November 16, 2010

Medicaid Encourages State Overspending

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A change in the way Medicaid is funded could help states avoid enormous budget gaps, says Matt Mitchell, a research fellow with the Mercatus Center at George Mason University’s State and Local Policy Project.

“Right now, the federal government pays out at least $1.20 for every dollar a state spends on Medicaid. This encourages the state to expand beyond the point where costs meet benefits,” Mitchell said. “Imagine the government paid $120 for every $100 you spent on a new car. You would likely buy more than you need.”

Mitchell suggests the federal government use a block-grant formula for payment. Switching to a block-grant formula in which the state is given a set amount of money from the federal government would encourage better decision making, he says.

“Every state overspends on Medicaid. Interestingly, this is also the largest budget-buster in most states. The practice will continue until we take away the incentive to overspend,” Mitchell said.