David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.
The latest budget proposal from the House of Representatives proposes fundamental changes to the way Medicare and Medicaid are funded. For Medicare, the government would give vouchers to seniors, and then each senior would buy their own insurance on the open market. (Obama's health care exchanges would be scrapped.) For Medicaid, the federal government would give block grants to states, and each state would design (and fund) its own Medicaid program.
Both of these changes are supposed to make the economy more sustainable by reducing the deficit. But in reality, both would do little to stem soaring medical costs, while imposing a great burden on seniors and others in need of health care.
The problem with block grants
Whenever you hear the words "block grant," watch your wallet. Block grants hide the politically unpopular aspects of program cuts, while doing nothing to lessen their sting. In a block grant, the federal government pays money to the states and then the states pick up responsibility for managing the program (in this case, Medicaid).
Block grants are God's Gift to evasive politicians. They allow lawmakers to seem like they are championing fiscal responsibility, but avoid the politically distasteful job of saying where the cuts will fall. Once a block grant system has been established, state officials can evade the public's criticism by saying "sorry about those cuts… but we can't spend money we don't have." Thus, both state and federal officials succeed in insulating themselves from an open and honest accounting in front of the voters.
Block grants bring another problem too: they are always political. A block grant allocates federal money to the states, but on what basis? Should the allocation be based on population, or number of sick people, or poverty levels, or square miles, or size of each state's economy? Not surprisingly, the allocation usually ends up based on who owes whom a political favor. History shows that block grants have historically sent more money to smaller states. However, many of the problems block grants are designed to address are concentrated in big cities in big states. Thus, block grants make it even harder to spend taxpayer money efficiently.
Block grants encourage states to tinker with the formulas for services. This tinkering creates large disparities in programs from one state to the next. These differences in programs force people and businesses to relocate based on which state's programs best meet their needs. These differences distort economic activity and reduce growth.
The problem with vouchers
A Medicare voucher system, as currently proposed, is basically stealth-rationing. The vouchers are based on a formula that will not keep up with the rate of increase in medical costs. Most seniors don't have the money to make up the difference. So the voucher program would push people quickly into inferior plans that provide less-and-less coverage. These plans will have more services excluded, more restrictions on providers, and higher co-pays.
The proponents of Medicare vouchers used the specter of "Death Panels" earlier to attack Obamacare, but the voucher system is basically a form of death panel, with the insurance companies doing the killing, while making a killing.
A Better Alternative
Medicare and Medicaid can't be made economically sustainable with vouchers and block grants. The systems are not efficient. The U.S. currently spends nearly twice as much for health care overall (as a percent of GDP) compared to other developed countries, and our outcomes are not as good. This is the fundamental problem, and the Medicare quandry can't be solved independently of the overall inefficiency of the health care system.
We can't fix the health care system simply by providing less care, yet that is fundamentally what the block grants for Medicaid and the vouchers for Medicare are designed to do.
Think about it like you're running a business: Imagine that each widget you make costs twice what it costs your competitor, and your customers are saying that they can't afford to buy as many of your widgets. The answer is not to sell half as many widgets. The answer is to get your costs in line. Unfortunately, individual consumers don't have the clout to force health care providers to improve efficiency, and they don't have the ability to shop for health care in countries that provide it more efficiently. (Congress has forbidden customers from buying prescription drugs abroad, for example.)
Consumers are simply not in a position to negotiate the contracts that set the prices. Anyone who thinks that vouchers and block grants will lead to a "market based solution" is living in a free-market fairy tale. These markets are not competitive with respect to consumer decision-making. Health care prices are set not by consumers, but by large scale contracts negotiated among employers, governments, insurance companies, and large health services organizations. Vouchers and block grants don't get us more cost effective health care, they just get us less of the same, old, too-expensive health care that we have now.