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Chapter 9 From Charity Care to Medicaid Governors, States, and the Transformation of American Health Care Colleen M. Grogan and Vernon K. Smith Throughout the twentieth century, state governments in the United States have taken responsibility for health care policymaking. States regulate hospitals and outpatient clinics, they determine licensure for the plethora of health care providers, and they plan and direct the building and development of our health care infrastructure. While the federal government affects the financial health of hospitals (and other health facilities) and influences medical education when it writes Medicare policy for the aged, even these areas are primarily under state government control. Of all the health care policy issues states confront, however, it is the Medicaid program that dominates states’ attention in the health policy domain. That a health care program for the poor—a program that states have long complained about—dominates their attention may seem surprising . But, if we investigate more deeply, we see that despite an original intent that the program be contained for only the ‘‘truly needy,’’ Medicaid has never been just a program for poor people. Indeed, over time states have acted to cover more and more nonpoor persons. As enrollment expanded and costs skyrocketed, governors developed a love-hate relationship with the program—embracing the ability to offer needed health coverage for poor and vulnerable populations in their state, while genuinely concerned with program costs and how fast they grow. Governors depend heavily on Medicaid to provide much needed health care coverage to millions of American families. However, along with this dependence comes the fiscal burden of high Medicaid costs. Total Medicaid expenditures (including the state and federal share) have increased to $313 billion in 2005, including $179 billion in federal funds and $134 billion in state funds.1 In recent decades, Medicaid From Charity Care to Medicaid 205 spending has increased at an annual average rate of about 8 percent, while state budgets have increased at an average annual rate of just over 6 percent, making Medicaid a large and ever-increasing share of state budgets.2 Indeed, in 2004, Medicaid became the largest single item in state budgets—in terms of total state spending, exceeding K-12 education , higher education, or any other category of total state spending.3 In part because of their limited ability to fund rapid rates of growth of Medicaid expenditures, states have either pushed for Medicare expansions —which are of course financed and run by the federal government —or favored private sector solutions for expanding health care to the uninsured and underinsured. Yet, while preferring non-Medicaid expansions, states have ended up with a large and expanding Medicaid program on their hands. The primary purpose of this chapter is to explain how this predicament came about. We argue that the main explanation has three parts: first, Medicaid covers populations—in both mandated and optional eligibility groups—that have very expensive health care needs, and no other public or private policy options exist to serve them; second, lack of national health care and the availability of coverage options through Medicaid means the groups not adequately covered are constantly knocking on state governments’ door; and, third, the availability of federal Medicaid matching funds provided a strong financial incentive for states to rely on Medicaid to cover a variety of needy groups. This chapter aims to explain the development of state-level health policy over the twentieth century. We show how key historical events led to this Medicaid build-up and how certain interpretations of the program influenced future policy decisions. From the outset we want to be clear that this discussion will not evaluate state-level policy and critique its value and effectiveness. Instead, we seek to explain why state-level policy developed as it did. In the first part of the chapter we show how in the early twentieth century, long before Medicaid was enacted, states took responsibility for the provision of health care for the poor. Even in this early period, states were pressured to help the nonpoor. Health care was expensive (relative to lower- and middle-class earnings at the time); therefore, when working families were sick and needed care, they often relied on the public sector to help them. Medicaid grew out of years of various state responses to this demand for health care from both the poor and nonpoor. In the second part of the chapter we illustrate how states have grappled with administering and financing this large Medicaid program, by...

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