Sunday, March 03, 2013

What does Medicaid mean to governors?

Published in The Tennessean, Sunday, March 3, 2013 and the full version at
FORBES with archives.

In the coming weeks, several state governors will attempt to increase low-income citizens’ access to medical services by expanding a state-federal program that, on average, pays doctors 40 percent less than private insurers pay. How wise is this?

When you pay less, eventually you’ll discover that you are getting less. In the case of Medicaid programs, we found that out pretty quickly. Medicaid has created a class of medical consumers that do not have either the incentive or ability to consider the cost of the services they consume. As with any third-party payment system, which gives the illusion of someone else paying, patients tend to demand far more medical services than they would if they believed they could spend any savings on something else.

In this regard, Medicaid works less well than food stamps. Whatever the flaws of the food stamp program, at least it does not require grocers to accept 40 percent less for food-stamp payments than they would from other customers. But that is exactly what Medicaid does to doctors and, as a result, many doctors are limiting their acceptance of Medicaid patients. Some doctors refuse to see Medicaid patients at all.

The current drive to expand Medicaid is really just an attempt to correct the problems created by the existing Medicaid and all the other government programs and regulations that have similar effects. During the 2010 health care reform debate that resulted in the utopian Affordable Care Act, opponents often claimed that this would result in the nationalization of 16 percent of the economy. But the difference from the status quo was not really that great.

Governments have long accounted for more than half of all medical expenditures, and health care is one of the most heavily regulated industries in America. The supply and qualification of doctors is restricted by governmentally enforced licensing requirements, not by a free market. Rather than seeing health and medical care as a profit center – a center of value creation, characterized by innovation and free competition to provide the best service – our governments have tended to treat medical services as a cost center.

Do our governors really believe that they can reduce the cost of medical care by decreeing lower prices? They have never succeeded in doing so and never will. Whatever advances we have experienced in medical care have been despite the misallocations caused by government interference. Had we regulated the electronics industry as tightly as the medical industry, then much of the diagnostic and informatic equipment that we now take for granted would not have been invented here. Even government-directed medical research money is redirected from some other research or productive use.

When we recognize these alternatives, we perceive a much bigger cost. The government might pay Medicaid doctors a lower price, but Medicaid patients have trouble finding doctors, wait longer for appointments, and have poorer medical outcomes than they would in a system that is more respectful of social realities.

Few people would begrudge giving assistance to the poor through charity or an efficient government program. But Medicaid is neither of these. We can do better.

Just as Medicaid creates counterproductive incentives for doctors and even for hospital administrators, the existence of the program and the possibility of its expansion create perverse incentives for many state governors.

For a state governor, the ultimate third-party payer is the federal government. As long as a significant number of voters believe that the federal government will always benevolently subsidize their state, they will be unhappy with a governor that turns down what they naively believe to be free money.

The decision rests on the governor’s integrity.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: