NCPA - National Center for Policy Analysis


June 15, 2005

The lessons learned from welfare reform should be applied to Medicaid, says Michael F. Cannon, director of health policy studies at the Cato Institute.

Cannon believes states should experiment with health savings accounts (HSAs) and other approaches, including different rules for different types of beneficiaries. But, he says, far more important than restructuring benefits is reducing the reach of Medicaid's perverse and harmful incentives.

Cannon recommends the following steps for Medicaid reform:

  • First, Congress should stop encouraging Medicaid expansions by freezing payments to states at the 2005 amount, just as welfare reform froze payments to states at the 1995 amount.
  • According to Congressional Budget Office figures, freezing Medicaid spending at 2005 levels would produce $941 billion in savings by 2015, or enough to wipe out 96 percent of the cumulative ten-year federal deficit.
  • Second, Congress should give states maximum flexibility to use federal funds to meet a few broad goals, as it did with the reformed welfare program, Temporary Assistance for Needy Families.
  • Those goals should include targeting medical assistance to the truly needy, reducing dependency, reducing crowd-out of private effort, including charitable care, and promoting competitive private markets for medical care and insurance.

By themselves, these reforms would not alter a single state's program, says Cannon. Each state would have the power to keep its program running and growing just as it would under current law. However, states likely will experiment with ways of providing efficient care to those who truly need assistance and encouraging private charitable care, without encouraging dependency, increasing health-care costs, or imposing a crushing burden on taxpayers.

To state plainly what it means to focus resources on the truly needy, he says, states should use this new flexibility to remove from the Medicaid rolls all those who could obtain coverage elsewhere.

Source: Michael F. Cannon, "Cuts Without Tears," Cato Institute, May 27, 2005.

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