The Republican case for reforming Medicaid

Republican efforts to pass health-care legislation are in jeopardy again, in part because of controversy over its potential impact on Medicaid. But the Republican reforms are more moderate, and more worthwhile, than they are getting credit for.

Medicaid is a program rife with inefficiency. A 2015 study found that recipients derived only 20 to 40 cents of benefit for every dollar governments spend on it. Researchers have struggled to find any positive effects Medicaid has on beneficiaries' physical health.

It's also a program that creates perverse incentives for state governments. Because the federal government has paid more than half the cost of the program, state politicians have been able to promise voters more than two dollars of benefits for every dollar of taxes they extract from them.

This funding structure has also meant that when state governments have to trim their budgets, every dollar of savings requires more than two dollars in benefit cuts.

Finding ways to stretch dollars, or even policing fraud, had a low return for states. It's not surprising, then, that Medicaid has become a larger and larger share of state budgets.

Obamacare expanded eligibility for the program: States could cover people up to 138 percent of the poverty level, and the federal government would pick up even more of the cost of this expansion -- upward of 80 percent of it.

Senate Republicans are not simply repealing this expansion. States could still cover everyone making less than 138 percent of the poverty level, and the federal government would still cover part of the tab. But it would not cover 80 percent of it.

The federal match rate would be lower, gradually receding to equal the rate at which Washington matches the rest of each state's Medicaid spending. Payments per Medicaid beneficiary would be capped, and the level of the cap would grow at a rate that would eventually be indexed to the general inflation rate.

The Senate Republicans would also allow people who are under the poverty level but aren't eligible for Medicaid in their state to use a tax credit to buy insurance outside the program.

The Congressional Budget Office expects that in 2026, 15 million fewer people will be enrolled in Medicaid if the legislation passes than if it doesn't.

In part that's because the Republican bill also ends Obamacare's fines on people without insurance. The CBO seems to expect that as soon as the fines are gone, about 4 million fewer Americans will seek Medicaid benefits.

It thinks that several states will expand Medicaid if Obamacare's match rates stay in place, but that none will under the reduced match rates.

And it thinks that some states will reduce eligibility levels under reduced match rates.

It's because of these assumptions that the CBO predicts that in 2026, federal spending on Medicaid will be 26 percent lower under the bill than it would be under current law.

When Democrats say that the bill would impose steep cuts on Medicaid, that's mostly what they have in mind -- the CBO's projection of the difference between how the program would develop under Obamacare's rules and how it would develop under the ones the Republicans are seeking.

Many of these assumptions seem implausible.

Are states really going to cut their voting residents' benefits to find savings of less than fifty cents on the dollar? Are that many people really going to stay off Medicaid if they're not threatened with fines? (And if they are, how valuable is it?)

If these assumptions are off in the way I'm suggesting, then the Republican legislation will save less money and result in more people getting coverage than the CBO thinks.

But as with most of the CBO's health-care projections this year, it is almost certainly right about the general direction of the change the Republican legislation would impose even if it is off about the magnitude of the change. The government would save money, and fewer people would be insured, under the Republican law than under an unmodified Obamacare.

That leaves two important questions.

First, how do we assess the trade-off between Medicaid coverage -- which, even if low-quality and inefficient, brings peace of mind to many recipients -- and cost control?

Second, if we think that the Republican bill gets the trade-off wrong, what's the best way to modify it? The legislation currently repeals all of Obamacare's tax increases, but some Republicans are talking about scaling back those tax cuts.

The extra money could be used to increase the match rate, which would yield a nicer score from the CBO.

But it might be better used to make it easier for people under 138 percent of the poverty level to buy non-Medicaid insurance: giving them a larger tax credit, or helping them pay deductibles.

My own conclusions should probably by now be pretty clear: The CBO is exaggerating the effects of the Republican legislation on Medicaid enrollment, it's worth putting Medicaid on a firmer footing, and any additional resources for health insurance for low earners should be directed toward enabling them to buy private coverage rather than pumped into Medicaid. On Medicaid, in short, the Republicans are on the right track.

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Ramesh Ponnuru has covered national politics and public policy for 18 years. He is an author and Bloomberg View columnist.