Photographer: Andrew Harrer/Bloomberg

The Sneaky Way to Kill a Government Program

Block grants can drain funding until programs die by attrition. That's what happened to welfare.

When Bill Clinton promised to “end welfare as we know it,” he used a block grant. Republicans in the Senate now want use the same approach to limit funding for Medicaid and Obamacare. The difference: While Clinton explicitly wanted fewer people on welfare, Republicans say more people will get health coverage. 

Lawmakers’ latest attempt to roll back federal health care programs relies on an approach similar to the one Clinton and a GOP-controlled Congress used more than 20 years ago to dismantle the federal system of cash aid to poor families. The current bill, known as Graham-Cassidy for two of its sponsors, would replace open-ended federal funding for states’ Medicaid and Obamacare programs with limited pools of money sent to states, called block grants or per-capita caps.

“The block grant language is really a way to cut programs without accepting responsibility for what those cuts mean,” said LaDonna Pavetti, vice president for family income-support policy at the Center for Budget and Policy Priorities, a left-leaning policy group. “It allows you to make cuts to programs without calling them a cut, and without having to be specific about who will be harmed.”

There’s an important difference between today’s effort and the welfare-reform bill Clinton signed into law in 1996. Back then, politicians intended to reduce the number of people getting welfare benefits, whereas the current health bill’s backers have promised—contrary to all evidence and careful analysis—that their plan will expand coverage. “There’ll be more people covered under the Graham-Cassidy-Heller-Johnson amendment than are under status quo,” Senator Bill Cassidy (R-La.) said on “Morning Joe” Wednesday.

Seventy-two million Americans, including children, people with disabilities and low-income adults, are insured by Medicaid in an average month. An additional 12 million have bought private health plans through marketplaces created by the Affordable Care Act, also known as Obamacare. Federal spending on Medicaid was about $333 billion in 2015 (PDF), and the cost of Obamacare’s tax credits and other subsidies is expected to be $45 billion (PDF) this year.

The Graham-Cassidy bill, according to Fitch Ratings, would amount to a “fundamental restructuring” of the 52-year-old Medicaid program. It would cut federal funding to states by $215 billion through 2026, according to a new analysis by consulting firm Avalere Health, funded by the left-leaning Center for American Progress. Another analysis from the Kaiser Family Foundation estimates that it would cut $160 billion out of federal health programs from 2020 to 2026. “Most states would receive less funding under the block grant than under current law,” analysts from Manatt Health wrote (PDF).

Federal Medicaid funding typically makes up 20 percent of states’ total budgets. Turning it into a block grant would pit state health programs against other entities that rely on state money—school districts, local governments, and state universities—for funds, according to the Fitch analysis. While current law lets federal health-care funding grow in tandem with overall demand for Medicaid programs, “block grants would remain fixed, further exposing states to additional risk and requiring them to make potentially difficult policy choices,” Fitch analysts wrote.

Because Medicaid is such a big chunk of state spending, the bill’s hit to budgets would be comparable to a recession’s, said Eric Kim, director at Fitch Ratings. The difference, he said: “Those are one-time events. They happen, and the economy gradually recovers, and revenues are restored.” Not so with Graham-Cassidy.

In principle, block grants let states use federal money to design more flexible programs; that’s what Republicans say their bill will do. But the lesson of welfare reform is that they can also drain funding for those programs entirely, letting them wither and die by attrition.

Graham-Cassidy’s block grants aren’t just smaller than the Obamacare subsidies they would replace. They also would vanish entirely after 10 years, likely setting up a standoff in Congress over whether to renew funding, end the program or leave states to shoulder billions in health-care costs on their own.

“This is one way to kill programs,” said Lyle Scruggs, a political scientist at the University of Connecticut. Block grants and per-capita caps let politicians insist that they haven’t cut the nominal level of federal funding, he said, even as they shift the political debate from addressing the needs of the public to “ignoring them in favor of a budget-cutting imperative.” 

The federal government has been helping states make payments to poor families since 1935; the law that created Social Security also provided a benefit for poor families. In 1995, more than 17 million people were getting some payment from the cash-welfare program, according to the Congressional Research Service (PDF). By 2012, fewer than 5.8 million were—less than a third as many.

Poverty didn’t drop by two-thirds in that time. After all, about the same share of children—21 percent in 1995, 22 percent in 2012—was living in poverty, according to census data. (Some measures of child poverty declined.) What changed was the cash-welfare program, turned into a block grant by the law Clinton signed in 1996.

That led to fewer people getting the benefit. Pavetti, of the Center for Budget and Policy Priorities, said it doesn’t mean the need has diminished. Instead, she said, “there are more people who have lost that part of the safety net.”

Since 1996, federal funding for the cash-welfare program has remained flat at $16.5 billion per year. Because the law didn’t link the benefit to inflation, the real value of that money has fallen by a third since 1996. States have more flexibility on how to spend it; much of it now goes to childcare assistance or other programs, rather than cash transfers to families.

It’s no accident that people left the welfare rolls after the 1996 law took effect; that was the point. A House committee report at the time noted that block grants created “an incentive to help recipients leave welfare because, unlike current law, states do not get more money for having more recipients on the welfare rolls,” according to the Congressional Research Service (PDF).

In other words, the very fact that many people got cash assistance was seen as the problem—Clinton said it fostered a “cycle of dependence”—and funding caps, along with work incentives and other changes, as its solution.

One thing the 1996 welfare reforms deliberately didn’t do was create block grants or otherwise cap federal funding for Medicaid, which since its creation in 1965 had been tied to welfare assistance. “Health coverage was seen as different—something that ought to be available to people even if they were no longer (or never were) cash assistance recipients,” two former Medicaid officials wrote in 2015.

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