On Medicaid, Follow Reagan's Lead

On Medicaid, Follow Reagan's Lead
AP Photo/Ira Schwarz, File

Health-care reform collapsed into a pile of rubble just before Congress began its August recess. Somewhere in the debris lies the idea of capping the federal government’s share of state Medicaid spending. Not too long ago — August 1981 — a similar proposal saved a lot of money. There is a lesson to be learned looking back to that time. President Reagan didn’t get a cap, but he did sign into law an across-the-board reduction in federal payments to states. When Congress moves forward with a budget process, that 1981 compromise could be a model for 2017.

Here’s what happened in 1981. The newly elected Republican president proposed a cap on Medicaid. Each state’s spending would be limited to the inflation rate. The Senate, controlled by Republicans for the first time in a generation, adopted the proposal. The House, still controlled by Democrats, did not. The House offered an alternative, an across-the-board reduction in the federal share for three years. The two bodies compromised on an across-the-board reduction, but a larger one than the House had proposed. The House prevailed on form; the Senate on the amount saved.

The fundamental difference between the two options stems from the rate of increase in medical costs. Health-care costs have grown faster than prices in general. As long as that pattern holds, a cap tied to inflation puts Medicaid on a different fiscal path than knocking off a few percentage points from the federal government share. Two lines with different slopes grow further and further apart.

The choice between a cap and an across-the-board reduction involves three roles Medicaid plays. In the federal budget, Medicaid takes more general revenue than any other domestic program. In America’s fiscal federalism, the financial relationship between the federal government and the states, Medicaid dominates dollar flows from the federal to state government. In health policy, nothing does more than Medicaid to define health care for those with disabilities and those with lower incomes.

Each of these roles provides a way to see the comparison between a cap and an across-the-board reduction. Both can achieve the same amount of savings over some particular range of years. They are very different approaches to fiscal federalism. A cap ends Medicaid’s open-ended payments to states. It thus moves risk to states. States face balanced budget requirements that the federal government does not. States will do something if the risk turns real. And that leads to health-care policy, where states may decide to manage risk at the expense of health-care providers or Medicaid users.

The across-the-board reduction may be something that can be salvaged from the wreckage left before the recess. It refocuses the debate on one topic: How much should Medicaid contribute towards the total savings in a budget package?

The Congressional Budget Office (CBO) did not break out savings from the cap from other Medicaid changes in either its assessment of the House passed bill or the version that went to the Senate floor.

But it does provide enough detail about its Medicaid assumptions to come up with a ballpark estimate. The Senate considered a proposal to begin a cap in 2020. A cap that began then and went up by CBO’s inflation assumption would likely save $214 billion over 7 years. A 6.1 percent across-the-board reduction would save the same amount over that period.

An across-the-board reduction leaves for another day the question of how the federal government and the states should allocate the risk that medical costs will rise faster than inflation. It also deflates scenarios that can be described using ugly and frightening terms like “slash,” “ration,” and “harm seniors.” It is an approach that can help address a pressing question: How can the domestic program that uses the most general revenue be made into less of a budgetary challenge?

Hanns Kuttner is a senior fellow at Hudson Institute. He was on the health policy staff for President George H. W. Bush and worked at OMB in 1981.

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