Would Federalizing Medicaid Increase Corruption?

The recent study of denial of care to Medicaid recipients has generated a great deal of commentary, including by the esteemed Professor Pollack. In reaction to the study, the idea of federalizing Medicaid, for example by rolling it into Medicare, is again gaining currency. This idea has long appealed to some on the right, such as Reihan Salam and to some on the left as well, for example Kevin Drum, who recently asked “What’s not to like?”.

The chief thing to like is that such a merger would allow the politically weakest groups at the federal level — poor children and mentally disabled adults — to ride on the coat tails of the politically mightiest group, namely the elderly. But an underappreciated risk of such a policy was alluded to by Mark Kleiman’s health care industry friend in a guest post at RBC: It would turn the federal government into one stop shopping for rent-seeking by health care suppliers.

Many advocates of federalizing Medicaid and of single payer systems more generally assume that the consolidation of purchasing would give the federal government enormous power to force health care suppliers to accept lower prices. This would happen in a fair fight, but what if some suppliers want to queer the pitch to their own advantage? The experience of corruption in law enforcement is instructive.

During Prohibition, a city police chief could sell a bootlegging gang citywide protection because his officers were a law enforcement monopoly (the feds had a grand total of 400 people to police Prohibition nationwide). Today, corruption among law enforcement is much less pronounced in part because there are so many competing enforcement agencies within and across the city, county, state and federal levels. No one officer or unit of law enforcement can sell complete protection to someone who wants to buy special treatment.

The incredibly convuluted mess that is our state and federal Medicaid system is currently like modern law enforcement and therefore hard to corrupt. If you want Medicare to buy your $200 piece of durable medical equipment for $800 you may need only one good lobbyist well-connected to one committee in Congress. But if you want Medicaid to do it, you’ve got 50 state Medicaid agencies, 50 state legislatures and their associated federal minders with which to deal, making efforts to corrupt the process a lot less inviting. Maybe you can swing a state or three, but the whole Medicaid program? Forget it.

A federalized Medicaid program would eliminate that barrier. Sway one agency or Congressional committee to bend the rules and massive nationwide profits would be yours, just is now the case with Medicare. Some people will deny this sort of thing could ever happen in the federal government…if so, DoD has an $800 screwdriver to sell them.

Author: Keith Humphreys

Keith Humphreys is the Esther Ting Memorial Professor of Psychiatry at Stanford University and an Honorary Professor of Psychiatry at Kings College London. His research, teaching and writing have focused on addictive disorders, self-help organizations (e.g., breast cancer support groups, Alcoholics Anonymous), evaluation research methods, and public policy related to health care, mental illness, veterans, drugs, crime and correctional systems. Professor Humphreys' over 300 scholarly articles, monographs and books have been cited over thirteen thousand times by scientific colleagues. He is a regular contributor to Washington Post and has also written for the New York Times, Wall Street Journal, Washington Monthly, San Francisco Chronicle, The Guardian (UK), The Telegraph (UK), Times Higher Education (UK), Crossbow (UK) and other media outlets.

22 thoughts on “Would Federalizing Medicaid Increase Corruption?”

  1. Don’t really buy this. I agree that Medicare has some serious systemic challenges. And to some extent one trades one set of problems for another.

    You’re right that it’s hard to corrupt the entire Medicaid program. But the limited administrative capacity and the poor monitoring of state policy creates widespread problems in Medicaid that are hard to address. Many states have no viable equivalent of CBO or GAO, and have much worse legislative corruption than we have in Washington.

  2. Sometimes, one state is all you need…
    On a substantive level, could that be cured with some level of a sunshine law? The performance specs of the machine are posted (i.e. the standards it must meet), but not the design itself, and the government contract price. If someone thinks they can build and deliver a better mousetrap, they can send in the bid to medicare knowing he can beat the prior bidder.
    Also, posting the data, in conjunction with strong whistleblower / qui tam benefits breaks that monopoly. If just one employee, if just one provider, if just one lower bidder that got screwed can sue the unscrupulous provider, then they can’t obtain their monopoly on delivery through one agency.
    At least the cops in prohibition could kill the people who wanted to talk. No such luck in the future (hypothetical) system.

  3. The important question that’s omitted from your post is whether the lower costs enabled by the program’s stronger bargaining power would be offset by the amount of corruption, or if the savings would outweigh the costs of corruption. Why don’t you highlight this tradeoff between bureaucracy and corruption? That’s what your post implies, might as well say it out loud and frame your argument properly.

  4. No kidding. It’s easy to laugh at an air force coffee maker costing thousands of bucks, until you learn that it’s supposed to function while pulling negative Gs during a cabin depressurization accident…

  5. You know the $800 screwdriver (and it’s actually a hammer, not a screwdriver) is essentially an urban legend, right? It was an artifact of accounting methods distributing overhead evenly across multiple simultaneous purchases:

    “The military bought the hammer, Kelman explained, bundled into one bulk purchase of many different spare parts. But when the contractors allocated their engineering expenses among the individual spare parts on the list – a bookkeeping exercise that had no effect on the price the Pentagon paid overall – they simply treated every item the same. So the hammer, originally $15, picked up the same amount of research and development overhead – $420 – as each of the highly technical components, recalled retired procurement official LeRoy Haugh. (Later news stories inflated the $435 figure to $600.)

    “The hammer got as much overhead as an engine,” Kelman continued, despite the fact that the hammer cost much less than $420 to develop, and the engine cost much more – “but nobody ever said, ‘What a great deal the government got on the engine!’ “

    Thus retold, the legend of the $600 hammer becomes a different kind of cautionary tale. It is no longer about simple, obvious waste. The new moral is that numbers, taken as self-explanatory truths by the public and the press, can in fact be the woefully distorted products of a broken accounting system.

  6. Even granting your assumption that corruption would increase – a premise that, like Professor Pollak, I’m skeptical of – there are still good reasons to federalize Medicaid. Even if select medical services and goods providers were able to regularly bribe politicians and the system in order to receive inflated payments, there is almost no way this cost would exceed the money saved. Federalizing Medicaid would give the government hugely substantial bargaining power to drive down prices. Even better, in a larger sense federalizing Medicaid would remove a major procyclical economic force that sustains and worsens recessions; surely federalizing the program, which would in fact help make Medicaid countercylical, would be so beneficial to the overall economy that each recession would return benefits multiple times larger than all the corrupt overpayments made since the previous recession. And if large government single-payer health care programs are fatally susceptible to corruption, how to you explain the dramatically lower costs of the existing Medicare program? Not to mention the wildly successful VA program, which isn’t merely single-payer but entirely government run?

    In addition, while it is prudent to design government programs in such a way as to minimize corruption, simply declaring corruption an unstoppable hindrance and walking away is no solution. If the fear is that federalizing Medicaid would increase corruption, then increase anti-corruption measures alongside the program! Lastly, I confess that to me this concern seems less realistic and more like some junior high school Libertarian debating point. It doesn’t pass the smell test.

  7. Given all of the state-level sh*t so prominently on display in the past two years, it’s pretty rich to conclude that 50 state governments pose that much of an obstacle. Half of them are for sale for pennies; the other half would eagerly give a company the money lest it go to actual health care for the poor.

  8. If the sole criteria for judging a program were probability of corruption, then I suppose this argument might actually make sense. But the first and most important test of a program is whether it meets its goals, and in too many states, the Medicaid program does not. In addition, as someone who works day to day with both major federal health care programs, I can say with confidence that Medicare is vastly more competent, less corrupt and certainly administered much more transparently by much more able people (on average). This is a function of the level of resources available to administer the program, which is also why larger states tend to have more competent Medicaid programs mostly regardless of political orientation.

    What you are talking about is political corruption or the proclivity of politicians to reward their friends. This doesn’t happen at the state level as much for Medicaid mostly because Medicaid is underfunded and politicians have better vehicles, like construction contracts, for doling out goodies.

    So the bottom line is that corruption is a problem best addressed by more straighforward means than permanently consigning poor people to get their health care through inefficient, poorly funded and politically unpopular state based health care programs.

  9. If your hypothesis that federalizing Medicaid would lead to increased corruption in the form of excess payments for medical supplies, which corruption is currently held in check by the multiplicity of distinct administrators within the current program, then shouldn’t the costs paid by Medicare vs. private insurance provide a “natural experiment” to test the hypothesis? After all, there is no monopoly in private health insurance. If Medicare is paying less than private insurers for CT scans, or stents, or defribulators than private insurers (and it is quite clear that Medicare does pay less for these services/devices) then isn’t your hypothesis, if not falsified, at least cast in serious doubt?

  10. “No kidding. It’s easy to laugh at an air force coffee maker costing thousands of bucks, until you learn that it’s supposed to function while pulling negative Gs during a cabin depressurization accident…”

    The thought of a crew having to handle a cabin depressurization accident without access to delicious coffee is too gruesome to imagine.

  11. Chaz, that’s very nice snark, but one hopes you are simultaneously intelligent enough to realize that in the situation under discussion, a $12.99 Mr. Coffee will spray the cabin with flying globules of boiling-hot liquid. For some reason flight crews don’t like that. Perhaps they lack your keen insight.

  12. The argument also supposes that Medicaid payments are low because of state efficiency or bargaining power. If only. Yes, the state has wonderful bargaining power because, basically, in a lot of states, no one really cares whether Medicaid beneficiaries receive adequate care. There is no negotiating leverage quite like not caring about the outcome. Which is to say, that in many states, payments are so low Medicaid beneficiaries might as well have no coverage beyond the same ER services that are available to the uninsured.

  13. Barbara wrote: If the sole criteria for judging a program were probability of corruption, then I suppose this argument might actually make sense.

    By “this argument” I assume you mean the argument that we should not federalize Medicaid. I didn’t make that argument, I said there was one thing about it I liked about it and I wondered if there might also be a drawback. I recognize that a common web-style is to say that one has the answer, stake out an extreme position and defend it with intensity, but I usually don’t write that way or think that way…there is a dialogue ongoing about a public policy issue which I have not myself made my mind up about, so I raised one thing I liked and one thing I didn’t.

    Barbara wrote: The argument also supposes that Medicaid payments are low because of state efficiency or bargaining power

    What I said was that having a complex web of purchasers lowers the ease of corrupting the entire system on a national basis. I don’t know of any evidence around relative efficiency or bargaining power by states (I mean that literally, I haven’t studied that) and made no claims about it one way or the other.

    Guy wrote: In addition, while it is prudent to design government programs in such a way as to minimize corruption, simply declaring corruption an unstoppable hindrance and walking away is no solution.

    No it’s not, which is why I didn’t do it. I raised corruption as an issue in an ongoing debate about which I have not made up my mind. There is nowhere in the post where I say we shouldn’t federalize Medicaid, unless one assumes that saying there are complexities to a policy or that it will pose some difficulties is taken as a vehement rejection of the policy (If so, you may assume I vehemently oppose all government policies, life is complex). As for your remarks about “junior high” debating….your own name calling doesn’t put you in a position to accuse others on this point.

    On Rich C’s point: Good question about falsifiability. The comparison point I think would be single payer systems with competing private insurance companies, such as most of western Europe has. The many private sector companies probably do a better job keeping supplier prices low than they would if the government used single source contracts for various classes of health care services and equipment. But it’s an empirical question worth of study.

  14. Isn’t it at least as likely that adding health care assistance to the poor to Medicare will dilute the public support of Medicare to the point that Medicare is finally perceived as a politically vulnerable entitlement program so that the republicans can succeed once and for all in their efforts to dismantle it?

  15. Wait, you’re using the experience of Prohibition, where local cops sold out at the drop of a hat and the federal agents were ‘untouchables’, to argue that federalizing Medicaid would lead to _more_ corruption? Um, to rephrase Inigo Montoya, I don’t think that example means what you think it means…

    [I really don’t actually think Prohibition is a good example, but I do think — and not a completely uneducated opinion — that corruption is far, far easier to hide on a local and state level than on a federal level, to a degree that more than makes up for the larger potential gains on a federal level]

  16. Keith, I honestly don’t think I understand what you mean by corruption here. If it’s corrupt transactions (fraudulent billing and the like), Medicaid is no better than Medicare. If it is the propensity of interest groups to drive disproportionate resources in their direction, Medicare is worse but only because there are more resources in Medicare to begin with. The point is that there are so many drawbacks to the Medicaid program it surprises me mightily to even think of “lack of cronyism” as a benefit — only because the program is so impoverished there isn’t enough in it to interest the pigs at the trough.

  17. Hello Barbara thanks for writing

    Fraud is indeed epic in some state Medicaid programs, but that doesn’t necessarily imply any corruption (i.e., the criminals could all be outside the system, gaming the people who run the program without their knowledge or despite their honest and best efforts). Corruption, as I am using the word here any way, means that someone on the inside breaks the law or bends the rules in exchange for something of value, e.g., a Congressman forces CMS to back off from dropping the purchase of grossly overpriced medical supplies in exchange for a campaign contribution, or someone who evaluates contracts at a watchdog agency lets a rip off purchasing contract go through just before his/her retirement so that the supplier will hire him/her as a high-priced consultant afterward.
    Separate point: In addition to reason I have noted, Medicaid is currently less attractive for those who would corrupt it for the reason that you note, it hasn’t got as much money as Medicare. But if were folded into Medicare, that would change and corrupting the program would become more lucrative and hence attractive.

  18. SP, that’s right. This is also at work when you look at an itemized hospital bill that charges $15 for a Qtip.

  19. “Chaz, that’s very nice snark, but one hopes you are simultaneously intelligent enough to realize that in the situation under discussion, a $12.99 Mr. Coffee will spray the cabin with flying globules of boiling-hot liquid. For some reason flight crews don’t like that. Perhaps they lack your keen insight.”

    Ugh. I had already anticipated that point, but I thought it was too stupid to merit a longer post. Brett did not say the coffee maker needs to “remain safe” in a depressurization, he said it needs to “function”, which means it has to make coffee.

    More to the point: Coffee makers are not an essential part of a military aircraft. They are not even important. They are an utterly unnecessary frill that is perhaps worth having if people really want them, so long as the change is cheap, safe, and easy to implement. If that’s not the case, then just don’t buy the things at all. The crew can drink canned coffee, or Coke, or a thousand other things. Does the USAF actually have coffee makers on some planes? I don’t even know.

  20. Okay, so I think I understand your point but I wonder whether you understand how Medicare works. The real corruption in the Medicare program isn’t what I understand traditionally as true corruption — graft — so much as it is continual congressional legislation that tries to stack the deck in favor of interested providers. The most successful have been oxygen suppliers. Another example would be the continued efforts to scale back even demonstration implementation of so-called competitive procurement of supplies. The typical gambit is that there is a reform, and then the interest group spends the next decade trying hard to undo or delay or water down the reform. Medicare Advantage, for interest, opened up the spigot of money to insurers that had been closed seven years earlier by the Balanced Budget Act of 1997. I could give you half a dozen other examples of this but they are, frankly, too complicated to explain.

    But the direct interevention to save the skin of an individual supplier or contractor is actually not that common in the Medicare program. There are examples of it: Medicare is supposed to certify transplant programs and certain programs really should have been decertified by now for failing to meet criteria. No doubt some congressional effort was expended, but most providers are just too small to bother with in this way and, moreover, providers are often booted for fraud — and most Congress people don’t want to go near fraud.

    So I agree that Medicaid would make the stakes of such political gamesmanship higher for the federal purse, but I don’t see once again why poor people should be victims of our impulse to fiscal restraint while the elderly get off scot free.

  21. P.S., Medicare is SO complicated that the average congressional staffer has no clue what they are talking about and when that’s the case, sad as it may be to say, they lose interest in the issue. Seriously, it’s hard even for me to imagine how complex some issues are. For instance, there is something called the wage base index that helps to allocate the DRG amount to hospitals by the relative expense of their workforce. When you are “near the line” of a geographic demarcation point the agency gets a lot of pleas for re-assignment to a more expensive region — and the agency has reams of statisticians who can pull out 800 page spreadsheets to show that you do or don’t deserve reassignment and Congress has made the agency’s determination unreviewable by a court. This is actually quite intimidating to the average congressional staff member.

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