The coronavirus started as a medical crisis, but quickly produced an unemployment crisis and a state fiscal crisis. Medicaid, the state-operated health care entitlement that covers 67 million low-income Americans, has been strained by all three. As unemployment increases, so does eligibility for the program and the costs that it imposes on states — just as their revenues come under strain. To fill this gap, Congress in March provided $50 billion in extra funding for the program, bailing out states as it did when they faced economic headwinds in 2001, 2003 and 2009.
Yet, Medicaid’s finances are problematic not just in economic downturns. While the economy is growing, states may claim federal funds in proportion to their own expenditures on the program — encouraging them to spend as much as they can. This has led the program’s funds to be distributed in a manner that is neither accountable, focused nor fair. A program supposed to assist the poorest Americans has proven disproportionately lucrative for the wealthiest states.
Congress can get more value out of Medicaid by aligning financial and operational responsibility within the program — so that the federal government would directly provide benefits that it determines are of greatest national importance, while states should be required to pay for further expansions of benefits that they choose to make by themselves.
To qualify for federal funds, states currently must cover Americans with disabilities, children, the elderly and parents with incomes below federally-defined eligibility thresholds, while they may choose to expand the program’s eligibility beyond this floor. For each of their enrollees, states must pay for hospital care, physician services, nursing facility care and home health — but also may choose to cover additional services such as dental care and rehabilitation.
Traditionally the federal government gave the poorest states $3 for every $1 they spent on Medicaid; the wealthiest states could claim $1 for every dollar they spent. For spending on beneficiaries made eligible by the Affordable Care Act, the federal government provides $9 for every $1 that states spend. This makes spending on the program very attractive for states, relative to spending on non-Medicaid activities (for which they receive no money from the federal government for every $1 they spend).
Such arrangements have done a poor job of distributing resources to where they are most needed. Some of the program’s recent expansions have done more to crowd-out private insurance than to reduce the number of Americans uninsured, and allocating funds according to how much states themselves are able to put in allows the wealthiest states with the largest tax bases to claim most. In 2018, Massachusetts received $15,482 in Medicaid funds from the federal government per resident under the poverty line, while Louisiana received only $9,474 — even though both were “expansion” states and Massachusetts collected a lower share of personal income (9.7 percent) in state taxes than Louisiana (9.9 percent).
All 50 states currently impose taxes on hospitals and other medical providers to inflate costs, for which they can claim reimbursement from the federal government — sharing the proceeds with providers. Though Congress has sought to limit this and similar scams, political push-back from states allows much manipulation to remain unchecked. If states are creative in inflating claims for federal reimbursements with a web of indirect payments, tax preferences, managed-care rules and favorable regulatory provisions, it is nearly impossible for the federal government to track and stop.
For the past four decades, Republicans have sought to address these problems by turning Medicaid into a system of block grants or capped allotments. Yet, Democrats have been concerned that fixed federal assistance would simply lead to the erosion of benefits over time, and so have tended to be resolute in their opposition. Nor would such a reform address the vulnerability of the program to the business cycle — and its consistent need for bail-outs in recessions.
As a new Manhattan Institute report explains, though it remains necessary to eliminate the incentives to shift costs and responsibility between states and federal governments, a fresh approach is required.
First, the federal government should take full financial and operational responsibility for core medical care services to Medicaid beneficiaries that states are required to cover. This would protect states from costs that are prone to fluctuate in line with the business cycle, against their fiscal capacity. Second, the federal government should provide a capped allotment to assist each state with the provision of long-term-care services to enrollees. Third, states should be free to expand eligibility and benefits beyond the coverage provided by the federal government — but they should be expected to fully fund it themselves.
In 2018, Medicaid cost taxpayers $593 billion, but the program is poorly-focused on filling unmet needs and remains a constant source of headaches for both state and federal officials. A clearer assignment of responsibilities is needed to make Medicaid fair, focused and accountable.
Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter @CPopeHC.