The problems with state-based safety nets

This is a perfect example of why Medicaid is not the same as Medicare:

Having counted on Washington for money that may not be delivered, at least 30 states will have to close larger-than-anticipated shortfalls in the coming fiscal year unless Congress passes a six-month extension of increased federal spending on Medicaid.

Governors and state lawmakers, already facing some of the toughest budgets since the Great Depression, said the repercussions would extend far beyond health care, forcing them to make deep cuts to education, social services and public safety.

Gov. Edward G. Rendell of Pennsylvania, for instance, penciled $850 million in federal Medicaid assistance into the revenue side of his state’s ledger, reducing its projected shortfall to $1.2 billion. The only way to compensate for the loss, he said in an interview, would be to lay off at least 20,000 government workers, including teachers and police officers, at a time when the state is starting to add jobs.

“It would actually kill everything the stimulus has done,” said Mr. Rendell, a Democrat. “It would be enormously destructive.”

The Medicaid provision, which would extend assistance first granted in last year’s stimulus package, was considered such a sure bet by many governors and legislative leaders that they prematurely included the money in their budgeting. But under pressure from conservative Democrats to rein in deficit spending, House leaders in late May eliminated $24 billion in aid to states from a tax and jobs bill that was approved and forwarded to the Senate.

Time for a refresher.  Medicare is a federal program.  The federal government is allowed to run a deficit.  Therefore, there is never any talk about running out of Medicare money before the end of the fiscal year.  The government just spends more than it brings in.  This is both bad and good.  Bad, because they, too often, run a deficit.  But it’s also good when it comes to health care.  A rational government would run a surplus budget in good times, but – in bad times – could run a deficit without decimating necessary programs like the health care system.

Medicaid, on the other hand, is a state based program.  States cannot run a deficit.  Therefore, in bad times, they cannot spend money they do not have.  They either have to cut health care spending, cut other parts of the budget, or raise money (taxes, bonds, etc).  Or, they can get money from the federal government to cover the shortfall.

This is especially a problem for Medicaid.*  Federal law can sometimes set regulations for Medicaid, and then it’s up to the states to come up with the money.  You may remember the ACA raised the Medicaid eligibility to 125% of the poverty line for all Americans.  This is a huge increase, which is why the federal government has promised to fund the vast majority of the expansion for a number of years.

If you didn’t notice, we’re in bad economic times.  The amount of money coming into the state treasuries is low.  Therefore, they have to cut their budgets.  This isn’t a Democratic or Republican thing, it just has to occur.  To help, the federal government passed a stimulus package which allocated extra money to states for Medicaid.  But then politics happened.  Panicky Representatives and Senators wanted to appear “fiscally conscious” and cut much of the money.

States can’t suddenly raise taxes for the next few months to amass the necessary billions.  So they either have to gut Medicaid or fire lots of people.  Honestly, what are they to do?

This is why I’ve argued before that Medicaid, like Medicare, may be better as a federal program.  If they are going to set the regulations, they need to come up with the money.  Moreover, Medicaid should not be subject to the swings of the economy; health sure isn’t.

This is not an argument to run deficit spending for Medicaid.  It’s an argument to run deficit spending in bad times.  I would welcome more cost-effective spending for both Medicaid and Medicare in the future.

*I’ve completely left out the fact that leaving Medicaid to the states has also made its coverage variable depending upon where you live.  But I’ve covered that in other posts.

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