Off the Charts Blog | Center on Budget and Policy Priorities

In the intensifying debate over cutting federal spending, troubling proposals to block-grant Medicaid or otherwise cap its funding are getting new attention.  For example, Rep. Fred Upton (R-MI), the new Chairman of the House Energy and Commerce Committee, has already discussed block-granting Medicaid with some governors.

Currently, the federal government picks up a fixed percentage — between 50 percent and 75 percent — of each state’s Medicaid costs.  It therefore shares in any increased costs or savings when state Medicaid spending rises or declines.

Under a block grant, the federal government would provide each state only with a fixed dollar amount of Medicaid funding, with states responsible for everything above that amount.  That would pose significant risks, as I detail in a new report:

• Risks for states. To produce budgetary savings, a block grant would have to give states less federal funding than they would receive under the current system.  Also, federal funding under a block grant would no longer rise automatically in response to recessions, epidemics, or medical breakthroughs that improve health or save lives but at increased cost.  For these reasons, the block grant would shift an ever-larger share of Medicaid costs to states over time.
• Risks for beneficiaries. Block-grant or cap proposals typically give states much more flexibility over their Medicaid programs.  So as states’ block grants fell further and further behind what they needed, states would likely make up for the shortfall by using this greater flexibility to sharply restrict enrollment, eligibility, and benefits.  Many people who would currently qualify for Medicaid could end up uninsured; many Medicaid beneficiaries, such as people with serious disabilities, could lose critical services.  States could also impose premiums and other costs on beneficiaries that many would find unaffordable.
• Risks to health care providers. In some states, low reimbursement rates have impeded Medicaid beneficiaries’ access to physicians, particularly specialists.  States looking for Medicaid savings have tended to focus first on provider reimbursement rates, and are likely to cut provider rates further in the face of inadequate block grant funding.  This would likely cause more providers to withdraw from Medicaid, threatening beneficiaries’ access to care.

Block-grant proponents argue that Medicaid’s financing structure has helped cause costs to rise out of control.  Over the past 30 years, however, Medicaid costs per beneficiary have tracked costs in the health-care system as a whole, both public and private.  Moreover, average per-beneficiary costs are much lower under Medicaid than under private insurance (after adjusting for Medicaid beneficiaries’ poorer average health), despite Medicaid’s more comprehensive benefits and significantly lower cost-sharing charges.

Block-grant proponents also contend that Medicaid’s financing structure remains highly vulnerable to “gaming,” under which states use creative financing mechanisms to maximize federal funding.

However, the federal government has significantly curbed gaming by states over the past two decades and could take additional targeted steps without fundamentally altering Medicaid.

That said, slowing Medicaid cost growth over the long run is essential to reducing federal deficits and debt.  Since Medicaid costs are growing for the same reasons that costs in private insurance are, slowing Medicaid costs over the long run requires controlling costs throughout the U.S. health care system — and the health reform law takes some significant initial steps to achieve just that. Addressing Medicaid in isolation from the rest of the health-care system, as a block-grant system would do, is no answer.

The drop in the unemployment rate in December was welcome, but an important reason for it was people leaving the labor force rather than finding new jobs. The jobs deficit remains large and we will need much more rapid job growth than we saw in 2010 to simultaneously bring people back into the labor force and bring the unemployment rate down to acceptable levels over the next few years.

Below are some charts to show how the new figures look in historical context. Here is a statement on the jobs report with analysis.

See our chart book for more charts.

When it comes to state finances, the big story is still the old story:  the recession, and the way it has continued to hurt states’ ability to keep up with rising needs.

New Census Bureau data give us critical perspective on what happened to state finances in 2008-09  — the first full fiscal year after the recession began.  Declines in earnings and purchases by households and businesses pushed tax revenues down by $67 billion, a collapse of unprecedented magnitude.  Rising joblessness and lost health insurance coverage increased the number of people eligible for Medicaid and other services.

As the Washington Post says in a story today about the Census data: “The economy has improved since the depths of the recession as the stock market has rebounded and states’ tax revenue has begun to tick upward.  Still, the recession’s lingering effects — particularly a national unemployment rate that is hovering at close to 10 percent — have left the vast majority of states with large budget deficits and increasing service demands.”

Bad as it was, it’s still important, though, not to exaggerate what happened.  Both the Post and the New York Times note the presence of a line in the Census data that on casual glance appears to suggest a stunning 30 percent drop in state revenues.  In fact, most of that decline is attributable to paper losses suffered by state employee trust funds when the stock market went south in 2008.

In reality — to quote the Times — the pension fund decline had “little immediate impact on state budgets.”  That is because states will have several decades to make it up, and the Census data don’t reflect the fact that pension funds generally earned most of the losses back when the stock market rebounded in late 2009 and 2010.  A Center analysis scheduled for release next week will explain further the reality of state pension fund challenges and their current and future implications for state budgets.

By contrast, the decline in tax revenue and the increased demand on state services caused an immediate problem for state budgets that hasn’t gone away.  Our analysis of a different set of Census tax data — this one collected on a quarterly basis — shows that, adjusted for inflation, state tax revenues are still 12 percent below pre-recession levels as of the third quarter of 2010.

There was a bright side for states reflected in the 2009 data.  While the recession was costing states tax revenue — threatening education, health care, and other services — the federal government was helping states recover some of that lost revenue.  Federal assistance to states for education, health care, and other areas rose $52 billion in fiscal year 2009, the Census Bureau said.  This is due in part to the beneficial impacts of the American Recovery and Reinvestment Act — the “stimulus” law enacted in 2009.  Without it, states’ budget problems would have been even worse; more people would have lost their jobs and more families would have gone without help they needed.

Unfortunately, that aid is scheduled to expire at the end of the current fiscal year.  As a result, states face budget gaps in 2012 that will make 2009 look almost rosy by comparison.

Our analysis of data that the Census Bureau released this week shows that the 2009 American Recovery and Reinvestment Act was one of the single most effective pieces of antipoverty legislation in decades. In 2009, the Recovery Act’s temporary expansion of the safety net kept 4.5 million people out of poverty.

Last September, the Census Bureau reported that, under its official measure of poverty, which counts only a household’s cash income (not tax credits or non-cash government assistance such as food stamps), the poverty rate rose from 13.2 percent in 2008 to 14.3 percent in 2009.

On Tuesday, the Census Bureau released several new poverty figures for 2009 that rely on alternative, broader poverty measures — ones that include tax credits and non-cash benefits. Under almost all of these alternative measures, the safety net as a whole, including the Recovery Act expansions, prevented any rise in poverty in 2009, despite the deep recession and very high unemployment. (In one of the eight measures, poverty went up but by only a fraction of the official figures, 0.4 percentage points. None of the other measures was statistically distinguishable from the year before.)

We examined the Census data to see how much of that poverty-reducing impact came from the Recovery Act expansions. We found that they kept more than 4.5 million people out of poverty in 2009 (see graph):

• 1.3 million people through extensions and expansions of federal unemployment benefits;
• 1.5 million people through improvements in the Child Tax Credit and Earned Income Tax Credit;
• nearly 1 million people through the law’s new Making Work Pay tax credit; and
• 700,000 people through an increase in benefit levels for the SNAP program (previously called food stamps).

Robert Greenstein just released this statement on the recently passed new House budget rules:

“Today’s vote by the new House majority to change the chamber’s rules, making it easier to pass tax cuts that increase the deficit, contradicts many Republican members’ anti-deficit rhetoric and marks a significant step away from fiscal discipline and toward the kind of rules that helped pave the way for the return of large deficits in the years after 2001.

“The new rules will replace the current House pay-as-you-go requirement — that any tax cut or entitlement increase be offset by a tax increase or entitlement cut — with a much weaker, one-sided rule under which increases in entitlement spending will still have to be paid for but tax cuts won’t. Also, an entitlement increase can be offset only by cutting another entitlement, not by revenue measures such as closing a wasteful special-interest tax loophole.

“This means, for example, that the House will no longer be allowed to strengthen an entitlement program that helps low-income working families and pay for it by closing an egregious tax loophole. But the House will able to expand tax loopholes — for wealthy individuals, powerful multinational corporations, or other special interests — without paying for them.

“The new rules will also allow the House to use the fast-track “reconciliation” process, which Congress originally used solely to enact deficit-reduction packages, to pass tax cuts that would increase the deficit. (For details, see the Center report “House Republican Rule Changes Pave the Way for Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric.”)

“Senate rules barring unpaid-for tax increases and the use of reconciliation to increase the deficit — as well as the statutory pay-as-you-go rule that calls for automatic spending cuts to offset any unpaid-for tax cuts or spending increases enacted despite Congressional rules — will remain in place. Still, the change in House rules will make it easier for House Republicans to pass politically appealing but fiscally irresponsible tax cuts, placing pressure on the Senate to go along by overriding its own rules.

“The new House rules echo Congress’s abandonment of strong budget enforcement rules in the early 2000s, which paved the way for enactment of unpaid-for tax cuts via the reconciliation process that contributed $2.6 trillion to the budgetary deterioration between 2001 and 2010 and helped transform surpluses into deficits. If anything, the new rules are even more irresponsible than such practices were a decade ago, given today’s swollen deficits. Sadly, these rules suggest that tax cuts, not deficit reduction, are House Republicans’ true priority — and that they are willing to expand deficits to secure them.”