Senate GOP Bill Preserves Medicaid

Member Group : U.S. Senator Pat Toomey

By Pat Toomey and Lawrence Lindsey

In 1994, President Clinton declared, “We all now, looking ahead, know that our number one entitlement problem is Medicare and Medicaid. They are growing much more rapidly than the rate of inflation plus population.” At that time Medicaid was just 5.6% of the federal budget, according to the Office of Management and Budget. Now it is 10% of the federal budget and growing.

The Republican Medicaid reform plan builds on exactly the point President Clinton was making. It contemplates reducing the growth rate of Medicaid reimbursements by the federal government to the rate of overall inflation plus the growth in the number of Medicaid beneficiaries. Only in the never-never land of Washington budget accounting and the media’s reporting on it would something that grows with both inflation and population be considered a “cut.”

But there is more involved than semantics. There are the laws of math. A basic fact: no such large component of the federal budget can grow faster than nominal Gross Domestic Product indefinitely. First, it is mathematically impossible; at some point you hit 100% of GDP. Second, and well before that, financing its growth would become economically impossible. Third, it would be politically impossible as increased Medicaid spending would crowd out spending on roads, national security, education and other priorities.

Under current policy, mathematical disaster is inevitable. Medicaid was designed in 1965 as an open-ended entitlement split between the federal and state governments. Whatever its costs are, the government meets them. No family, business, or government can simply declare that it will spend whatever it costs on anything.

Consider the history. In 1970, five years after it was signed into law, Medicaid made up 1.4% of federal spending. It has ballooned to more than seven times that now. In addition, Medicaid spending is consuming an ever greater share of state budgets, rising from 12.5% in 1990 to 28.2% today. In order to maintain this pace, the federal government would have to spend around $5 trillion, with states having to dedicate another $3 trillion, over the next 10 years.

Math is, or should be, a bipartisan fact. In the 1990s, President Clinton and every Democratic member of the Senate recognized the challenges presented by this limitless growth and proposed a substantial and meaningful reform. They wanted to maintain eligibility standards for the Medicaid program, but limit growth of spending on each beneficiary â€" a “per capita cap.”

The Senate proposal adopts that same per capita cap framework but phases in the changes gradually over time. For the first two years, there would be no major modifications to the Medicaid program. Starting in 2020, the per capita cap is implemented but indexed to a rate of growth beyond even that of medical inflation. Finally, eight years in the future, Medicaid spending would be pegged to the rate of overall inflation plus the growth in the number of beneficiaries, a combination that is roughly on par with the growth of nominal GDP.

Making Medicaid mathematically and economically sustainable can and should be done in a way that preserves the level of care. The best way to do that is not by bureaucratic rationing, as current health care policy (including Obamacare) is done, but by allowing the states maximum flexibility in how they administer the program. The Senate proposal takes some steps in this direction, and we hope that further flexibility is included.

Even with the Senate’s modest change, Medicaid can be available for future generations. Without it, it cannot be. The laws of mathematics prevent it. The late economist Herb Stein observed that “If something cannot go on forever, it will stop.” Medicaid growth in excess of GDP growth will stop. The question is whether it stops in eight years, as under the Senate plan, or abruptly as part of a fiscal crisis. For the sake of the millions of vulnerable Americans that depend on the program, we suggest that Congress take the first path.