Why not federalize Medicaid?

A way to end the debate tearing apart Democrats and health care advocates

“Better to do a little well, then a great deal badly.” This proverb, usually attributed to Sophocles, aptly describes David Dayen’s perceptive commentary posted today on the New York Times website. He calls on Democrats to end their squabbling over how to scale back Build Back Better (BBB) by focusing on a few, simple, universal programs instead of an expansive list of poorly funded, hard-to-administer benefits that won’t touch most middle-class Americans.

Dayen, who edits The American Prospect, illustrates his point by focusing on the family-friendly segments of the original, $3.5 trillion BBB bill: paid family leave, elder care, housing and daycare assistance and the child tax credit. Any compromise that substantially cuts their funding, limits their reach through means testing, and sets up complicated processes to access (run through insurance companies in the case of family leave) isn’t “worth selling to a skeptical public,” he writes. “After grinding an expansive agenda into paste, Democrats should not expect voters to re-elect the pastemakers so that they can sculpt the paste into something useful.”

Though Dayen doesn’t address health care, the same logic can and should be applied to those components of the bill. So far, the Democratic Party has engaged in a bitter debate about how to fund both an expansion of Medicare benefits and federalizing Medicaid expansion so the 12 states that have so far refused to accept full federal funding will be forced to provide health insurance for low-income people earning up to 133% of the poverty level.

The price tag for each is steep. According to this synopsis, the Congressional Budget Office projects expanding Medicare to include vision, hearing and dental benefits will cost about $300 billion over the next 10 years. Expanding Medicaid would cost an estimated $323 billion. It would require cutting both proposals in half to keep both in the compromise bill now being hashed out by Democrats on Capitol Hill.

I doubt President Biden played Solomon the Wise during his recent meetings with protagonists in the debate. If he had, he would have invited in the chief proponent of Medicare expansion (Sen. Bernie Sanders of Vermont) and Medicaid expansion (Rep. Jim Clyburn of South Carolina) in to see which one would volunteer to put their primary goals for the bill on hold. Then, following Old Testament precepts, he’d fully fund the volunteer’s preferred program.

If, on the other hand, he uses Dayen’s principles, Sen. Sanders’ Medicare expansion would get the nod. It’s universal (for all seniors and the disabled on Medicare); it’s relatively straightforward to administer (by adding new codes to the program’s fee schedule); and it’s the same for all seniors, who should have no problems with access since they’re already in the program.

Complexity promotes disparity

Federalizing the Medicaid expansion, on the other hand, is administratively complex and perpetuates disparities between the states. The U.S. doesn’t have one Medicaid program. It has 50 Medicaid programs not including the ones in the District of Columbia, Puerto Rico and the five U.S. territories. While each must cover core services like hospital, physician and nursing home care, other services like dental or extra aid for the poor elderly with high medical expenses are optional.

That has led to vast differences in benefits across the country, with traditionally more liberal states providing more comprehensive benefits for the poor. A federalized program expansion aimed at just 12 Republican-run states would, according to the House-passed bill, be limited to core benefits and would perpetuate those disparities.

Moreover, more than 70% of Medicaid beneficiaries nationwide are now in managed care plans run by insurance companies. They receive capitated payments and negotiate their own payment schedules with providers. The House bill, by giving federal contracts to insurers to administer expansion in the recalcitrant states, would perpetuate the disparity in payments to providers, which are less than Medicare rates and limit physician participation.

There is a logical alternative to the Medicaid morass: Federalize the entire program. Or, Congress and the Biden administration could end it by merging it with Medicare and giving extra benefits to the poor and near poor to pick up all their out-of-pocket costs. Or, they could privatize it by putting all Medicaid recipients into Affordable Care Act plans with no co-pays or deductibles for the poor and near poor.

It’s way too late to get that into BBB because it will require tax increases at the federal level to pay for massive tax relief at the state level. But if they can get Clyburn and Medicaid expansion advocates to agree, they should temporarily drop Medicaid expansion from the BBB bill and immediately push for more comprehensive reform in separate legislation in this session of Congress.

I’ve written before about the compelling logic behind federalizing Medicaid (see this 2017 piece in Democracy: A Journal of Ideas).  But I wasn’t first (see this early piece from 2012, for instance), nor was I the last (see this recent op-ed in The Hill by the head of the Robert Wood Johnson Foundation).

I’ll write another column this week outlining the arguments for and against federalizing the entire Medicaid program. Suffice it for now to say the primary reason for supporting it is that it meets all the Dayen tests: it’s universal, it’s fair and, perhaps most important of all in our fractured political environment, it has the potential to win support from the vast majority of Americans, including legislators and governors in Republican-run states.