David Frum
David Frum - 
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Kai Ryssdal: Vice President Joe Biden made yesterday's health-care news official this morning. He announced a deal with three hospital groups that's supposed to save $155 billion in Medicare and Medicaid spending. The hospitals will take less from the government for providing services to the poor and elderly. Commentator David Frum says that's a fine start. But Medicaid's got bigger problems.

DAVID FRUM: Virtually every American state is projecting a budget deficit for this coming year, and most expect a deficit in fiscal 2011 as well: perhaps $350 billion altogether over the next 24 months.

President Obama's chief of staff has advised "never let a crisis go to waste." Let's use this crisis to fix a glaring problem: the catastrophically perverse financing of Medicaid, for almost all states their fastest-growing budget expense.

The federal government pays at least half the cost of Medicaid, more in states with lower average incomes. In other words, rich states with a lot of poor people -- California or New York -- will receive less for each Medicaid recipient than a state with a lower average income but fewer poor. Wyoming, say.

In good times, this arrangement means that states can buy a dollar's worth of extra health coverage for no more than 50 cents, and often much less.

In bad times, it means that most of the savings from cutting Medicaid budgets reverts to the federal government. For the state politicians who have to do the cutting, a dollar's worth of political pain saves less than 50 cents of state money.

In good times and in bad, states are prevented from innovating and adapting because the federal dollars come attached with strict conditions.

No wonder that Medicaid has become America's fastest-growing major social program but also one of the most rigid and scandal-prone.

The people who make the spending decisions should also bear the responsibility for the cost of those decisions. If the states continue to administer Medicaid, the federal contribution must be capped and redirected away from poor states to poor people.

Otherwise, this program designed in the 1960s will drag American states into their worst collapse since the 1930s.

Ryssdal:David Frum is a resident fellow at the American Enterprise Institute.

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