Medicaid Expansion is Bad for Mississippi

By Aaron Rice
March 29, 2021

“I’ve been thinking a lot about Medicaid, and I’m concerned. I believe Medicaid is suffering from an identity crisis. Medicaid doesn’t know what it wants to be, and it doesn’t know its purpose in life. Some people want Medicaid to expand. I just want it to work.”

… Such are the musings of a healthcare policy wonk in Mississippi.

I have been discussing Medicaid, and healthcare generally, for many years now. I am no longer surprised when people do not know the difference between Medicare and Medicaid. I am surprised, however, when proponents of Medicaid expansion do not seem to understand what Medicaid actually is. For instance, that the Mississippi Division of Medicaid is not a healthcare provider, but a healthcare purchaser and that this distinction has significant consequences.

Medicare is a (mostly) single-payer, national insurance program fully funded by the federal government. By contrast, Medicaid is a joint federal-state program, with lots and lots of federal strings attached.

Medicare is a government-subsidized insurance plan for the elderly. Medicaid is a government-subsidized insurance plan initially created to help the blind, disabled, pregnant women, and children.

Now that we have that straight, what, exactly, is Medicaid?

Medicaid is an insurance program. But Medicaid is also a welfare program. This is the root of the problem for Medicaid. This is why costs keep going up, and this is one reason fraud is such a problem.

Medicaid is the largest single insurance plan in the United States, with approximately 75 million recipients. By contrast, Medicare has 44 million enrollees. This means that the federal agency (CMS) that pays for Medicaid/Medicare is the largest single-payer for healthcare in the United States. In short, if Medicaid were an insurance company it would be huge.

As an insurer, Medicaid does not operate like other insurers. To begin with, this is because health insurance in the United States does not work the way other kinds of insurance do. Consider how your auto insurance or homeowner’s insurance works. Auto insurance does not generally cover a flat tire. Homeowner’s insurance does not cover routine repairs and renovations.

Health insurance, however, covers a much wider array of services than do other types of insurance. It covers preventative care (comparable to controlling for termites or adding gutters, if we are comparing the body to a house). It covers emergency care (comparable to a fire or a flood, which is what typical homeowner’s insurance covers). It covers non-emergency, routine care (comparable to fixing the foundation or installing storm windows).

One reason health insurance is so expensive – though many people do not realize it because the cost is often automatically deducted from their paycheck – is because it covers so much.

Because it covers so much, Medicaid is just plain expensive, all the more so because healthcare prices keep rising. And when I say expensive, I do not mean to the recipients, I mean the overall price tag for the federal government and the states – that is, taxpayers and future debt holders. (This is not even to mention the cost-shifting that leads to increased prices for private insurance customers.)

Another reason Medicaid is expensive is because it is not just an insurance program, it is a welfare program. Indeed, unlike TANF (cash welfare) and other welfare programs, Medicaid is an open-ended entitlement. This means anyone eligible for Medicaid has a legal right to enroll. Federally mandated coverage groups include children, very low-income parents, pregnant women, and aged, blind, and disabled individuals receiving SSI (Supplemental Security Income).

States may cover optional services and populations, and many do in order to drawdown even more federal funds. At the same time, states are prohibited from implementing enrollment caps or individual spending caps. The only real limit on Medicaid spending is demonstrated need. Consequently, as healthcare economist Robert Graboyes puts it, Medicaid is “a market perpetually in a state of excess demand.”

To translate, this means that Medicaid spending is very hard for states to control. Advocates of Medicaid expansion claim it is a great deal because the federal government is paying 90 percent of the cost. This sounds a lot like renting a $10 million mansion at a 90 percent discount. The mansion may be 90 percent off, but you still need to come up with a million dollars in rent every year. Except in the case of Medicaid, that $1 million payment this year could turn into $2 million next year and $3 million after that. And there is really nothing you can do about it.

In order for Medicaid to work better, two things have to happen. First, Medicaid needs to begin operating like other welfare programs. This means enrollment is going to have to be limited. (Which also means expanding Medicaid to able-bodied, working-age adults is a very bad idea if your goal is to provide healthcare to those who really need it.)

Apart from limiting enrollment, which states cannot do right now, the most obvious way to control Medicaid costs is to cut payments to providers. This approach has a significant downside because it will encourage more healthcare professionals to stop taking Medicaid altogether.

The second thing that needs to happen is to begin treating Medicaid insurance as we do other kinds of insurance. This would mean transforming Medicaid into a catastrophic coverage type plan that only pays for major health events and then pairing that coverage with a publicly funded large Healthcare Savings Account (HSA). Such an account would give Medicaid recipients an incentive to control costs for themselves and to invest more in their long-term doctor-patient relationships.

I am not holding my breath for these two reforms to occur anytime soon. The Biden Administration is intent on “increasing access” to healthcare by increasing enrollment in Medicaid, regardless of whether this actually increases access or improves healthcare outcomes. That said, it is important to acknowledge that Medicaid is not like other kinds of insurance or, even, other kinds of welfare. And these are two reasons, among many, that make expanding Medicaid bad policy for Mississippi.


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