[Economic Report of the President (2002)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 5

Redesigning Federalism
for the 21st Century


The Nation's federal system is one of the great strengths of the
American economy. Federalism gives States and localities the freedom
to provide services that best meet the needs of their diverse
populations. It puts citizens closer to their government, and thus
in a better position to monitor and control how their tax dollars
are spent, and it creates competition between jurisdictions, which
drives innovation.

The Federal Government plays a crucial role in the effectiveness of
this system. It is important for the Federal Government to seek a
framework for competition and accountability that avoids burdensome
rules and regulations, which undermine the competitive advantages of
State and local governments. Rigid dictates from Washington about
how public goods and services are provided preclude innovation and
dull competition. Creating a flexible institutional structure that
will allow the efficient provision of public goods, by focusing on
achieving goals and freeing up innovation, is an important goal of
this Administration. In this way the Federal Government can improve
the quality and efficiency of public programs and increase their
responsiveness to public needs.
The advantages of this results-oriented, flexible approach are
evident in many programs and at all levels of government. First,
when the focus is on results, such as student achievement, rather
than on process, such as how schools spend money, States, localities,
and private organizations are empowered to choose, from a wider menu,
the most effective means to these ends in their area and for their
population. Second, flexibility allows more institutions to become
involved in providing these services. As long as all are evaluated
on the basis of results, governments, nonprofit organizations,
faith-based organizations, and others can compete on an equal
footing, while using different methods. The resulting laboratory
of methods allows more effective ideas and organizations to win
out over less effective ones, creating the potential for more and
better services for a given amount of spending.
This chapter examines both the promise and the challenges of
federalism, focusing on three specific areas of program design in
systems of flexible accountability: education, welfare, and health
insurance for those with low incomes. In education, this
Administration believes that the competition provided by choice is
the best tool available to improve quality, with public, private,
and charter schools vying with each other to provide the best
education most efficiently. When the right institutions are in
place, parents can hold school systems accountable for results.
Similarly, taxpayers must be able to hold the providers of safety
net programs, like welfare and Medicaid, accountable for the quality
of services they provide and the resources they use to provide them.
By tying payments to social service providers to the results that
they achieve, and by allowing private nonprofit providers to compete
on an equal footing with government providers, the same market
discipline that drives innovation and efficiency in the private
sector can be brought to bear on these programs as well.

Institutional Design in a Federal System

The preeminent means for providing goods and services in the U.S.
economy is private markets. The fundamental strength of the market
system is that consumers are able to evaluate the quality and price
of a variety of goods and services that they might purchase, and are
free to make decisions about which vendors to patronize. Competition
among providers promotes efficiency, which means goods and services
of the highest quality at the lowest cost.

In those circumstances where markets do not work efficiently, there
may be an avenue for governments to improve overall economic
performance. An example is the provision of public goods. Public
goods are those goods and services that, in contrast to conventional
private goods, provide benefits for society beyond those enjoyed by
any individual consumer. For example, there is no single
``consumer'' of a cleaner environment; as discussed in Chapter 6,
environmental protection is therefore a public good. Similarly, each
member of the population gets the benefits of safer streets, or a
better informed electorate, or a public park. Here the collective
nature of the benefits flowing from the good or service makes it
difficult or impossible for private providers to make any single
consumer pay for it. To ensure the availability of these public
goods, the government may arrange for their production, provision,
and financing.

The long federalist tradition in the United States is a tremendous
resource for governments seeking to meet this challenge. A
neighborhood park, for example, is a local public good, shared by
the citizens of a local area, not the Nation as a whole. Getting the
``right'' amount of these local public goods in every locality would
be an insurmountable task for a central government. Instead, State,
county, city, and town officials, who are closer than their
Washington counterparts to the needs and desires of their
electorates, are better positioned to be responsible for these
goods. Moreover, there is a natural check on their actions: residents
voting at the ballot box--or with their feet, by moving
elsewhere--force local governments to compete. Just as private
firms compete in markets for private goods, so, too, governments
can compete in terms of the quality, price, and quantity of the
services they provide, and this fosters innovation and efficiency.
This marketplace for government services constitutes a more efficient
means by which to provide these services in our society.
Although there might be a clear role for governments in providing
local public goods, it is not immediately obvious that it is
efficient for the public sector to produce a particular public good
or service. Instead the government could choose how much to provide
but rely on the private sector to undertake actual production. If
minimizing costs is the only objective, complete reliance on
competitive private sector production will likely be efficient.
In other circumstances, however, competition could foster an
excessive focus on cost reduction to the detriment of achieving
results of the desired quality. (This is especially likely when
it is difficult to write contracts that comprehensively specify
the level of quality to be achieved.) Strictly public provision,
on the other hand, might promote a focus on high-quality results
without due consideration of the efficient use of public resources.
Which is the better method of production depends on how difficult
it is to observe the quality of the services provided, the degree
to which cost reductions affect the level of quality, and the
potential for innovation in producing the services.
Thus, although competition between jurisdictions generally promotes
the efficient provision of public goods and services that are
tailored to the diverse needs of their citizens, it is neither
always necessary nor desirable that those jurisdictions themselves
produce those goods and services. The focus of public spending
should be on efficiency: on the quality of results achieved for
every dollar spent.

One way to produce public goods more efficiently is to let private
firms compete for public contracts. Some municipalities contract
out services such as trash collection to private vendors through
competitive bidding. There is no reason, however, that such
competition should be restricted to the for-profit sector. Indeed,
government agencies can promote competition through outside contracts
for staffing, limited reliance on exclusive grants and contracts,
and opening competition for grants and contracts to faith- and
community-based organizations. In each of these cases, it falls to
the government responsible for providing the service to monitor the
quality of services provided and to ensure, through whatever
contracting means are available, that services being purchased with
public funds live up to public expectations and requirements.
Competition between governments can then lead to the right public
goods and services being provided with the greatest efficiency.

In practice, several complex issues arise in a federalist approach.
First, by its nature, competition among governments offers no
guarantee of equal outcomes: competing jurisdictions may differ
greatly in the resources at their disposal to finance government
services, and thus in the amounts and the variety of services that
they can offer. Although these differences may reflect differences
in the tastes of households across jurisdictions--and thus show that
the government marketplace is working--they may run counter to a
desire for greater equality. In these and other circumstances, the
Federal Government may choose to provide funds to State and local
governments in a way that makes outcomes more equal. That is, it
may seek to alter the result of the federalist system. This may be
desirable in itself, but often the Federal Government has chosen to
dictate the use of these funds. Such mandates are at odds with the
goal of encouraging State and local governments to respond flexibly
to the desires of their constituents.
The history of federalism is to a large extent a history of the
struggle to achieve an optimal balance between allowing flexibility
for State and local governments and maintaining accountability for
the use of Federal funds. The New Deal of the 1930s and the Great
Society of the 1960s consolidated  in the Federal Government much
authority for the programs they created, and Federal spending
increased from 3.4 percent to 19.3 percent of GDP between 1930 and
1970. Then, in the mid-1970s, the ``New Federalism'' sought to
increase efficiency in the federalist system and to devolve program
control to States and localities, while introducing such innovations
as Community Development Block Grants and general revenue sharing.
In the late 1970s, the Federal Government sought to expand its
authority over these block grants. Ninety-two new categorical
grant programs were instituted from 1975 to 1980. (Categorical
grants are those that must be spent on a designated population,
and they may involve Federal matching of State funds.) In the 1980s,
the tide once again turned toward decentralization: 77 programs
were consolidated into 9 block grants. Much like the 1970s
decentralization, this movement was thereafter partially reversed
as more constraints were placed on the block grants, and previously
scaled-back regulations again became more cumbersome. The major
federalist initiative of the 1990s was the partial decentralization
of welfare. These swings highlight the tension between the desire
for assurances that Federal funds will be spent productively to
advance program objectives, and the desire to take advantage of
the efficiencies generated when local agencies have the resources
and the freedom to innovate and to cater programs to local populations.

These two goals need not be at odds. Federal micromanaging of
resources and processes achieves neither. By focusing instead on
setting standards for results--not dictating actions--and rewarding
providers for achieving goals, the Federal Government can give
local governments more control over the use of funds without
sacrificing progress toward national goals. This focus on outputs
is a key piece of the infrastructure for an efficient federalist
system, one that centers attention on what is delivered to the
final consumer and puts in place incentives to identify and measure
desired results. This Administration has signaled its commitment
to such systems through its vision for Federal, State, local, and
private partnerships across all areas of public spending.
Fostering Partnerships, Competition, and Accountability
Organizations, be they public or private, that accept Federal funds
in return for providing a service must agree to provide that service
in a manner that meets Federal standards and goals. It is desirable,
however, that they do so with the minimum interference possible.
In activities where measuring results is difficult, it is harder
to hold providers accountable. In some cases the data currently
available are insufficient for this task. However, it is important
to recognize that the existence of good data on program outcomes
is in large part determined by the measures used to evaluate the
programs. Developing a system of accountability based on
well-measured output will promote the collection and analysis of
this important information. This Administration seeks to create
an institutional framework that will encourage the development of
measurable standards to which all providers of public
services--Federal and local, public and private--can be held
accountable, and then to allow these providers themselves to find
the best way to meet those standards.
Leveling the playing field for governments, nonprofit providers, and
for-profit providers, and thereby encouraging the free entry of all
providers, promotes market efficiency just as in the private sector.
This is a desirable goal, and not an entirely new phenomenon. Market
forces already bear on for-profits, but they do on nonprofits as
well, when they compete for private donations. In a 1998 survey, 75
percent of respondents said that whether or not a charity used their
time and money efficiently affected their choice of charities.
Allowing private providers to compete with public agencies to
provide services in areas such as welfare, and evaluating all
providers based on achieving program goals, are ways of expanding
this market discipline to public providers. However, several
institutional and logistical barriers currently inhibit this kind
of competition. For example, although the Charitable Choice
provision of the 1996 welfare reform legislation was intended to
allow faith-based organizations to compete on an equal footing with
other organizations to provide welfare services, preexisting laws
and regulations in many States still prevent them from
participating. This Administration is committed to eliminating
these barriers.

Despite these impediments, many State governments are already
forging new partnerships with private organizations for the
provision of high-quality public services through performance
contracting in social services. Performance contracts usually
include output targets and may make the size of payments contingent
on meeting those targets. States have long used performance
standards in their budgeting processes. For example, under Texas's
approach to performance measurement, agencies are required to
include 6-year strategic plans in their budget requests. Each plan
must specify the agency's goals, objectives, outcome measures,
strategies, and efficiency measures. Pennsylvania has included
performance measurement in its program budgeting for over 25
years. As of 1997, 31 States had legislated some form of
performance-based budgeting requirements, and 16 had implemented
such measures through guidelines and instructions.
Although such provisions have long been standard in municipal
service contracts such as those for garbage disposal, they are
relatively new in social service contracting. In the municipal
services sector, results may be more easily defined and codified
in contracts: for example, where and how often trash will be
collected. However, the quantities and the quality of social
services desired can be much harder to specify and to observe,
making contracts more difficult to write. Recipients may not have
the expertise to evaluate the quality of the services they are
receiving, and they may not have the option of changing service
providers if dissatisfied. In such circumstances, the contracting
agency must provide oversight to ensure that adequate services are
provided. Creative solutions have been devised for some of these
problems; for example, providers can be required to meet a
professional or industry standard, potentially simplifying
contracts. The Federal Government could make performance
contracting easier for States by developing generic contracts
for commonly used social services, which interested States could
then adapt to their particular needs.

These public-private partnerships illustrate some of the advantages
and some of the difficulties of designing programs with flexibility
and accountability in a federal system. These issues are explored
below in the realms of education, welfare, and Medicaid.


Elementary and Secondary Education
Unlike many other publicly financed services, primary and secondary
education has historically been under the control of local
governments, with educators accountable to local taxpayers. Taken
at face value, this suggests that the forces of competition should
already be at work to promote high-quality, efficient provision of
public education. To some extent, taxpayers have the ability to
control the quantity, quality, and price of education by ``voting
with their feet'': if the local school district fails to perform
adequately, they can move elsewhere. In some jurisdictions,
citizens vote directly on property taxes, or even on school
budgets. Parents may also remove their children from the public
school system altogether by placing them in private schools or
home schooling them.

These mechanisms are more effective, however, when parents can
accurately evaluate the quality of local schools. When they cannot,
or when local alternatives to poor-quality schools do not exist and
moving is prohibitively expensive, effective competition is limited.
Also, given the broader social benefits of a well-educated work
force, some redistribution may be necessary to ensure that all
children have access to an adequate education. Thus, even though
State and local governments retain the primary responsibility for
educating the Nation's children, and face competitive pressures in
doing so, the Federal Government can still serve a vital role in
further lowering barriers to local competition.

This Administration seeks to create and strengthen the institutions
that allow local education markets to work, that let school districts
cater to the diverse needs of their populations, that empower parents
to choose what is best for their children, and that ensure that no
child is left behind. An efficient and effective market for
education, much like any other market, requires freely available
information and incentives for good performance. Tests are a key
component of this framework. This Administration believes that once
this information and these incentives are in place, competition
among schools is the best way for parents to make sure their children
receive the best education possible. School choice empowers them
to do so. To ensure that adequate options are available for all
children, the Federal Government can provide supplemental resources
for the education of low-income children and children with special
needs. However, these subsidies must be designed so that they do
not interfere with the incentives for schools and school districts
to spend efficiently.
The No Child Left Behind Act, proposed by the President, passed by
Congress, and signed into law on January 8, 2002, addresses each of
these goals. It is a major step toward improving the quality and
efficiency of the schooling available to America's children. The
rest of this section discusses in detail the principles that
underlie this legislation.

Setting Standards and Measuring Progress
In the provision of education, accountability hinges on the
development of adequate measures of results. In the long run,
important measures of the success of education are the well-being,
self-sufficiency, and productivity in adult life of today's
schoolchildren. As a practical matter, however, it is difficult to
evaluate schools based on their pupils' accomplishments 10 or 20
years later. For this reason, tests are a fundamental building block
for school accountability. This Administration believes that
well-designed tests are among the most valuable tools for evaluating
school performance, giving early feedback about the success or
failure of programs, educational reforms, teachers, and students
alike. They augment the other information parents need to evaluate
their children's schools. The No Child Left Behind Act makes
available school-by-school report cards, which include data on test
results, to help parents make the best decisions for their children.

Although the Federal Government provides substantial funding to
States for education, State and local governments themselves
contribute the lion's share--over 90 percent--of the funds for
public elementary and secondary schools.  Consistent with its focus
on results, this Administration believes that States should have
the freedom to design tests that provide parents with the tools
they need to evaluate local school systems, and the No Child Left
Behind Act specifies that each State be evaluated based on the test
of its choice. At the same time, however, a key aspect of good
testing is comparability: the ability to compare schools within
districts, and districts within a State. The tests that States
choose must be consistent enough so that parents can use them to
evaluate their children's education and make well-informed choices.
The National Assessment of Educational Progress (NAEP), a
nationally representative test designed to evaluate America's
students and schools, is also a useful tool for evaluating student
progress at the national and the State level. The Federal Government
has provided funds through the No Child Left Behind Act for some of
every State's fourth and eighth grade students to participate in
the NAEP.

Designing good tests is only the first step in strengthening
school accountability and enhancing competitive efficiencies in
education. Tests serve two goals: to create incentives for
students, teachers, and schools to excel, and to trigger
appropriate consequences for failure. When schools fail, parents
should have the choice to move their children to better schools.
To this end, the No Child Left Behind Act makes Federal education
funding conditional upon local school districts and States taking
defined steps to improve schools that fail to make adequate yearly
progress, as determined by testing.


Expanding Options
Once clear, measurable results have been defined, competition can
be a strong motivating force for improving schools. This competition
can come from several sources, including other public schools,
charter schools, and private (including parochial) schools. School
charters and the contracts of educational management organizations
(EMOs are private enterprises that run charter schools and contract
with school districts to operate individual public schools) can be
reviewed before renewal, and if measures of their results are
publicized, parents and school districts alike will be able to
evaluate their performance. The No Child Left Behind Act supports
school competition (through the creation of charter schools, for
example), which can improve school quality and increase the choices
available to parents.

There are currently some 2,400 charter schools operating in 37 States
and the District of Columbia, and the number is growing rapidly.
The performance-based competition for students that charter
schools exert puts pressure on all schools to excel. Indeed,
research shows that competition from charter schools forces
traditional public schools to respond and improve. Many school
districts are also experimenting with outsourcing education to
EMOs, which brings the benefits of market competition to public
education. Some studies of EMOs suggest that they perform
well relative to their public school counterparts. Competition
from private schools can have a similar effect: one study found
that such competition significantly increased the performance of
public schools in the same area. Another study found that
competition among public schools seems to both increase achievement
and lower costs.

The No Child Left Behind Act also ensures that parents in school
districts receiving funds under Title I of the Elementary and
Secondary Education Act (ESEA) will have the option of moving
their child to another public school in their district if the
child's school has failed to make adequate yearly progress (as
defined by the State) for 2 or more consecutive years, except
where that option is prohibited by State law. Students in schools
that fail for 3 straight years can receive funds to obtain
supplemental educational services, such as tutoring, after-school
services, and summer school programs. These options would benefit
students in thousands of schools that have already been identified
as failing under current law. Finally, if a school fails to make
adequate yearly progress for 5 consecutive years, it will face
restructuring as a condition for the State in which it is located
to continue to receive Title I funds. Such restructuring by the
State or locality may take forms such as conversion to a charter
school, contracting with an EMO, or complete reconstitution of
the school. Furthermore, any school district receiving any funds
under ESEA must provide parents with the option of moving their
child to another public school if the child has been the victim
of a violent crime at school, or if the State determines that the
school is unsafe. Giving localities the ability to offer parents
options other than relocation prompts schools to perform well to
keep their students, and it gives students in failing schools
additional options. At the same time, the financial consequences
for failure engender market-like discipline.
Vouchers could also increase the power of school competition.
Vouchers allow parents to use the money that would be spent in
their public school district to purchase education at another
existing public or private school. School vouchers of various forms
are available to parents in 38 States and the District of Columbia.
In some cases, however, these voucher programs are thought to be too
small to provide strong incentives for public schools to improve,
shifting too few educational dollars away from failing public
schools. Similarly, in some rural areas vouchers may be less
effective if there are not enough students to support multiple
schools. Preliminary academic evidence, however, suggests that
vouchers can be effective. Evidence from randomized field trials
in Dayton, Ohio, New York City, and Washington, D.C., found that
African American students receiving vouchers achieved moderately
large gains in test scores after 2 years. Evidence from voucher
experiments in Milwaukee suggests that students realized gains
in both reading and math. Tax credits are an alternative vehicle
that can deliver the power of choice to families. What these
initiatives have in common is that they exploit the ability of
markets to give parents the power to choose the highest quality
and most efficient education available for their children. The
ability to make those decisions depends crucially on the availability
of standardized and meaningful data, which testing can provide.
Providing for Vulnerable Populations: Government Partnerships
There is a compelling public interest in ensuring adequate
educational opportunities for all children. Children who are well
educated are likely to become more productive members of the work
force, are less likely to need public assistance later in life, and
tend to pass along their social and material well-being to their
own children. To the extent that local school districts do not take
these long-run effects into account, and given the difficulty
of redistribution at the local level, subsidizing education for
low-income children and children with special needs is a valuable
State and Federal function. This Administration has made it a
priority that no child be left behind.

Educational Resources for Low-Income Populations
The Federal and State governments have taken different approaches to
ensuring adequate educational resources for low-income school
districts. Most States have experimented with some form of school
finance equalization (SFE) in the past 30 years to redistribute
funds to low-income districts. SFE programs mainly seek to
redistribute funds from districts with high property values per
pupil to districts with lower property values per pupil. In practice,
however, many SFE programs actually redistribute funds based on
per-pupil education spending, not property values, and property
values themselves may be affected by tax rates.

State SFEs, if not carefully crafted, not only may fail to increase
the resources available to low-income students, but indeed may
decrease the resources available to all students. This can happen
for any of several reasons. When redistribution of funds to poorer
districts is based on district spending levels, it becomes, in
effect, a tax on education spending by the high-spending districts,
which may respond by reducing spending. Thus equalizations that
rely on this approach may have the unintended consequence of
``leveling down,'' achieving greater equality only by lowering
average spending per pupil; this could even result, perversely,
in lower per-pupil spending in poor districts. SFEs that subsidize
local education spending through matching may be able to
``level up'' through infusions of State funds.

The Federal Government, under Title I of the Elementary and Secondary
Education Act, targets funds to low-income students through their
school districts. Providing grants to high-poverty districts out of
general revenue has the potential to be much more effective and
less distortionary than State-level SFEs. Federal Title I aid may
be particularly valuable to high-poverty districts in States with
limited fiscal resources available to fund equalization programs.
In fiscal 2001 the Federal Government allocated almost $9 billion
to Title I, to reach approximately 12.5 million students in both
public and private schools. In fiscal 2002 the Federal Government
will spend more than $10 billion, and the President's 2003 budget
requests an increase of roughly 10 percent. Federal education
funds are more narrowly targeted to high-poverty school districts
than State and local funds. The poorest quartile of school
districts received 43 percent of Federal funds, but only 23 percent
of State and local funds, in 1994-95. Title I, Part A, funds are
generally targeted to students deemed most at risk of failure, but
if half or more of a school's students are living in poverty, the
funds may be used for school-wide programs. To discourage States
and localities from shifting their funding responsibilities to
the Federal Government, Title I conditions Federal funding on
local and State resources being comparably allocated to Title I
and non-Title I schools. Beyond these two conditions, schools have
a great deal of flexibility in the use of Title I funds, and this
flexibility should allow districts to use funds to meet their
most pressing needs.

To promote quality in education, since 1994 the Federal Government
has been using access to Title I funds to encourage districts to
establish results-oriented infrastructures. States' Title I funding
was made dependent upon their implementing final assessment systems
and providing the Department of Education with evidence that such
systems met Title I requirements by the 2000-01 school year. In
addition, through Title VI the Federal Government provides grants
to assist local education reform efforts that are in keeping with
statewide reforms, and to support other promising local reforms.
These programs are two examples of how the Federal Government can
encourage the creation of desired institutional infrastructures
while maintaining flexibility at the State level.

Special Education Funding
Although education of children with special needs is primarily a
local responsibility, State and Federal resources also support
this important work. The courts have determined that States and
localities are constitutionally required to educate students with
disabilities, and when Congress passed the Education for all
Handicapped Children Act (now the Individuals with Disabilities
Act, or IDEA) in 1975, States were given Federal dollars in exchange
for providing free, appropriate education to all such students. One
study estimates that Federal, State, and local governments bore,
respectively, 8 percent, 47 percent, and 45 percent of the cost of
public special education provision in 1998-99. The President's
2002 budget requests a 13 percent increase in IDEA grants to
States. This spending can have significant payoffs for children
with special needs: research shows that special education programs
improve the math and reading test scores of special education
students and do not undermine the achievement of other students.
The conflicting interests described in the earlier discussion of
public-private partnerships can also be seen in intergovernmental
partnerships. Special education is a prime example, demonstrating
the issues that arise when those who provide services do not fully
bear either the cost of those services or accountability for their
results. In the past, the extra resources that categorical State
and Federal funding made available for special education students
may have created incentives for school systems and parents to
expand the population identified as having special needs. Indeed,
there has been a steady rise since the late 1970s in the percentage
of students so classified, with the greatest increase in those
categories, such as learning disabilities (as opposed to physical
disabilities), where the identification of need is most subjective
(Chart 5-1). African American and Native American students make up
a disproportionate share of those referred into special education.
Furthermore, school districts are often able to exclude special
education students' test scores from State assessments; this may
give them an incentive to refer students to special education
inappropriately.

To address these undesirable incentives, the 1997 IDEA
reauthorization changed the way in which Federal special education
funds are allocated to States, but these funds account for less
than 10 percent of all special education funds, and many
undesirable incentives persist at the local and the individual
levels. The subjectivity of such hard-to-observe classifications
makes well-designed systems and incentives essential. On October 2,
2001, the President signed Executive Order 13227 to establish
the President's Commission on Excellence in Special Education. This
commission will examine these and other issues to prepare the
Administration and Congress for the upcoming IDEA reauthorization.




Summing Up: Getting Incentives Right
Education is one area of public spending that has traditionally been
subject to competition among localities, and between public and
private providers. Research suggests that this competition has
led to measurable gains in student achievement, but there is also
an important role for the Federal and State governments to play
in redistribution and social insurance. In designing systems
that provide these valuable services while maximizing local
flexibility, it is imperative to account for the influence of
incentives on governments, schools, teachers, parents, and
students alike. By rewarding good performance at all levels,
programs can align individual incentives with public goals to
promote efficiency and excellence. Indeed, these lessons pertain
beyond the realm of education.


Welfare
Safety net programs such as welfare and Medicaid pose some of the
greatest challenges--and the greatest opportunities--for more
efficient provision of services in a Federal system. The ability
of taxpayers to vote with their feet is more constrained in this
setting than in education, because, as discussed below, social
insurance is harder to achieve at a local level. This does not
mean that competitive forces cannot be harnessed to foster greater
efficiency in providing support for low-income families. Rather,
it is in these areas in particular that flexibility of method and
careful accountability for results are likely to achieve the
greatest gains, and where it is most important that the results
to be evaluated be chosen and measured well.
The 1996 enactment of the Personal Responsibility and Work
Opportunity Reconciliation Act (PRWORA) replaced Aid to Families
with Dependent Children (AFDC), the primary Federal welfare program,
with Temporary Assistance for Needy Families (TANF). PRWORA
increased State discretion over the use of welfare funds by
converting federally matched grants to block grants, thereby
affording States greater flexibility. PRWORA also set time limits
on benefit eligibility for recipients and created a framework for
innovation in welfare reform. PRWORA was introduced in the wake
of record highs in welfare participation and extensive program
experimentation. Already before the passage of PRWORA, many States
had been granted waivers, and 27 States had obtained major waivers
exempting them from various aspects of AFDC's eligibility and process
requirements, allowing them to experiment with alternative
approaches. PRWORA widened this flexibility to all States. Welfare
caseloads declined dramatically following PRWORA's enactment.
Between August 1996 and June 2001, the number of TANF recipients
was reduced by 56 percent nationwide. Although favorable economic
conditions certainly played a role, research suggests that
roughly a third of the decline was due to welfare reform (Box 5-1);
estimates vary, however. PRWORA appropriated funds for TANF grants
to States through fiscal 2002. Hence this year Congress will
determine appropriations for fiscal 2003 and beyond. This provides
an opportunity to review the program, the principles on which
reforms were undertaken, and those that should guide the program
in the future.

Focusing on Results
A prominent feature of PRWORA is its restrictions on benefits; these
include 5-year lifetime eligibility limits and the condition that
beneficiaries find work after receiving benefits for 2 years. Just
as important, however, PRWORA also mandated the devolution of
program design to the States (some States further devolved welfare
provision to the counties) and increased flexibility and opportunity
for innovation in welfare provision. When TANF replaced AFDC, the
Nation moved from a welfare system in which the Federal Government
prescribed the process of service provision to one in which it
defines goals and creates incentives, leaving the process to be
determined largely by each State. Under the former centralized,
process-based approach, the Federal Government determined how
funds were

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Box 5-1. Why Have Welfare Caseloads Declined?
There is no question that strong economic performance and the
resulting tight labor market of the late 1990s account for a portion
of the recent decreases in welfare caseloads. However, the decline
would not have been nearly as sharp were it not for the structural
changes in the safety net programs that support working families.
In 1999 the Council of Economic Advisers found that only 8 to 10
percent of the decline in welfare caseloads between 1996 and 1998
could be attributed to changes in the unemployment rate; research
also suggests that welfare reform was responsible for roughly
one-third of the reduction. The lifetime time limits imposed under
PRWORA create incentives for welfare recipients to find jobs (even
before they reach the limit), and researchers have found that the
imposition of time limits alone was responsible for over 10 percent
of the decline in welfare caseloads between 1993 and 1999. In
addition to encouraging self-sufficiency through time limits, PRWORA
explicitly conditions benefits on welfare recipients engaging in
work-related activities, and since its passage there has been a
dramatic increase in the work participation rates of welfare
recipients. This employment experience continues to help former
recipients over their lifetimes by building their human capital
and thus improving their future employment prospects.

Increases in other forms of support for working families also made
work more appealing, by making it more lucrative relative to welfare
receipt. After the passage of PRWORA, people could leave welfare
without fear of losing valuable Medicaid coverage (as long as their
income remained below eligibility limits, or for up to a year after
it rose above those limits). They could also continue to receive
child care subsidies, and many were eligible for an expanded Earned
Income Tax Credit. These expansions were also likely responsible for
part of the decline in caseloads. For example, one study found that
in 1986 a single mother with two children, who left welfare to work
full time at the minimum wage, would have increased her family income
by only $2,000 (and would still have been living on income of only
80 percent of the poverty line); she also would have lost her
eligibility for Medicaid. The same woman in 1997 would have increased
her family income, upon leaving welfare, by $7,000 in constant
dollars (almost doubling her income and raising her above the poverty
line) and would have likely retained her family's Medicaid coverage
for up to a year.

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allocated as well as many other details of the program.
Under PRWORA's outcomes-based approach, in contrast, funds are
appropriated to decentralized providers for the pursuit of defined
objectives, and these providers are then given discretion over how
the funds are used. Although process and design are important
features of any program, emphasizing ends rather than means can
be a more effective way to reach goals.
Participation in some other assistance programs, for example, is
conditioned on participation in job training.  Although the goal
of such requirements is noble--to enable recipients to become
self-sufficient members of the work force--uniform training
requirements may not be the answer for all workers. Some might
benefit more from relocation assistance, or from income support
to allow a longer job search. For some workers a greater obstacle
to employment may be lack of child care or transportation. Thus,
although training is one route to productive employment, it is
neither the only route nor the best route for all. Assuming that
the objective of these programs is to foster self-sufficiency, it
is reasonable to judge the success of a program by the number of
people it moves into lasting employment, rather than by the number
of hours of training it provides.


The Importance of Measurement
When public policy objectives are broken down into measurable
outcomes, providers can be paid and contracts awarded according to
how well they achieve those outcomes. This encourages agencies and
organizations to excel. By rewarding those programs that are
succeeding, government can foster innovation, efficiency, and
personalized solutions to the problems facing providers and their
clients.
The first step toward reaching these goals is to turn public policy
objectives into quantifiable measures and to set targets for those
measures. When possible, such measures should accurately reflect
broad policy objectives, not narrow intermediate steps. They should
also strive to distinguish subpar performance due to labor market
fluctuations and other anomalies from genuine program shortcomings.
Providers can then have maximum flexibility and a minimum of
restrictions, and be free from adverse incentives (such as the
incentive to maximize training, when training is neither right
for everyone nor the ultimate goal of the program).
Creating such measures is not always easy. Indeed, it is especially
difficult when people and localities differ in their needs; such
differences can affect both the appropriate goal of programs and
the feasible outcomes. For example, getting welfare recipients
into the work force is one measure of the success of welfare
reform. Under PRWORA, Federal funding is conditioned on States
meeting targets for the fraction of welfare recipients who are
employed. Among the conditions are that 50 percent of recipient
families (and 90 percent of two-parent recipient families) be
employed by fiscal 2002. States may reduce the target employment
rate on which their funding is conditioned by 1 percentage point
for each percentage point that welfare rolls are reduced from
their fiscal 1995 levels. The dramatic decline in welfare caseloads
actually observed since 1995 has meant that the overall
participation requirement has been binding on very few States.
Focusing solely on the size of welfare caseloads, however, could
have created incentives to make recipients ineligible for welfare
rather than make them self-sufficient. A broader goal of PRWORA is
ending needy parents' dependence on government benefits, by promoting
job preparation and work, while providing temporary income support
for those who fall on hard times.

When measuring success by results, basing measures on the right
outcomes is essential. These measures should ascertain the extent
to which State programs are meeting the ultimate goals of PRWORA
while still affording flexibility in program design. The Federal
Government can help ensure that Federal, State, and local agencies
have the tools they need to evaluate service providers. Although
not all data may be collected currently, basing payments on progress
toward those outcomes would encourage the collection of such data in
the future.

The Value of Incentives
The second step in achieving the goal of innovative and effective
provision is to create incentives for public and private service
providers to succeed. Rewards for excellence can be paired with
consequences for failure to meet minimum standards; this is
especially useful when dealing with government agencies that
cannot be replaced by more efficient entrants from the private
sector if they fail. If a State fails to meet the work participation
rate targets established in the TANF program, its block grant is
reduced by an amount determined by the Department of Health and
Human Services' evaluation of the duration and degree of its
noncompliance. States can avoid these consequences if their
performance improves in the following year under a corrective
action plan. The Federal Government also has discretion in penalizing
States and may choose to waive or substantially lower penalties
in extenuating circumstances, such as regional recession, natural
disaster, or a substantial increase in caseloads.
Flexibility is crucial to encouraging experimentation, because
all experimentation entails risk. Despite a State's best intentions
and efforts, reforms that appeared promising may not succeed. By
giving the Federal Government discretion in penalizing failing States
and using corrective action plans, TANF seeks to prevent such
penalties from discouraging the very innovation it intends to
foster. This furthers the ultimate goal of creating a system that
encourages the development of effective and efficient programs.

The Benefits of Flexible Approaches
This Administration believes that welfare goals and targets should
be flexible enough to accommodate local differences, encourage
innovation, and foster excellence, and that such flexibility must
be accompanied by accountability, careful monitoring, and rewards
for progress toward meeting goals. Providing these rewards based
on comprehensive outcome measures allows States, localities, and
organizations facing different economic and demographic circumstances
to design programs that work best for them. People on welfare face
different obstacles to self-sufficiency and will therefore benefit
from different services. Similarly, regional demographic and
geographic differences shape the types of assistance that are
appropriate, and State programs, capacities, and opportunities
differ as well. The idiosyncrasies of local labor markets mean
that the types of education and job training programs that are
beneficial may vary widely across communities and over time. States
have been using the flexibility granted under TANF to tailor programs
to the needs of the populations they serve. As a consequence,
between 1996 and 2000 the composition of welfare spending by
type of assistance changed dramatically (Chart 5-2).

One example is subsidies for transportation. Lack of transportation
can impede welfare recipients from getting training and holding a
job. In an urban area with a well-developed transportation system,
providing transportation subsidies to welfare recipients may make
sense. Rural areas, however, may lack public transportation, and even
some urban areas may have inadequate public transportation between
the neighborhoods where many welfare recipients live and those
where employment is available. States are using TANF funds to
address these difficulties in a variety of ways. Governments in
some States, such as Michigan and New York, are working with the
providers of public transportation systems to expand access and
service provision. Others are establishing programs to assist
welfare recipients in purchasing or leasing their own automobiles,
and some State agencies are providing transportation themselves.
Child care assistance is another area in which States are using
their greater flexibility to increase funding, despite the
disappearance of a mandate to provide this service. TANF released
States from AFDC's conditions that they guarantee child care to
all recipients who need it to work or go to school. Yet more
stringent work participation requirements have likely increased
recipients' need for child care services. In response, States have
used the flexibility in TANF to increase child care funding: in
fiscal 1999, Child Care Development Fund transfers and TANF funds
directly spent on child care totaled $4.4 billion, more than
double the amount spent in fiscal 1998. Many States have
experimented with child care vouchers, which have





reduced the paperwork required of them and made it easier for parents
to take advantage of child care subsidies. States have clearly
tapped into an important need among their populations and
generated innovations in service provision.
These examples reflect broad shifts taking place in State welfare
programs in the wake of PRWORA. Overall, between 1996 and 2000 State
welfare spending shifted away from cash assistance toward providing
social services. Beyond targeting services to communities, many
States are using their newfound freedom to experiment with the
structure of their welfare programs, recognizing that incentives
matter for individuals, organizations, and governments alike. In
2000, 34 States offered ``diversion payments'' or services to
families applying for TANF benefits. Most of these States provided
lump-sum payments in lieu of monthly benefits. It is hoped that
these payments, sometimes termed welfare avoidance grants, will
enable families to weather a temporary emergency while avoiding
attachment to the welfare system. Another structural innovation
aimed at preventing welfare dependence is an intermittent time
limit. Thirteen States are currently experimenting with such
limits, which deny or reduce benefits for a period of time after
a family has received assistance for a given number of months.

Some States are further devolving welfare to counties and local
governments. California, Colorado, New York, North Carolina, and
Ohio give counties block grants with which to provide welfare
services. Like the Federal Government, these State governments are
seeking to balance the desire to give local governments freedom to
innovate, and to tailor programs to local needs, with the need to
maintain standards. Most States that have ceded partial control
of programs to localities, however, maintain some control over
the criteria for eligibility, benefit levels, work requirements,
and time limits.

One of the great advantages of flexibility in the laboratories
of State programs is that each can learn from the experience of
others. Even States that are succeeding in meeting specified outcome
targets can benefit from information regarding other States'
experiences. The Department of Health and Human Services, the
National Governors Association, and other groups are already
facilitating such information sharing. Because the Federal
Government gathers and analyzes a great deal of State welfare
program data in its monitoring of TANF compliance, it can play a
vital role in helping States target their efforts, by disseminating
information on the programs that have proved most successful.

Encouraging Broad Participation
In addition to affording States greater flexibility, PRWORA enlarged
the pool of providers with whom States may contract. Under the
Charitable Choice provision of PRWORA, States may administer and
provide TANF services through contracts with charitable, religious,
or other private organizations. Any State that chooses to involve
nongovernment entities in social service delivery may not exclude
providers because of their religious nature. This provision does
not, however, amount to giving preference to religiously affiliated
organizations. As the President stated in his executive order
establishing the White House Office of Faith-Based and Community
Initiatives, ``This delivery of services must be results oriented
and should value the bedrock principles of pluralism,
nondiscrimination, evenhandedness, and neutrality.''

Religious organizations have long been involved in poverty relief
in the United States, and government partnerships with such groups
have a long history. In 1999 Catholic Charities and Lutheran Social
Services both received over half of their funding from the
government. The Charitable Choice legislation prohibits agencies
receiving government funds from discriminating against clients of
different faiths, but it does not require religious organizations'
beliefs to be strictly segregated from the services being provided.
Federal funding is also conditioned on the government making an
alternate service provider available if a client is uncomfortable
receiving assistance from a religious provider.

The inclusion of nonsecular service providers in welfare programs
is very much a work in progress. Changing agency policies and State
laws that had made religiously oriented service providers ineligible
for government funds is a time-consuming process. As of 2000, fewer
than half the States had removed legal and policy barriers to
religious organizations' participation in government-funded welfare
provision, but at least 23 States had new cooperative relationships
with newly eligible faith-based providers. The language of Charitable
Choice extends beyond TANF to food stamps and Medicaid as well, but
it has not been implemented in these programs because current law
requires that a public official, not a private citizen, evaluate
recipients' eligibility. Even in States and programs where legal
barriers have been removed, small organizations often struggle to
compete with agencies that have received government grants and
contracts in the past and already have the necessary infrastructure
to comply with government regulations. Federal grants and contracts
typically require formal recordkeeping, monitoring, and
substantial infrastructure, yet many religious congregations have
outreach budgets of less than $5,000, and few have more than one
staff member assigned to such activities. Although smaller
contracts might promote the incorporation of such agencies into
the welfare provision network, they are not always cost-effective.
Any gains from including small providers must be weighed against
the costs of coordination and other increased costs associated
with working with a greater number of providers.

Thus, in addition to affording States greater flexibility in the
types of services they offer, PRWORA allows them to choose from a
larger pool of service providers. Local organizations have a great
deal to offer and can be a source of valuable innovation. They
often have an established presence in the communities they serve,
greater credibility than a government agency with local populations,
and access to valuable volunteer labor.

Unfortunately, in the past, Charitable Choice language has not
ensured that Federal administrators will require State and local
governments to comply with new rules for involving faith-based
providers. Faith- and community-based groups remain an underutilized
resource, and this Administration will continue to work to eliminate
barriers to their participation.

Medicaid and SCHIP

Maintaining a healthy citizenry is a compelling public interest,
arising from the risk of the spread of disease, the loss of
productivity from illness, and the altruistic motivation to provide
for those who are ill but cannot afford health care. This can lead
to inefficiencies in the health care system if only emergency room
care is provided. For example, people without health insurance are
more likely to forgo cost-effective early or preventive care, to
wait until very ill to seek health care, and when they do, to use
the expensive option of emergency room care. The cost of this
uncompensated emergency room care may then be passed on to the
public in the form of higher medical fees or higher taxes. This
compromises both the health of individuals and the public finances
and suggests a role for government in subsidizing more efficient
health care for low-income populations.

At present, the primary mechanism for such assistance is Medicaid,
a Federal- and State-financed public health insurance program for
low-income individuals who are aged, blind, disabled, or members
of families with dependent children. In certain circumstances,
Medicaid also provides medical care to those with high medical
expenses but incomes modestly over the Medicaid threshold and
to pregnant women. (States have discretion over the eligibility
of both groups, and they are covered in 35 States and the District
of Columbia.) The Federal Government matches each State's Medicaid
spending at a rate inversely related to the State's income per
capita; rates range from 50 to 76 percent in 2002. As discussed
below, however, States are beginning to use their new flexibility
to explore alternative ways to provide high-quality and high-value
health care to their low-income populations.

States may seek waivers to use Medicaid funds to provide otherwise
uncovered services and to experiment with Medicaid program design,
and almost all States are now experimenting with different
approaches, especially for populations whose Medicaid eligibility
is not mandated. The State Children's Health Insurance Program
(SCHIP; Box 5-2) provides health insurance for low-income children
who do not qualify for Medicaid, under rules that provide more
flexibility, and with a higher Federal match rate. These systems
provide access to valuable health care for many low-income Americans
and have improved the well-being of many.

Medicaid and SCHIP resources, however, could be allocated more
efficiently than they are now, to provide greater benefits at lower
cost, by using market mechanisms to promote access to private health
insurance rather than relying on public production. Along with
States' flexibility to experiment must come more consistent
accountability for results. As in the education and welfare
programs discussed above, this Administration believes that a
Federal focus on ultimate goals and outcomes, rather than
micromanagement of processes, is needed to promote innovation
and efficiency.

Limitations and Shortcomings of the Current System
Medicaid enrollment grew by almost 60 percent between 1980 and 1993,
from 19.6 million person-years to 31.2 million. Much of the
enrollment growth since 1987 was driven by federally mandated
eligibility expansions, which increased the pool of eligible
individuals well beyond those eligible for

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Box 5-2. The State Children's Health Insurance Program
The State Children's Health Insurance Program (SCHIP) is a joint
Federal-State program, driven by Federal incentives to improve the
health care of low-income children while still affording States a
great degree of flexibility in reaching this goal. SCHIP was
established in the 1997 Balanced Budget Act, under Title XXI of the
Social Security Act, and provides health insurance coverage to
Medicaid-ineligible low-income children. Every State currently has
a federally approved SCHIP program, but the design and scope of
programs vary widely. Fifteen States and the District of Columbia
provide SCHIP insurance through existing Medicaid programs, 16
States have separate programs, and 19 States use a combined approach.
States are experimenting with providing health insurance to entire
families and with using sliding copayment scales.

Like Medicaid, SCHIP is funded through Federal matching of State
expenditure, with poorer States eligible for higher match rates.
In fiscal 2002 the Federal Government reimbursed individual States
for between 65 and 84 percent of the cost of providing health
insurance under the program. In addition to providing a substantial
portion of the funding, in fiscal 2002 the Federal Government will
use awards, based on the participation of former TANF recipients
in Medicaid and SCHIP, as incentives for States to insure low-income
children.

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AFDC by raising income limits. Although those receiving TANF continue
to be eligible for Medicaid, PRWORA severed the link between cash
assistance and Medicaid enrollment. Since 1993, Medicaid enrollment
has grown at a much slower rate, reaching 36.9 million in fiscal
2001, and is projected to grow by an average of only 1.9 percent a
year over the next 5 years. Federal Medicaid expenditure, on the
other hand, is projected to grow at an annual average rate of almost
9 percent, from $159 billion in fiscal 2003 to $206 billion in
fiscal 2007.

These expansions to families with higher and higher incomes appear to
have had diminishing effectiveness, both in improving health and in
reducing the number of uninsured. One unfortunate side effect of the
current system of publicly provided and publicly produced health
insurance is the crowding out of private insurance: the existence of
public insurance provides a disincentive for private employers to
offer insurance to those eligible for the public program. Research
shows that many of those to whom Medicaid eligibility was extended
during the broad expansions of the late 1980s and early 1990s already
had access to private insurance. Researchers estimate that only 27
percent of the children made newly eligible for Medicaid between
1987 and 1992 were uninsured in 1987, and that almost half of those
newly eligible may have lost private coverage. In fact, as the
fraction of children eligible for the program rose from 15.2 percent
in 1987 to 21.8 percent in 1996, the fraction of children who were
uninsured not only failed to decline but rather increased, from
12.9 percent to 14.8 percent. This experience illustrates the
potential pitfalls of expanding public programs without considering
potentially offsetting responses in private markets.
There is other evidence that mandated expansions of this form are
not the most efficient way to improve the health of low-income
families. A more diverse population of patients is likely to have
differing needs, making it more difficult for a one-size public
insurance package to fit all. One symptom of the inefficiency of
the current system is the failure to enroll all eligible children:
nearly a quarter of uninsured children are eligible for Medicaid,
and many more are eligible through SCHIP. Although Federal laws
explicitly guarantee continued Medicaid coverage for many of those
leaving welfare, researchers found that 49 percent of women and 29
percent of children lack health insurance 1 year or more after
leaving welfare. Confusion about eligibility, the effort required
to reapply for Medicaid after leaving welfare, and stigma may
contribute to this lack of health insurance among former welfare
recipients.

Fostering Market-Based Health Insurance
Greater flexibility is allowing States to address these shortcomings
in varied and innovative, market-based ways. By increasing the
access of low-income families to private insurance markets rather
than trying to provide the same public health insurance to all, the
Federal Government can promote the health of all citizens without a
monolithic, slow-acting, and inefficient bureaucracy. States have
requested waivers and demonstration projects to experiment with
other means of provision and have highlighted the potential gains
to such approaches, empowering patients and providers to choose the
best health insurance options at the best price through unfettered
markets. The process of applying for waivers used to be quite
cumbersome for State agencies, as was the oversight of waiver
programs for their Federal counterparts. The goal of the 2001
Health Insurance Flexibility and Accountability (HIFA) Demonstration
Initiative is to increase State access to Section 1115 Medicaid and
SCHIP waivers, simplify the waiver process, and create renewed
interest in working with private insurance markets to provide health
insurance to low-income individuals. The HIFA initiative encourages
States to use available Medicaid and SCHIP funding to develop
comprehensive health insurance coverage approaches. This offers
States greater flexibility in designing benefit packages and cost
sharing in exchange for increasing coverage, particularly in support
of private health insurance. Even without HIFA, the Administration
has already approved over 1,400 waivers and State plan amendments
through other programs. These waivers and amendments have already
made an additional 1.4 million Americans eligible for health
insurance and expanded coverage for over 4 million more, and the
Department of Health and Human Services has cleared application
backlogs for State plan amendments dating to the mid-1980s.
This use of Medicaid waivers parallels that of AFDC waivers before
TANF. Since 1981 the Centers for Medicare and Medicaid Services
(CMS, the agency formerly known as the Health Care Financing
Administration) has granted over 250 home and community-based
services waivers, which cover budget-neutral but previously
uncovered services for Medicaid-eligible individuals who would
otherwise be institutionalized. In 2001, 15 States were running
statewide health care reform demonstrations under Section 1115
waivers. These waivers allow States to change provisions of their
Medicaid and SCHIP programs in order to experiment with program
improvements, provide coverage to groups not eligible under current
law, or investigate an issue of interest to the CMS.

States are using these waivers to experiment with different methods
of health care delivery. The waivers offer the most flexibility
when used to extend coverage to ``optional populations.'' These are
groups that States may use Federal Medicaid funds to insure, but
whose coverage is not a condition of Federal funding. Because they
often have higher incomes than other Medicaid recipients, these
recipients are more likely to be employed and therefore to have
access to employer-sponsored health insurance. Enabling them to
purchase coverage through their employers is less likely to crowd
out private provision than is public Medicaid insurance. States
may choose to offer this insurance under their existing Medicaid
plans, under group plans, or through other sources of the States'
choosing, as long as the coverage meets Federal cost and quality
guidelines.

States have long had the option of using Medicaid and SCHIP funds to
help eligible individuals purchase private health insurance through
their employers. However, in part because of administrative and
operational complexities, very few States were able to take advantage
of this option. Massachusetts helps employees pay private insurance
premiums through its own premium assistance program. Kansas provides
small businesses with a $35 health insurance tax credit for every
employee to whom they provide coverage. The Administration's HIFA
model waiver initiative is designed to give States program
flexibility to support approaches that increase private health
insurance coverage options. HIFA quickly generated State interest
in exploring other ways to use employer-sponsored insurance to
provide coverage to Medicaid-eligible populations. The Department
of Health and Human Services has already approved one such waiver
for Arizona.
States are also using market mechanisms to expand access to health
insurance through other Federal laws, such as the Health Insurance
Portability and Accountability Act of 1996, and through high-risk
health insurance pools. Both are discussed in Chapter 4. Each uses
market mechanisms to set prices and expand access, while empowering
individuals to choose the plans that suit them best.

State flexibility can also promote cost containment without
sacrificing quality. Medicaid expenditure grew dramatically between
1988 and 1994, primarily because of cost increases and issues of
program integrity, but partly from the eligibility expansions and
enrollment increases discussed above. In an effort to control
costs, States have enrolled an increasing fraction of Medicaid
recipients in private health insurance programs. Fifty-four percent
of Medicaid recipients were enrolled in some form of managed care
in 1998. Other States are experimenting with directly providing
care through public clinics and community health centers (Box 5-3).
Although these measures have helped States (and the Federal
Government) contain costs, continued innovation in cost containment
is still greatly needed, as is flexibility to experiment.
Federal officials have expressed concerns about State financing
practices that increase Federal Medicaid spending without increasing
health insurance coverage. Recent studies by the Inspector General of
the Department of Health and Human Services and by the Congressional
Budget Office have identified provider payment policies that have
allowed billions of dollars in Federal Medicaid funds to be used for
purposes other than those intended, including nonhealth expenditure.
The Administration has taken steps to increase State accountability
while also increasing State flexibility.

Although the provision of health care poses challenges not seen in
other safety net programs, the lessons drawn can inform a wide range
of policies. By setting goals based on outcomes, promoting
innovation, and rewarding achievement, the Federal Government can
create a lasting institutional structure that adapts to the rapidly
changing health care environment without saddling States and
providers with cumbersome and quickly outdated conditions and
regulations.

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Box 5-3. Community Health Centers
The Community Health Center (CHC) program is a Federal grant program
that offers funding to local communities for the provision of
family-oriented primary and preventive health care services. In
fiscal 2001 the program funded services to 10.5 million people
living in medically underserved rural and urban areas throughout
the country. In the last decade there has been a significant increase
in the number of access points, primary care providers, and people
served, as well as in appropriations; more than 3,300 CHC sites are
now in operation, providing essential services that improve the
health status of these underserved populations. To ensure that more
communities benefit from the care provided by these centers, the
Federal Government will expand the program to 1,200 more sites over
the next 5 years, serving millions of additional patients. CHCs are
discussed in more detail in Chapter 4.

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Conclusion

Creating efficient, high-quality public programs requires balancing
freedom against responsibility, and local needs against national
interests. By tying Federal funds to meeting program goals, but not
tying the hands of willing and able providers, Federal dollars can
be stretched further and the quality of services provided can be
higher. Rewarding innovation and requiring success can bring out the
best in public and private providers alike.

The United States' federal system provides unique advantages for
getting the most out of public spending. Competition among States
and localities and public and private providers encourages the
efficient use of public funds. Accountability for results can be
achieved without rigid and burdensome Federal dictates. This
Administration believes that it is the role of the Federal Government
to create the infrastructure--including high-quality data, a level
playing field, and incentives that promote the efficient use of
taxpayers' money--that makes such competition and accountability
possible.