Should states expand Medicaid? The moral calculus part II

I have previously offered the economic case against Medicaid expansion, along with the moral case from the perspective of Medicaid beneficiaries. As with any benefit-cost calculation, reasonable people may disagree on the value to assign to various policy impacts. Thus, not everyone will agree that my first two arguments provide a bulletproof rationale for a state's refusal to expand Medicaid under Obamacare.

So now let's consider the moral calculus surrounding Medicaid expansion from the perspective of taxpayers and society in general.

The Moral Calculus from a Taxpayer Perspective

A few years ago while traveling in Cancun, my wife and I were accosted, as most American tourists are, by street hustlers trying to convince us to accept a free breakfast and other perks in exchange for a "short" time-share presentation. When I patiently explained to one insistent peddler that we had no interest in buying a time-share-hence the resort who'd hired him would literally be losing money were we to accept his lavish offer (which in monetary terms amounted to perhaps $100 for two hours of our collective time)-his retort was "play the game, man."

It was clear the company paid this man a commission (bounty?) simply if we showed up to hear the pitch-compensation completely divorced from whether or not we elected to buy. He did not particularly care about the adverse economic impact that his bribing completely disinterested buyers with goodies might have on his employer or in the long-run "sustainability" of this model (in fairness, he might have assumed the presentation would be so compelling that we'd change our minds and buy anyway). His cynical short-term focus was on maximizing his commissions that day.

Take the Money and Run

"Just take the money" is the Medicaid hustle in a nutshell.

John Kasich

John Kasich (Photo credit: Wikipedia)

Indeed, in reacting to this month's decision by Ohio Governor John Kasich to agree to the Medicaid expansion, Families USA President Ron Pollack said in a statement that any other decision by Kasich would have been "fiscal malpractice." Lou Cannon has characterized the decision by some Republican governors to agree to the expansion "the triumph of economics over ideology." But he might have just as easily called it the triumph of economics over morality.

For one critic trenchantly put it:

Advocates are pitching Medicaid expansion as a painless way for everyone to eat another free lunch on Uncle Sam's dime-when Uncle Sam doesn't have a penny to his name. And that's what got America into such a deep fiscal hole in the first place.

Or as state Sen. Dave Lewis (R-Helena) has characterized the expansion option: "It's like heroin... Once you buy in, you're in." Encouraging a long-term addiction to federal money surely is not morally defensible especially when Uncle Sam himself quite clearly has problems with spending impulse control.

If addiction sounds like an exaggeration, consider the kind of irresponsible behavior is encouraged by Medicaid's corrupting financing structure:

Would any of these states have "ripped off" themselves? Well, arguably they did, but the lion's share of costs for this irresponsible behavior was borne by citizens in other states. And that's exactly the problem: the only reason we see this pattern time and again in the Medicaid program is because the matching-rate formula essentially encourages it. It greatly weakens incentives for states to spend responsibly (after all, a state with a 3:1 federal match, gains $3 for every state dollar it is willing to spend, but correspondingly saves only 25 cents for every dollar it saves).

Not surprisingly, according to one Harvard expert, Medicaid overpayments routinely clock in at 6-7 percent (based on  official government audits) and the program is rife with fraud.  Is there any wonder dissatisfaction with government is at Watergate-era levels? Shouldn't we be trying to fix such a badly flawed program instead of massively increasing its size?

Some may argue that my examples do not illustrate "corruption" but merely "over-enthusiasm" on the part of certain states in playing the Medicaid game. But let there be no doubt that when federal dollars or regulatory authority are in play, the opportunities for genuine political corruption are ever-present. Indeed, it arguably is a feature of Medicare:

  • For example, The Washington Post just last week reported that Sen. Robert Menendez (D-NJ) pressed federal health officials about a Medicare dispute involving Florida doctor and political donor Salomon Melgen.
  • In the recent "cliff" legislation, a provision inserted at the last minute sharply cut Medicare payments radiation tools manufactured by Elektra AB, while leaving unchanged rates paid for a competing technology manufactured by Varian Medical Systems, a company with ties to Senate Majority Leader Harry Reid.[2]
  • There are very real concerns that greater federalization of Medicaid (which Obamacare greatly accelerates) will simply facilitate and encourage what political scientists call "rent-seeking" behavior by providers.

Moreover, all the examples cited above are not isolated cases. This is a pattern and a practice fueled by a ‘something for nothing' mentality.

For decades, dozens of states have played the game of imposing Medicaid taxes on providers, using those tax revenues as matching funds and then rebating to providers to amount of taxes they'd paid after Uncle Sam ponied up his share of the match.[3] State policymakers were happy (they had expanded Medicaid without having to go to taxpayers for the funds), providers were happy (they'd been made whole once Uncle Sam's money arrived), and the only ones getting fleeced were federal taxpayers. Why? "It's free money." "Everyone else is doing it."

Just Say "No"

In explaining his decision to accept the Medicaid expansion, Governor Kasich pleaded, "If Ohio doesn't use the money, it loses it to other states. Participating in the expansion "avoids leaving Ohians federal tax dollars on the table and keeps the federal government from simply giving them away to other states," he writes.

Expansion advocates in my state have taken this logic one step further, arguing that North Carolina will lose health professionals, jobs, and revenue to neighboring Virginia if it fails to expands Medicaid. This, of course, is a classic prisoner's dilemma-which results in spiraling Medicaid costs for everyone even though that was intended by no one.

But what about the other side of the coin? Avik Roy puts it like this:

If Ohio says "no" to the Medicaid expansion, but New York says "yes," then as Kasich notes, Ohioans' tax dollars are being diverted to benefit other states. However, the reverse is also true: by saying "yes" to the expansion, Ohio is taking money from the taxpayers of other states that continue to refuse to expand Medicaid.

The reality is that the flawed distribution formula used by Medicaid has for years transferred vast sums of money away from poor states and into wealthy states such as New York. Indeed, as Thomas Grannemann and Mark Pauly have demonstrated, the biggest "winner" from the way Medicaid funds are distributed is the state of New York, which in 2006 garnered $407 per resident more in federal Medicaid dollars than its residents had contributed in federal taxes towards Medicaid. One of the biggest losers was New Mexico, whose taxpayers paid $608 per capita more for Medicaid than it got back.[4]

Does it really make sense for a family of four in New Mexico (ranked 43rd in per capita income) to be paying more than $2400 a year extra in federal Medicaid taxes in order to benefit New York state residents (ranked 4th in per capita income) to the tune of $1600?  Obamacare did not create this badly dysfunctional program, but neither did it fix it. Likewise, the states did not design the prisoner's dilemma in which they now find themselves, but neither are they truly prisoners. As the National Review put it:

Somebody, somewhere, has to say, ‘No.'

If enough governors block the Medicaid expansion, D.C. policymakers will be forced to devise a more palatable arrangement, one that gives states much more freedom of choice and one that eradicates both these perverse incentives and flagrant inequities forever. I recognize that Medicaid is not the only problem. It's merely one component of fiscal federalism that "has made it difficult for citizens to figure out which level of government is responsible for particular policy outcomes.... When every government is responsible for an activity, no government is responsible."

Is picking everyone else's pockets to make your state better off really the right thing to do? The "everyone else is doing it" excuse surely didn't fly in my family when it came to matters of personal conduct and decent behavior.

A moral society encourages its citizens to be honest, responsible, self-reliant and industrious among other virtues.[5] As currently structured, the Medicaid program corrodes in various ways all of these virtues. Rather than provide a sturdy safety net, it instead it has created a nation of takers among the nation's statehouses-with governors and legislators eagerly seeking to shift as much of the program's costs onto taxpayers outside their borders.

 

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About the Author

 

Christopher J.
Conover

  • Christopher J. Conover is a Research Scholar in the Center for Health Policy & Inequalities Research at Duke University, an adjunct scholar at AEI, and a Mercatus-affiliated senior scholar. He has taught in the Terry Sanford Institute of Public Policy, the Duke School of Medicine and the Fuqua School of Business at Duke. His research interests are in the area of health regulation and state health policy, with a focus on issues related to health care for the medically indigent (including the uninsured), and estimating the magnitude of the social burden of illness. He is the recent author of The American Health Economy Illustrated and is a Forbes contributor at The Health Policy Skeptic.


    Follow Chris Conover on Twitter.

  • Phone: (919)428.4676
    Email: chris.conover@duke.edu

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