Medicaid's Unseen Costs

Abstract

Medicaid occupies a special place among government programs for the poor. Public support for Medicaid is broader and deeper than for other safety net programs because the consequences of inadequate medical care can be much more immediate and severe than those of a lack of money or even food. Medicaid is now larger than Medicare (the federal health program for the elderly and disabled) and is the single largest item in state budgets, even larger than elementary and secondary education. Yet Medicaid imposes additional hidden costs. Like all means-tested government programs, Medicaid discourages work and charitable effort among the taxpayers who fund it, while discouraging self-sufficiency and encouraging dependence among beneficiaries. Medicaid also imposes costs that stem from overuse of medical care, increasing costs for private payers, and giving patients poorer quality care than they could obtain with private coverage. As it did with federal cash assistance, Congress should: (1) cap federal Medicaid spending, (2) block grant federal funds to the states, and (3) allow states full flexibility to define eligibility and benefits under their Medicaid programs. States should use that flexibility to target Medicaid assistance to the truly needy, reduce dependence, reduce crowd-out of private effort, and promote competitive private markets for medical care and insurance. That means withdrawing assistance from those who are most able to obtain coverage elsewhere and deregulating health care and health insurance markets so they can meet that need.