Manhattan Institute senior fellow Chris Pope joins Allison Schrager to discuss health care in the United States, the future of entitlement spending, and ways to increase competition and coverage.

Audio Transcript

Allison Schrager: Welcome to Risk Talking, a podcast about economics. I'm your host, Allison Schrager, and today I'll be joined by my colleague Chris Pope. He's a senior fellow at the Manhattan Institute. Chris researches healthcare policy and the structure of entitlements in the U.S. How timely! He is also a political scientist whose commentary on the American political scene is consistently enlightening. Chris, thank you very much for joining.

Chris Pope: It's great to speak with you.

Allison Schrager: I think a lot of people don't really have a good sense of the American healthcare system. I mean, we complain a lot about it, but I don't think we really fully understand it. You've written that it's distinguished by the variety of different systems that it employs. We don't have a healthcare system. We have multiple of them, and each one has its own cost structures and designs. There's employer-sponsored insurance, which covers half the population. There's Medicare that covers 14 percent, typically people who are retired or have a disability. There's Medicaid, which covers 21 percent of the population, particularly low-income people.

And then there's the individual insurance market that is really part of the Affordable Care Act, although that seems to be quite a bit smaller. As you've pointed out, these various systems each resemble different systems in other countries, but the big problem is that these systems are not aligned and people fall through the cracks. I mean, how many people are falling through the cracks? Would we be better with a uniform system?

Chris Pope: Well, I mean, those are two good and two pretty different questions. I think there's almost two types of ways in which you can fall through a crack. There's almost the benign way in which you fall through the crack, but you're healthy. You don't need hospital care. You don't need physician care. You're in the cracks, but it doesn't really affect you day-to-day. You maybe have a minor incident and pay for it out of pocket, and it's not such a big deal. Similarly, there are people who are eligible for some of our entitlements, say people who are eligible for Medicaid, but they're not enrolled.

When they go to the hospital, the hospital will immediately enroll them and bill the Medicaid program. We have a fair amount of people who are technically uninsured, but in practice, it's not a problem. But then we have obviously a big category, and this is certainly not a trivial category, millions of people who are uninsured, who really have fallen between the gaps of employer-sponsored insurance, Medicare, Medicaid, other entitlements, and who do find themselves potentially facing big costs, who if they go to a hospital will get treated and then billed.

Every hospital really has to have a charity care policy where they have a set of people that they will treat for free, and then a slightly less poor set of people that they will treat at reduced rates. But these policies are very ambiguous. We have all these overlapping safety nets, shall we say. There are these partial guarantees that slightly overlap with each other, but it certainly is not difficult to find cases in which people fall between the gaps between the safety nets and end up being charged enormous amounts of money or end up not being able to afford the care that they need.

Allison Schrager: How would you fall through the cracks? Would it be if you lost your employer-sponsored health insurance and you don't qualify for a subsidy for Obamacare or you're not poor enough for Medicaid.

Chris Pope: I think about half of the people who fall through the gaps are people who are in the country illegally, for instance, or unauthorized immigrants who don't necessarily have employer-sponsored insurance. Typically, people without employer-sponsored insurance have lower-wage jobs that don't come with benefits. Now, Medicaid will provide coverage to some of them. But obviously if you're not a permanent resident, for instance, you won't be entitled to that. And then also it might be the case that you have a job that doesn't have employer-sponsored insurance, but you're above the income cutoff for Medicaid, and that will be another way that you could fall through a gap.

And then you find yourself on the individual market, essentially having to pay an enormous amount of money for insurance coverage that might not be worth it to you at that price. And then obviously if you get seriously ill or you need care in a hospital and supposed that suddenly very much worth it—and there are certainly many cases in which people will find themselves uninsured in that situation—then they could potentially face very high bills.

Allison Schrager: But wasn't Obamacare supposed to help with that by, one, creating a better individual market, and two, offering subsidies for people up to a fairly high income level to pay for it?

Chris Pope: I think there was the sales pitch of Obamacare and then there was the reality of Obamacare. The sales pitch of Obamacare certainly was that it was going to fix that problem. The reality of Obamacare is that it took money from some people on the individual market and gave money to other people on the individual market. The subsidies were certainly initially relatively minor. The problem that Obamacare tried to fix was the problem with preexisting conditions.

What it tried to do is it said insurers on the individual market have to ensure everybody and they have to ensure everybody at the same price regardless of their preexisting condition, which obviously made it certainly very good value if you had a preexisting condition, but meant that the cost of insurance skyrocketed if you were buying insurance before you got sick, for instance. That led millions of people to drop out of the market, caused premiums to skyrocket, and made things very awkward for people who were purchasing insurance as individuals for a very different reason. Now, the Affordable Care Act did provide subsidies.

Initially, those were fairly limited. I mean, if you were earning maybe under twice the federal poverty level, so if you were an individual earning maybe less than $30,000, those would be pretty generous subsidies. But above that level, the subsidies weren't very substantial. The Biden administration and the last Congress increased those subsidies, but it's really kind of just throwing money at a system without any real accountability. It is not clear how sustainable those subsidies will be in the long run, because that patch of subsidies is far out of whack with any other section of the American healthcare system.

That's a bit of a Band-Aid solution rather than a real solution. We have these parallel markets that still fit pretty poorly together. They're still far from seamless. If we're thinking about how to reform and deal with the fundamental courses of the problems of the healthcare system rather than just patch it with Band-Aids, then that's the core issue that we really need to deal with, or certainly one of the core ones.

Allison Schrager: How are the subsidies out of whack?

Chris Pope: There is an implicit subsidy for employer-sponsored insurance in terms of the exemption from taxes, and then there are subsidies for Medicaid, implicitly the amount of money that the federal government is spending, and then there are subsidies for the individual market. Originally, the individual market subsidy was pretty much in line with the degree of assistance individuals would've gotten at different income levels through Medicaid or through employer-sponsored insurance. Really to plug the whole and the pain that had arisen as a result of Obamacare's regulatory changes, the Biden administration just turned on the flood of money for the individual market.

The subsidies are much greater per person in the individual market than they are for any other kind of health insurance coverage at the moment, which is sustainable insofar as the individual market is just about 9 percent of the population. It's a fairly small part of the population. But if people will start leaving all the other markets to get access to the subsidy, if the 90 percent of people who are in other coverage arrangements move in, then the fiscal cost of that would become immediately unsustainable.

Allison Schrager: Was this a permanent change?

Chris Pope: No, it isn't. It's supposed to phase out at the end of I think either 2024 or 2025. The next Congress will have to revisit this, which will be a big political football, certainly.

Allison Schrager: It seems like a lot's coming up in 2025. All these messy overlapping systems, is that why the U.S. spends so much money on healthcare compared to other countries?

Chris Pope: Well, I think the fundamental reason why the U.S. spends more than other countries is just that the United States is a much richer country than other countries, so it can afford to tolerate these inefficiencies in a way that a poorer country certainly can’t. I think that's the core reason, and that all the inefficiencies are almost a symptom of America's greater affluence in some sense. If you look at every other developed country even, you have extensive debates about rationing hospital equipment, limiting beds, rationing and allocating physicians. Everything is very much in the mind of austerity and trying to spread out a scarce set of resources.

We barely get into those questions that the other countries deal with routinely just because we have at least thus far been able to say, "Well, there's a gap in coverage here. Let's just provide more money and fill the gap." And that's traditionally been how we've dealt with the problems. We've been wealthy enough to deal with problems that way, although it's obviously a very expensive way to deal with problems, but it does certainly avoid rationing of access to care, which is something that is very unpopular and the American people are averse to.

Allison Schrager: I mean, you're British and we're hearing a lot right now about problems with the NHS, like horror stories of people being left on the sidewalk for 24 hours at a time because an ambulance can't get there, and horrible things like that. We always talk about socialized healthcare in Europe. I mean, would we be better off moving to a system like that?

Chris Pope: I don't think Britain especially got into it because Britain thought, okay, what we need to do is have the government buy all the healthcare in the country and ration and allocate it, and that this will improve welfare. What originally happened was the second World War. And in a wartime situation, private insurance no longer worked. If you had total war, if you had the blitz of London and Britain's major cities, half of the housing stock in Britain, had been destroyed—they wanted to reserve medical professionals for military purposes. They wanted to allocate hospital resources for military objectives.

The government during the war basically took over the entire healthcare system for military and civil-defense purposes. What essentially happened is that that remained after the war had finished. They didn't put any new resources into healthcare in total. In fact, the amount of resources that went in Britain's healthcare system declined following World War II relative to prior to World War II. They had at the same time enormous austerity. It was really rationing from the outset, very strict controls on the development of technology. No new hospitals were built in Britain between the 1930s and 1960s.

Britain has always had a healthcare system that has rationed access to care, rationed the development and deployment of medical technology, has for many, many decades kept a lid on increased access to care, especially expensive surgical services. Nothing has really changed. What has changed, obviously, is that the population is aging in Britain as it is everywhere, and also the capacities of modern medicine have grown enormously. There are so much more that in theory people could be provided with and that actually really works, the procedures, surgical technology, devices, drugs that are really highly effective, and it gets harder and harder to deny access to things that are really very effective.

Whereas in the 1950s, you might have said, for a patient that has a heart attack, well, we can prescribe bedrest and painkillers and that won't be very expensive, but there's not much else you actually can do for these people. You could practically provide a level of care that wasn't too far below the standard of what you would've liked to have done. These days with the enormous development of medical technology, that really is no longer the case. Budgets are so much more strained relative to the demand for services that are out there.

Allison Schrager: I mean, I guess it sounds like we're facing that to some extent as well. I mean, healthcare is just getting so much more expensive everywhere and I guess that's causing problems. In some ways, do you think then our sort of messy overlapping system is better because it allows for more flexibility as the nature of healthcare changes?

Chris Pope: I think what's interesting is if you look across countries, every country pretty much spends eight to 10 percent of GDP in public spending on healthcare. We do too. That's pretty much what Medicare or Medicaid and a few other things cost combined. But the difference between Britain spending eight to 10 percent of GDP on public spending on healthcare and us doing so is that we concentrate that eight to 10 percent on Medicare and Medicaid, basically people who can't provide for themselves, but we also have access to the great amount of private spending on healthcare through employer-sponsored insurance mostly, which provides all these additional funds and really accommodates the growth of demand.

If you have the middle class people with good jobs, people who can provide for themselves, they have a very large and growing demand for healthcare. If you have people with near six-figure salaries, they want to spend more on healthcare. They want to buy access to better medical technologies and better medical procedures, better outcomes. It makes sense to accommodate this growth of demand rather than to basically say everyone should draw on this limited part of public funds, which obviously is a part of public funds. It has to compete with every other priority that the government might have, such as education or defense or pensions or people's tax aversion, everything else that constrains budgets.

Allison Schrager: Is there any country's healthcare system that you look at and think the U.S. would do better if they had, or that you think just works better?

Chris Pope: First of all, as I said earlier, the United States I think in terms of systems already has a wide variety of systems existing side by side. We certainly don't fall short in terms of being willing to experiment with different approaches of public or private payers. What I think we do well is, we allow more resources to be deployed. Ultimately, you get what you pay for pretty much under every system, and the fact that we allow a growth of private demand and make room for a growth of private demand and a responsiveness of private demand is fundamentally probably the greatest strength of our system.

I think our greatest weakness, as we touched on at the outset, is really the fragmentation in the gaps between these systems. It's not a new problem, and there we certainly can learn from other countries because other countries actually had similar problems. Germany had a similarly fragmented healthcare system. The Netherlands had a similarly fragmented, again, employer-oriented healthcare system. These countries worked to reform the healthcare systems really to bridge the gaps between the individual market and employer-sponsored insurance and really to give individuals more control of their insurance.

Instead of taking the comprehensive look and saying, "Should we copy any particular country wholesale," I think the useful question is, is there a country that faced similar problems and similar challenges to us in the past and were they able to fix that? I think looking at Holland and Germany, you can kind of say yes, these countries actually did have a very similar problem in terms of gaps between employer-sponsored plans and other arrangements. And by giving individuals more control over insurance, they were able to close those gaps.

Allison Schrager: What did they do exactly?

Chris Pope: Germany, like us—well, in some ways like us—had very much employer-controlled health insurance funds. They gave individuals more power basically to opt for their own coverage and basically to control the choice of plan. So that instead of being allocated to a plan, it could follow you as an individual and that it would be your plan. The Netherlands did this as well. The money would follow the individual. We've, I think, started to move in that direction.

The Trump administration issued a very low-profile, I would say, regulation called the Individual Coverage HRA rule, which basically allows an employer to put pre-tax funds in a tax-exempt account that an individual can then use to buy individual coverage from the individual market. And then that person can keep that insurance plan as they go from job to job or become self-employed for a little period of time and without having to move from one type of insurance to a very, very different type of insurance.

Allison Schrager: By individual plan, are these the Obamacare exchange of plans?

Chris Pope: They can be Obamacare plans, but not exclusively so, although at the moment that really is the bulk of the market, certainly, and there's very limited access to non-Obamacare plans. But in theory, it's not necessarily limited to Obamacare plans.

Allison Schrager: Because I was briefly on an Obamacare plan and the coverage was terrible. No doctor I had would take the plan. Has that been resolved? Are the individual plans on the exchanges equivalent to what you'd get from an employer plan now?

Chris Pope: Yeah, I think that's really the big obstacle now to this strategy, is that our individual market through Obamacare is very badly broken still. Really as a cause of that regulatory change to the Affordable Care Act introduced requiring insurance to be priced without regard to whether you buy it after you get sick or before you get sick. It basically makes the insurers unable to cover their costs on every particular enrollee.

It means that they're essentially hostage to having some enrollees that are potentially signing up when they're already seriously ill and really having to constrain those costs in an incredibly limited way instead of saying taking the long view, which is we'll get people to sign up before they get sick and they're going to have a balanced risk over the course of their lives. Some years they'll have higher risk, some years they'll have lower risk, and it'll even out over time. Because of the Affordable Care Act's regulatory change, that was no longer possible. In terms of fixing the individual market, that really is the core regulatory issue that you need to address.

If you did that, then the individual market would go back to being what it was, which was a fairly affordably priced, certainly a competitively priced source of insurance with good networks rather than the Obamacare exchange, which is incredibly inflated premiums, very high deductibles, very threadbare networks, and basically the bare minimum that a regulator would allow a plan to get away with.

Allison Schrager: How did Germany do it in a way that worked?

Chris Pope: Well, Germany's done it. Germany basically has a rule that says that an insurer is able to underwrite you, is able to adjust the premium for your risk on a one-time basis. When you first sign up, it can basically set a premium according to your lifetime medical risk, but that insurer has to keep enrolling you for the rest of your life so long as you want to sign up without underwriting you again. If you sign up for the first time and you're 25-year old, most 25-year-olds are healthy. By the time you get to your forties, your fifties, your sixties, you move around so long as you're healthy.

And then once you get sick, that insurer can't increase your premium subsequently. That really deals with the adverse selection problem in a way that doesn't cripple competition or doesn't create problems of adverse selection in terms of creating a stagnant pool of people who are very high risk in the short run. It basically allows you to deal with risk longitudinally rather than just cross-sectionally as it were.

Allison Schrager: Yeah, it's like buying an annuity when you're young. Ah, that's clever. I don't know why we don't do that. That seems so simple.

Chris Pope: It kind of comes back to the fact that employer-sponsored insurance is the coverage of first resort in the United States. Most people, if they're offered employer-sponsored insurance, they'll just take it and they'll drop out of the individual market. They might rarely interact with the individual market, and the individual market is something they really don't think about except for when they're between jobs. And if they're in between jobs at a time that they have a major preexisting condition, that's really bad news. This is why it's important, I think, to break down the barriers between the individual market and employer-sponsored insurance.

Because while people are well employed with a good source of insurance, if they're buying plans from the individual market with money from their employers, they will already have individual market coverage before they develop a preexisting condition, before they develop a chronic illness. And then even if their employment situation changes, their plan can remain the same. They won't be denied access to coverage by showing up for the first time.

Allison Schrager: I mean, I guess that's for a later day. In the meantime, Medicare and Medicaid are being discussed with the budget issues. You recently wrote for City Journal that the secret to Medicare reform is that both parties are quietly eager to reduce the program's spending. Is Medicare in trouble? Is it about to eat into our budget?

Chris Pope: Well, Medicare is, in just absolute dollar amounts, like the largest, fastest-growing program certainly over the medium term in terms of federal dollars. In 2020, it was about $800 billion, and within a decade that will double. As a share of GDP, Medicare is growing from about 3 percent going up towards 5 percent, which is very, very large. It combines with the fact that revenues are not growing to be a major cause of increases in the national debt and then in interest rates, and then that compounds pretty steeply after a couple of years. If you think about the debt over a medium-term horizon, Medicare is really the main factor that's driving this.

If you could basically put Medicare on a flat growth path, you would largely not have to tinker that much with many other programs. Social security has a very small increase in its cost relative to Medicare. Medicaid has an increase, but that's very small. And then discretionary spending by the defense or non-defense spending, that's fairly flat. It's really Medicare that's the big threat to the budget over the medium term.

Allison Schrager: Is that because people are getting older, or healthcare is getting more expensive?

Chris Pope: I think I would break it out into three factors. A small part of it is because more people are reaching the age of 65 and more of them are reaching the age of 80, where people really use an enormous amount of healthcare. A very small part of it actually is prices of healthcare going up. Medicare has price controls for most of its services. Those fees are fixed in statute. The big compounding growth of costs over the medium term is the assumption that Medicare will just pay for any new medical service that's developed no matter what its cost effectiveness or lack thereof.

It will pay for as many of these services as physicians basically commission. This is particularly obvious with diagnostic tests. There's almost an unlimited amount of diagnostic tests that you can run for any medical condition. It tends to be that when new ones are developed, they don't displace an existing test, they'll just commission a new scan or a new blood test, or whatever is invented, and the Medicare program will get billed for these additional tests. That's true not just of diagnostics, but it's true of surgical procedures. It's true of drugs.

The more and more the capacities of medicine increase, the greater the costs escalate, and that really increases in a compounding way over time. And that really is the greater source of Medicare's cost increase over the medium to long term.

Allison Schrager: Is any other country so generous with retirees’ healthcare?

Chris Pope: No, no. I mean, every other country that has a publicly funded healthcare system for retirees, which is most of them—not Germany. Germany relies on privately funded insurance for most of its retirees. But most countries that have publicly funded healthcare for their retirees do ultimately use many of the same rationing devices that they do for the rest of the population. They will limit the amount of beds in hospitals. They will limit the amount of surgical procedures. They will provide incentives to physicians.

They will limit the amount of physicians and the amount of patients that can be seen quite deliberately as a way of constraining expenditures. We within the Medicare program don't face enormous constraints, which in many ways is obviously a very good thing. You don't want patients who need care not being able to get it. But from a purely fiscal point of view, it also means that there are many medical services that are low value, not particularly useful, but are very expensive and being done even though it's not particularly of great value to taxpayers.

Allison Schrager: When we were being sold on Obamacare, we were told a lot about waste and inefficiencies. I feel like whether we're being sold that, if we got rid of just the waste and inefficiency, we could still have the same outcomes for less money and it would be sustainable. Is that true? I mean, you're describing a lot of waste in Medicare. Assuming we got all the incentives aligned, and no one did anything that was wasteful—I don't know if that's realistic, but at least if we did better at it, would that be enough to put us on a sustainable path? Or do we have to actually face the fact that getting this sustainable is actually going to involve some level of rationing?

Chris Pope: I think the essence of it is really fundamentally about the growth of technology. It's easy to fall in a discussion of rationing what we already have. But really, to make Medicare's cost sustainable, you largely just need to slow the addition of new technologies and procedures and increases of volumes to the program. We need to be a little more discerning about what the program is adding to its existing commitments. If it was just the existing price commitments and aging of the population, the cost of the Medicare program would actually be going down slightly as a share of GDP. It's really the open-ended commitment to pay for additional technology that is truly expensive.

Because Medicare is committed to paying for technology without any assessment of its value or cost effectiveness, it means that new technologies are developed with that in mind that, even if it's a technology that works only in 10 percent of cases, if you can get a reimbursement for it, then that makes it potentially a worthwhile technological development from an investment point of view. Are there policy levers that you can pull on?

I think the main one really is trying to expand Medicare Advantage, which is a Medicare arrangement where the government basically takes the amount of money that Medicare would've spent delivering services in a fairly indiscriminate way, paying for services regardless of value, cost, or usefulness to patients, and basically gives the patient the money as a voucher to buy a private health insurance plan, a managed-care plan.

That really creates an incentive to manage the volumes to only provide services that are cost-effective, to basically spread the investment of funds across the set of medical services so you get a higher return on investment, and really to spend more on preventive services and less on ineffective medical services, when a patient is already seriously ill, that are unlikely to change outcomes much. I think by giving people the choice to opt into these managed care plans, you're able to get a much greater value. I think the key to it is ultimately that people will take low-value medical services over the absence of low-value medical services.

But if it's ultimately up to them to spend the money and to decide what kind of insurance plan they're going to get with what kind of services covered and what kind of barriers to various services that are maybe less cost effective, people will actually then internalize the trade-offs. People will then think, "Oh, well, this service actually doesn't matter that much to me. I don't mind having a limited network or a prior-authorization requirement or some claims reviews." They're going to basically weed out the less effective services, because I'm ultimately getting a better benefit package or a low premium.

I think this is the way that you ultimately slow the compounding growth and indiscriminate growth of services, and you steer the program onto a track which is more cost conscious, because individual patients are given the reward for making cost-conscious decisions when they're figuring out what kind of plan they're getting.

Allison Schrager: Would it be the individual, or would it be the insurance company making these decisions?

Chris Pope: Well, the individual will get to pick the insurance company. The insurance company is going to vary. Some insurers have closed networks and are very cost conscious. You might think of Kaiser Permanente, for instance, which is a very tight managed-care network. And then you have some insurers that operate a pretty open-ended fee-for-service system. Those are more expensive.

You get some individuals for whom a very tightly managed care plan seems more appropriate, and then you get some people who prefer the ability to go out of network at the same cost, prefer the ability to have very few constraints on their ability to go straight to a specialist rather than going to a primary-care physician first. I think what needs to be done is really reorienting the program, and for a large part this is already happening, into a program where people are rewarded or essentially allowed to enjoy the savings of going to a more cost conscious insurance plan where cost actually is a consideration when all services are paid for.

Allison Schrager: I mean, do you think this will be enough? I mean that because you also wrote something else in City Journal that struck me. You said since World War II, Congress has never been able to raise more than 20 percent of GDP in revenue without provoking a tax revolt. But you also point out that we're on track for our spending to be 30 percent of GDP. You also say people are not willing to tolerate rationing. I mean, are these efficient ways of reforming Medicare? I assume you mean Part B or Part D. Do you think that's going to be enough to avert 30 percent of GDP?

Chris Pope: Yeah, because I think we've seen projections that we've been going to 30 percent of GDP for many, many years and Congress keeps intervening. Congress actually does keep cutting Medicare. Very few politicians like to admit or talk too much about how they're cutting Medicare, but they've been doing it constantly for decades.

Allison Schrager: How are they cutting it? I mean, what are they cutting?

Chris Pope: Probably the biggest change that was made was in 1982, when fees for hospitals were capped. A fee schedule was introduced. Before then, hospitals could claim reimbursement for whatever costs they incurred delivering care. That was done for physicians about a decade later. Then throughout the 1990s, physician and hospital fee schedules were tightened. Penalties were added for increased volumes, which again served to reduce fees. Cost controls were introduced on the prescription drugs. Again, in 1997, fees for post-acute care were capped. Even this past year, the Democrats talked about how they were reducing drug costs for Medicare beneficiaries.

But ultimately, what they were doing is reducing the amount of drugs that the Medicare program was promising to buy and that was where the savings were coming from. Congress is constantly intervening to reduce the cost of the Medicare program, has done so for basically constantly for the past 40 years or so. If you look at the cost trend of the Medicare program, it always points upwards in the initial years of the program. In the near future, if nothing is done, the cost trend for Medicare is always pointing upwards. But over the past 20 years especially, Medicare spending as a share of the economy has not really increased that much.

In some years it's gone down even. This is because Congress is constantly intervening to squeeze the program, because ultimately Congress doesn't want Medicare to eat up the federal budget. Members of Congress want to spend money on other things, or they want tax cuts. Republicans often will compromise with Democrats, who want to spend money on other things. This over the past 30 or 40 years has very much slowed the growth of Medicare. I think it's a fair assumption that that will continue to be the key dynamic here.

Politicians like to blame the other party for cutting Medicare, but also the amount of money that's committed to Medicare in theory is so huge that they also really want the amount of money as well, they want to use it for other things.

Allison Schrager: You also have a plan to reform Medicaid. You've argued that the federal government should take responsibility rather than just have this block rents to the states. Can you explain why that would be a good idea?

Chris Pope: What happens is the federal government provides between $1 and $3 for every dollar that states spend on the program for eligible beneficiaries. Take New York, for example. If the state spends $10 billion, the federal government will provide $10 billion. If the state spends $20 billion, the federal government will provide $20 billion. That has an inherent inflationary dynamic to it. It really rewards the state for spending. This is really obvious when you think about other spending priorities. When the state spends money on police or education, it doesn't get anything like that return on investment from the federal government.

This is a really great incentive for states to spend money on Medicaid relative to anything else that states could spend money on. Over time, this has been the great cause of the increase of Medicaid spending. States are just to a large extent putting any free resource they have into the Medicaid program because they get at least $1 back for every dollar they put in. Some states will get three. Medicaid is two things. It's a program for the poor, that provides healthcare benefits to the poor, but it's also a program for states. It's like a cash cow for states.

My view is that we should make Medicaid a program for poor people and just provide the benefits directly to poor people. The federal government should just provide the healthcare to individuals. It already does that in Medicare. It knows how to do. It does a pretty good job of it, and it can control the cost of doing it directly. It doesn't also need to be a welfare program for states, an all-purpose source of funds. The real problem with that ladder dynamic is that because it's such a good deal for all states, the states that are able to make most use of it are basically the wealthier states because they're the ones with the broadest tax bases and, incidentally, the fewest poor people.

It's a fundamentally poorly aligned system. My view is that the federal government should do directly what it wants to the program and achieve what it wants directly, which is to provide healthcare to poor people, and it should do that directly and do a straightforward job of it. It shouldn't also be an indirect junket for states to inflate their own receipts from the federal government.

Allison Schrager: Because you wrote elsewhere that you recommend federalization of entitlements that would allow eligibility programs to be ranked without allowing states to exploit this shift in the federal cost to taxpayers. I mean, how might this look in practice?

Chris Pope: I mean, Medicaid is really by far the biggest joint federal-state entitlement program. It's about two-thirds of the joint state-federal entitlement programs. Other ones are TANF, which is what remains of welfare. Unemployment insurance in some ways as a joint state federal program. In practice, there are two types of Medicaid beneficiary. There's a core group of poor people under 133 percent of the poverty line in terms of their incomes, and then there's a core set of services that states have to provide to these people. States have to do this with very little discretion, actually. The rates are actually fairly constrained by federal law.

It's very prescriptive, but the federal government doesn't actually provide all the money for that. On the other hand, the way that the wealthier states inflate their claims from the federal government is really by greatly expanding the eligibility to people who are less poor and also by greatly inflating the benefit package and payments to providers above these statutory limits. By basically taking away the ability of states to do that ladder thing, basically inflate their claims from the federal government, you could basically use that money for the federal government to really take 100 percent financial responsibility for providing direct benefits to the people that every state is required to provide benefits to.

You would really divide the program into two. You would have a set of services that the federal government is going to entirely take care of, and then you would have a set of services that states are going to entirely take care of, and they're going to fund that out of their own resources to the extent that they want. They can raise taxes for the purpose, they can move funds from other expenditure items, but you're going to have a clearer division of things that the federal government's going to pay for and things that states are going to pay for, rather than having a real mix between the two and no real clear accountability.

Allison Schrager: You make it sound so simple. I mean, with all this back and forth with the Congress not wanting to pay more for anything, but everyone wanting to get more of everything, it seems like you actually have some solutions that might deliver. I wish they would listened to you more.

Chris Pope: Well, the problem is that some states are going to object, obviously. The states that have done well fleecing the federal government under the system will have something to say about it. It's not necessarily that simple.

Allison Schrager: There are losers in this, but just not the most sympathetic people I suppose.

Chris Pope: Well, if you're a New Yorker—as Manhattan Institute employees and residents of the State of New York, we will hear complaints locally about this idea, I'm sure.

Allison Schrager: Yeah. As a taxpayer, I'm all for it. That's all we have time for, but thank you so much. I think people talk a lot about healthcare without really understanding the system that we have or being grateful for what works about it. I really appreciate you explaining it. We'll link to your author page in the description, and you can find City Journal on Twitter at @CityJournal or on Instagram at @CityJournal_MI. I recommend you read all of Chris's recent pieces there.

They're always incredibly clear and incredibly informative. If you read them, you'll know more about healthcare in this country than pretty much anyone you're going to talk to. It's a good use of your time. And as always, if you like what you heard on this podcast, please give us a five-star rating on iTunes. Chris, thank you so much for joining.

Chris Pope: Thanks, Allison. It's been great speaking with you.

Photo: photoman/iStock

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