How to Wean the Poor from Medicaid
What will welfare reform mean for medical care of the poor? Welfare recipients today get Medicaid, which amounts to government-paid free health care. If they go to work they will sooner or later lose Medicaid, leaving some without health insurance altogether. Thus, any plan to end “welfare as we know it” must deal with the question of health insurance for newly employed former Medicaid beneficiaries.
Medicaid has conditioned its recipients to look upon health care as free. It creates an incentive to overuse and abuse medical services. The challenge, therefore, is to craft a plan that would enable former welfare recipients to develop a sense of personal responsibility in using the health-care system, while ensuring that they have the care they need.
Medical savings accounts fit this bill perfectly. MSAs are a “soft” way to teach the “tough-love” principle that actions have consequences. Former welfare recipients will quickly learn that overuse or abuse of the health-care system will mean fewer dollars left over in their MSAs at the end of the year. They will thus teach themselves that wise use of health-care funds brings a year-end bonus that they can spend on other things. Medical care will not suffer during the learning process.
The MSA would be combined with a high-deductible “catastrophic” health insurance policy. The MSA, therefore, would pay for the deductible on this policy. The individual’s maximum annual out-of-pocket medical expense would be the gap between the MSA amount and the deductible on the insurance. Any unspent MSA funds at the end of the year could be rolled forward to next year. The individual would make his own health-care decisions.
A system of MSAs for former welfare recipients can be created by converting Medicaid to a more general system of low-income health insurance subsidies. The details would vary from state to state, but the general outline of such a plan is simple: Carve out welfare and Medicaid funds into a separate Low Income Health Assistance Fund. Since Medicaid currently offers very generous coverage, those resources will be large. Based upon the number of welfare recipients and working poor in each state, the authorities would determine the level of the deductible on catastrophic insurance they would subsidize. They would also set up a schedule determining contributions to each family’s MSA, phasing down and eventually out as incomes increase. For the lowest earners, the gap between the insurance policy deductible and the MSA amount would be small.
Former welfare recipients finding jobs with employment-based health insurance would be offered the choice of the subsidized MSA or their employer’s insurance. Employers of those choosing the MSA would be required to make a payment to the Low Income Assistance Fund in exchange for being relieved of the responsibility for insuring those employees.
This program must apply to all low-income families, not just former welfare recipients. If it applied only to former welfare recipients, the working poor would have an incentive to cycle into welfare so that cycling out would carry a health-insurance subsidy. Further, a policy that made former welfare recipients better off than equally situated workers who were never on welfare would breed resentment among the latter group.
One drawback to this plan is the implicit marginal tax rate involved with phasing down the MSA contribution with rising income. That is, the reduction in the MSA subsidy as income increases acts as a kind of tax, diminishing the incentive to earn more. While there is no way to avoid this completely (short of subsidizing everyone’s health insurance), care in crafting the phase-out schedule can minimize the disincentive. Using Indiana data, I calculate that the implicit marginal tax rate can be reduced to about 20 percent. This is higher than desirable, but it is not prohibitive. It certainty is better than the present “all or nothing” Medicaid coverage under which welfare recipients often cannot afford to work for fear of losing their health coverage.
MSAs are such a good idea that they may well be inevitable. Why not let the poorest among us be the wave of the future?
Mr. Styring is a senior fellow at the Hudson Institute in Indianapolis, Indiana. Reprinted with permission of the Wall Street Journal, where it first appeared in October 1996.
Posted in: Health Care, News Series