- The Washington Times - Sunday, November 27, 2005

Medicaid’s runaway costs ravage federal and state budgets. The program, which pays for medical care for the poor, is expected to cost $338 billion in the current fiscal year, up $80 billion, or about 31 percent, in just the last three years.

The feds pay about 57 percent of the program’s costs, with the states financing the rest. CBO projects Medicaid will be one of the main causes of the looming explosion in federal spending in the next few decades. If current spending trends continue, federal Medicaid spending alone will grow from 1 percent of GDP today to about 4 percent by 2050.

State Medicaid spending is growing to almost one-fourth of total state budgets, more than state education expenditures. Conservatives who believe in less government and lower taxes and spending must lead reform to stop these exploding costs. Fortunately, practical and feasible reforms have already been developed to do precisely this.

The model is the mid-1990s reform of the old Aid to Families with Dependent Children (AFDC). Following that model, federal Medicaid spending would be replaced by block grants to each state for its programs for the poor. State programs would have to include a work requirement for able-bodied recipients to qualify for the federal funds.

After such reforms, the number of recipients from the old AFDC program dropped by more than 50 percent nationwide. States with the strictest work requirements reduced their rolls nearly 80 percent because the reforms changed the incentives for the states and the recipients.

As with Medicaid today, the states received a dollar or more in federal funds for each dollar they spent on the old AFDC program. So the states had the incentive to sign up more welfare recipients, bringing more federal money to the state.

But the reforms provide a fixed block grant amount for each state, no matter what the state spends on its program. Any excess costs are now paid by each state alone. And any savings is kept by the state, freeing funds for other priorities.

With these reversed incentives, the states moved aggressively to get recipients off welfare, and limited aid to new, truly needy applicants. This was fostered by work requirements for the able-bodied, which eliminated incentives to go on welfare. If you must work anyway to receive assistance, you may as well take a private-sector job, with possible raises and promotions.

These same reforms adopted for Medicaid would again produce major savings. Even total federal spending on the block grants that maintains the level of current federal Medicaid spending, with no federal reductions for state savings would still save the feds almost a trillion dollars over the next 10 years in increased Medicaid spending without the reforms.

After that first 10 years, the federal block grants could be limited to grow no faster than GDP. Medicaid would then cause no future federal spending rise relative to GDP.

Such Medicaid reform would also make more feasible Social Security reform involving large personal accounts. The enormous long-run federal savings would be more than enough to cover the transition to large personal accounts as proposed by Rep. Paul Ryan, Wisconsin Republican, and Sen. John Sununu, New Hampshire Republican, counting as well the economic growth effects likely under such a reform.

Those large personal accounts, averaging roughly the employee share of the Social Security payroll tax, would make Medicaid reform more feasible. With workers saving and investing in such large personal accounts over their lifetimes, they would each retire with several hundred thousand dollars in their accounts in real terms, close to a million for average, two-earner couples.

Workers could then use part of those huge account accumulations to buy long term-care insurance, protecting their remaining funds from nursing home costs. More than half of Medicaid spending is, in fact, for nursing home care. The large personal accounts proposed by Ryan-Sununu would provide a vehicle to effectively privatize this Medicaid function, making limits viable on the program’s long-term spending growth.

If conservatives want to reduce Big Government, rather than see it explode into full-grown, old-fashioned, Scandinavian socialism, such Medicaid reform needs to be a central, urgent priority of the conservative agenda.

Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation and a senior fellow at the Free Enterprise Fund.

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