The price of being cheap

A few months back (although it feels like a few years ago), I posted a bit about what's going to happen to Medicaid under these health reform proposals. The gist of it was that Medicaid is going to be expanded to cover more people. At the time, the House bill called for expansions of Medicaid to include people whose incomes are up to just over 133% of the poverty line. That was later changed to 150% of the poverty line in the final bill that passed out of the House.

What's the virtue of doing this (from a politician's perspective)? It's cheap. Medicaid pays peanuts for the services that its recipients utilize. The downside of this, of course, is that many doctors don't bother to accept Medicaid clients because it's not particularly profitable (and Medicaid recipients as a group are generally difficult to deal with for a variety of reasons). But if we cover more people with Medicaid, that's a lot cheaper than helping to subsidize the purchase of private insurance. So instead of helping some uninsured person at 140% of the poverty line pay for private insurance, we'll be sticking him on cheap government insurance. This brings down the price tag of the bill.

But as that older post I referenced discussed, Medicaid is both cheap and very expensive. States never pay more than half of the costs of it and yet it still consumes an enormous chunk of state budgets. In fact, it's generally one of the two biggest items in state budgets (the other is education). And a great many states are in very serious financial trouble right now. As incomes drop during recessions and state tax revenues fall, more people tend to become eligible for Medicaid just as states begin having more and more trouble paying for things they could afford during the good times. In fact, since there are federal programs that give you a bit of a health care grace period when you lose your job--allowing you to keep getting the health insurance you got through your employer for a few extra months as long as you pay for it (or, thanks to the stimulus, 35% of it, with the feds temporarily picking up the rest of the tab)--the swelling of the Medicaid rolls tends to lag the worst of the recession a bit. So states might be taking an even bigger financial hit on Medicaid this year than they did last year. So what happens when Congress tells the states "oh, by the way, you're now required to cover more people and incur even more expenses than you did before"?

Bad things.

I got to listen in on a interview call the other day with the director of a certain national non-profit organization. This director mentioned that she had recently talked with representatives from a handful of states who indicated that unless they received more stimulus money to pay for certain programs, they were going to very seriously consider withdrawing from Medicaid funding. And this isn't an ideological threat; she indicated that 75% of the states who told her this were Democratic states.

States face certain requirements when they receive matching funds for their Medicaid program but they aren't required to actually have a Medicaid program. Indeed, the last holdout, Arizona, didn't institute a Medicaid program until 1982. But now certain states seem to be giving very serious thought to ending their programs because they're simply too expensive.

As you may remember, Senator Ben Nelson of Nebraska took a lot of heat recently for inserting a little sweetheart deal into the Senate bill for his home state: the costs of expanding Medicaid in Nebraska are to be borne by the federal government indefinitely. That is, they'll accept more people into their Medicaid program but it won't cost Cornhuskers any additional money because Uncle Sam is writing the check. Certain other states were understandably peeved that they're not getting the same perks as Nebraska. In his State of the State address recently, California's Governor Schwarzenegger was blunt:

"California's congressional delegation should either vote against this bill that is a disaster for California or get in there and fight for the same sweetheart deal that Sen. Nelson of Nebraska got for the Cornhusker State," Schwarzenegger said in his state of the state address on Wednesday. Schwarzenegger said Nelson "got the corn and we got the husk."

(In case you're wondering about the state of that State: they're in deep shit.)

They want the deal, too. And maybe they'll get it. There were rumblings that the final, final, final bill (the all-important center box) that's being drawn up now (and should be out this week) might federalize the Medicaid expansion for every state indefinitely. I don't know how much that would cost the federal government or how it would bloat the price tag of the final bill. But it might keep some states from doing something nobody's ever done before: ending their state Medicaid programs as we know them.