Mulvaney’s Medicaid Mirage

The Trump administration’s proposed Medicaid cuts are never going to happen. So why are they in the budget?

U.S. President Donald Trump
President Donald Trump speaks during a lunch at the White House on Feb. 22.

Kevin Lamarque/Reuters

What should we make of President Trump’s latest budget proposal? Mick Mulvaney, Trump’s budget director, calls it a “taxpayer-first budget,” one that aims to balance the federal budget over the next decade by reducing future federal spending by $3.6 trillion. There’s been a lot of talk, and for good reason, about the proposed budget’s rosy assumptions about economic growth and the closely related fact that it banks massive increases in federal revenue that simply can’t be reconciled with Trump’s call for massive tax cuts. Mulvaney’s protestations notwithstanding, we can safely write off the notion that this proposed budget will put us on the path to a balanced budget in 10 years. Short of a miraculous economic boom, there’s just no way this will happen.

Once we take the balanced-budget promise off the table, we’re left with what is essentially an aspirational document at the heart of which is a series of sweeping proposed changes to America’s safety net. What’s surprising about this budget is not that it envisions deep cuts—given Mulvaney’s reputation as a zealous budget-cutter, that hardly comes as a shock. Rather, it’s that buried amidst its most eye-catching and frankly unrealistic provisions, there are actually a few decent and defensible ideas.

Among other things, Trump’s proposed budget envisions cuts of $610 billion to future increases in spending on Medicaid (whether or not that’s on top of the $839 billion in cuts already included in the House-passed American Health Care Act is a bit of a mystery), $192 billion in cuts to the food stamp program (now known as SNAP), and $22 billion in cuts to Temporary Assistance to Needy Families (TANF); a requirement that all those who claim the earned-income tax credit (EITC) and the child tax credit (CTC) have a valid Social Security number, which the Trump White House expects will yield $40 billion in savings; the appointment of an expert panel that would devise reforms to disability programs, with an eye toward reducing spending by $73 billion; a small paid-leave program for new mothers and fathers packaged with a few modest tweaks to unemployment insurance for a grand total of $700 million in savings; and an extension of the Maternal, Infant, and Early Childhood Home Visiting Program (MIECHV) at an expected cost of $800 million.

Let’s get the unambiguously bad ideas out of the way. The plan to cut the TANF block grant falls into this category. State governments don’t have the fiscal capacity to deal with the sharp fall in revenue that comes with a recession, and cutting the money that goes to state governments to help them lift families out of poverty is shortsighted in the extreme. As for food stamps, Trump’s budget makes a similar mistake. Although I do believe there is a case for tightening eligibility to ensure benefits are flowing to low-income beneficiaries rather than those who are better off, the proposed budget seeks to shift some of the burden of financing the SNAP program from the federal government to state governments. The danger here is that the poorest state governments might find themselves forced to shortchange their poorest citizens, which would be perverse.

Then there are the fairly small-bore ideas such as the creation of a modest paid-leave program, the extension of MIECHV, the Social Security number requirement for those claiming EITC and the CTC, and the disability reform proposal. The basic idea is to ensure that the EITC and CTC go only to people who are authorized to work in the U.S. If you don’t believe unauthorized immigrants are collecting these benefits in the first place, this proposal will change nothing. If you do, an effort to ensure that these benefits don’t go to unauthorized immigrants might make you more favorably disposed to these very valuable programs. Will this small reform yield huge savings? I’m skeptical. And besides, in the unlikely event big savings do materialize, the money should really be plowed back into boosting the EITC and CTC for those who qualify.

What about the Trump budget’s approach to disability programs, which some have characterized as draconian? It’s little more than a call for experimentation. The idea is to convene a panel that will offer ideas for improving the incentives for people collecting Social Security Disability Insurance (SSDI) benefits to return to work. Some of the ideas for reforming disability programs in the proposed budget, such as piloting early intervention strategies to keep disabled individuals in the workforce, were previously floated by the Obama administration. The disability savings in the Trump budget are nothing more than an ambitious target.

This leads us to the most contentious and most important part of the Trump budget, namely the reduction in future federal Medicaid payments to the states. It must be said that these cuts are wildly unrealistic. There is a reason Senate Republicans are scrambling to dial back the Medicaid cuts in the AHCA, and there’s just no way Congress will go for even deeper cuts. I see the Medicaid cuts in the Trump budget in the same way I view the delusional revenue estimates: as little more than a wildly implausible way to make the math work on balancing the budget over 10 years.

Nevertheless, the basic idea behind the cuts is not entirely unreasonable. The problem with Medicaid is that it divvies up responsibility between the federal government and the states in a way that can encourage state governments to game the system. For most Medicaid beneficiaries, the federal government picks up between 50 and 75 percent of the tab, a rate that varies according to state per capita income. Obamacare expanded eligibility for Medicaid, and states were promised that newly eligible beneficiaries would be covered by a more generous match, which started at 100 percent and will fall to 90 percent of the total bill in 2020.* The more generous the federal match, the less incentive state governments have to keep an eye on costs. Local medical providers generate jobs and revenue, whether directly or indirectly, so it makes perfect sense for state governments to seek out as much federal Medicaid spending as they can get their hands on. This is why there’s been so much political pressure for even the most conservative legislatures to expand their Medicaid programs under Obamacare, and it’s no doubt part of why even the impeccably right-wing Mike Pence ushered in a Medicaid expansion as governor of Indiana.

In theory, putting a limit on federal contributions—for example, by establishing a per capita limit on the amount of money the federal government will spend per Medicaid beneficiary, as proposed in the AHCA and the Trump budget—would lead states to spend more responsibly. Opponents of per capita caps fear that the caps are too inflexible. Because the caps are tied to the number of beneficiaries, they would rise if the Medicaid rolls increased due to a recession. But what if per person spending soared—what would happen to beneficiaries then?

The answer is that if Congress decides the caps it set were unreasonably stringent, it can vote to loosen them, or to do away with them altogether. That is exactly what Congress has done in the past. In the Balanced Budget Act of 1997, Congress established the Medicare Sustainable Growth Rate (SGR), a measure that was designed to contain future growth in Medicare spending by limiting increases in the federal reimbursements paid to medical providers treating Medicare beneficiaries. If the SGR had been implemented as written, it would surely have yielded massive budget savings. But there was no way that was ever going to happen, as it would have enraged medical providers and, in some cases, jeopardized their ability to deliver medical care to older Americans. As a consequence, Congress regularly stepped in to pass “doc fix” legislation that prevented the SGR from kicking in. Eventually, legislators passed a “permanent doc fix” that killed the SGR for good.

It is easy to imagine something very similar happening if Congress voted to impose a stringent cap on future federal Medicaid payments. Would Congress really sit by as medical providers and Medicaid beneficiaries across the country went into revolt? Not on your life. But by changing the baseline, per capita caps would force state governments to justify why they need an increase in per capita payments, which would give Congress leverage to demand new reforms. Setting realistic per capita caps might nudge state governments towards more cost-effective policies. Setting ridiculous per capita caps, like those in the Trump budget, would almost certainly backfire. If a Republican Congress dared to implement such deep cuts, they’d be thrown out of office.

When it comes to the safety net, the Trump budget is a combination of the completely delusional (Medicaid), the anodyne (a modest paid parental-leave program), the worrisome (the proposed TANF cut), and if you squint hard enough, some OK ideas that a more competent White House might be able to build on (pilot programs to help get disabled individuals back to work). But when it comes to the proposed budget’s chief selling point to Republicans in Congress—that it balances the budget without hiking taxes—it just doesn’t add up. The promised savings are illusory.

*Correction, May 25, 2017: This article originally misstated that the federal government now covers 90 percent of Medicaid expenses for newly eligible beneficiaries. The federal government’s reimbursement rate will fall to 90 percent in 2020. (Return.)