To Fix Medicaid, Federal Government Should Increase State Payments
Or Start New Federal Insurance Program, Health Affairs Article Says

Urban Institute Scholars Examine State-Federal Relationship,
Say Medicaid Stresses State Budgets While Leaving Gaps In Coverage

BETHESDA, MD—The federal government should either increase its Medicaid contribution to states or start a new federal insurance program to close the gaps in coverage for the uninsured and ensure stable financing for any program, according to an article published today as a Health Affairs Web exclusive.

In an article examining the state-federal relationship in health policy, Urban Institute scholars John Holahan, Alan Weil, and Joshua Wiener acknowledge that the partnership that created Medicaid and the State Children’s Health Insurance Program (SCHIP) has accomplished a great deal in covering needy Americans.

Specifically, it finances care for millions of children and adults, including paying for about one-third of all births, has improved access to care and reduced out of pocket spending for a population that is less healthy than average, and directly and indirectly supports safety-net providers.
It also provides care to low-income Americans with a wide range of disabilities, supports the nation’s long-term care system, and pays for prescription drugs for many low-income elderly and disabled people. But despite the expense of $256 billion on Medicaid in 2002, more than 40 million Americans were uninsured. The program also has a host of other challenges, including:

• A threefold variation in coverage and spending per low-income person, contributing to a roughly threefold variation in uninsurance rates for both adults and children; this is well beyond what was intended in the design of the program, which incorporated high matching payments for low-income states to promote equity.

• Financial instability for states, because of pressure on state budgets during recessions when demands on Medicaid grow while state tax revenue slows, but also over the long run as Medicaid expenditures are projected to exceed state revenue growth even in good economic times.

• Distrust between the federal government and the states, following efforts by states to shift more of their costs onto the federal government through schemes that effectively raise the federal matching rate.

• Limited replication of successful state experiments in coverage expansions, managed care, and long-term care.

To meet these challenges and accomplish three goals—filling coverage gaps, ensuring more uniform coverage from state to state, and stabilizing program financing—the authors suggest a stronger federal role in covering low-income people and other needy people.
“It is time to rethink the allocation of responsibility between states and the federal government in coverage policy,” the authors say. “A greater federal role in financing coverage is necessary.

“Providing health care to low-income people is expensive, and the federal government is better positioned than the states are for a task such as this, which requires redistributing income. The federal government is also better positioned to provide countercyclical financing.”

The authors propose two options. One is raising and standardizing eligibility criteria for Medicaid and SCHIP, as well as simplifying optional eligibility groups, with strong incentives for states to go beyond the federal minimum. The federal government would support this option by increasing the federal match rate for every state by fifteen percentage points.

The second option would be to create a new federal program for low-income people, taking responsibility for many populations now covered by Medicaid while allowing the states to go farther. The existing shared state-federal relationship for long-term care would remain in place.

In both options, the federal government would assume complete responsibility for the acute care costs of seniors eligible for both Medicare and Medicaid, and the current disproportionate share hospital (DSH) payment program would be eliminated (and potentially replaced).

While both options would “create a sturdy federal floor of coverage for low-income populations,” they would have different effects on coverage and on state and federal finances. The first option would give states greater incentive to expand coverage beyond a federal floor and would still allow administrative variations between states, while the second option would leave it up to the states whether and how to expand coverage, without a federal incentive, but would bring about greater uniformity. On the fiscal front, both options would increase federal costs, offset by savings to the states, and would extend more fiscal relief to states that have already taken more steps to expand coverage than to those that have not.

The article is a synthesis of a new book, “Federalism and Health Policy,” edited by the three authors of the Health Affairs article. Published by the Urban Institute Press, the book is due out July 22.

John Holahan directs the Health Policy Center at the Urban Institute in Washington, D.C. Alan Weil directs the Assessing the New Federalism project there. Joshua Wiener is now a fellow at the Research Triangle Institute.

The work was supported by the Robert Wood Johnson Foundation and other supporters of the Assessing the New Federalism project: the Annie E. Casey, W.K. Kellogg, John D. and Catherine T. MacArthur, and Ford Foundations.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.

©2003 Project HOPE–The People-to-People Health Foundation, Inc.