Federal Funding of Medicaid: Block Grant or Capped Matching Funds?

If there is anything that every free-market health economist accepts, it is that the federal formula for funding Medicaid leads to unaccountably increasing spending. Because the federal government matches state spending, states have an unavoidable incentive to spend well beyond their taxpayers’ means. As NCPA’s Pam Villarreal has concluded, this means that richer states actually get more federal Medicaid funds.

Historically, the reform preferred by free-market types is federal block grants, as most recently proposed by U.S. Senator Tom Coburn. This reform should be palatable to the other side, because it is modeled on the successful 1996 welfare reform. Unfortunately, the term “block grant” appears anathema to Democrat politicians. This may be simple guilt by association with conservative Republicans like Dr. Coburn. As a result, block grants go nowhere.

It looks like there is a middle ground — “capped federal matching funds” — a significant step in the right direction. Even better, it is a reform with an emerging track record of bipartisan success. Washington State’s SB 5596, signed by governor Christine Gregoire at the end of May, was sponsored by conservative Republican senator, Linda Evans Parlette, and passed with unanimous support in the state Senate and Assembly.

The federal government will still transfer money based on state spending, but the total amount is capped over a multi-year period. This approach is probably somewhat less effective than block grants. However, it has one overwhelming advantage: It now exists in two states, and enjoys massive bipartisan support, as demonstrated by the vote tally in Olympia.

The other state benefitting from this arrangement is Rhode Island, which received a waiver on the last day of the Bush administration that capped its total (state and federal) Medicaid spending at $12.075 billion through 2013. At the current rate, it looks like the actual spending will be about $9.3 billion — with no evidence of reduced access to care.

Washington’s simple three-page bill authorizes the state to apply to the federal government for a waiver by October 1. Unlike the legislation, the waiver will be dozens, perhaps hundreds of pages long, and may describe too much bureaucracy and regulation. Nevertheless, it is likely to be approved by Secretary Sebelius, who would be unlikely to dismiss such an overwhelmingly popular bill signed by a liberal Democratic ally. And it will save Washington taxpayers billions of dollars in the years to come.

In the long run, advocates of individual choice and fiscal responsibility in health care should certainly continue to advocate universal block grants for Medicaid. However, it would be irresponsible to ignore the beneficial alternative of capped federal matching funds — a reform which has wind in its sails. If Democrats and Republicans in Congress agreed to break the longstanding log-jam on Medicaid reform by negotiating a national cap for federal matching funds, many states — both red and blue — would cheer and benefit.

Comments (8)

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  1. Devon Herrick says:

    The federal government’s current policy of subsidizing state spending at the margin is a recipe for disaster. These perverse incentives lead to wasteful spending and little incentive for cost control.

  2. Stephen C. says:

    I cannot understand why there is so much opposition to a block grant. You would greatly improve incentives at the state level and transfer all the problems to the political entities best suited to deal with them.

  3. Carolyn Needham says:

    I agree with Stephen. Is the block grant opposition more political? based in special interests? I’m interested to hear the counter arguments and see what special interests may exist.

  4. Buster says:

    In my opinion, the opposition to a block grant is because Democrats and advocates for the poor understand perfectly well the perverse incentive to over-spend under the federal matching formula. The federal match is a way to entice states to spend more than they otherwise would.

  5. Linda Gorman says:

    The opposition to block grants flows from the simple determination not to cut any entitlement anywhere.

    Block grants would convert Medicaid from an open-ended entitlement to a program with a budget constrant. It worked amazingly well with welfare and various parties do not want a repeat of that success.

  6. John R. Graham says:

    Agree (as always) with Linda Gorman: Block grants are intolerable to those who wish to always expand dependency. In fact, if I were in charge (an I suspect if Ms. Gorman were, too), the block grants would be zero and the federal government would be out of this business entirely!

    I would hate to see what would happen if Congress voted to make federal disaster relief open-ended matching funds. Governors would declare every autumn leaf-fall a catastrophe!

  7. steve says:

    It is opposed because of the level of decreased spending. Increase the amount, leave it as a block grant, and the opposition goes away.


  8. Jeffrey A. Marshall says:

    Critics of block grant funding suggest that a shift to block grants will reduce federal funding but will not reduce the underlying cost of providing health care to the old and disabled poor. They argue that it will just shift costs to states, localities, health care providers, and families.

    The opponents warn that to compensate for the steep reductions in federal funding, states would either have to contribute far more in their own funds, or, as is much more likely, exercise the new flexibility under the block grant to cap enrollment, substantially scale back eligibility, and curtail benefits for seniors, people with disabilities, children, and other low-income Americans who rely on Medicaid for their health care coverage.

    For example, the block grant model would inevitably result in less coverage for nursing home residents and shift more of the cost of nursing home care to elderly beneficiaries and their families. A sharp reduction in the quality of nursing home care would be virtually inevitable, due to the large reduction that would occur in the resources made available to pay for such care.