The large and growing U.S. deficit has led to calls for entitlement reform. Two prominent deficit commissions have made proposals to curtail Medicaid spending. One proposed a swap to address issues of gaming or creative financing in Medicaid. More recently, Congressman Paul Ryan proposed a block grant for Medicaid with substantially lower levels of federal spending. Both have problems. Swaps would result in a major redistribution of federal funds among states. The Ryan block grant would undoubtedly lead to much lower levels of coverage and access. In this paper we present a proposal for a swap that would largely eliminate incentives for gaming and strengthen incentives for cost containment without the distributional effects of straightforward swap proposals.
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