Medicaid: the 'monster in the road'

Slated for the single largest cut in the Bush budget, Medicaid is emerging as one of the big battles of the year - and a bellwether for how Washington will cope with an increasing share of the nation's health costs.

For President Bush, the proposed cut aims to squeeze $60 billion in "inappropriate" financing gimmicks out of the federal-state program over the next 10 years. It's also central to meeting his promise to cut the federal deficit in half.

But for the nation's governors, who met in Washington this week, the Medicaid proposal is a simple shift from the federal budget, which can run deficits, to state budgets, which cannot. "Medicaid is the monster in the middle of the road, and it's threatening the viability of every state in the union," says Gov. Robert Taft (R) of Ohio.

Launched in 1965 to provide healthcare for low-income women and children, Medicaid has since expanded into the largest health and long-term care program - a symbol of the increasing role of government in paying the nation's health bills.

While private funding covered some 75 percent of health costs in 1965, public funding is expected to count for half of national health spending by 2014, according to the Centers for Medicaid and Medicare Services. Some experts say that threshold has already been reached.

In addition to its own spending, government also pays the nation's health bill by the subsidies it offers for health-related expenses in the tax code, now approaching $200 billion. When you add in the subsidies, "you're way in excess of the government controlling more than one half of the market," said Eugene Steuerle, co-director of the Urban-Brookings Tax Policy Center at a recent briefing.

How to manage that ever-increasing share of the health costs is emerging as a major battle between Washington and the states that only gets tougher as the baby boomers begin to retire.

In 2005, Medicaid spending is expected to reach $329 billion, covering some 53 million Americans. In addition to providing insurance for many low-income children and some of their parents, it's the primary payer for more than two-thirds of those in nursing homes, a role governors say more properly belongs to Medicare.

The program has also expanded to cover two-thirds of all public mental-health funding and many people with disabilities. Medicare is also a major source of funding for hospitals and community health centers serving the uninsured.

At the state level, Medicaid spending is expected to jump 12 percent this year, due mainly to increases in medical costs and caseloads. While a one-time $10 billion federal bailout in 2004 helped rein in costs that year, future outlays from cash-strapped Capitol Hill look remote.

Medicaid enrollment has jumped 40 percent in the last five years, at a time when state revenues were dropping. For the first time, Medicaid now tops education as the leading draw on state budgets.

"It's pitting grandmothers against grand-kids in the states," says Gov. Mark Warner (D) of Virginia, chairman of the National Governors Association.

The governors say there are three forces driving the surge in health costs in state budgets: federal budget cuts, a sharp increase in the number of US businesses that are dropping health coverage for employees, and the trend of middle-class seniors to draw down or hide their wealth to qualify for long-term care under Medicaid. "Medicaid's spending growth will continue at rates far exceeding state revenue growth," according to a report prepared for the governors by Health Management Associates

"The current system is not sustainable over the long haul," says Gov. Mike Huckabee (R) of Arkansas.

United in opposition to the proposed Bush cuts and caps on future spending, governors were unable to agree on a strategy to change the dynamics of the ongoing budget debate on Capitol Hill.

In their weekly party caucus on Tuesday, Senate GOP leaders distributed a chart showing that the Bush Medicaid cuts marked only a modest decrease in the rate of growth of Medicaid spending. The White House says that many states are drawing down federal matching funds inappropriately, "undermining the federal state partnership."

"Medicare, Social Security, Medicaid ... they're all going to have to be addressed if we're going to do something about explosive costs. This is a first whack at it," says Sen. John Sununu (R) of New Hampshire, defending the president's proposed cuts.

Meanwhile, governors are continuing discussions with the Bush administration on how to build more flexibility into the system to make ends meet.

"The governors are more united than the Congress," says Mississippi Gov. Haley Barbour (R), whose bid to roll back Medicaid rolls was recently rebuffed by a federal court. "We have a huge deficit, and we're trying to prevent having a huge deficit next year."

Family advocates say that flexibility is a code word for decreasing benefits and increasing cost sharing.

"More and more people are losing access to health insurance through their jobs, and Medicaid is a safety net. The federal government should take more responsibility for Medicaid," says Ron Pollock, the executive director of Families USA.