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How the Feds Could Slow Down Entitlement Spending

Wednesday October 19th, 2016   •   Posted by Craig Eyermann at 5:53am PDT   •  

38068725 - tree growing from grant In 2016, the U.S. government’s annual budget deficit stopped falling for the first time in four years and swung sharply into reverse, increasing to $587 billion, which is 34% higher than 2015’s budget deficit.

Nearly all of that increase was due to “mandatory” spending on entitlements, the part of the federal government’s expenditures that goes to programs such as Social Security, Medicare, Medicaid, and the Affordable Care Act. The Manhattan Institute’s Charles Blahous, who is also one of the Social Security program’s trustees, describes the growing fiscal problem created by the inadequately controlled growth of spending for these entitlement programs:

Entitlement programs are those automatically authorized to continue to spend funds, often in increasing amounts, without further legislative action. Some of the biggest examples include Social Security, Medicare and Medicaid. Figure 1 shows how over time, automatic growth in such programs has precipitated a corresponding relative decline in discretionary/appropriated spending. (Interest costs are grouped with entitlements here because they are also mandatory spending; their inclusion does not affect the qualitative trend). Figure 2 shows that under current projections mandatory spending will continue to absorb an ever greater share of budget resources. In sum, unless and until the laws governing mandatory entitlement programs are changed, lawmakers will only exert annual control over a shrinking fraction of the budget.

Here are the figures to which Blahous refers:


The fastest growing part of that spending is that for Medicaid, whose spending growth was sharply escalated by the Affordable Care Act. Dan Mitchell of the Center for Freedom and Prosperity Foundation observes:

The burden of government spending is already excessive. But the numbers will get worse with the passage of time if policy is left on autopilot.

The main culprits are the so-called mandatory programs. Entitlements such as Social Security, Medicare, Food Stamps, and Obamacare that automatically dispense money to various constituencies are consuming an ever-larger chunk of the economy’s output.

And if you want to be even more specific, the fastest-growing entitlement program is Medicaid, which was originally supposed to be a very small program to subsidize health care for poor people but has now metastasized into a budget-gobbling fiscal disaster. Arguably, it’s the entitlement program most in need of reform.

Getting control over that spending growth needs to be the primary objective of federal lawmakers.

Several proposals to achieve that result have been offered. One of the more promising approaches would take a page out of the playbook for the welfare reform enacted during President Bill Clinton’s tenure in the Oval Office: block grants to the states. Dan Mitchell explains how that reform might work in the following video:

On his blog Downsizing the Federal Government, Chris Edwards estimates how much a block grant approach to funding the Medicaid could save, which would also require eliminating the Affordable Care Act.

Policymakers should repeal the 2010 Affordable Care Act (ACA). That would reduce spending on Medicaid and end spending on the exchange subsidies. In addition, policymakers should convert Medicaid from an open-ended matching grant to a block grant, while giving state governments more program flexibility. That was the successful approach used for welfare reform in 1996, which encouraged state innovation. Changing Medicaid to a block grant and capping annual spending growth at 2 percent would save about $128 billion annually by 2026.

There would still be challenges to setting up a block grant program for the states. John Holahan and Matthew Buettgens of the Urban Institute identify one key issue that would need to be addressed by Congress in establishing such a program:

Block grants and per capita caps have been proposed as mechanisms for controlling Medicaid expenditures. Block grants would allocate money to states based on current overall spending levels in each state, and per capita caps would allocate funds based on current spending per enrollee. In this brief we show that federal spending (adjusted for the size of each state’s low income population) varies across states by more than 5 to 1 and spending per enrollee varies on the order of 2 to 1. In general, high income states will get larger block grants and higher spending per enrollee caps because they spend more today. These disparities would be locked in under these kinds of proposals.

Congress would do well to improve a block grant program by basing its initial allocation of grants not on how much each state spends today, but rather on the size of a state’s low-income population, and then setting up a mechanism to revisit federal allocation every 10 years following each Census to account for changes in the U.S. population.

Steps like implementing block grants to fund health care for low-income Americans will be essential to restraining the future growth of the federal government’s mandatory entitlement expenditures. The sooner these steps are taken, the more stable our nation’s fiscal future.

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October 2016