Are Republicans Too Stingy with Medicaid?

By John C. Goodman and Thomas Saving 

Originally posted at Forbes, August 2017

Before the Senate voted on a “skinny” alternative to Obamacare, it was considering the House version of repeal and replace – called the Better Care Reconciliation Act (BCRA). President Trump called the legislation “mean” and Republicans were attacked for robbing the poor, the elderly and the disabled of needed health care dollars. But were these criticisms fair?

By the year 2036, Medicaid spending under the Republican proposal would be 35 percent lower than under current law. That’s according to an estimate by the Congressional Budget Office.

The reason? For the first time in its history, Medicaid would be subject to a budget instead of being an open-ended entitlement. Beginning in 2020, the federal allotment for the elderly, blind and disabled would rise by the rate of medical inflation plus 1 percent. For all other beneficiaries, it would rise by the rate of medical inflation alone. Beginning in 2025, all federal Medicaid spending would rise at the rate of general inflation – which is almost always lower than the rate of medical inflation.

The result: Medicaid would grow more slowly than the economy as a whole, even though health care generally is expected to grow faster than the economy as a whole.

This prospect was greeted with howls of protest on the Democratic side of the aisle. But it’s worth noting that Democrats did something very similar with Medicare when they enacted the Affordable Care Act (Obamacare). Thanks to Congressional Democrats, Medicare is no longer an open-ended entitlement. Spending is set to grow no faster than GDP plus .054 percentage points. That’s forever.

The accompanying chart shows what was expected at the time Obamacare was passed. Based on Medicare Trustees projections, the Democrats effectively voted to reduce Medicare Part A spending by 31 percent by the year 2035 and reduce Part B spending by 23 percent.

The Obamacare Medicare spending reduction relies on an automatic mechanism to reduce fees paid to doctors, hospitals and other providers. Here is how it works. The Independent Payment Advisory Board (IPAB) is a fifteen-member group which has the explicit task of keeping Medicare on its targeted spending path. If projected Medicare spending exceeds the target, IPAB must develop a proposal to reduce Medicare spending and Congress must consider this proposal under special rules. Although Congress is free to replace the IPAD proposal with its own proposal, it must achieve the same cost savings. Otherwise, the IPAD proposal cannot be changed without a vote of both houses of Congress, including a three-fifths super majority in the Senate.

[Note: President Obama never appointed the members of IPAB. Nor has President Trump. However, the law provides that if IPAB fails to submit a proposal, the Secretary of Health and Human Services must create its own proposal and the same congressional rules apply.]

In making its recommendations, IPAB is not allowed to eliminate any Medicare benefits or to increase premiums or enrollee cost sharing. As a practical matter, this means the only cost control alternative is to reduce fees to providers. Today, Medicare pays physicians about 80 percent of what private insurance pays.  In 20 years, that will fall to 50 percent.  Clearly this is not a good solution, unless we want to see seniors forced to the back of waiting lines – as bad or worse than what we see in Canada.

One way to think about the Democratic Medicare cap and Republican Medicaid cap is to see them as similar to the “global budgets” other countries have created for health care spending. The rationale is the same, regardless of country. Health spending can only continue rising faster than GDP growth if all other things we consume rise more slowly than GDP. Otherwise, health care will ultimately crowd out everything else we care about.

In the ACA, Democrats also imposed a cap on the amount of money they were willing to make available as subsidies to buyers of insurance in the health insurance exchanges. After 2018, that amount is also scheduled to grow no faster than GDP plus .054 percentage points. In the Senate Republican bill, that figure is lowered to .04.

In our opinion, the Republicans have made a tactical error in all this. Clearly there is pressure for them to increase spending for Medicaid. Where they are likely to end up is where they should have been in the first place: matching the Democrats’ cap for Medicare.

If Medicare, Medicaid and spending on tax credits for private insurance are all subject to the same growth limit and if Republicans choose the very same limit the Democrats put in Obamacare, it will be hard for the opposition party to object. It would also make all federal health programs consistent.

How can we live within those budgets? Instead of squeezing the providers, why not let Medicare and Medicaid patients have access to the full range of market-based services the rest of us have access to? For example, a typical visit to a walk-in clinic for a sore throat or an ear ache costs about $75 in Dallas. But since the Medicaid fee is only half that much, Medicaid patients end up waiting for hours in hospital emergency rooms – where the cost to taxpayers is many times that amount.

We think nothing of letting these same individuals add out-of-pocket money to their Food Stamp allotment when they buy groceries. Why not allow them to buy health care the way they buy food? Issue them a Medical Stamp allotment that can be used same as cash in any health care facility and then supplemented by them as they do at the grocery store.

In general, Medicaid and Medicare pay nothing for a consultation by phone or email or video conferencing. But the market offers these services for much less than a typical doctor visit. On weekends and at night there are Uber-type house calls in some cities for a fraction of what taxpayers are paying for emergency room visits.

Concierge medicine used to be for the rich. But a low-cost version is making its way around the country. Atlas MD in Wichita charges $10 a month per child and $50 for an adult. Patients get access to physicians by phone, email and web cam. They get free lab tests and generic drug prices that appear to be lower than what Medicaid pays.

Dr. Josh Umbehr, who founded Atlas MD, thinks his method of delivering primary care could cut Medicare’s costs by 20 to 30 percent. Why not let him try?

Here is the principle: in order to put our entitlement spending programs on a budget that makes them affordable, we need to let a free market for medical services help us get there.

This article was originally posted at Forbes on August 2, 2017.