Block Grants: The Medicaid Cuts That Aren't

President Obama and his Republican presidential rival Mitt Romney have spent a lot of time arguing over Medicare cuts and reforms this cycle. But the biggest difference between the two is in how they would deal with Medicaid, a health program for the poor and disabled that is jointly funded by federal and state governments.

President Obama's health care overhaul currently has Medicaid scheduled for a massive expansion in any state that chooses to participate. Romney, in contrast, says he would sign a repeal of that health law if it came to his desk. He'd also push to transform the way the federal government finances its portion of the program by converting it into a system of block grants. Currently, the federal government provides essentially unlimited matching dollars to states for the program. Block grants would cap the federal government's per-state spending, and gives states additional flexibility to manage their own programs.

To hear Obama's defenders tell it, this sort of Medicaid reform would cut the program down to the bone and hurt the nation's poorest and most vulnerable. But what they don't talk about is that Medicaid is already a disaster for its beneficiaries. And as for the devastating cuts—well, they're probably not really cuts at all.

Let's start with Medicaid as it is today. In 2011, the federal government spent about $275 billion on Medicaid. In 2012, that number fell to $258 billion, and in 2013, it's scheduled to come back up to $276 billion.

That's what the federal government is spending now. And guess what? Both candidates would have the federal government spend more annually. The difference is that President Obama wants to spend an awful lot more.

Under the original version of President Obama's health law, Medicaid spending was initially projected to hit $622 billion in 2022. Thanks to the Supreme Court's decision to let states opt out of ObamaCare's Medicaid expansion, that number is now expected to be closer to $585 billion, though that could vary depending on how many states choose not to expand Medicaid under the health law.

Exact numbers for Romney's plan are somewhat harder to pin down. But his running mate Paul Ryan's plan to block grant Medicaid serves as a useful proxy. According to the Congressional Budget Office, Ryan's block granting proposal would allocate $332 billion to the program in 2022.

So spending would rise from current levels under both plans. It's just that under a block granted system, it wouldn't rise as fast.

Critics of block granting describe this increase as a cut for two reasons.

The first is that it's less than the current baseline projects. The second is that it's quite a bit less as a percentage of the economy: With block grants in place, the federal government would spend about 1.25 percent of total GDP on Medicaid (adding in state spending would make the overall spending on the program higher) compared with about 2 percent of GDP now and a little more than 3.5 percent under an outlook that includes ObamaCare.

The problem with calling an increase a cut just because it consumes a smaller share of the total economy is that it assumes that if the economy grows, Medicaid spending should grow with it. It's essentially an argument that Medicaid should have a claim on a guaranteed portion of every dollar the economy produces.

Critics also point to estimates indicating that millions of people would lose Medicaid coverage under the relatively tighter spending levels. Estimates prepared by the Urban Institute for the Kaiser Family Foundation, for example, project that at least 14 million fewer people would have coverage—and, if the program's administrators were not able to control per enrollee spending growth, as many as 27 million. That's in addition to those who would not gain Medicaid coverage under ObamaCare.

This sounds dramatic, but the impact is actually relatively modest, especially when considered in the context of the program's recent enrollment expansion.

Between 2007 and 2011, Medicaid grew from covering 42 million people to covering a little more than 52 million. It's a countercyclical program, so as the recession took its toll and people lost employment, enrollment increased rapidly.

Block grants would roll that back somewhat, but would still leave tens of millions of beneficiaries. Under the cost-control scenario, more than 45 million people would remain covered by Medicaid in 2021, according to Urban Institute estimates. Under the cost-growth scenario, the program would continue to cover more than 32 million beneficiaries—still more than were covered in 2000, and still a large chunk of the country's population. 

But that's just coverage. What we should be concerned about most is health. It makes little sense to spend hundreds of billions on a program to provide coverage for tens of millions of people if it does not improve their health. And on that measure, Medicaid's track record is not so strong.

As Manhattan Institute fellow (and outside Romney campaign health adviser) Avik Roy has noted, Medicaid recipients have serious problems with access to care, and numerous studies show that on a variety of specific maladies and treatments, the program's beneficiaries actually fare worse in terms of health outcomes than those with no health insurance at all. Even research suggesting that Medicaid makes some positive difference often shows that it makes very little difference: Cancer survival rates for Medicaid patients are only slightly better than those of the uninsured.

Medicaid produces consistently dismal, or at best mediocre, results. The federal government already spends nearly $300 billion on it. Spending another $300 billion each year to expand its reach doesn't seem likely to make these results substantially better. And as Manhattan Institute Senior Fellow Paul Howard has reported, experiments with varying forms block granting mechanisms in a few states have already produced positive results: saving money, reducing emergency room usage amongst beneficiaries, and robust use of preventive care.

But perhaps the best argument for block granting isn't Medicaid. It's welfare. In 1996, under President Bill Clinton, the welfare program was reformed into a similar block grant program. Lots of liberals warned that the reform would be a disaster for the poor; several members of Clinton's own administration even resigned in protest. Yet the reform is widely viewed as a major policy success. And as Clinton himself has explained, that's not because block grants expanded welfare, but because it reduced enrollment. 

Block granting wouldn't solve all of Medicaid's problems. But it could be a good first step toward mending a broken, expensive program that costs us hundreds of billions each year and provides little to show for it.