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If you ask Republican senators what they like about Graham-Cassidy, the latest GOP effort to repeal and replace the Affordable Care Act, they’ll come back again and again to one talking point: It returns power to the states.
"As a general rule the states do things better than the federal government does," Sen. Jim Inhofe (R-OK) told my colleague Jeff Stein when asked what substantive problems the bill is meant to solve. "It lets states innovate and adopt creative solutions to local problems," Sen. Ted Cruz (R-TX) elaborated.
Graham-Cassidy replaces the money Obamacare used to expand coverage through Medicaid and private insurance with a fixed pot of money, or block grant, that states can use more or less as they please.
Supporters of the bill say history shows this approach will work, because, they argue, it worked with welfare reform in 1996.
“When we block-granted welfare to the states, it dramatically increased the amount of people going back to work, as well as lowered poverty rates and provided educational opportunities and a whole host of other things,” former Sen. Rick Santorum (R-PA), who has been lobbying for Graham-Cassidy and voted for the 1996 law, told Stein.
There’s only one problem: Welfare reform was a failure. It did little or nothing to improve material living standards among the poor, and it appears to have caused a substantial increase in deep poverty: the share of people living with little or no cash income, at half the poverty line or below.
And a big reason for welfare reform’s failure is the state-based block grant design that Graham and Sen. Bill Cassidy (R-LA) are emulating in their health care legislation. The bill’s block grant approach is drawn directly from the 1996 law.
But the welfare reform law imposed very few requirements on how states could use the $16.5 billion they annually get through the block grant, known as the Temporary Assistance to Needy Families program. As a result, states have started to use welfare reform money as a slush fund. Michigan has used the money for college scholarships, and Louisiana has used it to fund anti-abortion crisis pregnancy centers.
“You set up a system that incentivizes welfare for states, not people," University of Michigan professor of social work Luke Shaefer told me in an interview last year.
Given how poorly written Graham-Cassidy is, it’s likely that these problems would repeat themselves. States could get away with diverting funds from their intended purpose of expanding access to health care. And they’d have a very strong incentive to offer Medicaid or help buying insurance to fewer people, not more. “The money may not actually be used for coverage,” Edwin Park, vice president for health policy at the left-leaning Center for Budget and Policy Priorities, says.
The failure of welfare reform block-granting
The 1996 Personal Responsibility and Work Opportunity Act ended cash welfare through Aid to Families With Dependent Children, an entitlement that ensured that poor families had a regular source of cash income, and replaced it with Temporary Assistance to Needy Families, a block grant that gave states a fixed pot of money to use more or less as they saw fit.
Before welfare reform, AFDC functioned as an entitlement, like food stamps or Social Security or Medicaid. If you met the program requirements, you were automatically guaranteed access. Reform changed that. Instead, states were given a total of $16.5 billion every year.
Supporters of the 1996 bill argued this would allow states to experiment with different approaches, and give them new flexibility to help people off the welfare rolls. Sound familiar?
Instead, the share of women without any work earnings or welfare support doubled following the bill’s passage. In 1993, 4.5 percent of families were earning less than half of the poverty line in 1993; 6.6 percent were in 2004, a nearly 50 percent increase.
This failure was partly due to the structure of the welfare block grant. The $16.5 billion per year that states receive to run TANF is a static number, not adjusted for inflation — and inflation alone has eroded about a third of its value.
TANF has not been able to serve as an effective cushion in tough economic times, because the number stays the same regardless of the poverty rate. That turned out to be a major shortcoming of welfare reform during the Great Recession. As need increased, many government programs like food stamps stepped up to help out struggling households. But TANF didn’t.
Beyond those problems, the block grant in welfare reform set up a whole bunch of terrible incentives for states. TANF requires that half of people being helped by state programs be in a job or engaged in "work-related activity," like a vocational education program. One way to meet that requirement is to genuinely, in good faith, help people get jobs.
This is not, for the most part, what states did. Instead, they found it easier to kick people off the program, especially people who are hard to employ. To make matters worse, the law gave states a "caseload reduction credit," which reduces the work requirement for states that see their welfare rolls fall substantially.
While the law created incentives for states to help fewer people, it offered little in the way of regulations and checks to ensure that money wasn’t diverted to other programs. As a result, in 2014, just 26 percent of TANF spending went to "basic assistance" — cash welfare — and another 24 percent went to work programs and child care, according to a Center on Budget and Policy Priorities analysis. A third went to activities well outside the intended function of welfare reform:
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The availability of the money as a kind of slush fund for states — if only they don't use it on actual welfare — creates yet another incentive for states to discourage potential beneficiaries from applying. The fewer people apply and get benefits, the more money is available for everything else; in cash-strapped states that can’t run deficits and that frequently deal with budget shortfalls, that’s a powerful reason to undermine welfare.
This has prompted a backlash against TANF among even many conservatives. Peter Germanis, a veteran of the welfare reform battles from his time at the Heritage Foundation and in the Reagan White House, has become an outspoken critic of TANF because of the perverse incentives created by the block grant.
"When it comes to the TANF legislation," he writes, "Congress got virtually every technical detail wrong. … Congress gave states too much flexibility and they have used it to create a giant slush fund."
Other conservatives told me they agree. Lawrence Mead, a political scientist at NYU and one of the intellectual godfathers of welfare reform, told me in an interview last year that he still considers TANF a success but finds the Germanis critique compelling.
"There are clear-cut abuses and problems in TANF regarding its implementation," he said. "The problems are clear, and the three that stand out are the failure to allow people to apply for aid, the atrophy of the work programs, and the diversion of funds to other programs. Those were not intended in TANF, and they should be stopped. We should go back to a program that does provide aid to the needy, even if it does require work."
Even Ron Haskins, a Brookings Institution fellow who helped draft the welfare reform legislation as a House committee staffer and is still a defender of it, told me that the experience made him wary of attempts to further block-grant the welfare state.
Graham-Cassidy will have similar problems
Graham-Cassidy is explicitly based on the welfare reform law, and its structure suggests it will have many of the same problems. The health care bill, in the course of increasing state “flexibility,” cuts funding by 17 percent by 2026. Funding for the block grant is totally zeroed out starting in 2027; Cassidy claims this is because of budget rules, but there’s no rule requiring the program to just stop in ten years.
Like the welfare law, Graham-Cassidy would force states to make do with substantially less (or maybe even zero) money.
Some of those problems are going to be present with any block grant. Because block-granted programs aren’t entitlements, they basically all run the risk of cutting off people who need help. Still, there are better and worse ways to structure block grants. You can make the funding expand to match overall growth in medical costs. You can set up tough restrictions on what funds can be used for to avoid the kinds of problems TANF faced.
Graham-Cassidy does none of that. It uses a complicated formula that assigns funds to states based on the share of people between 50 and 138 percent of the poverty line, and the share of those people in insurance plans, with some mild adjustments for states with greater medical costs. But the total amount given out to states each year is capped at a set amount, and doesn’t grow automatically with medical costs. If the whole country went into recession, or faced a big public health crisis like the early 1980s HIV/AIDS epidemic or the current opioid crisis, there’d be no increase in funding to accommodate that change.
What’s more, the Graham-Cassidy proposal, like welfare reform, doesn’t require states to spend their block grants properly.
According to an analysis by the Center on Budget and Policy Priorities, the text of Graham-Cassidy allows the newly block-granted Affordable Care Act funding to be "spent on virtually any health care purpose, with no requirement to offer low- and moderate-income people coverage or financial assistance."
It would also allow states to waive many protections added as part of the ACA. States could allow insurers to discriminate against people with preexisting conditions, and to not cover certain essential health benefits, like mental health, substance abuse treatment, and maternity care.
We don’t know for sure how states would use this flexibility. But the best historical precedent we have is welfare reform, and it suggests that when you give states block-granted versions of entitlement programs, they do not try to serve everyone they can. Instead, they try to pocket the money and reduce assistance to an absolute minimum.
