Put Medicaid on Welfare

Put Medicaid on Welfare
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The American Health Care Act (AHCA), which was recently passed by the House of Representatives, proposes a radical change in Medicaid funding. Bill Clinton-era welfare reform served as a guide for the latest health care reform push—but to be successful, we must draw the correct lessons from those efforts in the 1990s.

Aid to Families with Dependent Children (AFDC), the pre-welfare reform cash assistance program for the poor, was a joint state-federal program, just as Medicaid is. Under this arrangement, Washington provides much of the funding and states operate the programs. Funds are distributed via matching grants, under which each dollar spent by states is matched by dollars from Washington. Medicaid varies the matching rate from between one and three dollars, with lower income states getting more. Notably, the Medicaid match has been open-ended--meaning as states spend more on approved coverage, they continue to receive more federal money.

The welfare reform signed by President Clinton in 1996 replaced AFDC with Temporary Assistance to Needy Families (TANF). TANF shares federal dollars using block grants, under which the federal transfer to a state in a given year is fixed, with relatively few strings attached. The AHCA proposes a slight variation on the block grant principle, with states receiving a fixed dollar amount per beneficiary beginning in 2020 (within five benefit categories). Federal assistance adjusts based on the number of enrollees. The AHCA also gives states the option of a straight block grant just as with TANF.

Block grants have been an important reason why there are 10 million fewer Americans on welfare today than in the early’90s, all without an increase in child poverty as critics of reform then feared. Matching grants create perverse incentives for states, which bear neither the full costs of over-generous programs nor retain the full amount of any savings from improved efficiency. As half or more of any Medicaid cost increase is paid for by Washington, state legislators are generous when spending federal dollars. Conversely, states only get to keep at most half of any savings from reducing Medicaid waste or abuse, thus there is little incentive to undertake any such efforts.

With block grants, meanwhile, states pay the full cost of expanding a program and keep all of the savings from reducing waste. The amount of federal assistance remains the same either way. State legislators must weigh the full cost of their generosity in such a system, enhancing efficiency in how they spend tax dollars.

Matching grants also impose conditions on state programs for eligibility, such as which groups of persons and types of care must be covered under Medicaid. Under AFDC’s matching grant system, states could not craft work requirements that best suited their population and economy without running afoul of federally imposed conditions. 

Block grants, by contrast, allow states flexibility in designing programs to meet local needs and conditions. In the case of welfare reform, moving to block grants allowed states to tailor work requirement policies for local conditions.

Opponents of welfare reform in 1996 feared that some states would drastically slash benefits, forcing remaining states to do the same or become welfare magnets. This “race to the bottom” did not materialize because welfare reform wisely included maintenance-of-effort provisions, which limited potential state cuts in benefit levels. This safeguard prevented a wholesale diversion of the block grants to other state spending. 

Also key to the success of welfare reform were the policy experiments that occurred before the 1996 law was signed. The innovative policies that transitioned millions of Americans from welfare to work emerged from waiver programs under the old AFDC. Similar recent experiments under Medicaid waivers suggest that the time may now be right for Medicaid reform. 

One weakness of welfare reform was the rather narrow application of the block grants. TANF is but one of dozens of means-tested assistance programs. The benefits of welfare reform would have been greater if more assistance programs had been combined into one super block grant. Given the close connections between medical expenses and health choices, broad block grants would be particularly valuable for Medicaid.

A Medicaid program made more efficient due to block grants would be unlikely to produce the same reduction in enrollees as seen with TANF, which helped transition Americans off of welfare and into work. But block grants are a useful tool even when reducing enrollees is not the goal. A more likely outcome for Medicaid is better coverage for core beneficiary groups. States currently choose to cover optional treatments in pursuit of matching dollars, spreading available federal dollars very thin and contributing to the chronic problem of low Medicaid reimbursement rates. 

In sum, block grants are not a panacea for federal and state budget woes, nor can they magically eliminate the cost of providing medical care to the nation’s poor—but their provision of flexibility and incentives for fiscal discipline allowed states to get welfare spending under control. It’s now time to put Medicaid on welfare.

Daniel Sutter is a professor of economics at Troy University and a senior affiliated scholar with the Mercatus Center at George Mason University. He is the author of “Welfare Block Grants as a Guide for Medicaid Reform.”

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