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What Is Medicaid – How It Works, Opposing Views & Future



Many health officials believe that Medicaid is the glue that helps to hold our healthcare system together, taking on the highest-risk, sickest, and most expensive populations that cannot qualify for outside private insurance or Medicare. It is America’s ultimate safety net. Unfortunately, it is also extremely costly: Medicaid, Social Security, and Medicare – the “big three” entitlement programs – accounted for 44% of the federal budget in 2012, according to The Heritage Foundation, and collectively consumed more than $2 trillion of services, with total revenues of $2.4 trillion.

According to the Congressional Budget Office, the Federal Government spent $275 billion in 2011 for Medicaid, covering on an average month 54 million Americans. Medicaid expenditures including federal funds is the largest government expenditure in each of the 50 states. Considering only state funds, Medicaid expenses trail only primary and secondary education expenses in state budgets.

Without fundamental change, our social welfare programs (including Medicaid) will ultimately bankrupt the country or drive taxes to unsustainable levels. A distinct possibility is that millions of poor Americans – the elderly, disabled, and children – will face a future without adequate healthcare or long-term nursing care.

What Is Medicaid

Medicaid was created in 1965 by an amendment to the Social Security Act, and has been altered by subsequent amendments over the past six decades. It is the primary source of health insurance coverage for low-income people and families, and is administered by individual states. State legislatures and administrators establish their own eligibility requirements, decide which services will be available, and how much providers will be paid for those services within guidelines provided by the Federal Government.

Unlike Social Security and Medicare, which are funded by employer and employee taxes, Medicaid is supported by the general tax revenues of each state and the Federal Government, the latter providing matching grants to the former for the program. The lack of a designated revenue source on either a state or federal level means that this critical program is periodically subject to widespread criticism from the left for its lack of coverage to needy beneficiaries, as well as from the right for its uncontrolled costs.

Also, unlike the other big entitlement programs, Medicaid directly reimburses practitioners providing services – physicians, hospitals, nursing homes, and pharmacies – with no payments going directly to beneficiaries. Instances of fraud and abuse occur on a provider level and not with recipients, since they have no access to funds.

To be eligible for Medicaid benefits, a person must fall below certain income levels (133% of poverty line income in 2012, or $23,050 in annual income for a family of four) and be a member of a designated eligibility group:

  • Elderly. The elderly accounted for approximately five million individuals receiving Medicaid assistance, each beneficiary receiving slightly more than $12,380 in assistance in 2011. According to the Kaiser Family Foundation, 7 of 10 nursing home residents are on Medicaid, primarily because middle-class patients usually run through their savings and are forced to rely on Medicaid for continued care. Cuts in the program will invariably force families to either bear a greater proportion of the costs for their aged relatives, seek other sources of care, provide care themselves, or abandon the nursing home resident to the vagaries of charity.
  • Blind and Disabled. In 2011 there were almost 11 million Americans in this category covered by Medicaid. The cost for the year was more than $110 billion, or about $10,735 per beneficiary. This group typically requires years of care, often in specialized facilities.
  • Children. Children under the age of 19 make up the largest group of Medicaid beneficiaries (33 million in 2011) with an average annual cost of about $1,694. The “bang for the buck” – the number of people covered for costs expended – is much greater with this group of beneficiaries than with any other.
  • Adults. Almost 18 million adults – such as pregnant women, low-income parents with children dependents, and adults with HIV – had medical coverage through Medicaid in 2011 for a total cost of $37 billion ($2,268 each). Only adults with less than $3,000 in assets are eligible for Medicaid.
  • Foster Care Children. Almost all foster care children are eligible for Medicaid as citizens of the United States. Both political parties agree upon the need to provide “safe and stable out-of-home care for abused, neglected, and abandoned children.” In 2009, 937,000 children were covered with an average cost of $6,372. Under the new Affordable Care Act, former foster care children can continue to receive Medicaid assistance until they turn age 26, effective January 1, 2014.
  • BCCA Women. These are women receiving assistance due to breast or cervical cancer. As a group, they constituted less than one-tenth of 1% of the beneficiaries and 0.2% of the expenditures in 2011.

The elderly and disabled accounted for more than 63.7% of Medicaid expenditures in 2011, even though they represent collectively less than 24% of the enrollees. For this reason, fiscal critics of Medicaid and excessive government spending have called the program “a boon to the middle class” and a “middle-class entitlement program” which should be cut to reduce federal deficits and the growing national debt.

Medicaid Insurance Coverage

Opposing Views of Medicaid

Medicaid has been attacked since its inception as another step by the nation toward socialism and the embodiment of the concept of “getting something for nothing.” State governments have resented and resisted the control and requirements of the Federal Government into what they perceive as a state issue, claiming they could do more with less if they had the flexibility to tailor a program to meet the needs of their state’s specific populations.

President Obama has indicated that pilot programs, coordinated with the new provisions of the Affordable Care Act (ACA), will face less restriction in the future as the major provisions of the ACA are put into place in 2014.

Conservative View

Dr. Scott Gottlieb, resident fellow at conservative American Enterprise Institute for Public Policy Research and one of presidential candidate Mitt Romney’s lead healthcare advisers, argues that beneficiaries would “do just as well without health insurance,” and that Medicaid is “worse than no coverage at all.” Furthermore, according to Mississippi Republican Governor Haley Barbour, “The Medicaid program is broken from both budget and health outcomes perspectives.”

States are particularly concerned about new beneficiaries added to Medicaid rolls as a result of the ACA and the effect of the added costs upon state budgets, possibly requiring large cuts in education spending to fund new Medicaid expenses.

Representative Paul Ryan, the 2012 Republican vice presidential candidate, has proposed that Medicaid be converted to a block grant program where the Federal Government simply provides a fixed sum of money to each state. In turn, the state is responsible for determining who would be covered, what benefits they would receive, and how long they could receive those benefits. The block grant would increase each year, but would be limited to the rate of inflation.

Many advocates for change in Medicaid assert that such block grants would give each state maximum flexibility to define and administer their own programs (eligibility, benefits, duration of benefits, requirements to maintain benefits, and provider payment terms) consistent with the state’s population. According to the Congressional Budget Office, the plan would cut $771 billion in federal expenditures over 10 years, reducing Medicaid spending by the Federal Government by 35%.

In March 2011, Utah created a Medicaid pilot program requiring beneficiaries to meet a work or community-service requirement, reflecting the Mormon Church’s practice of extending help to needy members, but requiring services in return. The program, though small, might be the forerunner of similar plans for other states if successful.

Liberal/Progressive View

Dr. Aaron E. Carroll, associate professor and chairman of Health Policy and Outcomes Research at the Indiana University School of Medicine, counters the conservative view, stating that “Medicaid is good for people, and the Medicaid expansion will save lives.” He continues to explain that most people have misunderstandings about Medicaid and who is covered, indicating that many adults – those who might be expected to work under the conservative proposal – are not covered.

“Two parents and a child living in Alabama, Arkansas, Indiana, Louisiana, or Texas with an income of $4,850 a year actually earn too much to qualify for traditional Medicaid,” he states. “And if you’re not a parent, then things are even worse. In most states, if you have no children, you can’t qualify for Medicaid no matter how little you make. In most states, even if you make no money at all, there’s no Medicaid for you.”

Edwin Park of the Center on Budget and Policy Priorities claims that “Medicaid is not an out-of-control program,” noting that on a cost-per-beneficiary basis, it is cheaper than private insurance or Medicare.

Proponents of Medicaid believe that the fundamental problems of Medicaid are generally the same structural problems underlying healthcare costs:

  • Aging population
  • Chronic health conditions
  • Increased use of technology and medical breakthroughs due to associated costs
  • Expensive end-of-life care
  • Poor health choices, such as smoking and poor diet
  • Lack of early, regular medical care due to financial circumstances

Progressives suggest that overall healthcare inflation will decline as the provisions of the ACA become effective and a greater percentage of the population bears a larger proportion of their healthcare costs through the mandatory coverage provisions.

In the short-term, the solution has been to reduce provider payments, forcing physicians and hospitals to wrestle with declining margins and reduced income. As a consequence, many providers have ceased to serve Medicaid patients, effectively rationing care.

Liberal Progressive View Medicaid

Medicaid Realities & Outlook

The issue of Medicaid lies not in the question of whether the country should provide assistance to its most vulnerable members, but how to afford those benefits within a context of competing societal requirements, such as defense, education, and infrastructure.

Conservatives sidestep the main issue, simply passing future costs of care onto the states and beneficiaries by limiting the Federal Government’s exposure to growing healthcare expenses with the block grant solution. In other words, the Federal Government would set a fixed dollar amount for the states based upon its own budget constraints, rather than the needs of the population within a state.

Efforts to cut the program’s cost are a political minefield, since the bulk of expenses go to the elderly and the disabled. Reducing their benefits and forcing families to bear larger costs will certainly generate a voter backlash. However, if the block grant solution is implemented, the backlash would be diverted to state officials, rather than Congressmen and Senators.

Liberals, on the other hand, have been unwilling to recognize the impact of Medicaid costs upon state budgets, which are already strained, as well as the resistance of average citizens to higher taxes required to support entitlement programs as they presently exist. They make a moral case for covering all of the different Medicaid classes, and it is a good argument: Most people believe that the most defenseless members of our society – the elderly, the disabled, and children – should have adequate care. However, asking for higher taxes in the midst of an economic slowdown and a future of sluggish growth is impractical and Pollyannaish at best.

Final Word

There is no easy solution, nor one that will satisfy every constituency. At best, the immediate path lies in compromise. It is likely that provider payments will continue to be reduced in the short-term, even though some providers will leave the program as a result. Some form of block grants, possibly restricted to certain Medicaid classes, will be instituted, and states will have greater freedom to tailor the Medicaid program to meet their needs. It is also probable that American families will bear a larger proportion of the costs of long-term care for the aged and disabled, either by paying more for the services, or by providing care in the family home.

Do you have a parent or child with a chronic condition that requires long-term care? What do you believe is society’s responsibility to its citizens?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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