Should We Replace Medicaid with Block Grants to States?

In recent posts I’ve discussed problems with Medicaid—problems about the quality of care, wastefulness, and unfairness in the current system. What should be done about Medicaid?

An alternative favored by many health policy analysts and some governors is to replace the current Medicaid system (and its tangle of rules and regulations) with unrestricted block grants to the states. For example, if Texas is currently getting 6.7 percent of federal Medicaid dollars, under a block grant the federal government might pledge 6.7 percent of all Medicaid spending for the next five years, leaving Texas free to decide how to spend the money. A pure unencumbered block grant would require only that Texas spend the money on indigent healthcare, and nothing more. A fairer method of distribution, as noted, would be to give Texas 9.9 percent of all federal Medicaid spending, since that is the state’s share of the national poverty population.

As health economist Linda Gorman has pointed out, welfare reform is an example of a successful block grant program.[1] In 1996, the Aid to Families with Dependent Children entitlement program was replaced with the Temporary Assistance for Needy Families (TANF) block grants. The switch to TANF block grants had generally positive effects on employment, earnings, and income. As states changed the structure of benefits to reward work, funds were shifted from cash assistance to childcare, housing, transportation, and education. A million children moved out of poverty as work effort increased, and caseloads fell more than 60 percent.

Case Study: Rhode Island

In its final days, the George W. Bush administration granted Rhode Island a waiver that capped total (state and federal) Medicaid spending at $12.1 billion through 2013. There is no evidence that access to care has been reduced.[2] Yet, at the current annualized rate of spending and projected growth, it appears that actual spending will be nearly one-quarter lower—or about $9.3 billion.

Private-Sector Contracting

Like Medicare, Medicaid is a public program; but a large number of Medicaid enrollees are actually in private health plans. In fact, nearly three-quarters (71.5 percent) of all Medicaid enrollees nationwide are in health plans managed by the private sector.[3] Two of the more innovative Medicaid programs are in Florida and Indiana.

Case Study: Medicaid Reform in the Sunshine State

In 2006, Florida received a waiver to implement a reform program initiated by then-governor Jeb Bush. The reform plan began as a pilot project in two large counties and has since been expanded to five counties. The population of these five counties is nearly 3 million people, with a Medicaid population of 290,000 participating in the pilot program. The goal of the exercise was to increase choice among Medicaid providers, spur competition, and boost efficiency without reducing quality or access to care for Medicaid enrollees.

The way Florida accomplished this feat was by allowing Medicaid enrollees to choose among competing, private managed-care plans, which can vary the provider network and the benefit package as long as it covers mandatory benefits. The hope was that firms that failed to provide high-quality services or that managed the care of Medicaid enrollees poorly would be punished with fewer enrollees. Those plans that provided better services would attract enrollees. Also, enrollees in the program had a stake in managing their own health; and a system of rewards was designed to encourage and reward healthy behaviors.

Five years after the start of the program, the evidence suggests that the program has achieved patient satisfaction better than traditional Medicaid and done so at a cost that is lower and rising at a slower rate than traditional Medicaid, both in Florida and nationally. Enrollees can choose from two to eleven different plans, depending on the county in which they reside. Plans offer additional services not normally covered under the old Medicaid program. Access to specialists has improved.

One estimate is that the pilot program is saving up to $161 million per year. If this program were expanded to the remaining 49 states, state Medicaid programs would save $91 billion annually while improving health outcomes and achieving enrollee satisfaction scores of 83 percent to 100 percent.[4]

Case Study: Consumer-Directed Medicaid in Indiana

Indiana Governor Mitch Daniels presided over an innovative program to insure low-income families with incomes too high to qualify for Medicaid. The Healthy Indiana Plan began in 2007 to provide low-income families with consumer-driven health plans, coupled with personal health accounts called a Power Account. The goal was not only to boost health coverage, but also to create an incentive for enrollees to take a more active role in their healthcare decisions.[5]

Low-income individuals and families who have been uninsured for at least six months can enroll in the program but must make monthly contributions to their Power account of 2 percent to 5 percent of income (up to $92). The state of Indiana contributes $1,100 to the account, which covers nearly three-quarters of the deductible. Preventive care is covered by the health plan on a first-dollar basis. Once the deductible of $1,500 is met, there are no other cost-sharing expenses or co-payments.[6]

About 45,000 people in Indiana participate in the program, and 90 percent of enrollees made their contributions.[7] Satisfaction is reportedly around 98 percent.[8] The Obama administration has apparently decided not to renew the federal waiver, which is required to continue the program.[9]

In our next installment we will look closely at a more fundamental approach to addressing the problems that plague Medicaid. For more details, please consult my book Priceless: Curing the Healthcare Crisis.


  1. Linda Gorman, “Medicaid Block Grants and Consumer-directed Healthcare,” National Center for Policy Analysis, Issue Brief No. 102, September 2011.
  2. “Rhode Island’s Medicaid Lesson,” Wall Street­ Journal, March 28, 2011,
  3. “Medicaid Managed Care Enrollment Report,” Centers for Medicare and Medicaid Services, US Department of Health and Human Services, undated,
  4. Tarren Bragdon, “Florida’s Medicaid Reform Shows the Way to Improve Health, Increase Satisfaction, and Control Costs,” Heritage Foundation, Backgrounder No. 2620, November 9, 2011.
  5. “Healthy Indiana Plan” website:
  6. Avik Roy, “Obama Administration Denies Waiver for Indiana’s Popular Medicaid Program,” The Apothecary­ (blog), November 11, 2011. aroy/2011/11/11/obama-administration-denies-waiver-for-indianas-popular-medicaid-reform/
  7. Timothy K. Lake, Vivian L. H. Byrd, and Seema Verma, “Healthy Indiana Plan: Lessons for Health Reform,” Mathmatica Policy Research, No. 1, January 2011.
  8. Kenneth Artz, “Obama Administration May Wipe Out Daniels’ Healthy Indiana Plan,” Healthcare­ News, November 11, 2011.
  9. Avik Roy, “Obama Administration Denies Waiver for Indiana’s Popular Medicaid Program,” The­ Apothecary­ (blog), November 11, 2011.

[Cross-posted at Psychology Today]

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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