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The news on Monday that one in six Americans are now enrolled in government poverty programs (Medicaid, food stamps, unemployment insurance and welfare) was an unsettling reminder of the economic fix we currently are in. Medicaid, as I’ve written before is now serving 50 million Americans, up at least 17% from when the recession began in 2007.

With a short-term, but ultimately inadequate, fix coming in the guise of Congress' $26 billion grant to states that extends federal increases in Medicaid funding that were part of the stimulus package, imminent disaster may have been averted. But according to Michael O’Grady and Jennifer Baxendell Young, both of whom served in senior positions at the Department of Health and Human Services before becoming policy consultants, it’s time to consider a longer term fix for a fundamental flaw in Medicaid financing. Writing on the Health Affairs blog, O’Grady and Young explain:

“States…face increasing Medicaid expenses at the very time they have decreasing revenues to pay for them. This is commonly referred to as the “counter cyclical” problem.  Whenever the ranks of the newly unemployed surge because of economic downturns, the ranks of those newly eligible for Medicaid surge as well. The states confront fundamental challenges to their budgetary stability. Tax revenues go down; spending goes up. States then historically have three main options available to them: (1) cut Medicaid reimbursement, (2) eliminate Medicaid benefits, or (3) restrict Medicaid eligibility for those not entitled by federal statute.”

These draconian measures—which further thin the safety net at exactly the time it needs to be beefed up—will no longer be options for many states. The federal government is imposing new “maintenance-of-effort” rules on states that require them to maintain current benefits in order to be eligible for increased federal Medicaid assistance percentages (FMAP) once health reform legislation kicks in. Instead, O’Grady and Young have devised a novel (and potentially long-term) solution to the current Medicaid crisis. The general idea, which you can read about in more detail here is to adjust downward a state’s FMAP share during an economic downturn like we are currently experiencing.

The authors write: “The adjustment would allow states facing economic hardship to make a lower contribution during the downturn, i.e., the FMAP would increase and the federal government would pay more. However, unlike current practice, the additional federal funds would be paid back using a lower FMAP (therefore a higher state share) once the state’s economy rebounded.  The design would achieve the dual policy goals of providing federal help to states during a downturn, and not adding to the federal debt.”

The Health Affairs post describes possible triggers for this emergency FMAP increase—state jobless rate hitting 10% or reduction in state gross domestic product of more than 5%—and adds that “the difference between the regular FMAP and the emergency FMAP would be treated as a loan with a five-year payback window.”

The authors offer their plan as a starting point—meant to stimulate discussion. But the goal, they write, is that “[t]his proposal allows states a path out of their problems, without shifting an ever-growing burden onto federal taxpayers.”

Read More: http://www.healthbeatblog.com/2010/09/a-longer-term-fix-for-medicaid.html