Are the Savings from Cutting Medicaid Illusory?
By David Henderson
Answer: It depends.
Chicago Tribune columnist Steve Chapman, and also my long-time friend, reminds us of one of the most important principles in economics: There’s no such thing as a free lunch. Indeed, this principle is so important that I’ve made it Numero Uno in my Ten Pillars of Economic Wisdom. Steve makes his point in “The Illusory Savings from Cutting Medicaid,” June 25, 2017.
Steve thinks that if we apply that principle to the Senate Republicans’ plans for cutting the federal government’s subsidies to Medicaid, we must conclude that others will pay more. His key bottom line:
Cutting back Medicaid coverage would save taxpayers some cash, but only by taking it from others. The reduction would raise costs for low-income people and most likely degrade their health.
He’s almost certainly right that it would mean taking more cash from taxpayers at the state level, since the Senate Republican plan would change the current federal subsidy to state Medicaid plans to a block grant to states. But would it save taxpayers cash only by taking it from others?
That depends. One argument for turning over Medicaid to state governments and letting them set the terms is that state governments can try different methods. Some will work better, some worse, and then state governments that want to can imitate the ones that work better. Is there a way to have Medicaid work better? There certainly is. It is to have small co-payments for medical services: say $5 for a doctor visit and $50 for a day in the hospital. The purpose of such copayments is not to, green eyeshade style, extract small amounts of money from poor and near-poor people. The purpose is to have them put “skin in the game” so that their use of health care costs them something and they don’t treat an incredibly expensive resource as a free resource. With a smaller federal role in setting the rules for Medicaid, surely some states would experiment with small co-payments. This could save substantial money without increasing taxes.
Another way state governments could save money without making health care worse is to let the Walmarts of the world deliver low-cost but high quality care using people who are health care professionals but not high-cost doctors. Some state governments allow this; others don’t. But if state governments had to bear more of the cost of Medicaid, some of them would likely respond to this incentive by allowing more such innovation.
And that might also mean that poor people’s health would not be degraded. We already know from the Oregon Medicaid study that Amy Finkelstein et al have written about that Oregon’s Medicaid doesn’t seem to have done much for the physical health of Medicaid beneficiaries there. (See Megan McArdle’s article for a very nice treatment of the issues.) And even if the effects are positive but too small to detect, the odds are good that those positive effects would still occur if poor people, responding to co-pays, dropped the marginal uses and kept the important ones.
The above paragraph is an application of two other important pillars of economic wisdom: Pillar #2–incentives matter–and Pillar #3–economic thinking is thinking on the margin.
Steve also writes:
Some recipients would get cut off under the GOP plans, and some would get less coverage. That–surprise!–would leave them worse off, because comprehensive health insurance is a good thing to have.
He and I probably think of health insurance the same way: it’s really good to have. But another important Pillar of Economic Wisdom is Pillar #7: The value of a good or service is subjective. I might think you should have health insurance but you might think you should not. If you lose health insurance solely because of a reduction in subsidy, then Steve is right: by your own standards, you are worse off. But the Congressional Budget Office, whom Steve quotes about the number of people who will lose health insurance due to Republicans’ proposed plans, found in its study of the House Republicans’ bill that a substantial number will lose Medicaid not because they will lose eligibility for Medicaid–many won’t lose eligibility–but because they will no longer be forced by law–the individual mandate–to sign up for it. The same is likely to be true of the Senate Republicans’ plan. So, whatever Steve or you or I think of the wisdom of their decision, by their standards, losing Medicaid means they are better off: they choose to lose it.
Steve Chapman is right: there is no such thing as a free lunch. But sometimes there are more efficient ways of delivering subsidized lunches.