Senate leaders are preparing yet another big bailout package, this time for states in the form of increased federal matching rate for the $350 billion Medicaid program. If enacted, this would be the second time in less than ten years that Congress provided a “temporary” increase in the federal Medicaid match. Rather than increasing the federal match rate for Medicaid, true reform is needed.

Reform should begin with the recognition that the existing matching requirement of Medicaid has proved to be too erratic and unstable for both the federal government and the states. In a November 16 Washington Post article, “Facing Shortfalls, States Seek Emergency Aid From Washington,” California Governor Arnold Schwarzenegger nailed it when he said, “Government is really at fault, and this is why government has to get us out of this mess …”. While he was referring to the subprime mortgage meltdown, he could have also been referring to the crisis states are facing in Medicaid. But when it comes to Medicaid, states must accept a fair share of the blame for the “mess.”

Much like the private sector, state officials got themselves into “this financial mess” through the lure of easy money. When state officials had extra money, they were advised to put it into Medicaid so they could double (at least) their money with matching funds, courtesy of the federal taxpayers. Worse, the Clinton Administration helped state officials use phony financing in Medicaid in the 1990s as an “economic stimulus”. Lured by easy money and the matching arrangement -in which the more states spend in Medicaid, the more money they get from the federal government- states expanded the program beyond their means to pay for it. By the dawn of the 21st century, Medicaid had become a jobs program in disguise. Rules created by Congress and the Clinton Administration conferred protected status for certain special interests, particularly public institutional providers. Few states even contemplated any serious reform of the program, while lobbying for the “free money” from Washington.

Unfortunately for current governors, the Medicaid matching arrangement works against states when budgets are tight. In order to save state funds, states must also forfeit federal funds, making the total impact twice (at least) as great. Faced with unsustainable growth in Medicaid and shrinking revenues, states are again looking to Washington for relief. But rather than simply adding more taxpayer dollars, the federal government should provide real and last reforms. Giving states greater authority to make defined contributions for Medicaid populations into private options, including coordinated care programs, would save tens of billions of dollars and improve access to quality care.

The federal government generally provides roughly 60 percent of Medicaid funding. Medicaid is a battle ground for massive cost-shifting, which alternatively adds to the burden of federal and state taxpayers while not adding to the quality of patient care. Congress can and does cost shift to the states. Congress can add to Medicaid programs, fail to cover their cost, and shift more of the burden to the states. In return, the states try out various schemes to shift the rising costs back to the federal taxpayer.

Medicaid has become the single largest expenditure for many states and is now swallowing revenues that otherwise would have gone to education, transportation, public health or other publicly funded responsibilities, not to speak of the demands on taxpayers. Relief to the states should be real reform, and should not simply repeat the flawed cycle of additional Congressional spending.