Medicaid, the joint federal-state program that provides health care insurance to some 34 million low-income Americans, faces the most radical changes in its thirty-year history. Under congressional proposals, federal Medicaid payments would be reduced dramatically compared to current law, many low-income Americans now guaranteed coverage regardless of where they live would no longer be entitled to Medicaid, and states would assume far greater responsibility for deciding who receives coverage and who does not. The federal role would be limited to providing Medicaid block grants -- that is, a fixed amount would be given to each state without a requirement for matching funds or rules about how the funds are to be allocated; the formula to be used to determine the amount each state will receive has yet to be decided.

Under current law, federal Medicaid spending is projected to grow from $89 billion in 1995 to $178 billion in 2002 -- about 10 percent a year. The main reasons for the anticipated growth are 1) rapid inflation throughout the health care system, which far exceeds the general inflation rate; 2) especially big cost increases in nursing home care and services for the disabled, which Medicaid covers; and 3) rising numbers of children who will become eligible for coverage.

From 1995 to 2002, total spending over and above current annual expenditures would be a cumulative $332 billion. Congress has agreed to reduce that projected growth in the program by $163 billion over the next seven years.^[1] Reductions in federal payments relative to current law would be 18 percent per year on average over the seven-year period. Because the size of the cuts increases over time, in 2002 federal outlays would be more than 28 percent less than they would be under current law.

Moreover, many federal requirements governing how the money is spent would be eliminated. The federal government's role would be limited mainly to delivering a lump sum payment (known as a block grant) to each state, which would then determine how the Medicaid funds would be spent. Because Medicaid would cease to be an entitlement, many impoverished children, pregnant women, elderly Americans confined to nursing homes, and disabled people would lose health care coverage, reversing more than fifteen years of federal efforts to extend Medicaid coverage to more of these people. In many respects, those changes succeeded in expanding access to medical services for millions of low-income Americans, especially children. The enormous decline in U.S. infant mortality since the enactment of Medicaid, which now finances a third of all baby deliveries,^[2] is largely attributable to the program.

Certainly, embracing more beneficiaries has been costly. Covering greater numbers of people has required more money, and federal and state Medicaid outlays have soared in recent years. One way the congressional plan would likely reduce the program's rate of growth is by removing some of those people from Medicaid eligibility, leaving them uninsured. In addition, Medicaid's already low payment rates to doctors, hospitals, and managed care providers such as health maintenance organizations would be cut further. One consequence of payment reductions would be the risk that doctors would be reluctant to accept Medicaid recipients as patients.

Inflation throughout the entire private and public health care system -- not just Medicaid -- has also far outpaced price increases in the rest of the economy. The main force driving rampant health care inflation is the proliferation of expensive new medical technology. Curtailing federal spending on Medicaid and Medicare is unlikely to dampen demand for that technology. Instead, doctors, hospitals, and other providers are likely to shift those costs from the government to the private sector as they have in the past. The public will still have to pay in the end.

This pamphlet, the third in the Twentieth Century Fund's "The Basics" series, presents the best available facts, figures, and arguments about what's right with Medicaid, what's wrong with Medicaid, and the potential risks associated with the congressional reform proposals. The intent is to enable those who care about Medicaid and good government to assess for themselves the successes and failures of the program and the best course for reforming health care for poor Americans.