Instead of Tax Hikes: Medicaid Reform

by Wyoming Liberty Group Staff

Of all the spending programs in the state budget, Medicaid is probably the toughest to reform. Half of it is funded by the federal government, with state funds covering the other half. There are a lot of strings attached to the federal funds, making the provision of Medicaid-funded health care a chore for providers (whose reimbursement is also a matter of concern).

Nevertheless, we need to reform Medicaid in Wyoming, and we need to do it to make it fiscally sustainable. With an estimated cost in 2018 of $627 million, of which $309 million was in-state funding, Medicaid is an unending threat to the fiscal solvency of our state.

Before we move on to discuss reform, it is important to point out that the problem with the program is not those who are enrolled. Most people who get on Medicaid have good reasons to do so, and they also trust the state and federal governments to provide for their health care needs. Instead, the problem is that our federal government has decided to hand out promises that it is no longer able to keep.

Medicaid costs in Wyoming have outpaced our tax base for as long as we have had reliable sate-level GDP data:

• Since 2006, total Medicaid costs have grown at less than 3.1 percent per year, on average, but the in-state portion had increased at 6.6 percent;
• During the same period of time, current-price GDP (the broadest possible measure of our tax base) has grown, on average, at 3.3 percent per year.

In other words, the in-state portion of Medicaid has outpaced its tax base by a factor of 2:1.

We are not even going to go into what Medicaid expansion would do to our state's tax base, especially since the federal funding part is not at all at the blessing that Medicaid expansionists claim. On the contrary, as Wyoming Liberty Group policy analyst Evan Blauser explained recently, states that have accepted Medicaid Expansion are notoriously prone to massive cost over-runs. Inevitably, a major, "unforeseen" bill falls on the shoulders of the state's own taxpayers.

Therefore, while campaigns for Medicaid Expansion continue in other states like Mississippi and Oklahoma, Wyoming should embark on a plan to radically, and fiscally sustainably overhaul its Medicaid program.

There are three components to Medicaid reform.

1. Elimination of federal funds. While gaspingly radical, initiating the process to cut federal funds out of Medicaid is a necessary first step in order to allow necessary reforms to take place. It is important to note, however, that the purpose of this step is not to simply transfer the funding responsibility from the federal government to the state, but to open for reforms that will significantly reduce the cost of health insurance under Medicaid.
2. The charitable option. Long-term care consumes nearly half of Medicaid. At $288.8 million in FY2017 (48.2 percent of all Medicaid expenditures in Wyoming) long-term care spending equals 95 percent of federal funds. A reform to this part of Medicaid that would replace tax revenue with private funds would make it possible to eliminate the need for federal funds even if other parts of Medicaid were untouched. A reform model is proposed below.
3. Privatized health care and health insurance. Medicaid spending on acute care is essentially equal to long-term care spending ($287.8 million in FY2017). There are two parts to this section of Medicaid reform, the first of which is a voucher system for Medicaid enrollees to buy private health insurance. The second part is tied to a broader reform of our state's health care industry in general.

The first point is a matter of opening a dialogue with the federal government. It is not mandatory for states to take federal funds – if they refuse, the federal government really does not have much clout. Theoretically, if Wyoming refused Medicaid funds the federal government could threaten to withhold funding for other programs, such as highways. That, however, would be a matter of a contentious legal fight over state sovereignty.

It is highly doubtful that the Trump administration would be interested in such a fight. On the contrary, termination of federal funds is in line with some of the thinking that has floated around the Trump administration regarding reforms to welfare programs. While more radical than what is otherwise considered mainstream, it is still within the realm of the imaginable.

Wyoming would have to approach the federal-funds op-out with determination and good planning, but if the legislature and the governor made a commitment, they could get it done.

The second point is essential to a state-only funded Medicaid program. It is also badly needed for non-fiscal reasons: providers of long term care explain that their business is under pressure from increasingly invasive regulations by the federal government. They describe a mission-creep style situation where their freedom to operate their businesses – for profit or non-profit – according to their professional skills and experience. Medicaid money often provides as much as 70 percent of revenue in long-term care, making the regulatory incursions particularly worrisome.

If this does not change, we may see a decline in the provision of long-term care in our state.

Put simply: it is essential that we replace federal funds with in-state sourced revenue. Furthermore, it is essential that we do this without without raising taxes.

Delivering this with a revenue goal of approximately $300 million per year is a tall order, yet there is a model that could provide the infrastructure for it. The vehicle is a so-called Charity Compact, a model for welfare reform that I developed eight years ago and included in my book Ending the Welfare State: A Path to Limited Government That Won't Leave the Poor Behind. Briefly, the reform model has three components:

1. Every taxpayer is allowed to make a dollar-for-dollar deduction on a designated tax if he makes a charitable donation to a certified non-profit provider of long-term care.
2. Providers of long-term care obtain certification as eligible recipients of said donations, through a charity compact. This compact is run either by the state or by the long-term care industry itself.
3. There are no other strings attached with either the certification of providers or the deduction-eligible donation than that the facilities operate by a basic, common-sense do-no-harm principle.

This donation model would create a free market for long-term care, where non-profit providers would attract donors based on, plain and simple, the care they provide. If someone fails to take good care of their residents, donations dry up; of someone spends the money on extravaganza instead of good care, donations dry up.

By contrast, if someone earns a reputation of good, quality care with happy residents and a staff that likes to come to work every day, donors will be happy to contribute.

What tax, then, would be the designated target of this dollar-for-dollar deduction? Since we do not have an income tax, the state portion of the property tax comes to mind. In 2016, according to Census data, the state government took in $338.8 million in property-tax revenue. Let us assume that this was the number for 2017 as well, the year when we spent $288.8 million in Medicaid money on long-term care and received $309 million in federal Medicaid dollars:

• If all long-term care providers taking Medicaid were non-profit; and
• If property-tax payers donated the entire state portion of their property taxes to long-term care; then
• Long-term care funding would increase by $50 million or 17.3 percent; and
• Our Medicaid system would be fiscally ready to sever its ties with the federal government.

Technically, Uncle Sam's Medicaid funds are not a block grant that we can choose to spend however we want to. Some of it has to go toward long-term care, some of it is locked in to other parts of the program. However, once the state has developed a model for sending enough money into long-term care without federal funding, it can also put together a model that reallocates other Medicaid funds to neutralize the loss of federal money.

There are many gains to be made from a model with entirely in-state funded Medicaid. To stick to long-term care as the example, once providers are liberated of federal regulations they can provide care of higher quality and with more efficiency than they can do today. Over time this lowers the cost, down the road giving charitable taxpayers a return on their effort.

Another gain is that the state is liberated to make reforms in other parts of the Medicaid program, in line with the third point made earlier. This part, however, we will have to return to in a separate article.