Obama's medicaid provisions are an albatross to economic recovery

Medicaid provisions tucked into the president's health care legislation are busting state budgets. These measures are becoming a key obstacle to lowering our high unemployment rate.

The Obama team has backed itself into a corner when it comes to Medicaid's financing. They pinned a good portion of the president's health care legislation -- and his promise to cover more of the chronically uninsured -- on a dramatic expansion in the Medicaid rolls.

Now, the Obama administration is unwilling to give states the flexibility that they need in order to cut Medicaid eligibility and downsize their Medicaid programs. But this is the only way that states can preserve benefits for the neediest recipients and avert budget disasters.

"In the end, states are going to be forced to cut other state programs to preserve their expanded Medicaid rolls. State workers are going to feel the brunt of this hardship."--Scott Gottlieb, M.D.

The administration's obstinacy was made clear last week when Health and Human Services (HHS) Secretary Kathleen Sebelius sent a letter to states telling them to pound sand when it came to modifying their Medicaid programs. She laid out a list of "suggestions" states can employ to reduce their Medicaid spending. But absent was what the states really need -- freedom from Washington to administer the Medicaid program as the governors see fit.

Medicaid's budget problems will only worsen since Congress is unlikely to extend the higher federal Medicaid contribution beyond its June 30 expiration.

The secretary's "suggestions" were mostly old ideas plucked from past failures. These include measures such as scaling back optional services like adult dental care and encouraging use of generic medicines. Most of these are small items. Many have already been implemented. Given the magnitude of the states' budget woes; these measures amount to weak tea.

This month, Jan Brewer of Arizona became the first governor to request what most of the states really need -- a waiver from HHS freeing the states from an Obamacare provision known as the maintenance of effort requirements. This is a mandate that forces states to maintain their current Medicaid rolls until 2014 for adults and 2019 for children. If the states trim programs, they end up forfeiting all of Medicaid's federal matching funds.

The Obama team doesn't want to see Medicaid shrunk as a matter of liberal principles. But their inflexibility is also a function of their fiscal prudence at the expense of the states. The problem is that Obamacare is written in a way that puts people who are new to Medicaid in 2014 entirely on the federal tab. So anyone dropped from the program now would return in 2014, only this time the federal government would pick up the entire cost of their care instead of splitting it with the states. In other words, the administration faces a stark choice when it comes to Medicaid: Either blow up the state budgets, or bust the federal tab.

Absent flexibility on the "maintenance of effort" requirements, states are going to be forced to embrace ultimately losing measures such as imposing sharp cuts to what they pay providers. This will force doctors out of the Medicaid program, making access even more difficult for recipients. It will push Medicaid still further down the road of being an empty benefit that leaves recipients with a list of covered services but no places to get care from.

Medicaid's budget problems will only worsen since Congress is unlikely to extend the higher federal Medicaid contribution beyond its June 30 expiration. This bolus of stimulus funding from 2010 allowed states to gorge on federal Medicaid dollars. Now that trough has run out.

In the end, states are going to be forced to cut other state programs to preserve their expanded Medicaid rolls. State workers are going to feel the brunt of this hardship. They will see their jobs "downsized" to pay for wrecked state Medicaid programs at the very time that the Obama team is trying to reverse the economy's sagging employment figures.

Mark Zandi, the chief economist of Moody's Analytics, says state austerity measures alone may add as much as 0.25 percentage point to the unemployment rate this year. This could make the difference between ending 2011 with unemployment above or below 9 percent, and 8 percent by the end of 2012. The state workforce reductions, according to Zandi, could top 600,000 jobs in the fiscal year that starts July 1.

State labor forces are bloated, but smart government reform -- not stopgap measures to plug Medicaid -- should drive streamlining. Some political analysts say that the president's chances for re-election turn, in part, on his getting unemployment below 8 percent by the 2012 election cycle. Health care reform was supposed to be the president's signature achievement. The political irony is that it has become an albatross to any economic recovery.

Scott Gottlieb, M.D. is a practicing physician and Resident Fellow at the AEI.

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