Medicaid fails the poor

Published 11:43 pm Wednesday, June 29, 2016

This year’s biggest state budget fight involved funding for Alabama Medicaid.  The legislature overrode Governor Bentley’s veto to pass a General Fund budget with almost $100 million less in funding than the Governor requested.  Budget fights over Medicaid should come as no surprise as it is the largest item in Alabama’s General Fund budget, even though we decided against the Affordable Care Act expansion and have very strict eligibility conditions for poor adults.

I recently completed a study for the Mercatus Center at George Mason University on the sources of growth of Medicaid over the past fifty years.  Perhaps the most revealing thing I learned while conducting this study is how dramatically our enormously costly Medicaid system fails America’s poor.

Medicaid and Medicare were established in 1965 as part of Lyndon Johnson’s Great Society to provide health insurance for the poor, disabled, and elderly.  Both programs I think were the inevitable product of earlier policy decisions tying health insurance to employment.  Employer-paid benefits were not treated as taxable income for employees, strongly encouraging employers to offer health insurance to employees and their families.  But this also left persons without jobs without insurance, creating the need for government insurance for the retired, disabled, and poor.

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Although Medicaid is commonly described as insurance for low income children and adults, almost two thirds of total spending is for the disabled and elderly.  States accomplish this in part by underfunding care for low income recipients.  Medicaid features the lowest reimbursement rates for doctors and hospitals for covered treatments of any insurer, including Medicare.  In addition, billing Medicaid is lengthy and time-consuming for healthcare providers.  Not surprisingly, doctors try to avoid Medicaid patients; one third of doctors would not accept new Medicaid patients in 2011-12.  Medicaid patients often face long waits when able to schedule appointments.

The problem is widely recognized.  Oregon Senator Ron Wyden once called Medicaid a “caste system” limiting the access of poor Americans to the health care they desire.  Health economist Robert Graboyes notes that, “For low-income Americans, Medicaid yields poor coverage, poor care, and poor medical outcomes.”

How bad are these outcomes?  A University of Virginia study found that Medicaid patients had higher in-hospital mortality, longer hospital stays, and higher costs, controlling for age and other risk factors, than patients with private insurance, Medicare, and even the uninsured.  Other studies from leading universities find similar results.

Medicaid recipients also use emergency rooms more frequently because of the difficulty they experience scheduling appointments.  Affordable Care Act proponents hoped that expanded insurance coverage would reduce healthcare costs by getting patients to see doctors before their health worsened and they went to emergency rooms.  Medicaid’s inadequate reimbursement rates thwart this hope.

Why does Medicaid deliver so little for low-income Americans?  One factor is what I’ve previously called in this column the “spend but don’t tax” attitude among politicians.  “Tax and spend” politicians want to spend lots of our money on things that they, their constituents, and special interest groups want.  Politicians win votes and campaign contributions for the next election by spending our money.  Tax and spenders are willing to raise taxes to fund this.

Spend but don’t tax politicians want to spend and keep taxes low to score points with fiscal conservatives.  These politicians want to have their cake and not pay for it.  Medicaid exemplifies the consequences.  Politicians take credit for providing health insurance for the poor; we constantly hear that Alabama Medicaid serves one million Alabamians.  Most voters are too busy with their lives to take the time to learn how Medicaid fails to deliver its promise.  Big government on the cheap is often an election-winning formula for politicians, but costly for America.

How the Federal government disperses money to states also contributes to the problems of Medicaid, as my study for the Mercatus Center found.  Consequently reform could both contain Medicaid’s cost and improve the quality of healthcare for low income Alabamians.  I’ll say more about potential reform next time.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  Respond to him at and like the Johnson Center on Facebook.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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