Mediscare, Mediscaid, and Block Grants

AEI’s  J.D. Kleinke has a long, eye-opening Forbes piece on the latest fads and foibles in the health care market. Aetna and Wellpoint have been buying up health (managed) care providers that principally service Medicaid populations. The valuations are rich: Wellpoint paid a 50 percent market price premium and about 18.4 forward PE for Amerigroup.

Behind this “Fools’ Gold Rush” is, of course, the Affordable Care Act, which (if implemented) will unleash mass migrations on a scale last seen when the frontier was still open—for example, from private and state plans into “exchanges” or Medicaid. Among the migrants are an estimated 9 million “dual covered” folks who are currently covered under Medi-care and –caid and will eventually be moved entirely into  Medicaid. With something like $300 billion in revenues on the table, the betting is that there’s money to be made in that market. But how?

Maybe the providers can work some managed care miracles. However, Kleinke (a former health care executive) points out, the real bet is on simple premium arbitrage: move the geezers from fee-for-service Medicare into Medicaid, where reimbursement rates are below rock-bottom. Pocket the difference. Repeat.

For this play to succeed, at least two groups have to cooperate:  patients, and politicians. Oops: patients probably won’t like being shuffled off into the Soviet-level Medicaid system, and politicians will mow down profit margins at the first sign of their existence. Between the patients and politicians will sit the health care profiteers, and what a wonderful world it will be for them.

I’ll add this to Kleinke’s trenchant observations: the market moves are yet another roadblock (as if any were needed) to the Romney-Ryan idea of block granting Medicaid. Replacing the feds’ open-ended Medicaid programs with a more moderately increasing block grant, we are asked to believe, will save well north of $1 trillion. States will still be better off because they’ll be free from federal “mandates.”

No way. Whatever savings and efficiencies are to be had in this miserable sector will have to include the providers’ profits. They know it. They will work to block it. And their lobbying muscle is rivaled, if at all, only by their stupidity in matters of corporate strategy. If team Romney makes it over the hurdle, it will need a Medicaid Plan B.

Michael S. Greve is a professor at George Mason University School of Law. From 2000 to August, 2012, Professor Greve was the John G. Searle Scholar at the American Enterprise Institute, where he remains a visiting scholar. Before coming to AEI, Professor Greve cofounded and, from 1989 to 2000, directed the Center for Individual Rights, a public interest law firm. He holds a Ph.D. and M.A. in government from Cornell University, and completed his undergraduate studies at the University of Hamburg. Currently, Professor Greve also chairs the board of the Competitive Enterprise Institute and is a frequent contributor to the Liberty Law Blog. Professor Greve has written extensively on many aspects of the American legal system. His publications include numerous law review articles and books, including most recently The Upside-Down Constitution (Harvard University Press, 2012). He has also written The Demise of Environmentalism in American Law (1996); Real Federalism: Why It Matters, How It Could Happen (1999); and Harm-less Lawsuits? What's Wrong With Consumer Class Actions (2005). He is the coeditor, with Richard A. Epstein, of Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy (2004) and Federal Preemption: States' Powers, National Interests (2007); and, with Michael Zoeller, of Citizenship in America and Europe: Beyond the Nation-State? (2009).

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