This week Congress, in its consideration of HR 4213 (American Jobs and Closing Tax Loopholes Act of 2010) is going to tap into taxpayers wallets once again to bailout Medicaid, a government health program administered by the states for the poor and the indigent. Many governors are feverishly lobbying for a six-month extension of the Medicaid bailout to their states. The first bailout was enacted in the so-called Stimulus Bill, the American Recovery and Reinvestment Act (ARRA) of February 2009. But if the Medicaid bailout is continued, Congress will add another $25 billion to the national debt.

Propping up the Status Quo. Meanwhile, states won’t make necessary budget cuts, delaying their return to fiscal sanity. Congress will refuse to pay for this additional spending with budget cuts elsewhere because they will deem it an ‘emergency’, which under the Congressional “pay-as-you-go” rules exempts this bailout from being “paid for”.

Over the past few decades, states have generally increased Medicaid programs by increasing eligibility and extending benefit packages. When bad times hit, enrollment swells. States have avoided dealing with their mismanagement of the program because they depend on Congress to force federal taxpayers to bail them out. During this decade, Congress has already bailed out state Medicaid programs 3 times.

For the states, Medicaid is a voluntary program. But all states administer Medicaid programs because federal taxpayers provide generous financial support. Typically, federal taxpayers pay half of the Medicaid bill for the wealthiest states and up to 80 percent of the bill for the poorest states. Even so, Medicaid consumed 21 percent of state spending in 2009.

Congress bails out these state programs by hiking the federal Medicaid reimbursement rate – called the Federal Medical Assistance Percentage (FMAP). As part of the ARRA, each state’s FMAP was increased by at least 6.2 percent. This resulted in an $87 billion windfall for state governments. This $87 billion was not offset with reductions in other government spending; it was simply placed on Uncle Sam’s credit card. At the end of December, the first funding expansion runs out, which is in the middle of most state’s fiscal years. Many states have already budgeted for the six-month extension of the FMAP increase and would be faced with further budget cuts without the extension.

Higher Deficits. Ordinary Americans express a rising anxiety about Washington’s already enormous budget deficits. According to a recent Washington Post/ABC News poll, 56 percent of Americans disapprove of the President’s handling of the budget deficit. Indeed, this year’s deficit year is projected to be well in excess of $1.5 trillion. Additionally, 69 percent of Americans feel that the Stimulus Bill either hurt or made no difference to economic recovery. Given the failure of the ARRA to stimulate the economy, combined with the already enormous budget deficits, Congress has no business making matters worse.

The Governors, after getting the first bailout, can be expected to make impassioned speeches about horrific budget cuts if Congress doesn’t enact the enhanced FMAP. But some perspective is in order. First, Medicaid spending has risen rapidly for the past two decades. Between 1990 and 2007, Medicaid spending more than quadrupled from $69 billion to $316 billion. Second, state spending has also skyrocketed.

Table 1 shows the changes in state per capita spending between 1990 and 2006. This table shows that the average increase in per capita state spending was 130 percent and that 43 states more than doubled per capita spending between 1990 and 2006. The truth is that many state governments pursued reckless fiscal management over the past two decades, accompanied by the dramatic growth in state Medicaid programs. In fact, states have accumulated much budget fat that can be further trimmed.

More money from Washington will guarantee one thing: States will continue to spend far in excess of what they can afford, and Congress will treat the federal taxpayers like an ATM machine to cover the shortfalls. Because raising taxes is unpopular and the vast majority of states have balanced budget requirements, state politicians look to Congress, knowing that Congress can always “borrow” the extra money. By refusing to extend the FMAP enhancement, Congress can send the signal that it is serious about excessive spending. Congress can end the era of Medicaid bailouts. State budgets will no longer be brought to balance by racking up additional mountains of debt on our children and grandchildren.

The next step is to cope with the impact of Obamacare, which will exacerbate Medicaid’s budgetary pressures. The reason: over half of individuals who gain insurance coverage will be enrolled in Medicaid. Additionally, the millions of individuals who are now eligible for Medicaid but who have not enrolled will have an incentive to sign up in order to avoid the penalty of the new law’s individual mandate. While the initial state burden for covering the newly eligible populations will be relatively minor, states will be on the hook for a much greater cost for currently eligible individuals who enroll. Obamacare, in other words, is deepening the mess. Meanwhile, Congress can do the right thing: Stand up for the American taxpayer by refusing to extend the Medicaid bailout.