Health care for the uninsured represents only a small fraction of government spending on health care. The government spent a total of $647 billion on health care in 2001, including Medicare, Medicaid, and other public programs.

Medicaid alone cost $224 billion in 2001 and is expected to cost $277 billion this year, according to the Centers for Medicare and Medicaid Services, more than $1,000 for every man, woman, and child in the country.

The strain on state and federal health care budgets is significant and getting worse. Escalating Medicaid costs are largely responsible for state budget deficits so large that most legislatures are considering income or sales tax increases or threatening cutbacks in other public programs like education and highways.

How We Got into this Mess

The boom economy of the mid 1990s and beyond made it possible for states to expand the reach of their Medicaid programs to populations not ordinarily covered by the program. Most state programs are over-extended, offering more benefits to more people than is sustainable during times of recession. As more workers find themselves laid off or working for an employer that can?t afford to provide health coverage, many are enrolling in Medicaid.

A survey conducted last year by Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured showed a Medicaid enrollment increase of 8.6 percent in 2002. This is slightly less than the 9.7 percent enrollment increase in 2001, but both are substantial increases over previous years. (See Figure 1.)

The states themselves listed enrollment increases as the number two cause of program spending increases behind pharmacy costs, according to the Kaiser survey. (See Figure 2.) Eighteen states said enrollment increases were the number one factor.

The increased enrollment growth was due in part to increases in eligibility limits. In some states, individuals with incomes three times the federal poverty limit (FPL) are eligible for Medicaid. For example, children can be enrolled in Missouri Medicaid?s Managed Care Plus program if their families make less than 300 percent of the FPL, or $55,200 per year for a typical family of four. Children in Vermont qualify for Medicaid if their family income is below 225 percent of the FPL, and uninsured adults qualify if their income is no more than 185 percent of poverty.

The same thing is true for the State Children?s Health Insurance Program (SCHIP). Originally designed to help children who ?fall between the cracks? because their families don?t have private insurance but also have incomes too high for Medicaid, some states have now extended coverage to the parents of these children. Colorado, Illinois, Maryland, New Jersey, Rhode Island, and Wisconsin have all extended their SCHIP programs, although New Jersey has stopped accepting new parents. Arizona uses unspent SCHIP funds to cover uninsured low-income adults without children.

Cut the Strings

What can be done to address the unsustainable expansion of state Medicaid programs? President Bush released in January the details of a plan that would offer states the flexibility to modernize their Medicaid programs for optional populations in exchange for some up-front federal assistance to get the changes off the ground.

Essentially, $3.25 billion would go to states accepting the offer for fiscal year 2004, with an additional $12.7 billion over the next seven years. States would be allowed to alter their programs for optional eligibility groups and optional services without first getting a waiver from the Department of Health and Human Services.

The Bush proposal would cut some of the strings attached to the federal bureaucracy and give states more flexibility with their Medicaid programs to contain costs. Like the successful federal welfare reform adopted in 1996, the Bush Medicaid proposal is built on the principle of engaging people in making responsible choices.

In most states, Medicaid beneficiaries would probably be expected to bear more of the cost of the services they use, giving them a better sense of the value of the care they receive. Getting beneficiaries more involved in their health care decision-making will also give this population increased choice of doctors, hospitals, and health coverage.

Critics of the Bush plan are mostly skeptical of the administration?s intentions. They worry the proposal is aimed at limiting federal spending on health care for the low-income. Worse yet, they fear the plan might prove as successful as welfare reform.

In defense of reforming Medicaid, a February 10, 2003 Wall Street Journal editorial stated, ?The same folks who inaccurately predicted the 1996 welfare reforms would leave indigent masses gutter-bound are now insisting that states will use this flexibility to toss people off the rolls. But that?s not in their best interests. These people will receive health care one way or another ...?

Using Defined Contributions

One option for reforming existing programs is to implement a voucher system using current Medicaid dollars. States could take existing Medicaid dollars and give each beneficiary his or her share in the form of a voucher for the purchase of private insurance from a menu of state-approved private-sector health plans, including Medical Savings Accounts.

Using vouchers as a vehicle for Medicaid reform accomplishes two things: It caps state expenditures at a defined-contribution amount, instead of the current, more open-ended and costly defined benefit; and it gives beneficiaries the ability to purchase coverage better tailored to their needs.

The ability of Medicaid beneficiaries to make choices concerning their own health care has been proven by the success of the Medicaid Cash and Counseling program. The program allows certain elderly and disabled beneficiaries to purchase their home health care and other community-based services with cash allowances. Beneficiaries hire and fire people who provide services, including their own family members. Cash and Counseling has nearly a 100 percent beneficiary satisfaction rate in Arkansas, Florida, and New Jersey, the first states to try the program.

Reforming Medicaid along these lines would give states the flexibility to control expenditures while improving satisfaction levels among beneficiaries in the program. Giving people the opportunity and incentives to improve their economic condition can work for health care as well as it did for welfare reform in the 1990s.

Joe Moser is a health policy analyst at the Galen Institute, a not-for-profit public policy research organization based in Alexandria, Virginia. The views expressed here are the opinions of the author and do not necessarily reflect the views of the Galen Institute.