The Welfare Reform Model for Medicaid

This column by ACRU General Counsel and Policy Director for the Carleson Center for Public Policy (CCPP) Peter Ferrara and Vice President for Policy at Americans for Prosperity Phil Kerpen was published April 13, 2011 in The Wall Street Journal.

One of the greatest bipartisan policy successes of recent decades was welfare reform, enacted into law by a Republican Congress and signed by President Bill Clinton in 1996. As House Budget Committee Chairman Paul Ryan (R., Wis.) has proposed in his budget, those reforms should now be extended to Medicaid and beyond.

The 1996 reform of the old Aid to Families with Dependent Children (AFDC) returned the share of federal spending on the program to each state in the form of a block grant. The grant was to be used for new welfare programs redesigned by each state based on mandatory work for the able-bodied.

Prior to this reform, federal funding for AFDC was based on a matching formula: The more a particular state spent on the program, the more it got from the federal government. In effect, the federal government was paying the states to spend more.

The key to the 1996 reform was that the new block grants were finite–federal funding did not vary with the amount each state spent. If a state’s new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings. The reformed program was renamed Temporary Assistance to Needy Families (TANF).

The reform was opposed bitterly by the liberal welfare establishment. Then-New York Sen. Daniel Patrick Moynihan, the Urban Institute and others predicted that the reforms would produce a “race to the bottom” among the states and that within a year a million children would be starving,

Of course, that never happened. The reform was wildly successful. The welfare rolls were reduced by two-thirds nationwide, and even more in states that pushed mandatory work most aggressively. As a result, in real dollars total federal and state spending on TANF by 2006 was down 31% from AFDC spending in 1995.

At the same time, because former welfare dependents were put to work, child poverty declined every year. Ron Haskins of the Brookings Institution reports that by 2000 the poverty rate for black children was “the lowest it had ever been,” and because of their renewed work effort, low-income families formerly on welfare saw their total income increase by about 25%.

Block-granting Medicaid, as Mr. Ryan has proposed, would build on that success. Medicaid obligations–made worse by requirements in the stimulus bill and in ObamaCare–are already placing enormous strain on state budgets. As ObamaCare moves forward in the next couple of years, the expansion of Medicaid will break the states. The Congressional Budget Office estimates that by 2021 nearly 100 million Americans will be on Medicaid. Thus, block grants should be enthusiastically supported by governors and state legislators of both political parties.

Medicaid reform would especially benefit the poor. In its current form, Medicaid underpays doctors and hospitals so badly that the poor face major difficulties gaining access to essential health care under the program, and they suffer worse health outcomes as a result. Under block-grant reform, states would be free to provide financing to the poor to purchase private health insurance. This would empower the poor to enjoy the same health insurance as the middle class.

To be sure, the experience with Medicaid block grants won’t be a carbon copy of the experience with AFDC block grants. Many people on Medicaid are in nursing homes, and they won’t be going back to work. But even here, enterprising states have already shown the ability to achieve substantial cost savings by substituting home care for nursing home care, for example.

In addition to applying block grants to Medicaid, Mr. Ryan would extend them to food stamps as well. We believe that this model can be extended to all federal means-tested welfare programs–at least another 184 besides TANF–effectively sending welfare back to the states. According to the Heritage Foundation, those programs are collectively estimated to cost over $10 trillion in government spending between 2009 and 2018. Reform portends huge potential gains for taxpayers and the poor.