And I’ve specifically written that Medicaid is the entitlement program most in need of reform.
Moreover, I explained in this video that Medicaid’s split-financing model (some of the costs are paid by Washington and some of the costs are paid by states) creates a perverse incentive for politicians to make the program bigger.
The bottom line is that Medicaid needs to be fixed. That being said, not all reform proposals are created equal.
In a column for National Review, Chris Pope of the Manhattan Institute starts by correctly diagnosing the perverse incentives that make Medicaid a fiscal nightmare.
Medicaid now generally provides between $1 and $3 of federal funds for every $1 that states spend on medical services for eligible low-income beneficiaries, offering them an extraordinarily high return on investment. …states have become adept at using Medicaid to harvest federal funds. All 50 states now tax hospitals and other medical providers to inflate the matching aid they can claim from the federal government… When Medicaid caseloads decline during economic upturns, states have tended to expand benefit packages and loosen eligibility criteria — relying on Congress to provide ad hoc bailouts when expenses spike in subsequent recessions.
Amen.
I’m particularly disgusted that the system rewards states for taxing healthcare providers (who largely like the system because the taxes are less than the extra money they get from the added Medicaid spending).
But my enthusiasm for his article evaporated when he said the solution is to put Washington completely in charge.
America’s state governments are currently flush with funds and expanding their spending commitments. …This dynamic — of states overextending themselves in healthy fiscal times and then relying on national bailouts when the business cycle takes a downturn — has become characteristic of modern American federalism. …Should a future recession necessitate another round of bailouts, the federal government should assume full financial and operational responsibility by nationalizing currently split entitlement programs. Federal legislation already mandates most details of basic Medicaid benefits and eligibility, as well as providing 70 percent of funding. …Entitlements can be provided most robustly and cost-effectively if they are administered and financed nationally. As with Medicare and Social Security, this would make programs easier for Congress to control, avert the need for bailouts of states in recessions, and eliminate the ability of politicians to overextend programs by shifting costs to taxpayers outside their states.
The author is almost surely right that a federal takeover would produce better outcomes than the current hybrid system.
But an even better option would be complete decentralization. The federal portion of Medicaid spending should be turned into “block grants,” meaning states would simply get a pile of money and they can then decide how best to provide health care to lower-income people.
Under that kind of system, we’d get innovation, with states learning from each other (and also competing with each other).
I’ll close by noting that this is not some sort of risky or untested notion. Bill Clinton’s welfare reform replaced a federal entitlement with a block grant and that was very successful.
Today, I want to underscore why it is important to focus on “the right kind” of reform.
On paper, you can save money with “means testing” of benefits, but that creates an indirect penalty on work, saving, and investment.
You can also, on paper, save money by imposing price controls on health care, but that policy has a long track record of failure.
At the risk of understatement, either of those approaches represents “the wrong kind” of entitlement reform. Indeed, those policies are not really reform. Instead, they are tinkering with systems that are fundamentally broken.
For what it is worth, most politicians do not support good reform or bad reform.
As predicted by “public choice,” their preferred approach is kicking the can down the road.
Which is what Greek politicians did for many years.
But they learned in Greece that ignoring a problem does not make it disappear. Instead, it is a recipe for fiscal crisis (and we will probably have to re-learn that lesson in Italy).
So my other goal today is to show why something needs to be done.
We’ll start with a look at Medicare from Brian Riedl’s chartbook.
That’s a very sobering image, so now I’ll share some very sobering words.
James Capretta of the American Enterprise Institute summarizes America’s grim fiscal future.
In 2001, the Treasury estimated the government’s net unfunded liabilities, in present value terms, at $6.5 trillion, or 61 percent of GDP, with federal debt accounting for $3.3 trillion of the measured obligations. …By 2021, the government’s net position had deteriorated to minus $29.9 trillion, or 128 percent of GDP, with federal debt accounting for $22.3 trillion of the liabilities. The government’s unfunded commitments beyond public debt had grown by $2.9 trillion over ten years. …The financial hole is actually deeper than these numbers reveal because they exclude the dramatic effects of Social Security and Medicare. …with Social Security and Medicare included in the assessment, the federal government’s unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP. …The problem posed by unfunded public liabilities is a relatively new one in U.S. history. It has only been over the past half century that the combination of an aging population and the modern entitlement system has pushed the federal government toward a financial crisis.
Having shared all this depressing data, I’ll now close with a couple of observations.
Second, “funded liabilities” are hardly an improvement over “unfunded liabilities” since that simply means debt-financed spending becomes tax-financed spending. From the frying pan to the fire, or vice-versa.
As I said in the above video, we need the right kind of entitlement reform so that we save money and have better policy for old people and poor people.
On the minus side, the party largely punted on the issue once Trump took over.
To be sure, punting is the easy route from a “public choice” perspective. Politicians like offering freebies to voters and many voters like getting handouts.
The Wall Street Journaleditorialized about the downside of making America more like Europe last October.
The result of…expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and less fiscal space for essential public goods like national defense. That’s the lesson from Europe’s cradle-to-grave welfare states… Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.
And what’s remarkable (and discouraging) is that some politicians in the U.S. want to expand entitlements even though many European governments now realize they made big mistakes and need to scale back.
The irony is that some European governments have tried to reform their tax and welfare systems to become more competitive. Germany and Sweden over two decades reformed their welfare and labor policies. …Other European governments are also pushing welfare-state reforms. French President Emmanuel Macron has passed pension reform and cut the corporate tax rate to 26.5% from 33% in 2017… Greece is pulling out of its debt trap with Prime Minister Kyriakos Mitsotakis’s tax, pension and regulatory reforms.
For what it’s worth, I’m happy about these reforms, but I fear many European nations are in the too-little-too-late category.
But if (or when) that happens, maybe American politicians will finally wake up and realize we need good reforms to prevent Social Security, Medicare, and Medicaid from causing a similar collapse on this side of the Atlantic Ocean..
Hopefully that epiphany will take place before it is too late for the United States.
P.S. For those who are interested in the history of fiscal policy, John Cogan of the Hoover Institution wrote about pre-20th-century entitlements earlier this year.
Here are excerpts from his column in the Wall Street Journal.
The history of U.S. entitlements is a 230-year record of continuous expansion… The first major entitlement, Revolutionary War disability benefits, was initially restricted to members of the Continental Army and Navy who were injured in battle and survivors of those killed in wartime. Eligibility was then expanded, first to state militia soldiers, then to veterans whose disabilities were unrelated to wartime service, and eventually to virtually all people who served during the war regardless of disability. Civil War disability pensions followed the same…process, except on a far grander scale. Pensions were initially confined to U.S servicemen who suffered wartime injuries and survivors of those killed in battle. Eventually they were extended to virtually all union Civil War veterans regardless of disability. …Congress followed the same liberalizing process with 20th-century entitlements.
If this excerpt doesn’t satisfy your curiosity, here’s Cogan discussing the topic for 46 minutes.
Back in 2015, just five years ago, it seemed like entitlement reform might happen.
Republicans in the House and Senate voted for budgets based on much-needed changes to Medicare and Medicaid. That was only a symbolic step with Obama in the White House, to be sure, but the presumption was that actual reform would be possible if Republicans controlled both the White House and Congress after the 2016 election.
The good news is that the GOP did wind up in control of Washington.
The bad news is that Donald Trump was in the White House.
Given his unfortunate views on government spending, that killed entitlement reform for the past four years.
And now Biden will be in the White House, and he wants to expand those programs, so that presumably kills reform for the next four years.
But does that change the fact that the programs should be reformed?
In a column for National Review, Fred Bauer asserts that Republicans should give up on trying to control big government.
Republicans…risk being lured toward a pivot back to 2010s-style austerity politics during the Biden administration, with a renewed focus on the federal deficit and entitlement reform. …Trying to push party-line entitlement reform has backfired on the GOP again and again in the recent past. George W. Bush’s 2005 Social Security–privatization proposal kneecapped his second term from the start. In 2012, Republicans got bogged down defending their position on Medicare reform… retreating to austerity politics could cost Republicans a chance to promote other kinds of reforms that would strengthen workers and families: fixing the medical marketplace (by reducing cartelization, revising medical licensing, etc.), passing a 21st-century infrastructure program, trying to secure a strategic industrial base, enacting smarter regulation of Big Tech that addresses market concerns and serves the public welfare, offering Americans family tax credits, and so on.
Also writing for National Review, Yuval Levin of the American Enterprise Institute explains that we have no choice but to grapple with entitlements.
The Republican Party has styled itself the party of fiscal restraint for the better part of a century… But there hasn’t been much action, or much willingness to expend political capital or make some painful deals to achieve a meaningful change in the trajectory of the government’s finances. …the willful blindness of the Trump era…means the underlying fiscal problems have grown worse… the costs of fiscal irresponsibility have more to do with constraints on future growth… Fiscal reform will need to involve changes to these programs.
Levin even suggests that entitlement reform is so important that it might be worth ceding ground in other areas.
Republicans should be willing to make bargains that involve leaving discretionary spending untouched, or even on a path of modest growth, if that allows for some reforms of entitlements. They should also be willing to contemplate tax increases and reforms that move the burden of federal revenue upward on the income scale, provided such changes do not unduly undermine growth.
My two cents is that Levin is right and Bauer is wrong.
To be sure, I don’t agree with everything Levin wrote (it’s theoretically possible to make a tax increase acceptable, for instance, but that won’t happen in the real world). But at least he recognizes the long-run spending outlook is so dour that entitlement reform is absolutely necessary.
Bauer, by contrast, argues that we should throw in the towel because reform is politically difficult.
I think he misreads the evidence.
Regarding Social Security, Bush got elected twice while supporting personal accounts, but the issue never went anywhere in his second term in large part because the White House never proposed a plan. Moreover, the public continued to be supportive of the idea of personal accounts, even after Bush left office.
Likewise, I think Bauer is wrong on Medicare and Medicaid. Republicans easily maintained control of the House in 2012, 2014 and 2016, notwithstanding Democratic attacks that they wanted to “push granny off a cliff.” And they still control the Senate after years of similar attacks.
But even if Bauer was right about the politics, he’s wrong about policy.
I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.
But if you don’t have the time to watch a long video, here are four key things to understand.
Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).
By the way, there’s one additional thing to understand.
Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.
Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.
The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.
If you prefer this information visually, here are a couple of pie charts from the study.
The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.
And here’s how they’ve been consuming ever-larger shares of America’s economic output.
What’s driving this ever-increasing fiscal burden?
Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.
I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.
Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.
Here’s how Capretta describes the relationship.
…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.
I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).
The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.
In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.
P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.
Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.
Needless to say, voters rarely if ever vote to raise their own taxes. Instead, they get seduced into robbing their neighbors in exchange for the promise of new goodies from politicians.
I raise this issue because the people of Oregon just gave fairly strong support to a tax-hike referendum. Here are some of the details.
…voters approved hundreds of millions of dollars in health care taxes in a special election. Measure 101, which led 62 percent to 38 percent with returns partially tallied, was the only issue on the ballot. It will raise $210 million to $320 million in taxes on Oregon’s largest hospitals and many health insurance policies by 2019.
At first glance, this is just another example of Oregon voters voting for bigger government and more class warfare.
But as you read further in the story, you’ll find something remarkable.
…the tax deal was a victory for…the health care industry, which bankrolled the “yes” campaign. …The largest contributor to the campaign to pass the taxes was the association that represents Oregon hospitals. Other health care companies also spent heavily to pass the measure.
Huh? Why would an industry support and bankroll an initiative to give more of their money to government?!?
It turns out that the industry isn’t filled with masochists (like the neurotic trust fund leftists who posture in favor of higher taxes). Instead, the special interests such as the hospital lobby viewed a couple of hundred million of taxes as an “investment” that will generate about $1 billion of taxpayer-financed loot.
…the health care industry…will benefit from the resulting $1 billion-plus that will be spent on Oregonians’ health care. …
And taxpayers in other states will pick up a majority of the tab!
That tax revenue will enable Oregon to qualify for $630 million to $960 million in federal Medicaid matching funds that benefit the state’s health care industry. …state taxes would allow the state to keep federal matching funds.
This scam was exposed last year in a Wall Street Journalcolumn.
…42 states tax hospitals. Why? One answer is the perverse incentives built into the Medicaid law. When a state returns tax money to hospitals through Medicaid “supplemental payments,” it qualifies for matching funds from Washington. …Medicaid supplemental payments, as the term implies, are separate and distinct from the reimbursements that cover the actual cost of services rendered to beneficiaries. But the federal government turns a blind eye to the circular nature of the arrangement: Hospitals and other providers are both the source and the recipient of most of the funds.
Here are more details on this oleaginous ripoff.
…supplemental-payment schemes…“have the effect of shifting costs to the federal government,” according to a 2014 study by the Governmental Accountability Office. The more a state taxes its hospitals and then gives them money back, the more federal funds it can obtain. …The hospital tax is the biggest revenue-raiser, but 44 states also tax nursing homes, and 34 tax at least one other type of health-care provider. The GAO study found that these taxes had almost doubled nationally, from about $9.5 billion in 2008 to $18.5 billion in 2012.
By the way, I have written on this topic before, and even included a handy infographic that explains a version of the scam.
Let’s now return to the column. The author cites an example from Connecticut.
Connecticut hospitals will pay $900 million in taxes, but the state will offset that with $600 million in supplemental Medicaid payments—matched with $450 million of federal funds. The state keeps those matching funds, plus the $300 million from the hospital tax, meaning Hartford comes out ahead in the whole scheme by $750 million. Nice work if you can get it.
I’m not a fan of my home state, but the Nutmeg State is hardly alone is playing this game.
What’s remarkable is that there are 8 states what don’t participate in the ripoff.
Anyhow, I can’t resist making one final point. Here’s a sordid tidbit from the earlier story about what happened in Oregon.
Democrats in the Oregon House helped achieve the deal by agreeing to fund three projects in a Medford Republican’s district, in exchange for that lawmaker providing the lone Republican “yes” vote in the state House.
One more piece of evidence that Republicans often are the most despicable people.
P.S. While today’s column focused on an odious quirk in the Medicaid program, let’s not lose sight of the forest by fixating on this particular tree. The reason we should care is that Medicaid is an initiative-sapping, money-draining program that greatly contributes to the mess in our overall healthcare system.
P.P.S. Which is why I encourage folks to watch the short video I narrated on the program. Pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending (e.g., what I wrote today). This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs.
Senate Republicans have produced their Obamacare repeal legislation, though as I noted at the end of this interview, it’s really more a bill about Medicaid reform than Obamacare repeal.
But critics are savaging this idea, implying that “deep cuts” will hurt the quality of care. Indeed, some of them are even engaging in poisonous rhetoric about people dying because of cutbacks.
There’s one small problem with the argument, however. Nobody is proposing to cut Medicaid. Republicans are merely proposing to limit annual spending increases. Yet this counts as a “cut” in the upside-down world of Washington budgeting.
The Washington Post contributes to innumeracy with a column explicitly designed to argue that the program is being cut.
…the Senate proposal includes significant cuts to Medicaid spending…the Senate bill is more reliant on Medicaid cuts than even the House bill…spending on the program would decline in 2026 by 26 percent…That’s a decrease of over $770 billion on Medicaid over the next 10 years. …By 2026, the federal government would cut 1 of every 4 dollars it spends on Medicaid.
An article in the New York Times has a remarkably inaccurate headline, which presumably isn’t the fault of reporters. Though the story has its share of dishonest rhetoric, especially in the first few paragraphs.
Senate Republicans…took a major step…, unveiling a bill to make deep cuts in Medicaid… The Senate measure…would also slice billions of dollars from Medicaid, a program that serves one in five Americans… The Senate bill would also cap overall federal spending on Medicaid: States would receive a per-beneficiary allotment of money. …State officials and health policy experts predict that many people would be dropped from Medicaid because states would not fill the fiscal hole left by the loss of federal money.
“Loss of federal money”?
I’d like to lose some money using that math. Here’s a chart showing the truth. The data come directly from the Congressional Budget Office.
At the risk of pointing out the obvious, it’s not a cut if spending rises from $393 billion to $464 billion.
Federal outlays on the program will climb by about 2 percent annually.
By the way, it’s perfectly fair for opponents to say that they want the program to grow faster in order to achieve different goals.
But they should be honest with numbers.
Now that we’ve addressed math, let’s close with a bit of policy.
The Wall Street Journal recently opined on the important goal of giving state policymakers the power and responsibility to manage the program. The bottom line is that recent waivers have been highly successful.
…center-right and even liberal states have spent more than a decade improving a program originally meant for poor women and children and the disabled. Even as ObamaCare changed Medicaid and exploded enrollment, these reforms are working… The modern era of Medicaid reform began in 2007, when Governor Mitch Daniels signed the Healthy Indiana Plan that introduced consumer-directed insurance options, including Health Savings Accounts (HSAs). Two years later, Rhode Island Governor Donald Carcieri applied for a Medicaid block grant that gives states a fixed sum of money in return for Washington’s regulatory forbearance. Both programs were designed to improve the incentives to manage costs and increase upward mobility so fewer people need Medicaid. Over the first three years, the Rhode Island waiver saved some $100 million in local funds and overall spending fell about $3 billion below the $12 billion cap. The fixed federal spending limit encouraged the state to innovate, such as reducing hospital admissions for chronic diseases or transitioning the frail elderly to community care from nursing homes. The waiver has continued to pay dividends under Democratic Governor Gina Raimondo. …This reform honor roll could continue: the 21 states that have moved more than 75% of all beneficiaries to managed care, Colorado’s pediatric “medical homes” program, Texas’s Medicaid waiver to devolve control to localities from the Austin bureaucracy.
By contrast, the current system is not successful.
Avik Roy explained this perverse result in Forbes back in 2013.
Piles of studies have shown that people on Medicaid have health outcomes that are no better, and often worse, than those with no insurance at all. …authors of the Oregon study published their updated, two-year results, finding that Medicaid “generated no significant improvement in measured physical health outcomes.” The result calls into question the $450 billion a year we spend on Medicaid… And all of that, despite the fact that the study had many biasing factors working in Medicaid’s favor: most notably, the fact that Oregon’s Medicaid program pays doctors better; and also that the Medicaid enrollees were sicker, and therefore more likely to benefit from medical care than the control arm.
In other words, I was understating things when I wrote above that there was “one small problem” with the left’s assertion about Medicaid cuts hurting people.
Yes, the fact that there are no actual cuts is a problem with that argument. But the second problem with the left’s argument is that Medicaid doesn’t seem to have any effect on health outcomes. So if Republicans actually did cut the program, it’s unclear how anybody would suffer (other than the fraudsters who bilk the program).
Here are the three most important things to understand about what the President has proposed.
First, the budget isn’t being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.
Second, government spending will grow by an average of almost 3.5 percent per year over the next 10 years.
Third, because the private economy is projected to grow by an average of about 5 percent per year (in nominal terms), Trump’s budget complies with the Golden Rule of fiscal policy.
Now that we’ve established a few basic facts, let’s shift to analysis.
But for those who prefer to see the glass as half-full, here are a couple of additional takeaways from the budget.
Fourth, as I wrote yesterday, there is real Medicaid reform that will restore federalism and save money.
Fifth, domestic discretionary spending will be curtailed.
But not just curtailed. Spending in the future for this category will actually be lower if Trump’s budget is approved. In other words, a genuine rather than fake budget cut.
I’ll close with my standard caveat that it’s easy to put good ideas (or bad ideas) in a budget. The real test is whether an Administration will devote the energy necessary to move fiscal reforms through Congress.
Based on how Trump was defeated in the battle over the final spending bill for the current fiscal year, there are good reasons to be worried that good reforms in his budget won’t be implemented. Simply stated, if Trump isn’t willing to use his veto power, Congress will probably ignore his proposals.
P.S. You may have noticed that I didn’t include any discussion of deficits and debt. And I also didn’t address the Administration’s assertion that the budget will be balanced in 10 years if Trump’s budget is approved. That’s because a fixation on red ink is a distraction. What really matters is whether the burden of spending is falling relative to the private sector’s output. In other words, the entire focus should be on policies that generate spending restraint and policies that facilitate private sector growth. If those two goals are achieved, the burden of red ink is sure to fall. Whether it happens fast enough to balance the budget in 2027 is of little concern.
When President Trump released his so-called “skinny budget” back in March (dealing with the parts of Leviathan that are annually appropriated), I applauded several of the specific recommendations.
Shutting down the wasteful National Endowment for the Arts.
Defunding National Public Radio and the Corporation for Public Broadcasting.
Terminating the scandal-plagued Community Development Block Grant program.
The only problem is that I didn’t sense – and still don’t see – any serious effort to push through these much-needed fiscal reforms (and the same is true for his proposed tax cut).
The bottom line is that Trump has the power to achieve the bulk of his agenda, but only if he is willing to veto pork-filled bills and force a partial government shutdown. But he’s already blinked once in this type of battle, so the spending lobbies feel confident that he can be rolled again.
But let’s set that aside. The White House is about to release the President’s full budget and there already is considerable angst about potential reforms to Medicaid. Here are some excerpts from a report in the Washington Post.
President Trump’s first major budget proposal on Tuesday will include massive cuts to Medicaid…more than $800 billion over 10 years. …Trump’s decision to include the Medicaid cuts is significant because it shows he is rejecting calls from a number of Senate Republicans not to reverse the expansion of Medicaid that President Barack Obama achieved as part of the Affordable Care Act. The House has voted to cut the Medicaid funding… The proposed changes will be a central feature of Trump’s first comprehensive budget plan…it will seek changes to entitlements — programs that are essentially on autopilot and don’t need annual authorization from Congress.
I have two reactions to this story.
First, the Washington Post is lying (and not for the first time). There will be no Medicaid cuts in Trump’s budget. Contrary to the headline, there aren’t “big cuts” and there won’t be any “slashing.” We won’t see the actual numbers until tomorrow, but I can state with complete certainty that the Trump Administration is merely going to propose a reduction in how fast the program’s budget increases.
Second, it’s a very good idea to slow down the growth of Medicaid spending.
Here is some background information on the program, starting with an article in The Week by Shikha Dalmia
Medicaid is arguably the civilized world’s worst health insurance program. …This joint federal and state program has historically allowed the feds to give states 50 cents for every dollar they spent on purchasing health coverage for the poor. Because of this federal largesse, Medicaid has grown astronomically, becoming the single biggest ticket item on virtually every state budget. …President Obama essentially money-bombed states into expanding it even further. He told states that Uncle Sam would pick up 100 percent of the tab for the first three years for every additional person they covered up to 138 percent of the poverty level. …Medicaid now covers almost 75 million Americans. And even before ObamaCare took effect, Medicaid paid for almost half of all births in America. …The combined annual cost of the program now exceeds half a trillion dollars (with the feds’ share at 63 percent and states’ at 37 percent) — which adds up to roughly $7,000 for every man, woman, and child covered by the program. …Several reputable studies have found that Medicaid patients experience no better health outcomes than uninsured people, and arguably even slightly worse outcomes. …ObamaCare is like a Rube Goldberg contraption. Taking it apart and reassembling it is easier said than done — even if it’s the right and smart thing to do. And if Republicans can’t figure out a way to do so, American patients and taxpayers will be the big losers.
And here are some excerpts from a Wall Street Journaleditorial.
The…important goal is to change the incentives over the long term and eliminate the perverse formulas that discount the welfare of the truly needy. …A helpful revolution in Medicaid would be to end the match rate that rewards higher spending and move to block grants. States would get some fixed pot of money annually, determined by how many people are enrolled. The pots might be expensive in the early years, but states would become accountable for marginal per capita spending growth over time. Governors can be assuaged by ending Medicaid’s command-and-control regulatory model, freeing them to use new tools to control costs.
James Capretta of the American Enterprise has additional details, particularly showing how the “federal medical assistance percentage” encourages higher spending.
In 1965, the authors of Medicaid thought they were creating a program that would provide federal structure, uniformity, and some funding for the many state programs that were already providing relatively inexpensive “indigent care” services to low-income households. …Medicaid has grown into the largest health care program in the country by enrollment, with 66 million participants and with annual federal and state costs of more than $550 billion. …Medicaid spending has increased rapidly nearly every year since the program was enacted, creating significant pressure in federal and state budgets. …The Medicaid FMAP is the fundamental flaw in the program’s current design and the main reason it is so costly. States can initiate new spending in Medicaid—spending that often will boost economic activity in the state—and federal taxpayers pay for at least half the cost. At the same time, savings from state-initiated Medicaid-spending cuts are also shared with federal taxpayers. For instance, in a state where the FMAP is 60 percent, the governor and state legislators face the unattractive prospect of keeping only $1.00 of every $2.50 in Medicaid savings they can identify and implement. The other $1.50 goes to the federal treasury. Put another way, governors and state legislators are reluctant to impose $2.50 in budgetary pain for a $1.00 gain to their bottom line.
The solution to this rigged system, he explains, is block grants or per-capita caps.
The…important structural change would be the switch to some form of fixed federal funding to states. The federal government would continue to heavily support the Medicaid program, but the commitment would have a limit, which would give states a strong incentive to manage the program for efficiency and cost control. One approach would be a block grant. Under a block grant, the federal government would make fixed, aggregate payments to the states based on historical spending patterns. Cost overruns at the state level would require the state to find additional resources within the state budget. Conversely, states that were able to control costs would enjoy the full benefits of their efforts. …Under per capita caps, the federal government would establish for each state a per-person payment for each of the main eligibility categories in the Medicaid program: the elderly, the blind and disabled, nondisabled adults, and children. The federal government would then make payments to the states based on the number of Medicaid enrollees in each of these categories. The per capita payment would be based on historical spending rates for the various categories of beneficiaries in each state and, again, would be indexed to a predetermined growth rate.
In a 2012 column for Forbes, Avik Roy explains why reform will produce good results.
People on Medicaid have far worse health outcomes than those with private insurance, and in many cases those with no insurance at all. …there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.
Writing for the Wall Street Journal, Professor Regina Herzlinger and Dr. Richard Boxer elaborate on how a new system would work.
Republicans should combine two ideas popular in their party: block grants and health savings accounts. The former would let states tailor their Medicaid policies to their local communities, while the latter would give enrollees the ability to choose their own insurers and providers. In essence, Washington could give the states Medicaid block grants, allocated per capita, to provide beneficiaries with high-deductible insurance and health savings accounts. …Health savings accounts, which force medical providers to compete for consumers who pay out of their own pocket, also reduce overall costs. When employers introduce such accounts, health-care costs are reduced by about 5% for each of the next three years, according to a 2015 study from the National Bureau of Economic Research.
Nicholas Eberstadt, in an article for Commentary, points out the Medicaid is an employment killer.
21st-century America has witnessed a dreadful collapse of work. …According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). …means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age.
And the icing on the cake is that Medicaid finances much of the opioid problem in America.
[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. …For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street. …Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.
And if we want a cherry on top of the icing, Medicaid also is a cesspool of fraud, as reported by Reason.
Every year, the Government Accountability Office (GAO) releases a report putting a dollar figure on the amount of improper payments in Medicaid. …it shows that the program…spends a substantial portion of its annual budget…On fraud, on waste, on services not rendered, not medically necessary, or incorrectly billed. Last year, for example, the GAO found that about 9.8 percent of federal Medicaid expenditures, or about $29 billion, was spent improperly. …This year, the total has risen once again. About 10.5 percent, or $36 billion, of federal spending on the program isn’t up to snuff, according to a GAO report released this morning.
Last but not least, Charlie Katebi discusses Medicaid problems in a column for the Federalist.
Trump advisor Kellyanne Conway said Trump wants to “block-grant Medicaid to the states” to ensure “those who are closest to the people in need will be administering.” …Block grants would cap federal Medicaid funding and let states decide how to use those dollars. It would introduce flexibility and budget discipline to a program that sorely needs both. …Medicaid’s funding formula incentivizes policymakers to expand the program at the expense of core state government functions. …Medicaid’s structure also hurts its beneficiaries. …Washington bars reformers from making meaningful changes without going through a lengthy and restrictive approval process. This forces states to control costs the only way they can: paying doctors less. States have cut Medicaid’s reimbursement so low that many providers simply refuse to treat its beneficiaries. …Block grants promise to break Medicaid’s vicious cycle of rising costs and declining care. Spendthrift politicians would no longer be able to expand Medicaid and expect the federal government to foot the bill. But state-level reformers will enjoy greater authority to streamline and improve the program.
I may as well close with the video I narrated for the Center for Freedom and Prosperity.
The video was released in 2011, but nothing has changed…except that the numbers today are far worse, in part because of Obama’s Medicaid expansion.
But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.
We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.
If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.
But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.
I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.
The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.
Interestingly, even CBO openly acknowledges that rising levels of red ink are caused solely by the fact that spending is projected to increase faster than revenue.
And it’s also worth noting that revenues are going up, even without any additional tax increases.
The bottom part of this chart shows that revenues from the income tax will climb by about 2 percent of GDP. In other words, more than 100 percent of our long-run fiscal mess is due to higher levels of government spending. So it’s absurd to think the solution should involve higher taxes.
This next image digs into the details. We can see that the spending burden is rising because of Social Security and the health entitlements. By the way, the top middle column on “other noninterest spending” shows one thing that is real, which is that defense spending has fallen as a share of GDP since the mid-1960s, and one thing that may not be real, which is that politicians somehow will limit domestic discretionary spending over the next three decades.
This bottom left part of the image also gives the details on built-in growth in revenues from the income tax, further underscoring that we don’t have a problem of inadequate revenue.
Last but not least, here’s a graphic that shows the amount of fiscal policy changes that would be needed to either reduce or stabilize government debt.
We need to invoke my Golden Rule so that government grows slower than the private sector. In the long run, that will require genuine entitlement reform.
Let’s look at just one piece of that puzzle. James Capretta of the American Enterprise Institute has a very sobering summary of how Medicaid has metastasized into one of the largest and fastest-growing entitlement programs.
You should read the entire article, but if you’re pressed for time, I’m going to share two grim charts that tell you what you need to know.
First, we have a look at how the burden of Medicaid spending, measured as a share of national output, has increased over time.
What makes this chart particularly depressing is that Medicaid was never supposed to become a massive entitlement program.
It was basically created so the crowd in Washington could buy a few votes. Yet the moment politicians decided that it was the federal government had a role in subsidizing health care for the indigent, it was just a matter of time before the program was expanded to new groups of potential voters.
And every time the program was expanded, that increased the burden of spending and further undermined market forces in the health sector.
This is why entitlement programs are so injurious to a nation.
But Medicaid isn’t just a problem because of its adverse fiscal and economic impact.
Which brings us to our second chart from Capretta’s article. Here’s a look at the share of the population being subsidized by Medicaid.
As a fiscal wonk, I realize I should care more about the budget numbers, but I actually find this second graph more depressing. In my lifetime, we’ve gone from a nation where the federal government had no role in the provision of low-income healthcare, and now nearly one out of every five Americans is on the federal teat.
Even though we’re far richer than we were in the mid-1960s when the program was created, which presumably should have meant less supposed need for federal subsidies.
For further background on the issue, here’s a video I narrated for the Center for Freedom and Prosperity.
I urge you to pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending. This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs. But it also happens because the federal match gives states big incentives to manipulate the system to get more transfers.
Instead, if you check out this map from the Tax Foundation, the answer is Mississippi, followed by Louisiana, Tennessee, Montana, and Kentucky. All of which are red states!
So does this mean that politicians in red states are hypocrites who like big government so long as someone else is paying?
That’s one way of interpreting the data, and I’m sure it’s partially true. But for a more complete answer, let’s look at the Tax Foundation’s explanation of its methodology. Here’s part of what Morgan Scarboro wrote.
State governments…receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. Aid is given to states for Medicaid, transportation, education, and other means-tested entitlement programs administered by the states. …states…that rely heavily on federal assistance…tend to have modest tax collections and a relatively large low-income population.
In other words, red states may have plenty of bad politicians, but what the data is really saying – at least in part – is that places with a lot of poor people automatically get big handouts from the federal government because of programs such as Medicaid and food stamps. So if you compared this map with a map of poverty rates, there would be a noticeable overlap.
Moreover, it’s also important to remember that the map is showing the relationship between state revenue and federal transfers. So if a state has a very high tax burden (take a wild guess), then federal aid will represent a smaller share of the total amount of money. By contrast, a very libertarian-oriented state with a very low tax burden might look like a moocher state simply because its tax collections are small relative to formulaic transfers from Uncle Sam.
Indeed, this is a reason why the state with best tax policy, South Dakota, looks like one of the top-10 moocher states in the map.
This is why it would be nice if the Tax Foundation expanded its methodology to see what states receive a disproportionate level of handouts when other factors are equalized. For instance, what happens is you look at federal aid adjusted for population (which USA Today did in 2011). Or maybe even adjusted for the poverty rate as well (an approached used for the Moocher Index).
P.S. For what it’s worth, California has the nation’s most self-reliant people, as measured by voluntary food stamp usage.
At the risk of sounding like a broken record (or like Donald Sutherland in Animal House), I’m going to repeat myself for the umpteenth time and state that the United States has a big long-run problem.
To be specific, the burden of government spending will inexorably climb in the absence of big reforms. This isn’t just my speculation. It’s a built-in mathematical result of poorly designed entitlement programs combined with demographic changes.
I wrote about these issues in a column for The Hill.
…there is a big reason to worry about the slowdown in population growth in the U.S. Many of our entitlement programs were created based on the assumption that we would always have an expanding population, as represented by a population pyramid. …however, we’ve seen major changes in demographic trends, including longer lifespans and falling birthrates. The combination of these two factors means that our population pyramid is slowly, but surely, turning into a population cylinder. …this looming shift in America’s population profile means massive amounts of red ink as the baby boom generation moves into full retirement.
Simply stated, the United States will become a failed welfare state if we don’t make changes in the near future.
But I point out that we can save ourselves from that fate. And it’s not complicated. Just make sure government spending grows slower than the private economy, which will only be possible in the long run if lawmakers reform entitlements, particularly Medicare and Medicaid.
…it’s also possible that Washington will get serious about genuine entitlement reform. …if Congress adopted the structural reforms that have been in House budgets in recent years, much of our long-run spending problem would disappear. …the real goal is to make sure that government spending grows slower than the private sector.
That’s the good news.
But here’s the bad news. Based on his campaign rhetoric, Donald Trump isn’t a fan of entitlement reform.
And if he says no, it isn’t going to happen. Writing for National Review, Michael Barone explains that Trump’s opposition is a death knell.
The election of Donald Trump has put the kibosh on…the entitlement reform sought by conservative elites… Trump…has made plain that he’s opposed to significant changes in entitlements… It’s hard to see how Republicans in Congress will go to the trouble of addressing entitlements if their efforts can’t succeed.
As a matter of political prognostication, I agree. Republicans on Capitol Hill are not going to push reform without a receptive White House.
It doesn’t matter that they’re right.
Conservative elites’ concern about entitlements is based on solider numbers… There’s a strong case for making adjustments now… The longer we wait, the more expensive and painful adjustments will be. …Conservative…elites may have superior long-range vision. But they’re not going to get the policies they want for the next four years.
But this doesn’t mean reform is a lost cause.
I explained last month that there are three reasons why Trump might push for good policy (even though he said “I’m not going to cut Medicare or Medicaid”).
First, politicians oftentimes say things they don’t mean (remember Obama’s pledge that people could keep their doctors and their health plans if Obamacare was enacted?).
Second, the plans to fix Social Security, Medicare, and Medicaid don’t involve any cuts. Instead, reformers are proposing changes that will slow the growth of outlays.
Third, if Trump is even slightly serious about pushing through his big tax cut, he’ll need to have some plan to restrain overall spending to make his agenda politically viable.
And maybe Trump has reached the same conclusion. At least to some degree.
Medicaid has grown in size in recent years, with ObamaCare extending coverage to millions of low-income people who hadn’t qualified before. But Republicans warn of the program’s growing costs and have pushed to provide that money to states in the form of block grants — an idea President-elect Donald Trump endorsed during the campaign. Vice President-elect Mike Pence signaled in an interview with ABC this month that the incoming administration planned to keep Medicare as it is, while looking at ways to change Medicaid. …Block grants would mean limiting federal Medicaid funds to a set amount given to the states, rather than the current federal commitment, which is more open-ended. …Gail Wilensky, who was head of the Centers for Medicare and Medicaid Services…argued that…If federal money for the program were fixed, “states would have much greater incentives to use it as efficiently as possible,” she said.
The real question is whether Trump ultimately decides to expend political capital on a much-needed reform. Because he would need to do some heavy lifting. If GOPers push for block grants, well-heeled medical providers such as hospitals will lobby fiercely to maintain the status quo (after all what’s is waste and fraud to us is money in the bank for them). Trump would have to be willing to push back and make a populist argument for federalism and fiscal responsibility rather than a populist argument for dependency.
I guess we’ll see what happens.
P.S. For what it’s worth, if Trump is going to fix just one entitlement program, Medicaid is a good choice.
P.P.P.S. That being said, if the major fiscal change of a Trump Administration is Medicaid reform, I’ll be relatively happy. I’ve been operating on the assumption (based in part of what he said during the campaign) that Trump is a big-government Republican. Sort of like Bush. I will be very happy if it turns out I was wrong.
And this is why the concerns I had about a Hillary Clinton presidency aren’t that different from the concerns I have about a Donald Trump presidency.
Simply stated, he apparently doesn’t even think there’s a problem that needs to be addressed. Here’s what Trump said in an interview with the Daily Signal.
I’m not going to cut Social Security like every other Republican and I’m not going to cut Medicare or Medicaid.
Some people have told me not to get too worried about this statement because candidates make so many speeches and give so many interviews that they’re bound to make mistakes and say things they don’t really mean.
I agree that we shouldn’t get too hung up on every slip of the tongue on the campaign trail (notwithstanding this clip, for instance, Obama surely doesn’t think there are 57 states).
But the Trump people actually re-posted the Daily Signal interview on the campaign’s website, which certainly suggests (to use legal terminology) malice and forethought on the issue of entitlements.
That being said, this doesn’t mean Trump is a lost cause and that genuine entitlement reform is an impossibility.
First, politicians oftentimes say things they don’t mean (remember Obama’s pledge that people could keep their doctors and their health plans if Obamacare was enacted?).
Second, the plans to fix Social Security, Medicare, and Medicaid don’t involve any cuts. Instead, reformers are proposing changes that will slow the growth of outlays.
Third, if Trump is even slightly serious about pushing through his big tax cut, he’ll need to have some plan to restrain overall spending to make his agenda politically viable.
For what it’s worth, I’m particularly hopeful (or not un-hopeful, to be more accurate) that Trump will be willing to address Medicaid reform, ideally as part of an overall proposal to block-grant all means-tested programs.
One reason for my semi-optimism is that the programs is becoming even more of a mess thanks to Obamacare and plenty of governors and state legislators would gladly accept that kind of reform simply to have more control over state budget matters.
And every serious budget person in Washington understands the program must be reformed because of spiraling costs.
The Wall Street Journal has an editorial today about out-of-control Medicaid spending.
One immediate problem is ObamaCare’s expansion of Medicaid, which has seen enrollment at least twice as high as advertised. …Governors claimed not joining would leave “free money” on the table because the feds would pick up 100% of the costs of new beneficiaries. In a new report this week for the Foundation for Government Accountability, Jonathan Ingram and Nicholas Horton tracked down the original enrollment projections by actuaries in 24 states that expanded and have since disclosed at least a year of data on the results. Some 11.5 million people now belong to ObamaCare’s new class of able-bodied enrollees, or 110% higher than the projections. Analysts in California expected only 910,000 people to sign up, but instead 3.84 million have, 322% off the projections. The situation is nearly as dire in New York, where enrollment is 276% higher than expected, and Illinois, which is up 90%. This liberal state triumvirate is particularly notable because they already ran generous welfare states long before ObamaCare.
Of course, the “free money” for states is a fiscal burden for all taxpayers. It’s just that the money from taxpayers gets cycled through Washington before going to state capitals.
But it’s also worth noting that the money soon won’t be “free.”
The state spending share of new Medicaid enrollment will rise to 5% next year and then to 10% by 2020, up from 0% today. The enrollment overruns mean these states will have less to spend than they planned for every other priority, especially the least fortunate.
I suppose this is a good opportunity to recycle my video on Medicaid reform. It was filmed more than five years ago, so some of the numbers are outdated (they’re worse today!). But the policy analysis is still right on point.
Who knows, maybe Trump actually will do the right thing and (in a phrase he took from Reagan) make America great again.
Remember, none of us expected that economic freedom would expand during Bill Clinton’s presidency, so a bit of optimism isn’t totally out-of-bounds.
And if you want to be even more specific, the fastest-growing entitlement program is Medicaid, which was originally supposed to be a very small program to subsidize health care for poor people but has now metastasized into a budget-gobbling fiscal disaster. Arguably, it’s the entitlement program most in need of reform.
So how big is the problem? Enormous if you look at the numbers from the National Association of State Budget Officers.
States increased their spending in fiscal year 2015 by the biggest margin in more than 20 years, but most of the increase was thanks to huge leaps in Medicaid spending under the first full year of the Affordable Care Act (ACA). Spending increased last fiscal year, which ended on June 30 for most states, by 7.8 percent, according to new estimates from the National Association of State Budget Officers (NASBO). It’s the biggest boost since 1992 and was thanks to a 15.1 percent increase in Medicaid spending, much of that paid for via federal Medicaid funds. Illinois, Michigan, Kentucky, Nevada and Oregon saw more than 30 percent increases in federal funding because they expanded Medicaid under the ACA. But 2015 was also a year where states were putting up more of their own money again.
Here’s the chart showing which outlay categories grew the fastest.
The article points out that spending is outpacing revenue.
On average, state revenues aren’t keeping pace with spending; NASBO estimates General Fund revenues will increase by just 3.8 percent.
Though the real problem is that spending is expanding faster than the private sector, which is the opposite of what is called for by my Golden Rule.
One of the reasons Medicaid grows so fast is that the program is split between Washington and the states, which both picking up a share of the cost. This may sound reasonable, but it creates a very perverse incentive structure since politicians at both levels can vote to expand the spending burden while only having to provide part of the cost.
The National Center for Policy Analysis explains how this system produces bad decisions.
Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. …So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers. …Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people.
But unless that kind of reform happens, the program will continue to grow and become an ever-larger fiscal burden.
Heritage Action has more details on the perverse incentives of the current system.
…the federal government promises to reimburse states for a majority of their Medicaid spending, most of which involves reimbursements to health care providers. Therefore, states collude with health care providers in the following manner: they tell providers that they will tax them (so-called “provider taxes”), bringing in more revenue to the state. The state then promises to filter that money back to those same providers in the form of higher Medicaid reimbursements. States then bill the federal government for this added cost. Because the federal government provides more than 50% of total Medicaid funding, both state governments and Medicaid providers are made better off by the arrangement, while the federal government is stuck footing a larger bill it had no part in creating.
Though I partially disagree with the assertion that the feds are blameless. After all, it was politicians in Washington who created this wretched system, including the reimbursement rules that states manipulate.
The net result of all this is a nightmare for federal taxpayers, but states also are losing out when you consider the long-run consequences. And that’s even true with the Medicaid expansions contained in Obamacare, which supposedly were going to be financed almost entirely by Uncle Sam. The Wall Street Journalreports.
…the Affordable Care Act was designed to essentially bribe states to expand their Medicaid programs: The feds offered to pay 100% of additional costs through 2016, dropping to 90% by 2020. This “free money” prompted 30 states and the District of Columbia to take the deal. Democratic activists have joined with state hospital lobbies to pressure lawmakers in the remaining 20 state capitals to follow.
But free money can be very expensive.
Consider the experience of the states that did expand Medicaid. “At least 14 states have seen new enrollments exceed their original projections, causing at least seven to increase their cost estimates for 2017,” the Associated Press reported in July. The AP says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment outstripped estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. This has blown holes in state budgets. Illinois once projected that its Medicaid expansion would cost the state $573 million for 2017 through 2020. Yet 200,000 more people have enrolled than were expected, and the state has increased its estimated cost for covering each. The new price tag? About $2 billion… Enrollment overruns in Kentucky forced officials to more than double the anticipated cost of the state’s Medicaid expansion for 2017, the AP reports, to $74 million from $33 million. That figure could rise to $363 million a year by 2021. In Rhode Island, where one-quarter of the state’s population is now on Medicaid, the program consumes roughly 30% of all state spending, the Providence Journal reports. To plug this growing hole, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange.
Interestingly, Obamacare is causing pro-big government states to dig even deeper fiscal holes.
The National Center for Policy Analysis has some remarkable data on this development.
States that expanded Medicaid tend to have per capita state spending that’s about 17 percent higher than non-expansion states. …In 2004, expansion states had median per capita tax collections (both state and local) of 19 percent more than non-expansion states. By 2012, this gap had widened with expansion states collecting 28 percent more taxes per capita than non-expansion states. Moreover, since 2008 expansion states have moved to increase taxes, while non-expansion states have reduced taxes slightly.
Unsurprisingly, the states that are making government bigger are experiencing slower growth.
In 2001 expansion states had real median income that was nearly 13 percent higher than non-expansion states. However, by 2013 this gap had narrowed to just over 9 percent. Expansion states have historically had slightly lower poverty rates, but the difference was only 1 percentage point by 2012 (12.9 percent vs. 13.9 percent). Non-expansion states, although slightly poorer, have lower unemployment than expansion states (6.7 percent versus 7.2 percent).
Another point worth mentioning is that the program isn’t even a good deal for the poor according to Scott Atlas at the Hoover Institution. Here’s some of what he wrote for the Wall Street Journal.
Americans should be more worried than ever about Medicaid… The cost of the $500 billion program is expected to rise to $890 billion by 2024… Yet more spending doesn’t necessarily mean better care for beneficiaries… The expansion of Medicaid is one of the most misguided parts of ObamaCare… Some 55% of doctors in major metropolitan areas refuse to take new Medicaid patients… Medicaid enrollees who manage to see a doctor typically experience outcomes worse than those under private insurance. That means more in-hospital deaths, more complications from surgery, worse posttreatment survival rates, and longer hospital stays than similar patients with private insurance. A randomized study by the Oregon Health Study Group showed that having Medicaid did not significantly improve patients’ physical health compared with those without insurance.
The proverbial icing on this foul-tasting cake is the way the program enables staggering amounts of fraud and theft.
I’ve written about this before (including how foreigners are bilking the system). But here are some fresh details from the Wall Street Journal.
…one of our favorite political euphemisms is “improper payments.” That’s how Washington airbrushes away the taxpayer money that flows each year to someone who is not eligible, or to the right beneficiary in the wrong amount, or that disappears to fraud or federal accounting ineptitude. Now thanks to ObamaCare, improper payments are soaring. Last week the Health and Human Services Department published an “alert” warning that the improper payment rate for Medicaid in 2016 will likely hit 11.5%. That’s nearly double the 5.8% rate as recently as 2013… The 11.5% for 2016 is likely an underestimate given that HHS’s goal last year was 6.7% and instead scored 9.8%, which amounts to $29.1 billion. The dollar amount of improper payments in Medicaid was bound to rise because ObamaCare vastly opened eligibility. In 2015 enrollment climbed by 13.8% and one of five Americans are now covered by the program. …In recent audits of Medicaid in Arizona, Florida, Michigan and New Jersey, the GAO uncovered 50 dead people who recouped at least $9.6 million in benefits after they died; 47 providers who registered foreign addresses as their location of service in places such as Saudi Arabia; and $448 million bestowed on 199,000 beneficiaries with fake Social Security numbers—12,500 of which had never been issued by the Social Security Administration.
But as bad as all this sounds, it can get worse.
If HHS tries hard enough, maybe the department can match the failure rate for school lunches (15.7%) or the Earned Income Tax Credit (23.8%).
And Kevin Williamson of National Reviewadds some acidic observations.
…the criminal — and I do not use the word figuratively — administration of Medicaid by the Obama administration. …improper payments under Medicaid have become so common that they will account this year for almost 12 percent of total Medicaid spending — just shy of $140 billion. …That rate has doubled in only a few years…12 percent in improper payments isn’t an error rate — it’s a malfeasance rate. …If improper and illegal federal payments were an economy of their own, that economy would be bigger than Hungary’s… The Obama administration is not lifting a pinky to do anything about this, even though analysts such as John Hood have — for years — been arguing that it is necessary and possible to reform this mess. As the Wall Street Journal has reported, we don’t even verify that doctors billing Medicaid for services rendered are actually doctors. In many cases, we do not do much to verify that their patients actually, you know, exist. We’ve paid untold billions of dollars to “clinics” that turn out to be little more — or nothing more — than post-office boxes and prepaid cell phones. And as bad as that 12 percent rate is, some policy scholars believe that it is in fact probably worse.
Kevin observes that this system is good for the Poverty Pimps.
…the real problem with the welfare state is not the poor people receiving checks — it’s everybody in the middle, the vast array of government employees, their union allies, contractors, and third parties who earn six-, seven-, eight-, or nine-figure paydays taking their cuts of money we think we’re spending on the poor. This is an enormous criminal conspiracy against the American people and the public fisc.
You might think that fixing this fraud would be an area for bipartisan cooperation.
But the sad reality is that fraud is a feature, not a bug. Politicians like the fact that scam artists in their states and district are stealing healthcare money from taxpayers. After all, recipients of the loot can be registered voters and campaign contributors.
So what’s the best way of fixing this mess?
Will big tax hikes solve the problems? If the problem is that America isn’t enough like France, then the answer is yes.
But if the problem is that government already is too much of a burden and that it would be a good idea to at least slow down the rate at which America becomes France, then the answer is genuine entitlement reform.
P.S. For all intents and purposes, block granting Medicaid is a partial repeal of Obamacare. Just in case you wanted an additional reason to support reform.
Based on what’s been happening, those of us who have been warning about the fiscal burden of Medicaid, Medicare, and Obamacare could rest on our laurels and say “we told you so.” But it’s a Pyrrhic victory because being right means bad news for the country.
Earlier this year, The Hillreported some very sobering news about the ever-growing burden of health entitlements.
Spending on federal healthcare programs outpaced spending on Social Security for the first time in 2015, according to an expansive report from the congressional budget scorekeeper released Monday. The government spent $936 billion last year on health programs including Medicare, Medicaid and subsidies related to the Affordable Care Act, a jump of 13 percent from 2014, according to the Congressional Budget Office. Spending on Social Security, in contrast, totaled $882 billion, the Congressional Budget Office (CBO) reported.
Let’s look at just one example of why the fiscal burden of health entitlements keeps growing so rapidly.
According to new data, the portion of Obamacare that expanded Medicaid is generating a torrent of new spending.
Charles Blahous is a former Trustee for Social Security and Medicare Given his inside-the-belly-of-the-beast familiarity with entitlement programs, what he’s written should be especially alarming.
The implementation of major legislation such as the Affordable Care Act (ACA) often results in fiscal outcomes that differ significantly from prior projections. …Recall that the ACA considerably expanded Medicaid eligibility… It turns out that the 2015 per-capita cost of this Medicaid expansion is a whopping 49% higher than projections made just one year before. This disclosure can be found on page 27 of the 2015 Actuarial Report for Medicaid, released this July.
Here’s the chart showing how much higher per-recipient spending will be according to the new numbers.
Blahous goes through a lot of technical information to explain why the previous forecasts were so inaccurate.
But here’s the part that I think is most important to understand. Obamacare created a free lunch for states, at least in the short run. So we shouldn’t be surprised that many states have been seduced into participating and that they’re now spending money like drunken sailors.
Basically states established far higher expenditure requirements for the expansion population than the federal government expected, by positing that beneficiaries would be in need of more health services. Why did this happen? Remember, the ACA established an initial 100% federal matching payment for state Medicaid expansion costs, contrasting with historical federal match rates that averaged 57%. Even when the feds paid 57% of the bill there was a longstanding concern that states were insufficiently accountable for their cost-expanding decisions, with much of that cost being shifted to federal taxpayers. But the ACA’s current 100% match means that states make the decisions about expanding Medicaid while the federal government picks up all the costs. Even after the ACA is fully phased in, the feds will still pay for 90%. Under such arrangements, cost overruns are predictable.
So what’s the obvious conclusion?
Having federal taxpayers pick up between 90-100% of the cost of state Medicaid expansions was one of many questionable policy decisions made in the ACA. It’s also proving to be much more expensive than the federal government expected.
Brian Blase of the Mercatus Center also has a grim assessment on the numbers.
The Department of Health and Human Services’ (HHS) annual report on Medicaid’s finances contains a stunning update: the average cost of the Affordable Care Act’s Medicaid expansion enrollees was nearly 50% higher in fiscal year (FY) 2015 than HHS had projected just one year prior. Specifically, HHS found that the ACA’s Medicaid expansion enrollees cost an average of $6,366 in FY 2015—49% higher than the $4,281 amount that the agency projected in last year’s report. The government’s chief financial experts appear not to have anticipated how states would respond to the federal government’s 100% financing of the cost of people made eligible for Medicaid by the ACA. It appears that the enhanced federal funding for the ACA expansion population has led states to set outrageously high capitation rates—the amount government pays insurers—for the ACA Medicaid expansion population.
Blase points out that this goes beyond the traditional failure of bureaucrats to accurately anticipate behavioral changes when politicians give away other people’s money.
There’s also some sleazy maneuvers to funnel money to special interest groups.
…the amounts…suggest that states are inappropriately funneling federal taxpayer money to insurers, hospitals, and other health care interests through the ACA Medicaid expansion. …The health care interest groups within the states, particularly hospitals and insurers, benefit from the higher rates while federal taxpayers are left footing the bill. …Moreover, the elevated federal reimbursement rate removes the incentives for states to make sure that insurers are not overspending on providers since overpayments come at the expense of federal, not state, taxpayers.
And most of the new spending does wind up in the pockets of the interest groups.
Recent evidence that new Medicaid enrollees only receive about 20 to 40 cents of benefit for each dollar of spending on their behalf.
But even the small fraction that goes to consumers doesn’t seem to have much positive impact on their health according to one major new study.
Medicaid expansion in Oregon was not related to significant health improvements.
So what does all this mean?
Obamacare has been a disaster. This column has been a look at how just one provision has backfired on taxpayers.
And just as bureaucrats are grossly incompetent at estimating the revenue impact of changes in tax law, they’re also grossly incompetent at predicting behavioral changes when expanding entitlement programs.
Some of us, for what it’s worth, warned about this as Obamacare was being debated.
P.S. Since I don’t want to be a naive rube, allow me to acknowledge there’s an alternative explanation for consistently inaccurate fiscal forecasts from the government.
In a triumph of hope over experience, let’s see once again if we can get the boulder to the top of the hill.
James Piereson of the Manhattan Institute has a superb article in Commentary about “The Redistribution Fallacy.” Here are some passages, starting with an observation that American voters are very skeptical about using government coercion to equalize incomes.
Public-opinion polls over the years have consistently shown that voters overwhelmingly reject programs of redistribution in favor of policies designed to promote overall economic growth and job creation. …While voters are worried about inequality, they are far more skeptical of the capacity of governments to do anything about it without making matters worse for everyone. …Leaving aside the morality of redistribution, the progressive case is based upon a significant fallacy. It assumes that the U.S. government is actually capable of redistributing income from the wealthy to the poor. …Whatever one may think of inequality, redistributive fiscal policies are unlikely to do much to reduce it, a point that the voters seem instinctively to understand.
…there are perfectly obvious reasons on both the tax and the spending side as to why redistribution does not succeed in the American system—and probably cannot be made to succeed. …The highest marginal income-tax rate oscillated up and down throughout the 1979–2011 period. It began in 1979 at 70 percent during the Carter presidency. It fell first to 50 and then to 28 percent in the Reagan and Bush years. It rose to 39.6 percent in the 1990s under the Clinton presidency, and went down again to 35 percent from 2003 to 2010. It is now back up to 39.6 percent. The highest rate on capital gains moved within a narrower band, beginning at 28 percent in 1979 and falling as low as 15 percent from 2005 to 2011. The highest rate is currently 23.8 percent. Over this period, regardless of the tax rates, the top 1 percent of the income distribution lost between 1 and 2 percent of the income share after taxes were levied. …At the other end, the poorest quintiles gained almost nothing (about 1 percent on average) in income shares due to cash and in-kind transfers from government. In 2011, for example, the poorest 20 percent of households received 5 percent of (pre-tax) national income, and 6 percent of the after-tax income.
Moreover, it’s laughably inaccurate to claim that the United States doesn’t have a progressive tax system.
Many in the redistribution camp attribute this pattern to a lack of progressivity in the U.S. income-tax system; a higher rate of taxation on the wealthy should solve it, they think. …A 2008 study published by the Organization for Economic Cooperation and Development found that the United States had the most progressive income-tax system among all 24 OECD countries measured in terms of the share of the tax burden paid by the wealthiest households. …The top 20 percent of earners paid 93 percent of the federal income taxes in 2010 even though they claimed 52 percent of before-tax income. Meanwhile, the bottom 40 percent paid zero net income taxes—zero. For all practical purposes, those in the highest brackets already bear the overwhelming burden of federal income tax, while those below the median income have been taken out of the income-tax system altogether.
Indeed, it’s worth noting that the reason that government is much bigger in Europe is not because they tax the rich more, but rather because they have higher burdens on low- and moderate-income taxpayers (largely because of the value-added tax).
Simply stated, there aren’t enough rich people to finance a giant welfare state, particularly when they can easily choose to avoid confiscatory tax levels.
And this explains why honest American leftists occasionally will admit that they’re real goal is higher taxes on the middle class. That’s where the money is.
But I’m digressing. Let’s get back to Piereson’s article.
He also explains that redistribution doesn’t work on the spending side of the fiscal ledger.
Turning to the spending side of fiscal policy, we encounter a murkier situation because of the sheer number and complexity of federal spending programs. The House of Representatives Budget Committee estimated in 2012 that the federal government spent nearly $800 billion on 92 separate anti-poverty programs that provided cash assistance, medical care, housing assistance, food stamps, and tax credits to the poor and near-poor. …most of the money goes not to poor or near-poor households but to providers of services. The late Daniel Patrick Moynihan once tartly described this as “feeding the horses to feed the sparrows.” This country pays exorbitant fees to middle-class and upper-middle-class providers to deliver services to the poor. …This is one reason that five of the seven wealthiest counties in the nation are on the outskirts of Washington D.C. and that the average income for the District of Columbia’s top 5 percent of households exceeds $500,000, the highest among major American cities.
Gee, I’m shocked to learn that big government is a racket that lines the pockets of Washington insiders.
So what’s the bottom line?
The federal government is an effective engine for dispensing patronage, encouraging rent-seeking, and circulating money to important voting blocs and well-connected constituencies. It is not an effective engine for the redistribution of income. …those worried about inequality should abandon the failed cause of redistribution and turn their attention instead to broad-based economic growth as the only practical remedy for the sagging incomes of too many Americans.
Amen.
If you want an example of how statism hurts the less fortunate, look at what’s happened to Venezuela.
It’s so bad that even establishment media outlets can’t help but notice, as illustrated by this passage from an article in The Economist.
Though the poor initially benefited from “Bolivarian socialism”, economic mismanagement has made them poorer.
In other words, Venezuela is a real-world example of the famous parables about socialism in the classroom and buying beer with class-warfare taxation. Demagogic politicians don’t understand (or don’t care) that when you punish production and reward sloth, you get less of the former and more of the latter.
Which brings me back to Piereson’s concluding points. If you care about the poor, strive for more economic growth with policies based on free markets and small government.
Nations that follow that approach vastly out-perform the countries that choose statism.
That’s looking at the big picture. Now let’s look at an example that confirms Piereson’s point about redistribution programs mostly benefiting interest groups rather than poor people.
Medicaid is the largest means-tested welfare program in the United States. …new research suggests that only 20 to 40 cents of each Medicaid dollar improves recipients’ welfare. …How much does Medicaid increase recipients’ actual welfare? In other words: Does $100 of Medicaid spending increase the dependent’s well-being by $100? More? Less? …recipients’ behavior indicates they only valued their benefits at one-fifth to two-fifths of the money spent is a serious indictment of the program.
So who does benefit from the program’s ever-growing fiscal burden?
Medicaid spending is driven by providers, especially hospitals, which have relentless lobbying operations. …The study group found that 60 percent of Medicaid spending comprises transfers to such providers
But here’s the most amazing conclusion from this new research.
Medicaid enrollment did not improve mortality or any physical health measure.
The only logical conclusion is that we need to reform Medicaid. Heck, let’s fix the entire mess created by the Washington-created welfare state.
But I was just looking at big-picture fiscal aggregates.
And while that was discouraging, it gets downright depressing when you look behind the numbers and consider how a growing share of Americans are getting lured into government dependency.
Nicholas Eberstadt of the American Enterprise Institute has a very grim analysis on the growth of entitlement dependency in the United States.
The American welfare state today transfers over 14% of the nation’s GDP to the recipients of its many programs, and over a third of the population now accepts “need-based” benefits from the government. This is not the America that Tocqueville encountered.
It wasn’t always this way.
The article looks at the history of the welfare state in America.
In 1961, at the start of the Kennedy Administration, total government entitlement transfers to individual recipients accounted for a little less than 5% of GDP, as opposed to 2.5% of GDP in 1931 just before the New Deal. In 1963 — the year of Kennedy’s assassination — these entitlement transfers accounted for about 6% of total personal income.
But things began to deteriorate under LBJ.
During the 1960s, …President Johnson’s “War on Poverty” (declared in 1964) and his “Great Society” pledge of the same year ushered in a new era for America, in which Washington finally commenced in earnest the construction of a massive welfare state. … Americans could claim, and obtain, an increasing trove of economic benefits from the government simply by dint of being a citizen; they were now incontestablyentitledunder law to some measure of transferred public bounty, thanks to our new “entitlement state.”
And guess what? Once we started rewarding dependency, more and more people decided they were entitled.
Over the half-century between 1963 and 2013, entitlement transfers were the fastest growing source of personal income in America — expanding at twice the rate for real per capita personal income from all other sources, in fact. Relentless, exponential growth of entitlement payments recast the American family budget over the course of just two generations. In 1963, these transfers accounted for less than one out of every 15 dollars of overall personal income; by 2013, they accounted for more than one dollar out of every six. The explosive growth of entitlement outlays, of course, was accompanied by a corresponding surge in the number of Americans who would routinely apply for, and accept, such government benefits.
And how many people have been lured into government dependency? A lot, and mostly because of welfare spending rather than age-related social insurance programs such as Social Security and Medicare.
…the government did not actually begin systematically tracking the demographics of America’s “program participation” until a generation ago. Such data as are available, however, depict a sea change over the past 30 years. …By 2012, the most recent year for such figures at this writing, Census Bureau estimates indicated that more than 150 million Americans, or a little more than 49% of the population, lived in households that received at least one entitlement benefit….Between 1983 and 2012, by Census Bureau estimates, the percentage of Americans “participating” in entitlement programs jumped by nearly 20 percentage points….Less than one-fifth of that 20-percentage-point jump can be attributed to increased reliance on these two “old age” programs. Overwhelmingly, the growth in claimants of entitlement benefits has stemmed from an extraordinary rise in “means-tested” entitlements.
Ugh. I’ve previously written that getting something from the government doesn’t automatically turn somebody into a moocher or a deadbeat.
Nonetheless, it can’t be good news that 49 percent of U.S. households are on the receiving end for goodies from Uncle Sam.
Here’s a table from his article that should frighten anyone who thinks work and self-reliance are worthwhile values.
There’s lot of information, so I recommend just focusing on the numbers in parentheses in the first two columns. Those show how dependency is increasing by significant amounts for many programs.
…the rolls of claimants receiving food stamps (a program that was officially rebranded the Supplemental Nutrition Assistance Program, or SNAP, in 2008 because of the stigma the phrase had acquired) jumped from 19 million to 51 million. By 2012 almost one American in six lived in a home enrolled in the SNAP program. The ranks of Medicaid, the means-tested national health-care program, increased by over 65 million between 1983 and 2012, and now include over one in four Americans. …Between 1983 and 2012, the number of Americans in households receiving Federal SSI more than sextupled; by 2012, over 20 million people were counted as dependents of the program.
Asking for, and accepting, purportedly need-based government welfare benefits has become a fact of life for a significant and still growing minority of our population: Every decade, a higher proportion of Americans appear to be habituated to the practice. … nearly half of all children under 18 years of age received means-tested benefits (or lived in homes that did). For this rising cohort of young Americans, reliance on public, need-based entitlement programs isalreadythe norm — here and now. It risks belaboring the obvious to observe that today’s real existing American entitlement state, and the habits — including habits of mind — that it engenders, do not coexist easily with the values and principles, or with the traditions, culture, and styles of life, subsumed under the shorthand of “American exceptionalism.”
And the erosion of cultural capital is very difficult to reverse, thanks in large part to the welfare-aided erosion of traditional families and falling levels of work among males.
The corrosive nature of mass dependence on entitlements is evident from the nature of the pathologies so closely associated with its spread. Two of the most pernicious of them are so tightly intertwined as to be inseparable: the breakdown of the pre-existing American family structure and the dramatic decrease in participation in work among working-age men. …the rise of long-term entitlement dependence — with the concomitant “mainstreaming” of inter-generational welfare dependence — self-evidently delivers a heavy blow.
Since this has been an utterly depressing analysis so far, let’s close with a vaguely optimistic look at the future.
While it may not be easy to reverse the erosion of cultural capital, it is simple (at least in theory) to reverse bad policies.
P.S. This is some great work by AEI, which follows on the stellar analysis that organization recently produced on income inequality. Makes me almost want to forgot that AEI put together a somewhat disappointing fiscal plan.
Back during the 2012 presidential campaign, I criticized the view that America was divided between “makers” and “takers.”
But not because I disagreed with the notion that people trapped in government dependency have an unfortunate self-interest in supporting politicians who want a bigger welfare state. Indeed, I’ve explicitly warned that some statist politicians explicitly want to create more dependency to advance their power.
That being said, it’s important to understand the depth of the problem. It’s not accurate, as I’ve written, to assume that people who don’t pay tax are part of the moocher class.
…those people are not necessarily looking for freebies from government. Far from it. Many of them have private sector jobs and believe in self reliance and individual responsibility. Or they’re students, retirees, or others who don’t happen to have enough income to pay taxes, but definitely don’t see themselves as wards of the state.
Moreover, it’s not even accurate to say that households receiving benefits from the government are part of the dependency class.
…the share of households receiving goodies from the government...is approaching 50 percentand it probably is much more correlated with the group of people in the country who see the state as a means of living off their fellow citizens. But even that correlation is likely to be very imprecise since some government beneficiaries – such as Social Security recipients – spent their lives in the private sector and are taking benefits simply because they had no choice but to participate in the system.
If we really want to understand the depth of America’s dependency problem, it’s much better to look at the share of the population that gets money from anti-poverty programs.
The Census Bureau has just released a report looking at the share of the population receiving “means-tested” benefits, which is the term for programs targeting low-income recipients. Here are some of the highlights (or lowlights) from the accompanying release.
Approximately 52.2 million (or 21.3 percent) people in the U.S. participated in major means-tested government assistance programs each month in 2012, according to a U.S. Census Bureaureportreleased today. Participation rates were highest for Medicaid (15.3 percent) and the Supplemental Nutrition Assistance Program, formerly known as the food stamp program (13.4 percent). The average monthly participation rate in major means-tested programs increased from 18.6 percent in 2009 to 20.9 percent in 2011. …The largest share of participants (43.0 percent) in any of the public assistance programs stayed in the programs between 37 and 48 months.
Perhaps more worrisome are the details on how some segments of the population are more likely to be trapped in government dependency.
In an average month, 39.2 percent of children received some type of means-tested benefit, compared with 16.6 percent of people age 18 to 64 and 12.6 percent of people 65 and older. …At 41.6 percent, blacks were more likely to participate in government assistance programs in an average month. …At 50 percent, people in female-householder families had the highest rates of participation in major means-tested programs.
Though perhaps “trapped” is too strong a word. As you can see from this table, less than 50 percent of recipients appear to be long-term dependents.
Looking at all this data, my conclusion is that we’re not in any immediate danger of hitting a “tipping point” of too much dependency. To be sure, the trends are not favorable, thanks to politicians like Obama, but 21 percent of the population receiving means-tested benefits is not nearly as bad as 47 percent.
Though it appears that the Census Bureau doesn’t count the “earned income credit” in its calculations. That’s an odd omission since it is a means-tested spending program (operated through the tax code). So the problem presumably is worse than what is stated in the report, but I’m assuming that there’s a big overlap between EIC recipients and those already counted by the Census Bureau. which means that the share of households getting money from Uncle Sam is still significantly less than 30 percent.
But that doesn’t mean we shouldn’t be worried. Indeed, the welfare state should be radically changed because we care about both taxpayers and poor people.
Writing for The Federalist, Robert Tracinski explores specific policies that would restrain and reduce the welfare state.
He lists seven ideas, which I’ve shared below (in very abbreviated form) followed by my two cents.
1) Repeal ObamaCare – If we want to roll back the welfare state, we will never have any better opportunity to start than by repealing ObamaCare—a program that is relatively new, has never been popular, and is in a slow process of imploding.
2) Health Savings Accounts – Scrapping ObamaCare would be a natural opportunity for Republicans to propose their own free-market health-care reforms. The centerpiece of that alternative should be Health Savings Accounts, which make it easier for individuals to save money in tax-free accounts which they can use for medical expenses.
My response: Not my preferred option. HSAs are a big improvement over the current system and presumably would help with the third-party payer problem, but fixing healthcare requires far bigger changes to Medicare, Medicaid, and the tax code’s fringe benefit loophole. And if you make those changes, HSAs wouldn’t really matter.
3) Means-test Social Security – Social Security is already a bad deal for the middle class, since the benefits are already skewed in such a way that they are equivalent to a tiny return, between 1 and 2 percent annually, on what might have been a private investment. By contrast, long-term returns on the stock market are about 7 percent annually. And in order to make Social Security sustainable, it will have to become a much worse deal.
4) Restart economic growth – the United States has slipped into theObama rate of growth, a permanent state of semi-stagnation. We’ve been through market crashes and recessions before, but usually after a year or two of pain, we get a strong burst of growth to make up for it. …This low rate of growth makes the burden of the welfare state greater, because we can no longer grow our way out from under its expenses. …If we’re going to expect people to be more self-reliant, they must also have a sense of economic hope.
5) Re-reform welfare – …the Obama administration has used the recession togut the welfare reformof the 1990s, extending unemployment benefits and loosening work requirements. …the administration has used the state for the opposite purpose: to push people from self-reliance into dependence.
My response: Also hard to argue with this suggestion. It’s very worrisome how leftists are operating behind the scenes to push more dependency.
6) Save the cities – …the centers of economic inequality and racial conflict—the key issues on which Democrats always campaign—are places that are the sole property of Democrats, owned and run by them for about as long as anyone can remember. …If we want less class and racial conflict, if we want more people moving up into the middle class and no longer feeling the need for government support, if we want to compete for the vote in what are now deep centers of political support for the left—then we need to start targeting the cities for basic reforms that will improve the quality of life there and bring back the middle class.
My response: A very accurate description of the problem, but I suspect advocates of limited government won’t gain control of policy in big cities, so it might be better to first focus on rhetorical efforts to explain how statism leads to bad results.
7) Federalism – This is not a foolproof solution, because we’ll still occasionally get local handouts… But the general idea is that we can let New York and California set up more generous welfare states—if they want to pay for them. And they should let the hinterland scale back welfare. Then the states can compete to see whose approach is more successful and how many people vote with their feet for the small government model.
Authored by Joseph Antos, Andrew G. Biggs, Alex Brill, and Alan D. Viard, all of whom I know and admire, this new document outlines a series of reforms designed to restrain the growth of government and mitigate many of the tax code’s more punitive features.
Compared to current law, the plan is a huge improvement.
But huge improvement isn’t the same as perfect, so here’s my two cents on what’s really good, what’s partially good, and what has me worried.
I’ll start with something that’s both good and bad.
According to the latest CBO estimates, federal tax revenues for 2015 will absorb 17.7 percent of GDP and spending will consume 20.4 percent of economic output. Now look at this table showing the impact of the AEI proposal. As you can see, the burden of taxes and spending will both be higher in the future than today.
That’s obviously bad. One would think a conservative organization would present a plan that shrinks the size of government!
From that perspective, the AEI plan actually is good since it is based on reforms that stop most – but not all – of the already-legislated expansions in the size of the public sector.
So here’s the bottom line. Compared to what I would like to see, the AEI plan is too timid. But compared to what I fear will happen, the AEI plan is reasonably bold.
Now let’s look at the specific reforms, staring with tax policy. Here’s some of what’s in the report.
The goal of our tax reform is to eliminate the income tax’s inherent bias against saving and investment and to reduce other tax distortions. To achieve this goal, the income tax system and the estate and gift taxes would be replaced by a progressive consumption tax, in the form of a Bradford X tax consisting of a…37 percent flat-rate firm-level tax on business cash flow and a graduated-rate household-level tax, with a top rate of 35 percent, on wages and fringe benefits.
We’d have a less destructive tax code than we have now, but it wouldn’t be as good as it could be. Indeed, the plan is conceptually similar to the Rubio-Lee proposal, but with a lot more details.
Not that I’m happy with all those additional details.
To address environmental externalities in a more cost-effective and market-based manner, energy subsidies, tax credits, and regulations would be replaced by a modest carbon tax. The gasoline tax would be increased to cover highway-related costs.
I’m very nervous about giving Washington a new source of revenue. And while I’m open (in theory) to the argument that a carbon tax would be a better (less worse) approach than what we have now, I’m not sure it’s wise to trust that politicians won’t pull a bait and switch and burden us with both a costly energy tax and new forms of regulatory intervention.
There are also other features that irk me, including the continuation of some loopholes and the expansion of redistribution through the tax code.
Child and dependent care expenses could be deducted… A 15 percent refundable credit for charitable contributions… A 15 percent refundable credit for mortgage interest… A refundable credit for health insurance…the EITC for childless workers would be doubled relative to current law.
But now let’s look at the most worrisome feature of the plan. It explicitly says that Washington should get more money.
… we also cannot address the imbalance simply by cutting spending… The tax proposals presented in this plan raise necessary revenues… Over time, tax revenue would gradually rise as a share of GDP… The upward path of tax revenue is necessary to finance the upward path of federal spending.
This is very counterproductive. But I don’t want to regurgitate my ideological anti-tax arguments (click here if that’s what you want). Let’s look at this issue from a strictly practical perspective.
I’ve reluctantly admitted that there are potential tax-hike deals that I would accept, at least in theory.
But those deals will never happen. In the real world, once the potential for additional revenue exists, the appetite for genuine spending restraint quickly evaporates. Just look at the evidence from Europe about the long-run relationship between taxes and debt and you’ll see that more revenue simply enables more spending.
Speaking of which, now let’s shift to the outlay side of the fiscal ledger.
We’ll start with Social Security, where the AEI folks are proposing to turn Social Security from a substandard social insurance program, which is bad, to a flat benefit, which might even be worse since it involves a shift to a system that is even more focused on redistribution.
The minimum benefit would be implemented immediately, increasing benefits for about one third of retirees, while benefits for middle- and high-earning individuals would be scaled down to the wage-indexed poverty level between now and 2050.
The failure to embrace personal accounts may be the most disappointing feature of the AEI plan. And I wouldn’t be surprised if the authors veered in this unfortunate direction because they put the cart of debt reduction ahead of the horse of good policy.
To elaborate, a big challenge for real Social Security reform is the “transition cost” of financing promised benefits to current retirees and older workers when younger workers are allowed to shift their payroll taxes to personal accounts. Dealing with this challenge presumably means more borrowing over the next few decades, but it would give us a much better system in the long run. But this approach generally isn’t an attractive option for folks who fixate on near-term government debt.
That being said, there are spending reforms in the proposal that are very appealing.
The AEI plan basically endorses the good Medicare and Medicaid reforms that have been part of recent GOP budgets. And since those two programs are the biggest drivers of our long-run spending crisis, this is very important.
With regards to discretionary spending, the program maintains sequester/Budget Control Act spending levels for domestic programs, which is far too much since we should be abolishing departments such as HUD, Agriculture, Transportation, Education, etc.
But since Congress presumably would spend even more, the AEI plan could be considered a step in the right direction.
Finally, the AEI plan calls for military spending to consume 3.8 percent of economic output in perpetuity. National defense is one of the few legitimate functions of the federal government, but that doesn’t mean the Pentagon should get a blank check, particularly since big chunks of that check get used for dubious purposes. But I’ll let the foreign policy and defense crowd fight that issue since it’s not my area of expertise.
You get to spend other people’s money. But that’s just for starters. Using the power of majoritarianism, you also get to tell the rest of the country what to do, how to behave, and even what to eat.
And it’s definitely true if you’re part of the statist chattering class.
Jillian Kay Melchoir of National Reviewreveals that the pro-tax crowd at MSNBC must think they’re working at the OECD.
How else to explain that so many of them have unpaid tax bills?
Touré Neblett, co-host of MSNBC’s The Cycle, owes more than $59,000 in taxes, according to public records reviewed by National Review. In September 2013, New York issued a state tax warrant to Neblett and his wife, Rita Nakouzi, for $46,862.68. Six months later, the state issued an additional warrant to the couple for $12,849.87. …MSNBC’s hosts and guests regularly call for higher taxes on the rich, condemning wealthy individuals and corporations who don’t pay their taxes or make use of loopholes. But recent reports, as well as records reviewed by National Review, show that at least four high-profile MSNBC on-air personalities have tax liens or warrants filed against them.
And why is this hypocritical?
Because, as illustrated by this video from Washington Free Beacon, so many of them urge higher taxes on the rest of us and argue that paying taxes is a wonderful experience.
I guess the MSNBC hosts forget to mention that higher taxes are only good for other people, not for themselves.
Now let’s look at another example.
Though I confess I’m merely assuming hypocrisy in this case. It deals with actors, the vast majority of which almost surely would want to impose a higher minimum wage on, say, the fast-food industry.
But, writing for Investor’s Business Daily, Larry Elder points out that these actors in Los Angeles don’t want to be covered by the minimum wage because they understand it means less work for themselves.
In Los Angeles County, the minimum wage is $9 per hour. Theater actors, however, can be paid as little as $7 a performance, and an actor can even work long rehearsal hours with no pay. Three decades ago, L.A. County actors sued their union for an exception to union wages for theaters with 99 seats or fewer seats. Why do these stage actors work for so little? They want to work. By working, they improve their skills, stay sharp and or perhaps have a chance to get spotted by an agent. Some say simply having something to do is better than just sitting around and waiting for a casting agent to call. Actors Equity, the national union, wants to change this. …But then a very Republican thing happened — 66% of the union members voted against a higher minimum wage. Their rationale was simple: A higher minimum wage means fewer plays get performed. Fewer plays mean fewer opportunities for actors and therefore fewer opportunities to gain experience, stay in practice or get discovered. …When it comes to their own lives, these actors understand the law of economics: Artificially raise the cost of a good — in this case the price of an actor in a stage play — and you reduce the demand for actors.
Unfortunately, this episode of economic enlightenment doesn’t have a happy ending.
But the union’s national council ignored this advisory vote and ordered, with some exceptions, a $9 per hour minimum wage.
Mr. Elder also includes a very perceptive quote from a Hollywood celebrity.
Pat Sajak, host of “Wheel of Fortune,” recently offered a different perspective on the minimum wage. “When I had minimum wage jobs,” he tweeted, “my goal was to better myself, not to better the minimum wage.”
Kudos to Mr. Sajak. Too bad there are so many politicians (including many Republicans) who don’t understand that higher minimum wages mean fewer jobs for the less vulnerable.
Though, to be fair, maybe supporters do understand the harsh impact and simply don’t care.
P.S. I wrote yesterday about the impact of tax reform on the 2016 election, and I included a postscript about a healthcare issue that has resonance with voters.
Well, Philip Klein of the Washington Examinermakes the case for another healthcare issue that he hopes will motivate Republican primary voters to reject Ohio Governor John Kasich.
…not only did Kasich decide to participate in Obamacare’s fiscally destructive expansion of Medicaid, in doing so he also displayed a toxic mix of cronyism, dishonesty and executive overreach. …despite campaigning on opposition to Obamacare, Kasich crumbled under pressure from hospital lobbyists who supported the measure, and endorsed the expansion. When his legislature opposed him, Kasich bypassed lawmakers and imposed the expansion through a separate panel — an example of executive overreach worthy of Obama. Kasich cloaked his cynical move in thelanguage of Christianity, and, just like a liberal demagogue, he portrayed those with principled objections to spending more taxpayer money on a failing program as being heartless. …Republican voters made a terrible miscalculation when they chose so-called compassionate conservative George W. Bush as their nominee, as he went on as president to push the largest expansion of entitlements since the Great Society in the form of the Medicare prescription drug plan. …During this presidential primary season, Republican voters will have much better options than they did last time. They don’t have to settle for another champion of big government. By punishing Kasich for expanding Medicaid, conservative primary voters would be sending the message to state-level Republicans everywhere that if they choose to advance big government healthcare solutions, there will be consequences — and they will have no chance of rising to higher office.
The program is a nightmare for both federal taxpayers and state taxpayers.
In an article for the Daily Caller, John Graham of the Independent Institute has some very grim analysis of the fiscal black hole otherwise known as Medicaid.
In 2014, total Medicaid spending is projected to grow 12.8 percent because Obamacare has added about 8 million dependents. A large minority of states have chosen to increase residents’ eligibility for Medicaid by expanding coverage to adults making up to 138 percent of the federal poverty level. Unfortunately, more states are likely to expand this welfare program. This is expected to result in a massive increase in the number of Medicaid dependents: From 73 million in 2013 to 93 million in 2024. Medicaid spending is expected to grow by 6.7 percent in 2015, and 8.6 percent in 2016. For 2016 to 2023, spending growth is projected to be 6.8 percent per year on average. This comprises a massive increase in welfare dependency and burden on taxpayers.
But the actual numbers may be worse than these projections.
…official estimates often low-ball actual experience. This is because it is hard to grapple with how clever states are at leveraging federal dollars. …The incentive lies in Medicaid’s perverse financing merry-go-round. In a rich state like California, for example, the federal government (pre-Obamacare) spent 50 cents on the dollar for adult dependents. So, if California spent 50 cents, it automatically drew 50 cents from the U.S. Treasury. And most states had a bigger multiplier. Which state politician can resist a deal like that? …The situation will deteriorate because Obamacare’s Medicaid expansion significantly increases states’ perverse incentives to game Medicaid financing. …Newly eligible Medicaid beneficiaries will be fully financed by the federal government for 2014 through 2016. Then, it slides down until the federal government funds 90 percent of their costs starting in 2020, with the states footing 10 percent. Recall the cunning with which states developed ways to abuse federal taxpayers when they could only double their money from Uncle Sam. The new normal is that they will be able to get nine times their money!
A reform in the right direction would be to get rid of the federal match in favor of a block grant, based on a simple measurement of the population in each state, and precisely define a limited federal commitment.
He’s exactly right, at least in the short run.
Let’s copy the success of welfare reform and turn over a fixed amount of money – along with concomitant authority and responsibility – to state governments and let them figure out the best way of delivering health care to lower-income populations.
In the long run, of course, I’d like to phase out the block grant so that states are responsible for both collecting the money and providing the services.
But before we get to the point of adopting health care policies for an ideal libertarian society, we first have to stop the bleeding (or, to be more accurate, hemorrhaging) and stabilize the program.
And that’s why I fully agree that the federalism approach, in the form of block grants, is the right policy.
And since I’m sharing videos, I can’t resist commenting on the latest “Gruber-gate” scandal. The MIT professor and Obamacare insider (he got $400,000 of taxpayer money to help design the plan) has become an embarrassment for the left because he has been caught on tape saying that the legislation relied on deception. He even said that proponents of Obamacare took advantage of the “stupidity” of American voters.
You can watch the most well-know example by clicking here. But he also denigrated supposedly “stupid” Americans in this video.
I want to defend one small component of Gruber’s statement.
But I want to be completely clear that I’m not defending his elitist disdain for ordinary Americans. Indeed, I don’t think voters are stupid. Instead, to the extent they’re uninformed, it’s the result of serial dishonesty from Washington or because they’ve decided it’s not worth their time to pay attention to the crowd in DC (the “rational ignorance” hypothesis).
The part of Gruber’s statement that has merit is that he’s talking about the fact that there’s a big loophole in the tax code for fringe benefits. To be more specific, tens of millions of Americans get part of their compensation in the form of fringe benefits such as health insurance. Yet while workers are taxed on their “cash” income, they are not taxed on their “fringe benefit” income (a policy sometimes called the “healthcare exclusion”).
And this has created, over time, a very inefficient system of over-insurance.
To understand why this system doesn’t make sense, just think about your homeowner’s insurance or auto insurance. Those policies, unlike health insurance, work reasonably well and costs remain relatively stable. Why is there a big difference?
The difference is that employee income that is diverted to health insurance avoids both income tax and payroll tax, so there is a significant monetary incentive for gold-plated plans. And these plans often include insurance coverage for ordinary medical expenses, which contributes to the problem of third-party payer.
No wonder health insurance is so costly. After all, imagine what would happen to the price of your homeowner’s insurance if it had to cover the cost of a new couch? Or repainting the hallway? Or what about the cost of your auto policy if it covered the cost to fill up with gas or get an oil change?
We instinctively recognize that this would be insanely inefficient and expensive, yet that’s how our health insurance system operates thanks to a giant tax preference.
So Gruber was right to say it’s a problem. And I’ve even said that addressing the exclusion is a very tiny silver lining in the awful dark cloud of Obamacare.
But now that I’ve bent over backwards to say something nice, now let me point out that Gruber (and Obama and other statists) didn’t have the right solution. Yes, they wanted to cut back on the tax exclusion, but only because they wanted to use the money for other purposes (such as subsidies that also exacerbate the third-party payer problem).
Now that we’ve addressed a serious point, let’s laugh about the fact that Gruber’s comments have created a big headache for the White House. We’ll start with this Steve Kelley cartoon.
And here’s Gary Varvel’s take on the honesty of the Obama White House on the topic of health care.
Last but not least, Lisa Benson optimistically suggests that the serial dishonesty of Obamacare supporters may be undone by the Supreme Court.
Which would be poetic justice, since Professor Gruber also was caught on tape – over and over again – stating that Obamacare only allowed subsidies for people getting insurance policies through state-based exchanges.
And now the Supreme Court will decide whether those subsidies, notwithstanding statutory language, can be provided via the federal exchange.
Though I’m not holding my breath since certain Justices on the Court already have demonstrated that they’re willing to put politics above the law.
P.S. Just in case I wasn’t sufficiently clear, good tax reform also is good health reform. That was one of the points I made in my tax reform speech at the Heritage Foundation and I suspect I’ll continue making that argument until we win or I’m dead (and I don’t want to take odds on which happens first).
P.P.S. On a more upbeat note, the House of Representatives approved budgets in 2011, 2012, 2013, and 2014 that assume Medicaid gets block-granted to the states. So that reform may actually happen while I’m still breathing.
Given this background, you can imagine that I was very interested (and depressed) to see that Veronique de Rugy of the Mercatus Center put together some very important charts and analysis based on new fiscal policy projections.
…data from the Congressional Budget Office’s (CBO) recently released update to its Budget and Economic Outlook to show the trends and components of projected revenue and outlay increases. …growing entitlement obligations and net interest payments are projected to push outlays (spending) to grow faster than revenues over much of the next decade.
She also produced a chart showing the ever-rising burden of both taxes and spending. Pay close attention to how the numbers get worse at a rapid rate over the next 10 years.
In other words, America’s long-run fiscal problems are solely a result of a rising burden of government spending.
Second, on the topic of government spending, it’s important to understand that the problem is overwhelmingly caused by entitlement programs. Social Security is part of the problem, but the real issue is government-run healthcare.
But let’s focus just on the next 10 years. Ms. de Rugy adds some detail.
…CBO projects three large budget categories—major health care programs (consisting of Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance), Social Security, and net interest payments on the debt—will account for 85 percent of the total increase in outlays from 2014 to 2024. Total outlays are projected to increase from roughly $3.5 trillion in 2014 to $5.8 trillion in 2024, for a total increase of $2.3 trillion. Major health care programs are projected to grow by $816 billion, which accounts for 32 percent of the total. Social Security spending will grow by $654.9 billion over the next decade, which constitutes 28 percent of the total increase in outlays.
Let’s close, though, with some good news.
The numbers in the previous charts are all based on what happens if government policy is left on autopilot.
But what happens if politicians impose a modest bit of spending restraint?
According to the latest CBO forecast, inflation is supposed to average almost 2 percent over the next 10 years. So if some sort of spending cap is imposed and outlays “only” grow by a commensurate amount, it turns out that there’s a remarkably quick change in America’s fiscal profile.
As seen in this chart, there’s a budget surplus by 2019. And more important, government spending by 2024 is about $1.5 trillion lower than it would be with the budget left on autopilot.
Here’s a video from a few years ago. The numbers are out of date, but the underlying analysis is still completely appropriate. Simply stated, it’s very easy to balance the budget if politicians simply follow the Golden Rule of spending restraint.
P.S. Since this was a somewhat depressing topic, let’s close with some humor.
Last but not least, I’m also a taxpayer, so I can’t resist occasionally expressing my frustration at how the government is a giant pinata of waste fraud and abuse. And government-run healthcare seems especially vulnerable.
The Washington Post has an excellent expose on how government incompetence has made Medicare a prime target for fraudsters and other crooks.
…in a Los Angeles courtroom, Bonilla described the workings of a peculiar fraud scheme that — starting in the mid-1990s — became one of the great success stories in American crime. The sucker in this scheme was the U.S. government. …The tool of the crime was the motorized wheelchair. The wheelchair scam was designed to exploit blind spots in Medicare, which often pays insurance claims without checking them first. Criminals disguised themselves as medical-supply companies. They ginned up bogus bills, saying they’d provided expensive wheelchairs to Medicare patients — who, in reality, didn’t need wheelchairs at all. Then the scammers asked Medicare to pay them back, so they could pocket the huge markup that the government paid on each chair. …The government paid. Since 1999, Medicare has spent $8.2 billion to procure power wheelchairs and “scooters” for 2.7 million people. Today, the government cannot even guess at how much of that money was paid out to scammers.
Wow. Billions of dollars of fraud and the government to this day still can’t figure out the level of theft.
And wheelchair fraud is just a small slice of the problem.
…while it lasted, the scam illuminated a critical failure point in the federal bureaucracy: Medicare’s weak defenses against fraud. The government knew how the wheelchair scheme worked in 1998. But it wasn’t until 15 years later that officials finally did enough to significantly curb the practice. …Fraud in Medicare has been a top concern in Washington for decades, in part because the program’s mistakes are so expensive. In fiscal 2013, for instance, Medicare paid out almost $50 billion in “improper payments.”
You won’t be surprised to learn that fraud is so lucrative because the government routinely over-pays for items.
…The original equipment scam had sprung up in the 1970s, at a time when Medicare was young and criminals were still learning how to steal its money. Doctors, for example, could bill Medicare for exams they didn’t do. Hospitals could bill for tests that patients didn’t need. The equipment scam was the poor man’s way in, an entry-level fraud that didn’t require a medical degree or a hospital. …“Let me put it to you this way: An $840 power wheelchair, Medicare pays close to $5,000 for. So there’s a huge profit margin there. Huge,” said one California man who participated in a recent fraud scheme involving wheelchairs.
The good news is that the wheelchair scam is slowly fading away.
The bad news is that the overall problem of a poorly designed entitlement system ensures that scammers and other crooks will simply come up with other ways to pillage taxpayers.
Today, even while the wheelchair scam is in decline, that same “pay and chase” system is allowing other variants of the Medicare equipment scam to thrive. They aren’t perfect. But they work. In Brooklyn, for instance, the next big thing is shoe inserts. Scammers bill Medicare for a $500 custom-made orthotic, according to investigators. They give the patient a $30 Dr. Scholl’s.
But perhaps the rampant fraud means Medicare should be addressed first.
Though the right answer is to reform both programs, which is why I’m so pleased that the House of Representatives has approved the Ryan budget for four consecutive years, even if each new proposal allows more spending than the previous one. What matters most if that Ryan’s plan block grants Medicaid and creates a premium support system for Medicare.
Those reforms won’t eliminate waste, fraud, and abuse, but the structural reforms will make it harder for crooks to take advantage of the programs.
P.S. If you want more background information on Medicare, here’s a post that explains why the program is so costly even though seniors don’t enjoy first-class benefits.
P.P.S. And here’s my video explaining why Medicare desperately needs reform.
Speaking of amputations, an unfortunate man was put on such a long waiting list that his only treatment, when he was finally seen, was to have his penis removed.
Instead, we’re going to look at some great moments in government-run healthcare in both the United States and the United Kingdom.
Our first story is from the Chicago Tribune and it deals with Medicaid and Medicare spending.
But we’re not going to look at the aggregate data. Those numbers are very sobering, to be sure, and you can click here and here to learn more about that problem.
Instead, we’re going to drill down into the details and get some up-close evidence of why the programs are so costly. Simply stated, providers learn how to bilk the government.
A few years ago, Illinois’ Medicaid program for the poor noticed some odd trends in its billings for group psychotherapy sessions. Nursing home residents were being taken several times a week to off-site locations, and Medicaid was picking up the tab for both the services and the transportation. And then there was this: The sessions were often being performed by obstetricians and gynecologists, oncologists and urologists — “people who didn’t have any training really in psychiatry,” Medicaid director Theresa Eagleson recalled. So Medicaid began cracking down, and spending plummeted after new rules were implemented. …Illinois doctors are still billing the federal Medicare program for large numbers of the same services, a ProPublica analysis of federal data shows. Medicare paid Illinois providers for more than 290,000 group psychotherapy sessions in 2012 — more than twice as many sessions as were reimbursed to providers in New York, the state with the second-highest total. Among the highest billers for group psychotherapy in Illinois were three OB-GYNs and a thoracic surgeon. The four combined for 37,864 sessions that year, more than the total for all providers in the state of California. They were reimbursed more than $730,000 by Medicare in 2012 just for psychotherapy sessions, according to an analysis of a separate Medicare data set released in April.
Some of the specific examples are beyond belief. Keep in mind as you read the next passage that there are only 365 days in a year, and only about 261 workdays.
Of the Illinois OB-GYNs billing for group psychotherapy, Dr. Josephine Kamper had the highest number of sessions. She was paid for 10,399 sessions in 2012, at a cost to Medicare of $207,980. …Another OB-GYN, Lofton Kennedy Jr., billed for 9,154 group psychotherapy services. He declined to comment. The third-highest-billing OB-GYN, Philip Okwuje, charged Medicare for 8,584 group therapy sessions.
Illinois isn’t the only place where taxpayers are getting ripped off.
A Queens, N.Y., primary care doctor, Mark Burke, was paid for more sessions than anyone else in the country — 20,841. He accounted for nearly one in every six sessions delivered in the entire state of New York in Medicare, separate data show. He did not return messages left at his office. Another large biller was Makeba Gordon, a social worker in Detroit. She was reimbursed for nearly 5,000 group therapy sessions for her 26 Medicare patients, an average of 190 each. She also billed for 2,820 individual psychotherapy visits for the same 26 patients, who allegedly would have received an average of 298 therapy sessions apiece in 2012. Gordon could not be reached for comment.
And I’m sure you won’t be surprised to learn that the bureaucracy in Washington doesn’t seem overly worried about this preposterous waste of money.
Aaron Albright, a spokesman for the U.S. Centers for Medicare & Medicaid Services, said in an email that Medicare has no policy regarding which physicians may perform group psychotherapy. During such sessions, “personal and group dynamics are discussed and explored in a therapeutic setting allowing emotional catharsis, instruction, insight, and support,” according to rules set out by one of Medicare’s contractors.
The second story comes from the United Kingdom.
Regular readers know that the government-run healthcare system in the United Kingdom is an ongoing horror story of denied care, sub-standard care, and patient brutality (click here to see some sickening examples).
You would think the U.K.’s political class would respond by trying to use money more effectively.
You would be wrong. The bureaucrats somehow have decided that tax monies should be used to finance a sperm bank, even though private sperm banks already exist.
Here are some excerpts from a report in the Daily Mail.
Britain is to get its first NHS-funded national sperm bank to make it easier for lesbian couples and single women to have children.For as little as £300 – less than half the cost of the service at a private clinic – they will be able to search an online database and choose an anonymous donor on the basis of his ethnicity, height, profession and even hobbies. …The National Sperm Bank will be based at Birmingham Women’s NHS Foundation Trust, which currently runs an existing NHS fertility clinic and recruits sperm donors from the local population. Funded by a £77,000 Government grant, the bank will be run by the National Gamete Donation Trust (NGDT) which this year received an additional £120,000 of public money to organise egg and sperm donation.
Some have criticized the initiative because it will purposefully increase the number of fatherless children.
…the move – funded by the Department of Health – is largely designed to meet the increasing demand from thousands of women who want to start a family without having a relationship with a man. Critics last night called it a ‘dangerous social experiment’ that could result in hundreds of fatherless ‘designer families’. …Ms Witjens rejected suggestions that children suffer adverse consequences from lacking a father figure. …Ms Witjens pointed to the removal of the reference to a ‘need for a father’ in the Human Fertilisation and Embryology Act, when taking account of a child’s welfare when providing fertility treatment.
I’m sympathetic to the argument that children do best in conventional households with fathers, but my main reaction to this story is that government shouldn’t try to either penalize or subsidize unconventional households.
And a government-sponsored sperm bank definitely falls into the latter category.
But I’m not surprised. Governments love to squanders other people’s money, and the U.K. government has considerable expertise (if you can call it that) in this regard.
Heck, the U.K. healthcare system is even financing boob jobs. But we’re not talking about reconstructive surgery for women who had mastectomies. They pay for breast augmentation for women who claim “emotional distress.”
But not because of what I ate. My lunch was unpleasant because I moderated a noontime panel on Capitol Hill featuring Senator Ron Johnson of Wisconsin and my Cato colleague Chris Edwards.
And I should hasten to add that they were splendid company. The unpleasant part of the lunch was the information they shared.
The Senator, in particular, looked at budgetary projections over the next 30 years and basically confirmed for the audience that an ever-expanding burden of federal spending is going to lead to a fiscal crisis.
Here’s a chart from his presentation. It shows the average burden of spending in past years, compared to various projections of how much bigger government will be – on average – over the next three decades.
The Senator warned that the most unfavorable projection (i.e., “CBO ALT FISC”) was also the most realistic one. In other words, federal spending will consume a much larger share of economic output over the next three decades than it has over the past two decades.
But our fiscal outlook is actually even worse than what you see in his slide.
The Senator’s numbers are based on average spending levels over the 2015-2044 period. That’s very useful – and sobering – data, but if you look at the annual numbers, you’ll see that the trendline gives us additional reasons to worry.
More specifically, spending for the major entitlement programs (Social Security and Medicare, as well as Medicaid) is closely tied to the aging population. So as more and more baby boomers retire over the next couple of decades, spending on these programs will become more burdensome.
In other words, our fiscal problem will be much larger in 2040 than it will be in 2020.
Here are the long-run numbers from the Congressional Budget Office. The blue line is federal spending on various programs and the pink line is total spending (i.e., programmatic spending plus interest payments). And keep in mind that these numbers don’t include state and local government spending, which presumably will chew up another 15 percent of our economic output!
Moreover, CBO’s grim outlook is matched by similarly dismal numbers from theIMF,BIS, andOECD.
By the way, CBO doesn’t do projections once federal government debt exceeds 250 percent of GDP, so the gray-colored trendline beginning about 2048 is not an official projections. It’s merely an estimate of the total spending burden assuming that the federal budget is left on autopilot.
Of course, we’ll never reach that level. We will suffer a fiscal crisis before that point. But when it happens to us, the IMF won’t be there to bail us out for the simple reason that the IMF’s credibility is based on the backing of American taxpayers.
And we’ll already have been bled dry!
So unless we find some very rich Martians (who are also stupid enough to bail out profligate governments), it won’t be a pretty situation. I’m not sure we’ll have riots, such as the ones that have taken place in Europe, but there will be plenty of suffering.
The real question, though, is whether politicians in America would be willing to adopt the entitlement reforms that are needed to control the long-run growth of spending.
But that’s just one example. Today, we’re going to experience a festival of statist hypocrisy. We have six different nauseating examples of political elitists wanting to subject ordinary people to bad policy while self-exempting themselves from similar burdens.
Our first three examples are from the world of taxation.
Here are some excerpts from a Washington Timesreport about a billionaire donor who is bankrolling candidates who support higher taxes, even though he structured his hedge fund in low-tax jurisdictions specifically to minimize the fiscal burdens of his clients.
Tom Steyer, the billionaire environmental activist who is spending $100 million to help elect Democrats this fall, is rallying support for energy taxes that could impact everyday Americans. But when he ran his own hedge fund, Mr. Steyer sought to help wealthy clients legally avoid paying taxes, confidential investor memos show. Mr. Steyer’s strategy included establishing funds in tax havens like the Cayman Islands and Mauritius… Mr. Steyer boasted to investors such as major universities that his hedge fund, Farallon Capital Management LLC, had a “desire not to earn income which would be taxable to our tax-exempt investors,” one internal memo reviewed by The Washington Times showed. Mr. Steyer also helped his firm’s wealthy clientele avoid the highest of U.S. taxes and penalties by establishing arcane tax shelters… Mr. Steyer is pushing for a variety of new taxes on the energy sector. In California, Mr. Steyer supports an oil extraction tax, and he is funding politicians who support taxing carbon, including Sen. Mark Udall, Colorado Democrat.
By the way, Steyer did nothing wrong, just as Mitt Romney did nothing wrong when he utilized so-called tax havens to manage and protect his investments.
But at least Romney wasn’t overtly urging higher taxes on everyone else, so he’s not guilty of glaring hypocrisy.
Speaking of international taxation, how about the behavior of Senator Joe Machin’s daughter? She’s the head of an American drug-making company, a position that almost surely has something to do with her father being a senator. Particularly since the company gets a big chunk of its revenues from sales to the federal government.
In any event, her company has decided that it’s okay to benefit from sales to big government, but that it’s not a good idea to pay taxes for big government. Here are some blurbs from a National Journalreport.
…this column happens to be about a Democratic senator from West Virginia, Joe Manchin, and his daughter, Heather Bresch, the chief executive of Mylan, a giant maker of generic drugs based outside Pittsburgh. Her company’s profits come largely from Medicaid and Medicare, which means her nest is feathered by U.S. taxpayers. On Monday, Bresch announced that Mylan will renounce its United States citizenship and instead become incorporated in the Netherlands – leaving this country, in part, to pay less in taxes.
But it’s a bit hypocritical when the expatriating company is run by a major Democrat donor.
Our third example of hypocrisy also deals with corporate expatriation, and it’s probably the most odious and extreme display of two-faced political behavior. Here’s some of what was reported in the L.A. Times about the Secretary of the Treasury’s attack on corporate inversions.
Calling for “a new sense of economic patriotism,” a top Obama administration official urged Congress to take immediate action to stop U.S. companies from reorganizing as foreign firms to avoid paying taxes. …”What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Lew wrote to the top Democrats and Republicans on the congressional tax-writing committees. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes,” he said. …Lew said such moves were unfair to U.S. taxpayers. …”Congress should enact legislation immediately — and make it retroactive to May 2014 — to shut down this abuse of our tax system,” Lew wrote.
So he inverted his own funds but doesn’t want other taxpayers to have the right to make the same sensible choices.
Now let’s look at three non-tax related examples of hypocrisy.
First, we have a pro-Obamacare politician running for Congress. One of his main talking points is that his wife is an OB/GYN and he also trumpets his support for expansion of Medicaid (the government’s money-hemorrhaging healthcare program for lower-income people).
John Foust has made his wife the face of his campaign for Virginia’s 10th District. Dr. Marilyn Jerome is an OBGYN… Foust attacks his Republican opponent Barbara Comstock for opposing Medicaid expansion. Failure to expand Medicaid to rural hospitals could be “devastating,” he says. Dr. Jerome has also written in support of the Affordable Care Act on the Foxhall website, citing the Medicaid expansion as beneficial to low-income women.
But it seems that Medicaid expansion is only a good idea when other doctors are dealing with the government.
It turns out, however, that not all women can receive “compassionate reproductive healthcare” from Foxhall. The practice doesn’t accept Medicaid. …in public, Dr. Jerome is preaching the Affordable Care Act and praising the Medicaid expansion while, in her practice, she doesn’t accept it.
The message is that sub-standard government-run healthcare is okay for us peasants, but doctors who cater to the political elite in Washington want nothing to do with the program.
Second, it turns out that global warming alarmists use above-average amounts of energy.
Here are some tidbits from a column in the UK-based Telegraph.
People who claim to worry about climate change use more electricity than those who do not, a Government study has found. Those who say they are concerned about the prospect of climate change consume more energy than those who say it is “too far into the future to worry about,” the study commissioned by the Department for Energy and Climate Change found. …The findings were based on the Household Electricity Survey.
Third, we have a remarkable bit of political jujitsu from Martin O’Malley, the governor of Maryland, on the issue of illegal aliens. Here’s an amazing excerpt from a story in Politco (h/t: National Review).
Martin O’Malley says that deporting the children detained at the border would be sending them to “certain death” — but he also urged the White House not to send them to a facility in his own state.
Wow. Regardless of what you think about open borders, amnesty, and other immigration issues, O’Malley comes across as a craven politician. This is NIMBY on steroids.
But it could be worse. Writing in the Washington Post, Robert Samuelson explains that two-dozen states have refused the lure of expanding Medicaid (the means-tested health care program) in exchange for “free” federal money.
From 1989 to 2013, the share of states’ general funds devoted to Medicaid has risen from 9 percent to 19 percent, reports the National Association of State Budget Officers. Under present law, the squeeze will worsen. The White House report doesn’t discuss this. …To the White House, the right-wing anti-Obamacare crusade is mean-spirited partisanship at its worst. The 24 non- participating states are sacrificing huge amounts of almost-free money… Under the ACA, the federal government pays all the cost of the Medicaid expansion through 2016 and, after that, the reimbursement rate drops gradually to a still-generous 90 percent in 2020.
But that “almost-free money” isn’t free, of course. It’s simply money that the federal government (rather than state governments) is diverting from the productive sector of the economy.
So the 24 states that have rejected Medicaid expansion have done a huge favor for America’s taxpayers. To be more specific, Nic Horton of Watchdog.orgexplains that these states have lowered the burden of federal spending (compared to what it would have been) by almost $90 billion over the next three years.
By not expanding Medicaid, 24 states are saving taxpayers $88 billion over the next three years. That is $88 billion that will not be added to the national debt — debt that will not be passed on to future generations of taxpayers. On the other hand, states that have expanded Medicaid through Obamacare are adding roughly $84 billion to the national debt through 2016.
Returning to Samuelson’s column, he would like a grand bargain between states and the federal government, with Washington agreeing to pay for all of Medicaid (currently, states pay a portion of the bill) in exchange for states taking over all spending for things such as roads and education.
We could minimize this process for states and localities by transferring all Medicaid costs to Washington (or at least the costs of the elderly and disabled). To pay for it, Washington would reduce transportation and education grants to states. Let Washington mediate among generations. Let states and localities concentrate on their traditional roles of education, public safety and roads. Spare them the swamp of escalating health costs. This is the bargain we need — and probably won’t get.
I like half of that deal. I want to transfer education, law enforcement, and roads back to the state level (or even the local level).
But I don’t want Washington taking full responsibility for Medicaid. Instead, that program also should be sent down to the states as well. This video explains why that reform is so desirable.
P.S. Since we’re on the topic of Obamacare, this Chip Bok cartoon perfectly captures the essence of the Hobby Lobby decision. The left wants the mandate that contraception and abortifacients be part of health insurance packages.
Rather than exacerbate the damage of using insurance to cover routine costs, wouldn’t it make more sense to have employers simply give their workers more cash compensation and then allow the workers to use their money as they see fit?
That way there’s no role for those evil, patriarchal, oppressive, and misogynistic bosses!
I realize this might upset Sandra Fluke, but at least she has the comfort of knowing that her narcissistic statism generated some good jokes (here, here, and here).
I suppose there’s no objective way to pick the most ill-conceived policy, but if you think the biggest problem is either Obamacare or falling labor force participation, then I have some very grim news that will confirm your fears.
According to new research, it appears Obamacare will drive many more people from the labor force. More specifically, the Medicaid expansion will alter – in a very destructive way – the tradeoff between labor and leisure.
Researchers Laura Dague, Thomas DeLeire, and Lindsay Leininger argue in a National Bureau of Economic Research working paper that Medicaid enrollment will lead to significant and lasting reductions in employment among childless adults. …Dague and her colleagues conclude that if the Medicaid expansion enrolls about 21 million additional adults, anywhere from 511,000 to 2.2 million fewer people will be employed. Furthermore, they argue that the Medicaid expansion will knock almost a full point off of today’s labor force participation rate — or share of the civilian population that is working — a measure of economic health that is already at its lowest point since 1977. …This research provides strong evidence for the contention that enrolling in Medicaid traps people in poverty and makes it harder for them to make their way into the middle class. Furthermore, it links the Medicaid expansion to the weakening of our nation’s economy.
By way of background, Medicaid is the federal government’s healthcare entitlement for (supposedly) poor people, while Medicare is the entitlement for old people. And, as part of Obamacare, the eligibility rules for Medicaid were dramatically weakened.
But the new research cited above shows that if you give people “free” health care, that makes them less likely to work.
That’s obviously bad news for taxpayers, who bear the direct cost of a bloated welfare state.
But it’s also bad for the less fortunate. They get trapped in a web of dependency, both because handouts reduce the incentive to work (humorously depicted here and here), band also because they face very high implicit marginal tax rates if they actually try to escape government dependency.
The Census Bureau just released a report on America’s aging population.
The big takeaway is that our population will be getting much older between now and 2050.
And since I’m a baby boomer, I very much like the fact that we’re expected to live longer.
But as a public finance economist, I’m not nearly as happy.
As I explain in this interview with the Wall Street Journal’s Digital Network (and as confirmed by BIS, OECD, and IMF data), the United States is going to get deluged by a tsunami of entitlement spending.
I mentioned that it’s important to focus on the ratio of workers to retirees. This “dependency ratio” matters because economic output largely is a function of an economy’s working-age population.
To cite my famous cartoons, you need a sufficient number of people pulling the wagon to support those riding in the wagon.
Here’s a chart from the Census report to help you understand the magnitude of the problem. As you can see, both in the United States and other nations, the increase in the dependency ratio is almost entirely the result of aging populations.
This is why I said that we face a slow-motion train wreck because of poorly designed entitlement programs.
But the good news is that there is time to reform those programs and avert a crisis.
In a column citing the new private pension system in the Faroe Islands, I gave the arguments for modernizing Social Security with personal retirement accounts.
But we also need to deal with the health entitlements.
By the way, some of the damaging provisions of Obamacare can be de facto repealed by including them in the Medicaid block grant, so it’s a critically important reform.
Needless to say, I think these reforms are far better for the economy than the big tax hike Obama has endorsed to deal with the giant financing gap.
P.S. For a clever look at the worker-dependency ratio, check out the party ship produced by a Danish think tank.
P.P.S. The interviewer also mentioned that America’s racial composition is changing, which gives me an excuse to point out that Social Security reform is particularly beneficial for blacks because of differences in life expectancy.
the United States faces a very grim fiscal future.…states have become adept at using Medicaid to harvest federal funds. All 50 states now tax hospitals and other medical providers to inflate the matching aid they can claim from the federal government… When Medicaid caseloads decline during economic upturns, states have tended to expand benefit packages and loosen eligibility criteria — relying on Congress to provide ad hoc bailouts when expenses spike in subsequent recessions.
…there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.
For as little as £300 – less than half the cost of the service at a private clinic – they will be able to search an online database and choose an anonymous donor on the basis of his ethnicity, height, profession and even hobbies. …The National Sperm Bank will be based at Birmingham Women’s NHS Foundation Trust, which currently runs an existing NHS fertility clinic and recruits sperm donors from the local population. Funded by a £77,000 Government grant, the bank will be run by the National Gamete Donation Trust (NGDT) which this year received an additional £120,000 of public money to organise egg and sperm donation.
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