The Illusory Savings From Cutting Medicaid

Steve Chapman
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Posted: Jun 25, 2017 12:01 AM
The Illusory Savings From Cutting Medicaid

When economists talk in their sleep, they say, "There is no such thing as a free lunch." This axiom is drilled into them from day one of their undergraduate education and never leaves their minds. Any economist who tried to deny it would find herself suddenly choking in pain and unable to speak.

What it means is that if the government does something that costs money, some human somewhere will bear the expense. "Free" public schools, "free" parks and "free" roads all have to be paid for by the citizenry. Collectively, we can't get something for nothing.

This useful insight has long been offered as an objection to costly government programs. But it applies as well to measures that extract savings from costly government programs.

In their replacement of Obamacare, congressional Republicans promise to achieve greater frugality in Medicaid, which helps low-income Americans, without inflicting more hardship. The melancholy truth: Not gonna happen.

Last year, total spending for Medicaid amounted to $533 billion. Nearly two-thirds of the funds come from the federal government, and the rest comes from the states. Some 69 million people are covered by it, up from 54 million in 2012.

The expansion was intentional. Under the Affordable Care Act, Washington signed on to cover 100 percent of the cost of expanded coverage at the outset, with its share falling to 90 percent from 2020 on.

The health care plan offered by Senate Republicans, like the one passed by the House, would reverse the trend by giving states a certain amount per Medicaid recipient or a block grant for a fixed amount. Either way, the federal contribution would steadily shrink compared with what it would do under the ACA.

Under the House plan, the federal savings would amount to $880 billion over a decade. The Senate bill is supposed to wring out even more. Supporters say Medicaid enrollees would be better off because states would be free to redesign their programs to make them more efficient and responsive to beneficiaries.

But remember that fundamental economic proposition. Just as you can't get something for nothing, you generally can't get more for less.

The House changes, according to the nonpartisan Congressional Budget Office, would reduce the number of people on Medicaid by 14 million by 2026. Many people who now have coverage would lose it, and many who would have become eligible would be turned away.

States could always protect the vulnerable by boosting their contribution to make up for the lost federal funds. But that would mean requiring their taxpayers to foot the bill.

Republicans say the changes would be positive because Medicaid coverage is often useless. House Speaker Paul Ryan claims that "more and more doctors just won't take Medicaid."

In fact, 69 percent of physicians currently accept new Medicaid patients, and the percentage has been stable for decades. It's lower than for privately insured patients, because Medicaid provides doctors with lower reimbursements, but budget cuts would probably exacerbate that malady.

Some recipients would get cut off under the GOP plans, and some would get less coverage. That -- surprise! -- would leave them worse off, because comprehensive health insurance is a good thing to have. Medicaid coverage, reports the Kaiser Family Foundation, is proven to ensure "earlier detection of health and developmental problems in children, earlier diagnosis of cancer, diabetes, and other chronic conditions in adults, and earlier detection of mental illness in people of all ages."

Cutting back Medicaid coverage would save taxpayers some cash, but only by taking it from others. The reduction would raise costs for low-income people and most likely degrade their health.

It would also increase the financial load on hospitals, which treat a lot of people who have no coverage. A study by scholars at Northwestern University and Columbia University figured that each new uninsured person costs nearby hospitals an average of $900 a year.

Less Medicaid coverage would strain the finances of struggling hospitals, particularly small ones in rural areas, and put some out of business -- to the detriment of all patients, not just those on Medicaid. When one closes, the uninsured migrate to other hospitals, putting more stresses on them.

Economists know there's no such thing as a free lunch, a free medicine or a free X-ray. There is, however, such a thing as a false economy.