Health Care

Provide Health Care to Poor, not Uninsured

Some 15 percent of all Americans are without any medical insurance, but the uninsured are not left in the streets to bleed from a car crash, nor are they denied a heart surgery if needed. Emergency rooms must treat anyone regardless of ability to pay. Taxpayers and people who are insured subsidize those medical services.

Some, including myself, believe that while the state should leave medical care to the free market, it should worry about the minority of the genuinely poor (and chronically ill, etc.). For others, forcing employers to insure the uninsured is the inauguration of a road toward a government-run health care system a la Canada.

Massachusetts recently made a big splash by enacting a law forcing all its residents to buy health coverage. Gov. Bill Richardson, who is campaigning in the national arena, wants “every New Mexican insured by 2008, 2009.”

Let’s compare New Mexico with Massachusetts and see if, instead of mimicking Gov. Mitt Romney’s plan, we can do better by modifying New Mexico’s new health initiatives. But first note: According to the Statistical Abstract of the United States, in 2003 average personal income per capita in New Mexico was fourth from the bottom with $24,995; Massachusetts was fourth from the top with $39,504.

According to the U.S. Census Bureau (average 2002-2004) New Mexico was the state with the second highest rate for uninsured residents, 21.8 percent. Massachusetts with 11.2 percent uninsured was the 13th from the bottom.

In April, Romney grabbed national headlines when he persuaded the Massachusetts legislature to pass a universal-health plan characterized as “market friendly.” It isn’t, nor is it fiscally wise. It penalizes employers to the tune of $295 per year per uninsured employee— a crude interference in the marketplace; it offers the needy state-subsidized health insurance policy with a zero deductible that insulates the insured from the true cost of medical care and, consequently, it costs taxpayers a fortune.

So, can poor New Mexico, with one of the highest rates of uninsured, do better than rich Massachusetts with a relatively low rate of uninsured?

Medicaid in New Mexico, with a budget of $2.59 billion (about 72 percent federal) in state fiscal year 2006, is very generous to poor children, including medically fragile children, the disabled, the aged who require institutional care and a variety of other needy persons, such as the blind.

New Mexico is currently in the process of implementing the State Coverage Insurance (SCI) plan, which involves businesses that employ 50 or fewer: The employer pays $75 per month per employee. The employee pays $0-$35 per month along a sliding scale. The state and federal government through Medicaid cover the remainder, estimated at $260 per month.

SCI is offered only to adults 19 through 64 years of age, who earn no more than 200 percent of the federal poverty guidelines. As an illustration, 200 percent of the poverty level for a single mother with two children is currently $33,204 per annum.

The SCI’s paramount advantage over the Massachusetts plan is that it is not mandatory: An employer can take it or leave it without paying any penalty. But it is flawed as follows:

  • It targets only a subgroup of needy employees who happened to work for small companies.
  • SCI fails to accept the premise that in a competitive labor markets, particularly where small employers are present, there is a dollar-for-dollar trade-off between wages and health benefits. A genuinely poor employee who pays no income taxes would hate to trade off $75 per month of reduced wages for health insurance knowing that he can gain admittance to hospitals through emergency rooms.
  • SCI offers the poor employee insurance with a $0, $5 or $7 co-payment, depending on income, for a physician/provider office visit. But the SCI has no deductibles. Even the needy should not be completely insulated from health-care costs in the real world. Moreover, the lack of deductibles results in a huge monthly premium of $355 ($20 75 260), or $4,260 per adult per annum.

Gov. Richardson wants to outdo Gov. Romney. But, to innovate and do better than Massachusetts, New Mexico should target all genuinely poor adults with income less than 200 percent of the poverty level, instead of focusing on small employers and raising the poverty threshold to a fiscally irresponsible level of 300 percent of the poverty level.

The requirement that employers pay $75 per month per employee should be rescinded. The no-deductible policy is bad. The health care policy for the poor should offer a deductible that increases with income along a sliding scale.

The state should leave small employers alone: They are neither poor nor little children and they can figure out for themselves how to band together to form insurance pools.

Finally, those who argue that the cost of expanding medical care to the uninsured non-poor balances out the cost of funding uncompensated care for providers are wrong: “Free care” is negligible for the uninsured with incomes greater than 200 percent of the poverty level.

The Land of Enchantment can do better than the Bay State by focusing on the genuinely poor, not the uninsured.

Micha Gisser is professor emeritus of economics and senior fellow at the Rio Grande Foundation, a research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Health Care

Should Expanding Coverage Drag Working Families Down, or Lift Them Up?

On Friday, December 8, the Rio Grande Foundation invited Michael Cannon, Director of Health Policy Studies at the Cato Institute to discuss several important issues in health care. At the event, Cannon presented his ideas on necessary changes to New Mexico’s health care system, specifically targeting Medicaid reform.

Click here to download the presentation in Adobe PDF format.

Health Care Research Tax and Budget

Treat Sick Tax Policy: First, Undo the Harm from 2004 Legislature

Health care providers have long needed relief from New Mexico’s gross receipts tax. But the 2004 legislative session produced a bad law. It provided unfair relief to those involved in “managed care,” making matters worse for those engaged in traditional fee-for-service care. Moreover, it will result in harm to the economy, hurt the consumer and worsen the health care “crisis.”


Health care providers have long needed relief from New Mexico’s gross receipts tax.  But the 2004 legislative session produced a bad law.  While it provides relief to those involved in “managed care,” it makes matters worse for those engaged in traditional fee-for-service care.  Moreover, it will result in harm to the economy, hurt the consumer and worsen the health care “crisis.”  This paper summarizes the need for tax relief.  Then it discusses the results of the law, and why the bad aspects of the law far outweigh the good2.  It concludes with some recommendations that would reduce the harm.

The need for tax relief

New Mexico’s gross receipts tax has imposed an excessive burden on firms providing services.  Health care providers are particularly hard hit by the tax because of high overhead costs, all subject to the tax3.  Since no other state in the region taxes services, the gross receipts tax has induced dentists and doctors to leave New Mexico.  The following table summarizes the adverse situation faced by doctors and dentists in Albuquerque4 relative to Texas had the tax law not changed:


Before Tax Law Change
Total Tax Paid by Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes and effect of the grt in NM)
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $29,292 $37,756 $46,564 $55,373 $64,376 $73,962
Texas Tax $10,800 $15,956 $21,556 $27,156 $33,006 $39,606

You can easily see the incentive for doctors and dentists to leave New Mexico.  For example, a dentist earning taxable income of $160,000 would save over $28,000 in taxes5 simply by moving to Texas!

How the new law changes things

Beginning in 2005 managed care practices will no longer be subject to the tax. Unfortunately, however, traditional care doctors and dentists will see their tax rates go up!  The basic feature6 of “managed care” is that “providers must supply health care services to enrollees on a contract basis.”  However, copays, coinsurance and deductibles are subject to the tax even under managed care contracts.  The following table summarizes the new situation for each group in Albuquerque:


After Tax Law Change
Total Tax Paid by Managed Care Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes)    
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $16,128 $22,175 $28,639 $35,103 $41,802 $49,206
After Tax Law Change
Total Tax Paid by Fee-For-Service Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes and effect of the GRT in NM)
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $30,378 $39,041 $48,043 $57,045 $66,238 $76,004


What is wrong with the new law?

  • It is grossly unfair.  Why should the state favor “managed care” over traditional care?  Notice from the table above that “managed care” doctors and dentists pay almost $18,000 less in taxes than traditional care doctors and dentists for taxable income of $160,000.  A dentist or physician engaging in traditional care will have incentive to increase the proportion of her practice fitting the managed care criteria.  To break even net-of-taxes a health care provider must charge 25 percent more for the same procedure under traditional care than she would under managed care.  For example, a dentist filling a tooth for $100 under managed care would have to charge $125 under traditional care.  In each case the dentist would receive roughly $68 net of taxes.  The government simply has no business legislating such favoritism.
  • It penalizes responsible behavior.  New Mexico penalizes people who self-insure or are willing to pay high deductibles, coinsurance or copays?  This is the kind of personal responsibility the government should encourage, not penalize.
  • It will harm the economy.  The one-half percentage point increase in the gross receipts tax rate will affect firms and consumers throughout New Mexico.  Since tax harms tend to go up exponentially, the damage done will be far more than double the roughly 8% increase in the tax7.
  • It harms the consumer.  The greatly expanded proportion of health care delivered under managed care in New Mexico will exacerbate everything that is wrong8 with health care – more government price controls and mandates, encouragement of bad principles of insurance, increasing the incentives of patients to overconsume when somebody else is paying the bill, more decision making by managed care “gatekeepers” (rather than individuals in consultation with their physician or dentist) and much less incentive to take advantage of the new, market-friendly Health Care Savings Accounts.  It is difficult to understand how such a bad law could be passed; perhaps the Medicaid crisis tail (and all its managed care interests and advocates) is now wagging the tax policy dog.  And it may be a not-so-subtle policy shift that gains momentum for socialized health care in New Mexico.
  • It is an administrative nightmare.  The complex law requires additional record keeping to justify the gross receipts tax exemption.  Penalties are substantial for those who make errors.

This bad law should be rescinded in the next legislative session.  And it should be replaced with a law that is fair, consumer friendly, helps the economy and provides tax relief to health care providers.  This can be accomplished by an across the board gross receipts tax rate reduction (my favorite), a tax rate reduction for all services or a tax rate reduction only for health care providers.

  1. An earlier version of this article appeared in the October 2004 edition of the New Mexico Dental Journal.
  2. The law also eliminated the tax on groceries purchased for home consumption, while raising the overall gross receipts tax rate in municipalities by 0.5 percentage points.  The part of the law is terrible too, since it will actually hurt the poor (because the tax increase far outweighs any relief from the tax on groceries).  Interested readers will find a thorough analysis of this abomination in the paper Reform This! on the Foundation’s Web site.  Also, an earlier paper “Lower Taxes Period: the right way to end the tax on food” provides additional analysis and background.
  3. Health care providers have a higher percentage of overhead than do other service providers.  Consequently they suffer more.  The percentage of overhead used for the examples in this paper is 65 percent (source Dr. David Moore 9/8/04).  Tax calculations are for couples filing jointly.
  4. Other jurisdictions (e.g. Santa Fe, Las Cruces, Taos) generally have higher gross receipts tax rates than does Albuquerque, making the adverse situation even worse.
  5. Texas has the most favorable tax climate in the region.  But the health care provider would still save over $22,000 in taxes by moving to a less favorable tax state such as Utah or Oklahoma.  The table assumes that the legislature will not renege on the scheduled reduction of the top rate on individual income to 6.0% (from 6.8% this year).
  6. A detailed discussion of qualifying managed care criteria along with examples can be found in publication FYI-202 on the website of New Mexico Taxation and Revenue Department.
  7. See the Foundation’s publication “Reform This!” for a discussion of how taxes cause harm.
  8. A detailed analysis of this assertion can be found in “Solutions to the Medicaid Crisis in New Mexico” on the Foundations
Health Care Research

State Health Insurance Plan Should Include the Uninsured

Gov. Bill Richardson promises to try again in 2005 his plan to put some 600,000 public employees and retirees into a single health-insurance purchasing pool. While this plan would create a huge state institution that will not do much, if anything at all, for state and public employees, it does not address some of the serious health care problems we face in New Mexico.

The aims of any down-to-earth health care policy for New Mexico should be first to attract more physicians and other care providers to New Mexico; second to remove the vestigial gross receipt tax on out-of-pocket medical expenditures; and, third, examine the issue of the high rate of the uninsured in New Mexico.

The national rate of uninsured steadily, but slowly, increased from 12.9 percent in 1987 to 16.3 percent in 1998. Then it made a sharp turn and moved downward to 14.2 percent in 2000 and upward to 15.2 percent in 2002. The apparent cycle in recent years is mainly in response to changes in unemployment and health care costs. In the near future, when the unemployment rate will continue to decline, the national rate of uninsured will change course and turn southward. It is too early to make predictions about the long-run trend. In what follows I focus on interstate insurance comparisons.

The proportion of persons without medical insurance in New Mexico is one of the highest in the United States. Indeed, according to the U.S. Census Bureau, 14.6 percent of all Americans were without any insurance in 2001. Iowa , with 7.5 percent, had the lowest rate; Texas, with 23.5 percent had the highest rate; New Mexico, with 20.7 percent was the second highest.

I applied statistical procedures using Census 1999 and 2000 data for all the states for estimating the impact of economic and social variables on the rate of uninsured. First, I found that an increase of average personal income by $1,000 is expected to reduce the rate of the uninsured by 0.45 of one percentage point. Second, a one percentage point increase in the number of Hispanics is expected to result in a rise of one-third of one percentage point of uninsured persons. Third, a one percentage point increase in the ratio of blacks in total population is expected to result in only one-tenth of one percentage point increase in uninsured persons.

Why Hispanics are less likely than non-Hispanic whites to be covered by health insurance is a puzzle. New Mexico should support a study to explore this issue. Additionally, policy-makers should focus on the uninsured who are extremely poor, chronically ill or disabled. For starters, not all uninsured persons deserve subsidized medical care even when they earn low incomes. Consider young adults who just graduated from college. In general, these young adults are relatively more likely to contract HIV, suffer violent injuries in car accidents, and, if they are females, become pregnant. But, between their feeling of invincibility and small bank accounts, graduates shun inexpensive short-term plans.

Or, consider adults who are temporarily unemployed or in job transition and being aware of the de facto subsidized health care for the uninsured, fail to continue insurance by COBRA (Consolidated Omnibus Budget Reconciliation Act). Or, how about those who retire before qualifying for Medicare but decide not to buy an individual health plan because it is surprisingly more expensive than they imagined.

Finally, there are the risk lovers for whom gambling, no matter in what form, is fun. It is likely that the availability of Health Saving Accounts (HSA) signed into law by President Bush in 2003 will induce some of the above to insure themselves: HSA will give them the same tax advantages now granted to mostly all other groups.

But we cannot ignore the truly needy. Medicaid in New Mexico is very generous to children, including medically fragile children, the disabled, the aged who require institutional care and a variety of other needy persons, such as the blind. There is a subgroup, however, of extremely poor, chronically ill, or a combination of the above, adults who are uninsured and do not qualify for Medicaid. As an illustration, consider a single parent- a mother with two children- earning $20,000, or a married couple earning $20,000 in which one spouse is chronically ill. Instead of rushing to embrace a grandiose plan creating a huge pool for state and local government employees, our elected leaders should focus on the extremely poor and chronically ill. We need a solid economic study, based on a fresh survey of uninsured persons in New Mexico. Such a survey should sort the uninsured not only by the traditional explanatory factors- income, ethnicity, age and education- but also by Medicaid eligibility, unemployment status, job transition, recent graduation from college, being chronically ill and so on. The order of magnitude of the number of the truly needy among the uninsured is essential before any sound policy regarding the medically uninsured can be considered.


A Statistical Estimate of the Average Number of Physicians per 100,000 Residents in 1998 as a Linear Function of Personal Income, Medicare Expenditures per Enrollee and Medicaid Expenditures Per Recipient and per Capita


Regression 1

Constant Personal Income1998

Medicare Expenditures per Enrollee2000 Medicaid Expenditures per Recipient2000

Medicaid Expenditures per Capita2000 Adjusted R2
Coefficient -233.89 0.009 0.037 0.011   0.68
t-ratio -4.8 4.2 5.8 1.5    
Regression 2
Coefficient -203.19 0.009 0.023  



t-ratio -5.11 5.6 3.9   5.35  

A Statistical Estimate of the Percentage Uninsured as a Linear Function of Personal Income, Hispanic and Black as Percents of Total Population, Educational Attainment and age

The Data are for 51 States


Constant Personal Income 1999 Persons of Hispanic or Latino Origin as Percent of Total Population2000 Black or African American as Percent of Total Population2000 Educational Attainment2000* People 18 to 24 Years Old: Percent of Total Population2000 Adjusted R2
Coefficient 18.08 -0.00045 0.33 0.106 0.072 -0.291 0.58
t-ratio 1.9 -4.2 7.3 2.5 0.6 -0.76

Health Care

Health Savings Accounts Cure Patients of Blind Consumption


abq_journalThose who advocate the nationalization of the American health-care system often cite the trend of rising national health expenditures as percentage of gross domestic product. From 1960 to 2000, health care’s share of GDP in the United States increased from 5.3 percent to 13.2 percent. Rising personal income, higher quality care and insurance that insulates individuals from health care’s real costs are the main factors behind this trend. From 1960 to 2000 real GDP per capita, has increased from $13,155 to $32,670 (expressed in 1996 prices). During the same period, real GDP per capita devoted to non-medical services increased from $12,458 to $28,3588. Put differently, the so-called explosion in medical-care expenditures reduced the average annual rate of growth of real GDP per capita devoted to non-medical goods from a potential 2.30 percent to 2.08 percent.

American consumers are wealthier than ever: The more than doubling over four decades of real GDP per capita excluding medical expenditures is reflected in real consumption. The “explosion” in medical-care expenditures ate a bite of our salad, but hardly the whole lunch. And for that increase in health spending, we receive better high-tech care that was not available at any price in 1960.

In that light, the present looks pretty good. The future looks even better, mainly due to the surge of American productivity and the Health Savings Account Act that President Bush signed into law in 2003.

Traditional medical insurance covers two dissimilar events: minor ailments and catastrophic illnesses. If a consumer faces a 5 percent probability that she will contact a catastrophic illness in a given year requiring $20,000 of medical care, she would be willing to purchase a policy for $1,000 (plus transaction costs). She will not use more of the heart-surgeon’s services just because her out of pocket spending is zero.

This consumer also faces some probability of suffering the run-of-the-mill headaches, sniffles, backaches etc. Assume that she would be willing to purchase a policy for additional $1,000 for sniffles, etc. Under the tax law she is allowed to exclude $2,000 from her taxable income. Her demand for care for minor illnesses is inversely related to price: At the true high price she would consult the medical encyclopedia and use over-the-counter drugs. At a low price- zero if her insurance pays the entire cost- she would consume much more care.

The problem with the prevailing medical insurance is that the third-party payment of health care bills insulates the consumer from the real costs of medical care services for non-catastrophic illnesses.

The new Health Savings Account law basically allows the consumer in our example to set aside $1,000 in an HSA that is tax exempt, and can be used for sniffles and headaches at her discretion. If this year she spent only $300, she can use the remaining $700 for next year’s sniffles, or save it for retirement.

HSAs thus eliminate “moral hazard” by separating catastrophic from minor illnesses and injuries. Additionally, it is designed to enhance competition by eliminating managed-care-third-party restrictions. It is also likely that availability of HSAs would induce many of the uninsured to insure.

Furthermore, under the HSA law, it behooves our individual to convert a high-cost-$2,000 premium, low-deductible policy into a low-cost-$1,000 premium, high-deductible policy. Before the HSA option was enacted, such a transition would have resulted in a loss; turning the $1,000 premium saving into taxable income would have resulted in a loss of roughly 40 percent (income and payroll taxes.) But now, the individual can use the sum of $1,000 to fund a health savings account, and the contribution to this account will be fully deductible, whether she itemizes deductions or not.

Because of the contribution of the new HSA law to competition and efficiency, the next four decades look even brighter than the previous four.

There are two additional legislative modifications that should be initiated at the federal level in order to further reduce the future costs of medical care:

  • Congress should change the Medicaid formula for matching state funds to making block grants. With block grants, states will have stronger political incentives to distribute Medicaid money more efficiently.
  • In July 2003, the U.S. Senate could not muster the 60 votes needed to pass the medical liability reform to cap medical malpractice damage awards. They should try again, because such a reform would go a long way to reduce the cost of physicians’ services all over the United States.

The New Mexico Legislature removed the gross-receipts tax on payments to physicians from commercial managed care companies. But, the gross-receipts tax will continue to be imposed on the kind of out-of-pocket medical expenditures that would be made from health savings accounts. The 2005 Legislature should remove that vestigial gross receipts tax, an act that will make HSAs more attractive to consumers and help attract more physicians to New Mexico.

Health Care

Medicare Needs a More Logical Formula

The number of physicians per capita is a major indicator of quality and quantity of health care services available in New Mexico, or anywhere. This ratio is a function of money available to pay physicians.
A: The short run. The only provision in the (recent) tax bill proposals that makes economic sense is to rescind the gross receipts tax (GRT) paid by medical care providers. The report by the New Mexico Health Policy Commission, “Physician Supply in New Mexico: 2002,” concluded that the main factor contributing to physicians leaving New Mexico is GRT. Consider a physician who grossed $350,000 a year, of which $100,000 from Medicare and Medicaid is not subject to GRT. After paying all expenses, the physician nets $150,000 income before taxes. Rescinding the GRT (5.8125 percent) would net the physician an additional $14,531- almost 10 percent of net income before taxes. Obviously, the relief from abolishing GRT on medical providers will be shared by both doctors and patients, but the lion’s share will benefit the doctors. The GRT is a good tax, and except for the doctors’ and hospitals’ bills it should be retained. In particular, grocery tax on food should be retained.
B: The long run. According to the U.S. Census Bureau, in 1998 the average number of physicians per 100,000 resident population in the United States was 251. For New Mexico this figure was 212. Is the physician shortage in New Mexico severe? The ratio for Massachusetts was 412. If we sort the 51 states (including D.C.) by a descending order, New Mexico is No. 32. Idaho, with a ratio of 154, has the most severe shortage.
Calculations based on the Census Bureau reports show that in 2000 the average Medicare expenditures per enrollee nationwide was $5,578. The highest level was $10,316 in D.C. The second highest was Louisiana with $7,342, and the lowest figure was $3,053 in Iowa. In New Mexico, the fourth state from the bottom, the average Medicare expenditures per enrollee amounted to only $3,729.
Getting New Mexico a little closer to the national average, say by increasing its Medicare allocation by 20 percent, roughly to $4,500 per enrollee, would increase the number of physicians by 17- from 212 to 229 physicians per 100,000 residents.
Obviously, the archaic formula used in the process of allocating Medicare money is senseless and disadvantageous to New Mexico. A basic economic principle tells us that, on average, in a free labor market, incomes of physicians (and nurses, etc.) across the U.S. would be proportional to the cost of living. For example, if the cost of living in California is 10 percent higher than in New Mexico, we should expect neurosurgeons to earn 10 percent more (in nominal terms) in California relative to New Mexico.
To illustrate the arbitrariness of the federal allocation of Medicare money, I compare two states, Texas and New Mexico. The accompanying comparison illustrates my point:
Texas and New Mexico: A Comparison Based on ACCRA
• Medicare expenditures per enrollee: 2000
$3,729 in New Mexico
$6,540 in Texas
• ACCRA cost of living: 2002, four-quarter average
103.7 in Albuquerque
91.9 in Houston
The cost of living in Albuquerque is 10 percent higher than in Houston. Yet, in 2000, Texas was allocated 75 percent more Medicare money per enrollee than New Mexico. This is ludicrous. States like Iowa, Vermont, Maine and New Mexico that come up on the short end of the stick should band together and form a political coalition for the purpose of revamping the allocation of Medicare money. To this end they must have a cross-sectional price index that would calculate the cost of living for each of the 51 states. There is no reason why the experienced Bureau of Labor Statistics could not undertake to perform this task.
Our congressional delegation should lead the battle for a logical distribution of Medicare money by first convincing their colleagues to legislate the creation of a cross-sectional Consumer Price Index. The distribution of Medicare money to enrollees should be determined solely by a cross-sectional price index.
We should note that New Mexico legislators deserve credit where the U.S. Senate failed. New Mexico law caps punitive and economic damages at $600,000. (See “Better Than Most” by Winthrop Quigley, Business Outlook, Albuquerque Journal, June 26, 2003). However, the fact that New Mexico offers physicians cheaper malpractice insurance than most of the country is not enough to overcome physician shortages.
Health Care Research

Solutions to the Medicaid Crisis in New Mexico

This RGF study answers the following questions: Why is Medicaid so expensive? How rapidly will the costs grow if nothing is done to change the program? What are the options for controlling costs and how will these options affect the health and well-being of Medicaid recipients? What are the larger issues facing New Mexico and other states that stem from the federal government’s approach to Medicaid?
We find that New Mexico’s problems have five main sources:
  • Mandated benefits (no choice, really bad principles of insurance)
  • Overly generous benefits (no private insurer provides a benefit package as generous as Medicaid’s)
  • No incentive on the part of beneficiaries to be careful shoppers in finding and using health care benefits (payment is made almost entirely by someone other than the user)
  • Major disincentives to work and earn income (the generous benefit package comes with a means test, meaning you are severely penalized if you earn too much money)
  • The federal match to the state’s Medicaid expenditures provides the illusion of “free” money. Since each state is under the same illusion, the match actually results in a free-for-all among the states (each state pays a small portion of its own Medicaid to the federal treasury plus 49 small portions for each of the other 49 states, summing to one huge portion).

We make some major recommendations to fix these problems. Now is an opportune time to do so, since the whole program is out of control. The Bush administration is encouraging states to apply for waivers from Medicaid rules to try innovative, market-like solutions to solving problems. This presents New Mexico with a real opportunity to be on the cutting edge of innovation. One promising solution to Medicaid is a defined contribution approach. We illustrate the approach and the incentives involved by use of an example for a family of four.

Click here to download the full report in PDF format.