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Witnesses Urge $50 Billion Boost in Federal Medicaid Outlays

By John Reichard, CQ HealthBeat Editor

November 13, 2008 -- Gene Sperling, who served as a top economic adviser in the Clinton White House, joined with Gov. Janet Napolitano, D-Ariz., and other governors Thursday in calling for an increase of $40 to $50 billion over a two-year period in federal Medicaid spending. But two other witnesses who also testified at Thursday's hearing by the House Energy and Commerce Health Subcommittee differed with Sperling and Napolitano over adding Medicaid money to a new economic stimulus package.

Subcommittee Chairman Frank Pallone Jr., D-N.J., called the hearing to push for inclusion of Medicaid money in a stimulus package the House may take up next week, as well as added funding for the National Institutes of Health (NIH). But Pallone indicated after the hearing that he'll urge a more modest $14 billion Medicaid infusion over 18 months, noting that the opposition of President Bush to added federal Medicaid spending means any amount that is included will have to be relatively small. Pallone admitted that inclusion of added NIH money is less likely than the boost in Medicaid spending.

An economic stimulus package put off until early next year could create an opportunity for larger Medicaid spending, but a number of economists say Congress should act quickly to address the faltering economy.

House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., are urging lawmakers to pass a new economic stimulus package including new aid for struggling automakers. But Pelosi and House Majority Leader Steny H. Hoyer, D-Md., say they won't bring the House back for a possible lame-duck session the week of Nov. 17 unless Bush and Senate Republicans allow a stimulus and auto industry aid to become law. That hasn't happened yet.

Sperling called the nation's fiscal outlook the worst he's seen in his career as a professional economist. "We have to start with the notion that we are in a demand crisis," he said. "I can't see where demand [for goods and services] is coming from next year." He is now a senior fellow with the left-leaning Center for American Progress Action Fund.

Hit by a double whammy of declining real estate values and shrinking retirement accounts, families everywhere are focused on one thing, Sperling said—how to reduce their spending. "For tens of millions of families who are observing a weakening labor market and dual hits to their home wealth and pension savings, there is only one conversation going on around these millions of kitchen tables: What are we going to cut back?"

Businesses see that happening and are shelving expansion plans and laying off employees, adding to the downward spiral of demand, Sperling said.

In recent years, inflation-adjusted income hasn't grown but families were able to spend more by using rising home equity values as ATM machines, he noted. But those ATMs have run out of cash with plummeting real estate values and hopes have been dashed that the combination of a falling dollar, cheaper exports, and strong demand for U.S. products in Europe would help the nation emerge from its current downturn.

"Where exactly is a surge in economic demand likely to come from in 2009?" he asked. The only realistic hope is for a big stimulus package, which Sperling said should follow in economic terms the military principles espoused by Colin Powell when it decides to undertake warfare: that it marshal an overwhelming force to quickly achieve a decisive victory. "This is a Powell Doctrine moment for stimulus," Sperling said, one that should aim "to have overwhelming force."

To that end he called for spending a minimum of $300 to $400 billion over an 18-month period. Sperling said even if that's $100 billion to $200 billion too much, the economic risks involved are small compared with that of a prolonged global recession. He said he could easily justify spending $75 to $100 billion of that over 18 to 24 months on fiscal aid to the states, with half of that for a temporary increase in the Federal Medical Assistance Percentage (FMAP), the share of Medicaid spending borne by the federal government.

Napolitano said that 35 to 40 states will ultimately face budget shortfalls in 2009 because of declining revenues from the economic downturn. "These states will accumulate deficits of at least $140 billion through fiscal 2010," she predicted.

Napolitano said the federal government should boost FMAP by $25 billion a year for two years to help states cope with rising Medicaid enrollment fueled by job losses and prevent cuts in health care services caused by declining revenues. She added that lawmakers should change the Medicaid statute to automatically boost federal Medicaid spending during economic downturns.

"There is broad consensus that an early enough, long enough stimulus during an economic downturn can ameliorate some of the downturn's worst effects. There is also consensus that temporary FMAP increases are one of the best ways to stimulate the economy," she said.

Napolitano was testifying on her own behalf and not on that of other governors. But the National Governors Association released a paper Thursday that called for a similar, if somewhat smaller, amount in added FMAP spending. Congress should boost FMAP outlays by a least $20 billion a year for two years, the governors said.

However, Raymond Pinard, a Boston-based print business owner who testified on behalf of the U.S. Chamber of Commerce, testified that the "best way to protect health care benefits and reduce health care costs incurred by states is to provide incentives for the private sector to create jobs." He said that tax breaks in the economic stimulus package signed into law earlier this year hastened his company's $2.25 million purchase of a printing press that created a number of new jobs with health care benefits.

"I am also aware that some of the proposals you are entertaining are helping states with their Medicaid obligations or providing additional funding to NIH for research. While these are interesting proposals, as an employer I feel that you will get more bang for the buck by considering a second round of tax incentives crafted for small businesses to invest and expand instead," he said.

Alan D. Viard, a resident scholar at the American Enterprise Institute, said that the need for a stimulus package is uncertain but that if one is adopted "increases in the federal Medicaid matching rate should not be included because they are an ineffective means of boosting aggregate demand."

"It is tempting to argue that increased spending on a specified item—medical care, alternative energy, defense, business investment, or anything else—will create jobs. It is always easy to see the large number of workers who will be employed to produce the specified item. But, it is also necessary to see the jobs displaced elsewhere in the economy, as an increase in spending on the specified item forces a reduction in spending on other goods and services."

Sperling agreed that "it absolutely is not a way" to permanently increase jobs but said a stimulus is a way to stop a painful downward cycle. "I'm just extremely, extremely worried," Sperling said, adding that he's never before advocated a stimulus package exceeding $150 billion.

In terms of added NIH spending, Pallone asserted that it provides "real, direct economic benefits at the local level including increased employment, growth opportunities for universities, medical centers, local companies, and additional economic stimulus for the community."

Ron Pollack, executive director of the advocacy group Families USA, testified that "every dollar invested in NIH generates more than twice that amount in state economic input." It is "an investment that can stimulate state economies while helping ensure that we maintain our preeminence in biomedical research." According to a Families USA analysis, $22.8 billion in NIH grants and contracts to universities and other research organizations in 2007 generated a total of $50.5 billion across the states in new business activity.

Raynard S. Kington, acting NIH Director, testified that stagnant funding for the agency comes at a critical time when biomedical science is on the threshold of many new medical breakthroughs. It also threatens the career development of a cadre of young researchers who could help convert NIH discoveries into major advances, he suggested. On the other hand, added spending leads to new technologies, patents, and businesses generating economic activity, he said.

Rachel King, CEO of the biotech firm Glycomimetics, testified that the current downturn puts many emerging biotech firms "in a precarious position where they must continue their development projects, but are unable to attain additional financing from investors. Adding money for NIH would improve the investment climate for emerging biotech firms, said King, who testified on behalf of the Biotechnology Industry Organization (BIO). BIO is urging the inclusion of an added $1.9 billion in NIH funding as part of a stimulus package.

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