LTC Bullet:  The Medicaid Dissertation

Friday, April 25, 2014


LTC Comment:  A recent doctoral dissertation sheds light on Medicaid’s public policy role and impact.


LTC Comment:  Several years ago I noticed the published work of a young Heritage Foundation analyst.  His was among the best writing I’d seen on Medicaid acute health care policy.  I contacted him and we began a conversation about Medicaid’s role in long-term care financing.  I invited him to accompany me on a field visit to New York in the fall of 2010.  Together, we interviewed Medicaid long-term care eligibility policy specialists, supervisors and workers in the state’s county-based welfare offices.  The resulting report “Long-Term Care Financing in New York:  How to Save Money While Serving the Needy” was published by the Empire Center for New York State Policy in March 2011.  Read it here.

Shortly thereafter, Brian Blase left Heritage to join the professional staff of the Committee on Oversight and Government Reform of the U.S. House of Representatives.  He was instrumental in organizing a committee hearing titled “Examining Abuses of Medicaid Eligibility Rules” on September 21, 2011 at which a New York Medicaid eligibility supervisor, an Illinois Medicaid director, an elder law attorney and I testified.  You can watch that hearing or read the testimony here.  We analyzed the hearing in LTC Bullet:  Friendly Fire in the Class War (9/22/11) and LTC Bullet:  Moses Replies to Congressman's Questions (10/13/11).  The proceedings make dramatic reading or viewing.

But the House Oversight and Government Reform Committee didn’t stop there.  The Committee released its first bipartisan report in four years on February 13, 2013 titled “Billions of Federal Tax Dollars Misspent on New York’s Medicaid Program.”  [This link takes you to a page with further links to a video and to the full published report.  If you watch the video, note that the committee’s deliberation begins at 7 minutes, 21 seconds in.] The report details some of the historic problems with New York State's Medicaid program as revealed by independent investigators, news organizations, and the Committee's own research. It shows that fraud, waste, abuse, and mismanagement has been a large problem in New York’s Medicaid program for decades. The report discusses the long-standing and aggressive State approach to maximize federal dollars flowing into New York through the federal Medicaid reimbursement.  We covered this important report in “LTC Bullet:  Bipartisan Congressional Blast at New York Medicaid” (2/22/13).

Bottom line, we are all very fortunate to have Brian Blase in a position of responsibility in Washington, DC.  He received his Ph.D. from George Mason University last year.  Following are excerpts from his doctoral dissertation (footnotes omitted), which examines the public policy role and impact of the Medicaid program. I believe you’ll find his observations of interest. We thank Dr. Blase for permission to re-publish this material.


Excerpts from “Three Papers Toward a Better Understanding of State Medicaid Programs and Program Efficiency” by (current title): 

Brian C. Blase, Ph.D., Senior Professional Staff Member, Committee on Oversight and Government Reform, U.S. House of Representatives

From the dissertation’s “Abstract”:

“The federal government provides an uncapped reimbursement of state Medicaid spending. In theory, states can use the federal Medicaid funds as a replacement for state funds or the federal funds, which take the form of a matching grant that reduces the relative price of Medicaid, can increase (or stimulate) spending on Medicaid with state-raised tax revenue.”

“I . . . find that states with wealthier and more liberal populations tend to have larger Medicaid programs and that states with Democratic legislatures tend to have more Medicaid beneficiaries than states with Republican legislatures all else equal.”

“Between 2009 and 2011, many states enacted health care provider taxes as a way to bring in additional revenue through the federal Medicaid reimbursement.”

“I find significantly larger Medicaid spending growth for hospitals in states that added hospital taxes and significantly larger Medicaid spending growth for nursing homes in states that added nursing home taxes within the first two years of the enactment of the tax. I also find some evidence that states with hospital taxes were able to increase their total Medicaid spending more than states without hospital taxes during the economic downturn and initial recovery period. This paper also contains evidence that nursing home taxes diverted Medicaid spending from home and community based services to nursing homes.”

“Ultimately, the evidence in this paper suggests that health reform built around a significant public insurance expansion is likely to result in minimal, if any, overall health gains measured in the entire population, at least in the short run.”

From the dissertation’s “Paper 4:  Conclusions”:

“The growth in Medicaid over the past two decades has been substantial. In 1990, the United States expended about 1.27 percent of Gross Domestic Product through Medicaid. By 2011, this percentage increased to 2.70 percent and the percentage is expected to increase to 3.80 percent by 2020.” (p. 154)

“A key finding from my first paper, Subsidizing Medicaid Growth - The Impact of the Federal Reimbursement on State Medicaid Programs, was the high correlation between the number of Medicaid recipients in a state's program as well as state Medicaid spending with the percentage of state Medicaid spending reimbursed by the federal government (the state FMAP) after controlling for many confounding factors. I found that a one percentage point higher FMAP was associated with between $5 and $16 in greater per capita state Medicaid spending and between 0.04 percent and 0.29 percent more program recipients depending on the functional specification.”  (p. 155)

"The uncapped federal Medicaid reimbursement, which is essentially a matching grant, produces both a substitution effect and an income effect. The substitution effect significantly decreases the price of Medicaid relative to other categories of state expenditures. Basic economic theory shows that consumers who only bear a fraction of the price of items will tend to consume these items beyond the optimal point. As such, economists and policymakers should be concerned about the distortionary effect of the federal Medicaid reimbursement which directs resources into the health care and long-term care sectors that would likely be better directed elsewhere.
"In my second dissertation paper, Impact of Hospital and Nursing Home Taxes on State Medicaid Spending, I discuss many of the methods, such as provider donations, provider taxes, and intergovernmental transfers, used by states over the past two decades to depress the state share of Medicaid expenditures."  (pps. 155-6)

“I found that states that added provider taxes used the increased federal funds primarily to increase spending on the provider class subject to the tax. Specifically, I found that states increased average annual Medicaid spending received by hospitals by 14 percent in the first two years that states enacted hospital taxes and that states increased average annual Medicaid spending received by nursing homes by 10 percent in the first two years that states enacted nursing home taxes all else equal. I also found evidence that states with hospital taxes increased total Medicaid spending more than states without hospital taxes during the economic downturn and initial recovery period and that states that enacted nursing home taxes during this period diverted Medicaid spending from home and community based services to nursing homes.” (p. 156)

“It is important for policymakers to understand that the financing techniques employed by states, such as provider taxes and large supplemental payments to public providers, do not simply transfer costs from state taxpayers to federal taxpayers. The resources employed by states to maximize the federal Medicaid reimbursement, including the work of contingency fee consultants, is almost pure deadweight loss as those resources are involved with redistribution and not production. Moreover since the uncapped federal Medicaid reimbursement incentivizes states to game the federal Medicaid reimbursement, a federal bureaucracy has formed with the task of reducing inappropriate state Medicaid spending. A large part of the federal bureaucracy would be unnecessary if the incentives at the core of the Medicaid program were better aligned.” (p. 158)

“Probably more important than the deadweight loss of individuals engaging in socially unproductive activities for economic efficiency considerations, creative financing techniques, like provider taxes and supplemental payments, reduce the transparency of the cost of the Medicaid program to state policymakers. As a result, these techniques reduce the incentive of states to ensure that Medicaid expenditures obtain adequate value to justify the spending and lead to a reduction in the efficiency of state Medicaid programs. The root cause of the problem is the uncapped federal Medicaid reimbursement. The financing techniques discussed in the second dissertation paper would be counterproductive if the federal financing of state Medicaid programs did not take the form of an uncapped matching grant.” (p. 158)

“My final dissertation paper, Statewide Health Impact of Tennessee's Medicaid Expansion, assessed the health impact of the largest increase in the size of a state Medicaid program over the past two decades. I found evidence that TennCare, Tennessee's Medicaid expansion in 1994, was largely unsuccessful in the first four years of its enactment.”  (p. 159)

"I found evidence that - relative to the surrounding states - some measures of utilization (blood pressure checks and cholesterol checks) increased in Tennessee after TennCare but self-reported health and mortality rates were less favorable in Tennessee after TennCare. I also found that TennCare did not have a beneficial impact on individuals who failed to graduate high school, a subgroup that Tennessee's Medicaid expansion was more likely to directly impact.

"Finally, the results from my dissertation enable me to make several predictions about the impact of the Medicaid expansion contained in the Patient Protection and Affordable Care Act. The federal government has enticed states to expand Medicaid by offering a 100 percent FMAP for the expansion population for the years 2014 through 2016. While the FMAP for the expansion population gradually declines to 90 percent by 2020, current law maintains the 90 percent FMAP indefinitely. States with provider taxes in place in 2014, particularly hospital taxes and nursing home taxes, will result in states receiving a windfall from the expansion population as adding individuals to the Medicaid program at a 100 percent federal match will increase federal funding to state Medicaid programs by an amount in excess of 100 percent of the cost of the expansion population because of the provider tax mechanism.

"I predict that in many states the Medicaid expansion will cause states to spend additional state resources on Medicaid since the high FMAP makes the Medicaid expansion very lucrative for states. If left unchanged, I predict that the ideological opposition to the Medicaid expansion will weaken over time and nearly every state will expand their program as interest group pressure intensifies. However, given the projected strain on the federal budget as the retirement of baby boomers intensifies and Medicaid's sizeable and growing share of federal spending, I predict intensified fights over Medicaid policy in future years and that federal policymakers will realize that the easiest types of program reforms will be making perverse financing mechanisms, such as provider taxes, more difficult to utilize."  (pps. 159-60)

"I believe economic theory indicates that PPACA's Medicaid expansion will increase the inefficiency of state Medicaid programs as states will have less incentive to be wise stewards of taxpayer dollars."  (p. 160)