WHERE IT MAY REALLY HURT

By MATTHEW MILLER

For months Bill Clinton waffled on the details. So it was a surprise to hear exactly where the President drew the line last week when he vetoed the Republican balanced-budget bill and unveiled a new plan of his own. Topping the list of things on which Clinton took a stand was Medicaid, the jointly funded, federal-state health program that serves 36 million Americans. The Administration renewed its call for a plan that would save $54 billion from the program over seven years, only one-third of the savings Republicans seek. But Clinton went further, saying if the G.O.P. kept insisting that the Federal Government retreat from the Medicaid business, the Republicans could forget about a budget agreement. "That would violate our values,'' Clinton declared. Steaming Republicans countered that Clinton's intransigence could "blow up'' the talks. All of which raised one question: With Clinton's attacks on the G.O.P.'s Medicare plan lifting the President's poll numbers, and a hundred other fights to pick with Republican spending priorities, how on earth had Medicaid suddenly become the ultimate deal breaker?

The answer is that the Administration, along with the American Medical Association and even some Republican Governors, believes the G.O.P.'s Medicaid proposals pose real risks to the most vulnerable Americans. By affirming that some sensible Medicaid savings could be achieved, but no more than that, the Administration may have marked a decisive turning point in the fiscal debate that will dominate the Capitol at least through Christmas. To many Americans, the battles over Medicare and Medicaid quickly dissolve into a confusing blur of federal health programs whose names sound virtually identical. But Medicaid demands special attention. Going too far for the sake of savings could worsen many of the problems that already afflict America's increasingly divided society.

Commonly thought of as health care for the poor, Medicaid is actually several programs in one. It provides basic health coverage for 26 million poor children and adults, but they account for just a quarter of the program's $156 billion annual tab. The big costs come from providing long-term care for 10 million elderly and disabled Americans. All told, Medicaid covers 1 in 4 American children, pays for 1 in 3 births, and finances more than half the nursing-home care in the country. For the time being, Medicaid is also an "entitlement," like Social Security and Medicare. This means that those who meet certain criteria--qualifying for welfare or disability benefits--automatically get coverage.

The Republican Congress wants to change all that. In place of an open-ended entitlement, the G.O.P. proposes block grants that would essentially give states a lump sum each year to spend for Medicaid's traditional purposes as the states see fit. The G.O.P. would then slow the growth rates of these "Medigrants" from the current forecast of 10% yearly to 5%, with some states coming down to as little as 2% growth. On the positive side, the block grants limit the Federal Government's financial exposure to rising Medicaid costs. And the G.O.P. is not proposing actual cuts, but reductions in the rate of Medicaid's growth. Still, given the outlook for affected Americans, the Medicaid proposal has drawn harsh criticism from many, like Oregon Governor John Kitzhaber, a Democrat and a physician, who calls the withdrawal of guaranteed health coverage a "cynical political move" meant to balance the budget on the backs of people who don't vote Republican. The A.M.A., which earlier endorsed the G.O.P.'s Medicare reforms, went public last week with concerns that the Medicaid safety net is being torn wide open.

It's not just theatrics. To begin with, the number of Americans on Medicaid rolls is expected to grow by 10 million in the next seven years. That's not due to any general population surge but to coverage expansions already on the books. Although it's rarely noted, Medicaid today covers only half the poor, since eligibility is typically linked to other federal benefits, like Aid to Families with Dependent Children, that most needy Americans don't receive. To strengthen the safety net, both parties came together in 1990 and passed a law phasing in coverage for poor children under 18 by early in the next decade. Congress over several years had already expanded access for pregnant women. In addition, the number of disabled people on Medicaid is expected to grow much faster than the overall rolls, as more uninsured Americans become aware of these services and the baby-boom generation ages. This expansion will be accompanied by an increase in the very old. The population age 85 and over, 20% of whom now live in nursing homes, will rise 50% during the 1990s. A patient's annual nursing-home care can run to $35,000; a poor child's overall health-care bill, by contrast, costs Medicaid just $1,200.

TOGETHER THESE EXPANSIONS translate into a 28% increase in the number of people Medicaid is expected to serve seven years hence. That's nearly three times as large as the beneficiary growth predicted for Medicare, which depends simply on the increase in the number of seniors. Yet even with these planned expansions, the country would end the century with an estimated 40 million uninsured citizens, a state of affairs unthinkable in other advanced democracies, where universal coverage is the rule.

With this rising tide of the aging and disabled, how will states meet tight new budget targets? The options aren't pretty. They can drop people from the rolls, but that makes the problem of the uninsured worse. Employer-based health coverage has already declined in recent years as companies turn to part-time workers who don't get benefits--or simply lay people off. Medicaid has helped limit the damage caused by these cutbacks. (Without it, according to the independent Kaiser Commission on the Future of Medicaid, 9 million more Americans would be uninsured today.) But if the G.O.P. prevails, the ranks of the uninsured seem sure to grow. The Urban Institute, a Washington research group, projects that between 4 million and 9 million Americans will lose Medicaid coverage, depending on how states carry out the change. As a result, the cuts could inadvertently poison the prospects for welfare reform. How? It's a matter of incentives. As states cut back, they're likely to leave coverage for the truly destitute intact but drop it for working families struggling near the poverty line. Losing the Medicaid that covers their kids will be another way of telling these Americans that they're better off staying on the dole, where health coverage remains guaranteed, at least for now.

Cutting payments to doctors and hospitals is another option. But Medicaid already pays far less to health providers than Medicare and private insurers pay; nursing homes, for example, often get 25% to 30% less. If payments fall further, more doctors and hospitals could simply refuse to treat Medicaid patients. Managed care, meanwhile, is still touted as a cost-saving panacea. And it does hold promise, as many state experiments attest. But there may be only so much efficiency to be extracted from the treatment of, say, disabled seniors tethered to oxygen machines.

In Medicare there are more than a few places to save money. For example, the government can raise premiums, co-payments and deductibles for the middle- and upper-income beneficiaries who don't really need generous subsidies from the feds. Republicans have had the courage to call for these increases, which make sense. President Clinton has hypocritically assailed them, while his own Medicare blueprint does basically the same. But such costs for the poor or near poor can't really be raised. In fact, Medicare and Medicaid are intertwined in a way that ensures that every time Medicare premiums go up, Medicaid's costs automatically rise as well, since Medicaid pays the Medicare premium expenses for 4 million needy seniors.

Given the box they'll be in, what are states to do? In the next recession, with demands on Medicaid rising and the feds saying, "That's your problem," the states will be the site of an awful showdown. The powerful elderly and nursing-home lobbies will be fighting for Medicaid expansions to serve seniors. The only pot of money big enough to raid will be education, a state's biggest expense, which averages 30% of state spending. If state legislatures bow to pressure and steal from the classroom, communities will have to raise property taxes to protect their local schools.

Such cascading budget crises spell big political trouble in the next few years for the 31 Republican Governors. They have thus far kept mum about their anxieties, afraid that going public would stall their party's momentum in Washington. That can't last. Rising G.O.P. star Christine Whitman of New Jersey, up for re-election in 1997, could be the first to face the consequences. She says she supports the block-grant approach "philosophically" but wants "a glide path that's doable," not the downshift Gingrich has in store, which would take New Jersey from 10% growth to 2% in just 11 months.

Some Medicaid savings are necessary and achievable. From state to state, there's a huge disparity in federal Medicaid spending. New York and Washington, for example, collect an average of $2,000 per poor person, while in Idaho and Kansas it's about $500. With that much federal money running through the system, some states have helped create an overgrown health-care industry and health-care bureaucracy, both of which could stand some pruning. Other states have whole departments devoted to scamming more Medicaid money from the Federal Government. And when it comes to services, some optional benefits, like adult dental care or eyeglasses, might be trimmed on the theory that the poor shouldn't be entitled to a better benefit package than many middle-class people enjoy.

The Medicaid debate may come down to two choices. The two parties can remove the need for Medicaid savings this deep by dropping their tax cuts or putting back into the negotiations the half of the budget they've taken off the table: defense and Social Security and other entitlements for the well off. The alternative is to fix Medicaid later. In effect, that's Plan B for antsy Republican Governors, who pray that if the President doesn't save them by scaling back the cuts, there will be time to revisit the issues before disaster strikes. Maybe they'll get lucky. But judging by experiences in Arizona and Tennessee, two states that went early down the road to Medicaid reform, Governors had better learn to thrive on chaos--and learn fast.