 trillion over a decade, relative to projected expenditures. What more can one ask for?

Sanity. For any number of reasons, a capped Medicaid block grant can’t be enacted. And even if enacted, it would most likely drive health care costs up, not down.

Start with the baseline problem: the SHFA would freeze each state’s transfer payments at 2012 levels, presumably because that is “fair” to each state. However, those payments are largely a function of each state’s own past (mis)conduct—specifically, the propensity to maximize federal transfers. Rich states can afford that opportunistic strategy more readily than can poor states; hence, they tend to be the biggest Medicaid beneficiaries. New York takes the cake: depending on the service, costs per poor resident are four, five, ten times those of the least profligate states.  Medicaid experts from the Urban Institute to AEI have sharply criticized Medicaid’s egregious misallocation as indefensible.

A block grant proposal that gains any kind of traction will invite rampant opportunism. If current expenditure levels are the baseline, states will literally go for broke to drive it upward.  (This happened in the run-up to the GOP’s fabulous “Medigrant” in 1995.) You can’t sweet-talk states into a money-saving capped block grant; you’d have to spring it on them. That cannot be done.  Moreover, the manifest irrationality of the baseline will invite tons of argument. The only way to solve the distributional conflicts is to pump more money into the system so as to make everyone better off. For that reason, the Bush Administration’s proposal envisioned automatic 8.5 percent payment increases per year. As if that would fix our fiscal wagon.

Because it wouldn’t, the proposed SHFA proposes to freeze current expenditures. (The difference between that baseline and Medicaid’s projected off-the-charts growth is where the supposed savings come from.) It’s conceivable that “good” states, with responsible governments, might take and then live with a freedom-for-fewer-dollars bargain: liberated from federal mandates, they may be able to realize Medicaid savings. However, a block grant scheme that permits good states to do good things will also permit bad states to do very bad things: fork money over to providers, throw needy citizens off the rolls, and scream crisis!; offload “dual-covered” elderly into Medicare; and so on. Costs will go up, services will go down, and Congress will re-categorize the program and increase funding. The supposedly tough-minded SHFA explicitly provides for that option.

The Free State Option

What might meaningful reform look like? The first, essential step, as noted, is to think of Medicaid not as a vertical, feds-versus-states problem but as a horizontal, good-versus-bad states problem.

The principal force that once upon a time limited the reach of the central government wasn’t the enumerated powers doctrine, or a more limited understanding of the spending power, or anything of the sort. The force was sectionalism—a fundamental, non-negotiable divide among states, with a significant number of states on both sides. If there are enough (fifteen-plus) anti-centralization states to prevent the majority states from rolling over the minority, and if their coalition is sufficiently firm to prevent the majority from bribing defectors into a minimum winning coalition, federalism will survive.

Historically, the divide has been defined by race, slavery and Jim Crow. That is no longer a salient federalism dimension. Strikingly, however, the sectional divide has survived or perhaps re-emerged around a different set of issues—emphatically including ObamaCare.

The map below shows the plaintiff-states in green and states with right-to-work laws in grey. The overlap is striking—no? Call this the free-state coalition. (Right-to-work laws are a good marker for a state’s general regulatory climate.)

The pink states are the ones supporting ObamaCare in the Supreme Court—predominantly, wealthy (though mostly declining) states that have served as principal engines of Medicaid expansion.

The central political task is not to be nice to “the states.” It is to block California, New York, Illinois, and their semi-socialist pilot fish from arranging federal law and policy in accordance with their preferences, to the detriment of and at variance with the preferences of the free-state coalition.

I have suggested earlier what that might look like: nationalize Medicaid and give the money to poor people, not politicians in Albany or Sacramento. Or, provide a proportionate income tax rebate to taxpayers in states that opt out of Medicaid. I’m perfectly open to additional suggestion. The larger point is this: one way or the other, we will have to make our federalism, and ourselves, safe for California et al.  ObamaCare is far from the only front in that war; but it is a very fine place to start.