NCPA - National Center for Policy Analysis

Medicaid Block Grants and Medicaid Performance

April 23, 2012

Medicaid has expanded rapidly since its inception in 1965.  This could possibly be linked to the program's financial structure, in which the federal government matches state spending.  The incentives are so dysfunctional that states have increased the cost of health care in order to increase the federal matching funds that they receive, says Linda Gorman, a senior fellow at the Independence Institute.

The need for reform is paramount.  This is not only true because the program has expanded rapidly over the past few decades, but also because this trend is expected to continue into the near future.

  • With almost 60 million people enrolled, state expenditures on Medicaid have increased from 0.2 percent of total state tax revenues in 1966 to an estimated 21 percent in 2005.
  • In 1975, just 10 percent of the U.S. population was enrolled in Medicaid, but by 2008, 19 percent of the U.S. population was enrolled in Medicaid.
  • In FY 2010, Medicaid surpassed elementary and secondary education as the largest component of total state spending.
  • Furthermore, the Affordable Care Act will add at least 18 million people to Medicaid rolls.
  • Without reform, some states will see Medicaid spending increase by as much as 50 percent in 10 years.

An obvious reform is to block grant Medicaid funds to the states.  This would grant them greater flexibility in tailoring Medicaid offerings to their state's specific needs, and would place the onus upon the states to limit spending.

  • Block grants would encourage states to mimic successful private health care delivery reforms, and if those reforms reduce spending on acute care by just 4 percent per year, annual spending would fall by $9.5 billion.
  • Another possible benefit from eliminating matching fund finance is lowering the cost of uncovering Medicaid fraud, thus making policing Medicaid fraud more attractive to states.
  • Finally, block grants would remove a significant incentive for states to inflate the price of health care by imposing health care taxes that increase federal matching funds.

Such a reform would likely have the same impact as was seen when Aid to Families with Dependent Children (a federal funds matching program) was converted to Temporary Assistance for Needy Families block grants.  In that case, caseloads fell, poverty was reduced and states streamlined the process.

Source: Linda Gorman, "Medicaid Block Grants and Medicaid Performance," Independence Institute, March 2012.

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