Buying Inefficiency: Federal $ and State Medicaid Spending

Brian Blase, my former RA, presents some edifying facts about Medicaid at National Review Online.

The nearly $1 trillion stimulus bill making its way through Congress includes a little bit of everything, but if the bill passes as is, a large chunk of the money will go toward relieving state budget shortfalls by increasing federal subsidies for Medicaid...

Medicaid is the second-largest component of state spending, after education. Medicaid spending is growing rapidly--it nearly quadrupled between 1990 and 2004--and represents over 20 percent of the average state budget. The little-known secret behind this increase: Federal subsidies largely caused it.

During the Reagan presidency, overall federal grants to states shrank substantially. Medicaid grants did not shrink, however, so the program became the main method by which states could get money from the federal government. The federal subsidy for the wealthiest states is 50 percent of Medicaid spending; for poorer states, the number can rise above 75 percent. Put another way, even wealthy states get a dollar from the federal government for every dollar they spend, and poorer states can get more than $3.

I strongly suspect that as far supporters of federal grants are concerned, the rise in state Medicaid spending is a feature, not a bug.  But economists should be ultra-skeptical.  Externalities might justify subsidies to fight contagious disease, but that's only a small fraction of spending.  In any case, the health benefits of the marginal dollar of spending are well-known to be small.

My question: Would Obama listen to his technocratic economist advisers if they told him all of this?  Actually, I take that back; I think I already know the answer.

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