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But modern, free market conservatives have built on Hayek's recognition that social safety nets are not inconsistent with free markets, and just reflect modern social responsibility. Free market conservatives today are advancing fundamental entitlement reforms that would actually serve seniors and the poor far better than today's outdated entitlement programs based on old fashioned, 19th century, tax and spend conceptions. These free market safety nets would be based on market competition, incentives, and individual choice. They would rely primarily on modern capital and labor markets to achieve their goals far more effectively. Their incentives would promote productive behavior that contributes to rather than detracts from economic growth and prosperity for all.
A case in point is Medicaid, the national entitlement program for the poor, to ensure that no one suffers without essential health care due to lack of money. That was one focus of the Presidential debate between Obama and Romney this week, in which Romney again thoroughly flummoxed an uninformed Obama, lost deep in the last century. That program is also a central component of the entitlement problem threatening to bankrupt the nation.
Financing for the program is shared with the states under a federal formula, with the Feds paying about 60% of the costs on average. That is a matching federal formula, with the feds sending more federal money to a state the more the state spends on the program. President Obama's budget projects federal Medicaid costs to total nearly $4.4 trillion over the next 10 years alone, just for this one program, with annual costs soaring by 127% over that time to nearly $600 billion by 2022.
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The state costs would run roughly an additional two-thirds more. The National Association of State Budget Officers reports that states already spend more on Medicaid than anything else - even K-12 education programs. The federal Center for Medicare and Medicaid Services projects that total federal and state costs just for Medicaid alone will be over $800 billion by 2019.
Because of the false genius of Obamacare, 85 million Americans will soon be on Medicaid, growing to nearly 100 million by 2021, according to CBO, up from roughly 60 million today. That, of course, is contributing greatly to the exploding costs of the program.
Yet, Medicaid pays doctors and hospitals only 60% or less of costs for their health services to the poor. Consequently, the poor on Medicaid face grave difficulties in obtaining timely and essential health care, and suffer worse health outcomes as a result. Scott Gottlieb of the New York University School of Medicine writes in a March 10, 2011 commentary in the Wall Street Journal ("Medicaid Is Worse Than No Coverage at All"), "In some states, they've cut reimbursements to providers so low that beneficiaries can't find doctors willing to accept Medicaid." As a result, Gottlieb adds, "Dozens of recent medical studies show that Medicaid patients suffer for it. In some cases, they'd do just as well without health insurance."
The deathly problem was illustrated by the case of 12 year old Deamonte Driver, from a poor Maryland family on Medicaid. When Deamonte complained of a toothache, his mother tried to find a dentist who would take Medicaid. But only 900 out of 5,500 dentists in Maryland do. By the time she found one, and got the boy to the appointment, his tooth had abscessed, and the infection had spread to his brain. Now she needed to find a brain specialist who took Medicaid. Before she could find one, the boy was rushed to Children's Hospital for emergency surgery. He called his mother from his hospital room one night to say, "Make sure you pray before you go to sleep." In the morning, he was dead.
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Romney and Ryan propose to address Medicaid by extending to the program the enormously successful 1996 welfare reforms of the old, New Deal, Aid to Families with Dependent Children (AFDC) program. That reform returned the share of federal spending on AFDC to each state in the form of a "block grant" to be used in a new welfare program redesigned by the state based on mandatory work for the able bodied. Like Medicaid, federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to spend more. The key to the 1996 reforms was that the block grants to each state were finite, not matching, so the federal funding did not vary with the amount the state spent. If a state's new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings. The reformed program was renamed Temporary Assistance to Needy Families (TANF).
The reform was shockingly successful, exceeding even the predictions of its most ardent supporters. The old AFDC rolls were reduced by two-thirds nationwide, even more in states that pushed work most aggressively, as those formerly on the program went to work, or married someone who worked.
As a result, in real dollars total federal and state spending on TANF by 2006 was down 31% from AFDC spending in 1995, and down by more than half of what it would have been under prior trends. At the same time, because of the resulting increased work by former welfare dependents, the incomes of the families formerly on the program rose by 25%, and poverty among those families plummeted.
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CBO scores extending these same reforms to Medicaid as saving $800 billion over 10 years. President Obama's response to this proposal in the debate was, "Governor Romney talked about Medicaid and how we could send it back to the states, but effectively this means a 30 percent cut in the primary program that provides help for seniors in nursing homes, for kids who are with disabilities."
But it would not be accurate to say these 1996 reforms "cut AFDC by 50%." They reformed AFDC, benefiting the poor enormously, while saving taxpayers 50%. Similarly, it would not be accurate to say that extending these same reforms to Medicaid involves cutting Medicaid by $800 billion. It would reform Medicaid, benefiting the poor even more than the AFDC reforms, while saving taxpayers $800 billion over the first 10 years.
What the states could do under Romney's proposed reforms is shown by the example of Rhode Island, which received a broad waiver from federal Medicaid requirements in return for a fixed cap on federal financing for 5 years. The state turned to managed care, competitive bidding by health care providers, and comprehensive case management by private insurers for those on Medicaid. It shifted more long term care out of nursing homes to home and community-based care.
The Lewin Group, a top health care consulting firm, studied the reforms and concluded that they were "highly effective in controlling Medicaid costs" while improving "access to more appropriate services." Indeed, the state's costs were reduced by nearly 30% in the first 18 months alone. Yet the poor enjoyed assigned health providers to ensure they received essential care.
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Alternatively, states could serve the poor by using the program to provide public assistance through Medicaid that would help the poor to pay for the private health insurance of their choice in the marketplace. Such premium support would free the poor from the Medicaid ghetto, enabling them to obtain the same health care as the middle class, because they would be able to buy the same health insurance in the market. Such market health insurance has to pay the doctors and hospitals sufficiently to enable those with that insurance to obtain timely, effective health care, or their insurance would have no customers. This would be an enormous gain for the poor. It would mean no more Deamonte Drivers.
Instead, President Obama's mad, mindless expansion of Medicaid under Obamacare would just make access to health care for the poor served by the program even more difficult, as tens of millions more swamp the offices of doctors and hospitals seeking care, when those doctors and hospitals don't want to, and financially can't, serve them for what Medicaid pays.
Obama's response to this Romney/Ryan Medicaid reform shows that Obama is ideologically rigid, and resistant to new ideas that present new, far more effective means for addressing the nation's problems from the past, old fashioned means. It shows that Obama is not open to entitlement reform that involves any significant reduction in spending, and in a second term will just seek to increase taxes to finance the still further enormous runup in federal spending due to runaway entitlements.
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