The Solution:

Medicaid Block Grants for the States

Limited state block grants and the elimination of most federal regulation unleash two forces that will drive efficiency:

1)   Limited block grants give states the incentive to run lean, efficient programs. If a state’s Medicaid expenditure exceeds the budgeted amount, the extra cost must be absorbed by that state, not shifted to other states. This motivates each state to craft a Medicaid program that stays within budget rather than expand the program to draw in additional federal funds.

In addition, this model unleashes the power of the federalist system. As 50 states work on refining their Medicaid programs, each can learn from the others. If Florida finds a more effective way to reduce overuse than Virginia, Virginia can implement those ideas the following year. If Virginia comes up with a better way to reduce fraud than Florida, Florida can adopt Virginia’s model the next year.

2)   Ending onerous federal mandates gives states the ability to streamline oversized Medicaid programs. Freeing states from regulations such as the Maintenance of Effort provision in the PPACA allows states to restructure the program to ensure Medicaid provides efficient medical care to only those who truly need public assistance. This will give states the ability to reduce the state Medicaid spending that crowds out spending on education, transportation, and other state priorities. (See Appendix.)

Giving states both the incentive and the ability to craft lean, efficient Medicaid programs addresses both the federal and the state budget shortfalls. The fact that federal Medicaid spending is determined by state Medicaid spending makes it difficult to budget federal Medicaid expenditures. Block grants enable Washington know exactly how much this program will cost.

Federal Savings

The final question is how much would state block grants reduce federal spending? Two recent reports suggest the savings would be significant:

•     The Congressional Budget Office recently released a report analyzing the state block grant proposal in Congressman Paul Ryan’s 2012 budget. The CBO concluded state block grants for Medicaid would generate a 35 percent decrease in federal Medicaid spending by 2022.*

•     The Center for Medicare and Medicaid Services recently released a report projecting future Medicaid spending. That report estimated total Medicaid spending to reach $896 billion by the end of the decade.** Because Washington funds approximately 60 percent of Medicaid, federal Medicaid spending will approach an estimated $540 billion by 2019. If state block grants cut this by 35% (as noted above) this would result in an annual savings of $189 billion.

Even if one assumes state block grants would reduce federal Medicaid spending by only 10 percent (far less that the 35 percent CBO projection noted above), by the end of the decade these changes would generate approximately $50 billion of federal savings annually. These savings could easily offset the Medicare cuts to physician reimbursement called for by the Sustainable Growth Rate Formula (SGR), prevent the collapse of Medicare, and allow seniors to continue to access care.

A more detailed examination suggests that state Medicaid block grants would indeed cover the SGR budget shortfall. When combined, three areas of increased efficiency produce $30+ billion of savings annually. This equals or slightly surpasses the amount of money needed to stabilize Medicare for seniors:

1)  Cutting Federal Overhead

The federal government currently spends $300 billion each year on Medicaid. Because Medicaid is a joint federal-state venture, both the federal and state governments must have infrastructure to run the program. By turning primary Medicaid oversight to the states, much of the federal Medicaid bureaucracy can be dismantled without shifting additional cost to the states.

Estimates place administrative costs at 4 to 6 percent. This represents a cost of $12 to $18 billion. Dismantling much of the federal Medicaid oversight system could save an estimated 2 percent of federal Medicaid spending.

      Estimated annual federal savings:
      $6 billion.

2)  Reducing Waste, Fraud and Abuse

Experts estimate that fraud and abuse consume approximately 10 percent of Medicaid spending, or 30 billion federal dollars each year.***Under the current system of an unlimited federal match, states actually receive additional federal funding for increased Medicaid spending. This gives them little incentive to carefully guard against fraud and abuse.

Block grant legislation should have a goal of reducing fraud and abuse by one third. Any further reduction of fraud and abuse would go directly to state savings. This policy proposal will incentivize states to more effectively screen for fraud, waste, and abuse.

      Estimated annual federal savings:
      $10 billion.

3)  Shift Some Long Term Care Coverage to the Private Sector

Long-term care represents approximately 1/3 of Medicaid spending, or approximately 100 billion federal dollars annually. Current Medicaid law makes it relatively easy to hide wealth to gain access to Medicaid’s long-term care benefits. To avoid overwhelming both state and federal budgets, Medicaid must return to its original intent: to provide coverage for those who truly need assistance.

However, given the expense of long-term care, even families with considerable financial resources need assistance. This need can be met more efficiently though private, long-term care insurance. By encouraging individuals and families with assets to purchase long-term care insurance, much of this cost can be transferred back to the private sector.

Block grant legislation should have a goal of shifting 15 percent of long-term care costs back to the private sector. Any savings beyond this can go directly to state savings.

      Estimated annual federal savings:
      $15 billion.
                                 

States can employ additional methods to constrain Medicaid costs. However, just the three reforms above save an estimated $31 billion of federal funding annually. Taken together, these could generate the savings needed to prevent the SGR cuts to Medicare. Any savings beyond this would be kept by the states to offset spending on education, transportation, or tax reduction. Allowing states to keep some of the savings further incentivizes them to run lean, efficient programs.