Thursday, July 29, 2010

As Arizona Goes, So Goes the Nation: How Medicaid Ruins the States' Fiscal Health

As Arizona Goes, So Goes the Nation: How Medicaid Ruins the States' Fiscal Health

No. 6, July 2008
All is not well in Senator John McCain's home state. Confronted with a general fund budget shortfall of more than $1.3 billion, the Arizona legislature in June enacted modest cuts (primarily in community college and prison budgets), a stepped-up traffic enforcement system to produce some $90 million in speeding tickets, and $2 billion in new debt--half of it to close the hole in the $10.9 billion budget. (The other half will fund university construction.) The budget is a stopgap measure that bodes ill both for next year's budget and for the state's fiscal future, and no Arizona politician pretends otherwise.
Measured as a percentage of the state's fiscal year 2008 general fund, Arizona's projected FY 2009 deficit was the most serious shortfall of any state, exceeding even California's....
Arizona's fiscal crisis is due chiefly to the state's expansion of its Medicaid programs. That decision, in turn, is largely attributable to the perverse incentives created by Medicaid's inordinately generous transfers to the states. To oversimplify slightly, states get into fiscal trouble not because the feds shirk their obligations, but because they have made promises to pay in the first place. While Arizona's problems are exacerbated by a dysfunctional political system, the state's predicament illustrates a pervasive structural crisis.
Despite a relatively conservative political climate, Arizona used to be a high-tax state. Over the decades, however, Arizona's tax burden has remained roughly constant, while that of many other states has risen. As a result, Arizona has improved its position relative to other states. By the most widely used measure (the Tax Foundation's index of state tax burdens), Arizona is now near the median in terms of combined state and local tax burden on citizens....
However, the fiscal effects of federal-to-state transfers are not unambiguously positive, even for net recipient states like Arizona. While federal grant programs may have some fiscal substitution effect, on balance they increase state and local taxation and spending. By making program expansions look cheap and making cuts look outrageously expensive, federal matching grants ratchet up spending and taxes and tend to exacerbate the states' boom-and-bust budget cycles. All else equal, those effects increase in proportion to the matching program's size and generosity....
Under Medicaid, the federal government reimburses between 50 and 77 percent of a state's qualifying expenditures, depending on the state's wealth. Put differently, a state can purchase a dollar's worth of Medicaid health services at a cost of less than fifty cents to itself. Less happily, it cannot cut a dollar from its domestic budget without "losing" federal transfers....
Some states now cover families with incomes of up to 275 percent of the poverty level. Almost all provide long-term care for the poor and low-income elderly. In a few states, one-third of the population is now on Medicaid. In Arizona, about one-fifth of the population receives health care coverage through AHCCCS [Arizona Health Care Cost Containment System]....
Unsurprisingly, Medicaid expenditures constitute an ever-growing share of state expenditures. In 1987, that share amounted to slightly more than 10 percent. In 1992, the number was 17.8 percent; in 2006, 22.2 percent....
In Arizona, the crowding-out has been far more severe and rapid. The state's involvement with Medicaid did not begin until 1982, with the creation of AHCCCS. Previously, Arizona had been the only state to reject federal Medicaid funds. (Individual counties provided a piecemeal system of health care for the state's indigent.) AHCCCS was the first statewide Medicaid program to use managed care, offering recipients a variety of private and public health plans that channeled them into private physicians' offices. As recently as 2002, AHCCCS was cited as a model Medicaid program.
But AHCCCS has since caused much fiscal and budgetary trouble. These difficulties can be traced to the enactment of Proposition 204 in 2000, which substantially expanded Medicaid-eligible populations and services. Proposition 204 significantly loosened eligibility requirements for several AHCCCS programs. (For example, it allowed persons with incomes above the poverty line to spend down their income on medical bills to qualify for coverage.)...
The option of finding offsets for increased Medicaid spending elsewhere in the budget is illusory. Only the general fund and "other appropriated funds"--less than half of all state expenditures combined--are actually subject to the legislature's appropriation authority. "Other" appropriated funds are earmarked, and even within the general fund, about 60 percent of spending is essentially nondiscretionary, as it is automatically set to increase or decrease each year.[9] Thus, short of closing down community colleges and state prisons (or, perhaps, launching an aggressive pro-smoking campaign to raise short-term revenues and long-term mortality rates among Medicaid consumers), the Arizona legislature can do only what it has, in fact, done: enact phony cuts, use traffic enforcement as a revenue device (not a tax and therefore not subject to the Proposition 108 two-thirds requirement), and issue a pile of new debt....
 Arizona instead resorted to aping the Bush administration's major domestic policy innovation: the tax-free, debt-only finance of a major public health program.
No state can avoid the choice between more debt or rip-roaring tax hikes, combined in some way. The only plausible solutions to the states' Medicaid-induced fiscal troubles are to be found in Washington. Those solutions, however, have foundered and will continue to founder--paradoxically, due to the opposition of the states.

It is tempting but wrong to view Medicaid's stupendous, irresistible growth trends and its effects on state budgets as accidents. Medicaid is designed to be fiscally unsustainable--but politically self-sustaining....
Medicaid has created a political wonderland: to a man and woman, public officials who know the program to be ruinous to their states nonetheless clamor for more of the same. There is no will or incentive in Washington for a call to reality--not among Democrats, who rightly view Medicaid (and SCHIP) as HillaryCare on a bicycle, and not among Republicans, who are receptive to the intergovernmental lobby's call for "states' rights" and its clamor against "unfunded mandates" (and never mind that Medicaid is neither).
Eventually, Medicaid will fall victim to the late Herbert Stein's law: something that cannot go on will eventually stop. No one knows on what terms it will stop. We do know this, though: before it stops, there will be a lot more Arizonas.

My thoughts:  ...And socialism sucks.  I still can't excuse our legislatures for our debt.  They are there to be leaders and to tell the truth not lie and be cowardly.

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