NCPA - National Center for Policy Analysis

Reforming Medicaid

June 25, 2014

According to James Capretta, Senior Fellow at the Ethics and Public Policy Center, Medicaid today looks nothing like the program that Congress created in 1965. The focus of the 1965 Social Security Act amendments was Medicare, not Medicaid, and the authors of the amendments had no idea that they were creating what would become the largest entitlement program, measured by enrollment, in the country.

Seventy million Americans receive Medicaid at a cost of $440 billion annually, and the program is marked by shortcomings -- from political accountability issues to perverse incentives and a lack of spending discipline.

One way to reform the program is through the waiver process, a provision within Medicaid which allows states to seek permission to modify and tweak Medicaid within their borders. However, the approval process is political and subjective. Real reform, Capretta writes, would require federal legislation.

Capretta identifies a few statutory reform options, one of which involves using a system of fixed block grants:

  • Converting federal funding of Medicaid to a fixed sum of money -- not one that changes depending upon state spending -- would give states incentives to manage Medicaid dollars more effectively.
  • Moreover, the federal contribution would not decrease if a state cuts its costs, giving state taxpayers the savings from increased efficiency and cost-cutting.

The main problem with Medicaid, says Capretta, is that neither the federal nor the state government is completely in charge. To reform the program, lawmakers need to transform the federal-state relationship, with the federal government giving states -- who decide how to spend the funds -- a fixed level of support.  

Source: James C. Capretta, "Reforming Medicaid," in The Economics of Medicaid: Assessing Costs and Consequences, Mercatus Center, May 2014.


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