Sending Medicaid, Food Stamps Back To States Will Reduce Costs

What’s in a word? When it comes to how to define potential changes in a budget reconciliation bill, one word makes plenty of difference.

A recent article by Politico claimed that provisions of Republican budget reconciliation legislation targeting Medicaid and food stamps would merely “shift” costs from the federal government on to the states. In reality, however, these provisions would do far more. By reducing states’ current incentives to free-ride on the federal dole, the policy changes being discussed would reduce costs rather than merely shifting them.

Governors Bellying Up to the Washington Trough

The story quoted numerous policy-makers, many of them former state officials, as claiming the proposals under consideration would move fiscal shortfalls from Washington to state capitals:

• Former South Dakota Gov. and current Sen. Mike Rounds: “Most of us are not interested in simply shifting costs.”
• Former West Virginia Gov. and current Sen. Jim Justice: “I hope to goodness we don’t go there.”
• An official from the National Association of State Budget Officers: “It’s clear states won’t be able to absorb the federal cuts and cost shifts in recent federal actions and congressional proposals … States are required to balance their budget, and states won’t be able to fill in the gap.”
• North Dakota Sen. Kevin Cramer, who previously served as a state official: Shifting costs “may make [the federal] numbers look better … but it still becomes a burden.”
• Texas Sen. John Cornyn: “I think the politics of work [i.e., Medicaid work requirements] are a lot lighter burden to carry than just pushing off some of the costs to the states.”

The story also quoted Senate Agriculture Committee Chairman John Boozman, R-Ark., as having “concern” about states sharing costs for the food stamp program.

It is perhaps understandable that lawmakers who previously worked in state government might take a sympathetic view towards the potential plight of their successors if a budget reconciliation bill passes that substantively changes the state-federal relationship for Medicaid, food stamps, or both. But they are absolutely wrong in their perspective, because changing that relationship wouldn’t just shift costs — it would reduce a major driver of cost increases in these two programs.

Gorging on Federal Dollars

Anyone who has ever visited an all-you-can-eat buffet knows exactly the dynamic I’m talking about. With respect to Obamacare’s expansion of Medicaid to the able-bodied, states fund a mere 10 percent of the costs — at least in theory. But a rapid growth of what amounts to a legalized money laundering scam means that some states do not pay any general fund dollars to finance their expansion. That same scam has also allowed states to shift many of the costs for their traditional populations (e.g., children, individuals with disabilities, etc.) on to Washington’s tab.

With respect to food stamps, the situation is even worse. States have never funded any portion of that program’s benefits, although they do bear some portion of the administrative costs.

For decades, states have used these programs to grab as much money as they can from Washington. A recent New York Times history of the Medicaid money laundering scam, which observed that lawmakers have called the maneuver “Mediscam,” noted that Judd Gregg, R-N.H., at the time the Granite State’s governor and later its senator, first used it to bridge a gap during a state budget crunch in the 1980s. But he figured Washington would close the loophole: “I always assumed it would go away. It didn’t. It continues, and became a fait accompli that has continued on and on.”

Therein lies the problem. For decades, no one at the state level has had any incentive to manage these programs responsibly. Far from it, in fact. With Washington picking up nearly the entire tab for these two programs, is it any wonder that the federal government spent billions of dollars to fund Medicaid benefits for individuals in as many as five states at the same time?

Lower Costs

Retaining the status quo means that states will continue to have no incentive to crack down on waste, fraud, and improper payments in Medicaid and the food stamp program. By contrast, reforms being discussed in the context of budget reconciliation — from requiring states to fund a portion of the food stamp program to cracking down on the Medicaid money laundering scam to penalizing states with high levels of improper payments for these programs — would reform and realign the incentive structure in ways that could drive down overall spending levels.

The New York Times article on the Medicaid money laundering scam quoted a former Democratic staffer as saying “we should have been having” a conversation to end the scam “in the early [19]90s” — a true enough statement. But with the federal government over $36 trillion in debt, the second-best time to have the discussion is now.

Forcing the states to have “skin in the game” and to actually take a substantive interest in rooting out waste and fraud would help modernize these programs for the 21^st century. It would do more than shift costs from the federal government to the states; it would reduce them. That might explain why states oppose these changes, but it also explains why Congress should enact them.