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Why Shouldn't Medicaid Money Treat Poverty Too?

Oren Cass is a senior fellow at the Manhattan Institute.
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Poverty in the U.S. seems intractable, even as safety net spending rises each year. Most policy makers, meanwhile, remain locked in trench warfare over whether to increase spending further or cut it, launch new programs or restrict current ones. But what if states had more flexibility to move federal dollars between antipoverty programs -- not to increase spending or cut it, but to find its most effective use?

The  social safety net provides more than $1 trillion a year for low-income households. Yet no coherent antipoverty strategy allocates the spending. As the various programs have been created, their individual funding streams have pooled resources haphazardly and inefficiently.

Medicaid, in particular, dominates the safety net. From 1975 to 2015, total safety-net spending per American in poverty doubled, in 2015 dollars, from $11,600 to $23,400. Of that increase, 91 percent was the result of higher health-care spending -- nearly all for Medicaid, whose costs rose tenfold to $568 billion. Meanwhile, bipartisan efforts to expand the Earned Income Tax Credit remain stalemated, because Congress can't figure out how to pay for a $6 billion increase in the $60 billion program.

A disproportionate investment in health care wouldn't necessarily be bad policy, if society believes health outcomes should be the safety net’s top priority. But Medicaid delivers poorly on that goal. A randomized controlled trial comparing outcomes for people in Oregon assigned to receive Medicaid or not found “no significant improvements in measured physical health outcomes in the first two years.” (The study did find a 30 percent drop in the rate of depression, and a reduction in financial hardship.)

Critics of the study claim that two years isn't long enough for positive effects to materialize. But a longer-term statistical analysis published earlier this year found no significant correlation between health-care access and life expectancy for low-income households across different geographies. In any case, the standard for policy makers should not be whether Medicaid spending achieves more than doing nothing (a remarkably low bar). It should be whether some Medicaid funds could achieve more if they were spent elsewhere.

Researchers at the Yale School of Public Health attempted to address this question by comparing health outcomes in states that allocated relatively more or less social spending to health care compared with services such as housing and nutrition. They found that states spending a lower share on health care had significantly better health outcomes on a variety of measures, including mental health.

QuickTake Safety Net

If the goal of social spending is defined as not just supporting the poor, but helping them move out of poverty, Medicaid’s dominance of the safety net seems even more misguided. A billion dollars spent almost anywhere -- on housing, transportation, child care, education and training, apprenticeships, etc. -- could better facilitate upward mobility.

It makes little sense to replace one mandatory allocation with another equally inflexible one. Nor would it be smart to impose block grants that slow spending growth for ineffective programs; that would save money but do nothing to help the poor. Rather, states should be given the flexibility to move Medicaid dollars toward other antipoverty strategies.

One potential starting point: Let each state shift some Medicaid spending (and the matching federal dollars that come with it) into an expansion of its Earned Income Tax Credit to subsidize low-wage employment, or into clearing its housing-voucher waitlist. If successful, this approach could expand to encompass pools of resources trapped inefficiently in other antipoverty programs beyond Medicaid. States could even create safety net programs of their own to substitute for ineffective federal ones.

States that are happy with the status quo in Medicaid, and with their safety nets generally, could stand pat. But those that want to experiment with other strategies to help low-income households escape poverty should be allowed to try. As they learned what works and allow budgets to adjust accordingly, their dollars could achieve far more. Slowly, our badly tangled safety net might begin to reach further.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Oren Cass at ocass@manhattan-institute.org

To contact the editor responsible for this story:
Christopher Flavelle at cflavelle@bloomberg.net