It’s been just over seven years since President Obama declared: “It is not sufficient for us simply to add more people to Medicare or Medicaid to increase the rolls, to increase coverage in the absence of cost controls and reform. Another way of putting it is we can’t simply put more people into a broken system that doesn’t work” [emphasis added].
Regrettably, the law he signed less than 10 months later fell far short of the president’s own benchmark as it relates to Medicaid. Not only did the ACA fail to impose any cost controls on Medicaid, it likewise contained no reforms to reverse or even corral the perverse incentives that for decades had simultaneously led to indefensible levels of Medicaid overspending even while creating enormous problems of access to the very people the program aimed to help. Instead, it amplified those incentives, making an already-bad situation even worse.
In short, the historic health reform that improbably squeaked through Congress on a strict party-line vote in 2010 was a huge missed opportunity. Now, seven years later, equally improbable circumstances have presented Americans with an equally historic opportunity for a do-over. It would be a tragedy for the nation’s poor and taxpayers alike were we to blow it again.
The American Health Care Act of 2017, passed last month by the House, substantially reforms Medicaid. As the Senate gets ready to vote on its own version of health reform, I thought it might be useful to remind readers of the reasons why it is critically important to reform Medicaid. This is a three part series that will explain the 3 biggest flaws in Obamacare’s Medicaid expansion to help readers better understand the debate between the House and Senate on this issue.
In order of importance, the 3 biggest flaws related to the Medicaid expansion include:
- the enhanced federal matching rate (Part 1);
- the failure to alter Medicaid’s open-ended matching rate structure (Part 2); and
- the lack of integration with private health insurance, especially the new health care Exchanges created under the law (Part 3).
The Enhanced Federal Matching Rate
The ACA sought to bribe the states into adopting the Medicaid expansion by offering a 100% federal matching rate for the first 3 years, falling to 95% this year, eventually reaching 90% in the year 2020 and then purportedly staying at that level in perpetuity.
But the idea that Uncle Sam can afford to bankroll this expansion at a 90% rate even over the next 30 years–much less in perpetuity–is delusional. But even if we could afford it, this enhanced rate is a spectacularly bad idea for three reasons.
States Vary Greatly in Altruistic Willingness-to-Pay. First, there is a sizable diversity among states in their altruistic willingness-to-pay for the health care needs of low income people.
If we use state Medicaid dollars per $100 of taxable resources  as a crude measure of differences in the willingness of states to pay for the health care needs of poor people, we can see there is literally a four-fold difference between Ohio and Washington state in the amount of taxable state resources that residents are willing to see allocated to Medicaid spending (Fig. 1).
Interestingly, there is not a strong correlation between state income per capita and this willingness-to-pay for indigent health care. The 5 states with the highest willingness-to-pay tend to be in the middle of the pack when it comes to per capita income. And North Dakota is among the 5 states with the lowest willingness-to-pay despite having the 4th highest per capita income.
This should be our first clue that trying to impose a uniform, one-size-fits-all generous national standard on Medicaid eligibility was a really bad idea. Yet the ACA’s designers sought to do exactly that. Fortunately they were thwarted by a Supreme Court that recognized it is unconstitutional for the federal government to coerce states in this fashion.
But the consequence of that fateful decision 5 years ago is that states faced the painful dilemma of whether expansion is worthwhile.
ACA Privileges Able-Bodied Adults Over Historically-Favored Vulnerable Populations. Privileging able-bodied adults over pregnant women, infants, children, the elderly and disabled makes no policy sense. There’s a very good reason that historically, Medicaid has offered the most generous eligibility standards for children, followed by pregnant women and infants, the elderly and disabled.
Most progressives might recoil at the very notion of the “deserving poor.” But unless we wish experts to undemocratically supersede the expressed desires of the American public, we have to recognize that the reason able-bodied adults were generally left out of Medicaid is because most Americans were not comfortable guaranteeing such individuals taxpayer-financed health care—even if they had low incomes.
I feel confident in attributing this sentiment to “most” Americans since prior to the ACA, there was nothing standing in the way of any state from adding a state-only Medicaid program to cover such individuals. Yet only a handful of states ever elected to do so. The Kaiser Commission on Medicaid and the Uninsured reports there were only seven states (Arizona, Delaware, Hawaii, Maine, Massachusetts, New York, and Vermont) that had expanded eligibility to childless adults to at least 100 percent of the federal poverty level prior to enactment of Obamacare.
The ACA not only decisively reversed that longstanding policy judgment, but it doubled down by giving these newly eligible able-bodied individuals a federal subsidy that was anywhere from one third to 100% larger than the subsidy given to everybody else. Does that seem either sensible or fair?
Try explaining to Granny why Chip Baskets deserves to get a far larger share of his medical bills paid by Uncle Sam than she does.
Of course we all know the reason Obamacare was structured in this fashion was because everyone knew that making able-bodied adults eligible under traditional federal matching rates would have result in far fewer states opting to pursue the expansion. It was a flagrant (albeit fiendishly clever) effort to end-around the reality that in the vast majority of states there was not political support for raising state taxes to cover this group.
Instead, Obamacare was structured to make it look to states as if the the lion’s share of the costs of expansion were being offloaded outside every state’s borders. And the law’s designers quite consciously penalized any state that desisted from jumping on the gravy train by forcing its taxpayers to bankroll the expansion in states less inhibited.
In short, the enhanced federal matching rate was one of the most visible and brazen attempts within Obamacare to substitute the judgment of Washington policymakers for that of state policymakers to adopt a one-size-fits-all, all-or-nothing approach. This “Washington knows best” mentality was an important contributor to the voter backlash culminating in sweeping electoral losses for the Democrats in 2010 (when they lost the House) and 2014 (when they lost the Senate).
Medicaid matching formula has long encouraged wasteful spending and discouraged states from economizing; this creates a one-way ratchet effect that fuels ever-rising Medicaid spending. The 90% federal matching rate under the expansion puts such incentives on steroids; now, states that save $1 of Medicaid funds get to pocket only 10 cents of those savings, while states that waste $1 pay only 1 dime more.
This is not a hypothetical concern.
- An estimated 10 to 30% of Medicaid payments are fraudulent. Forbes’ Opinion Editor Avik Roy has explained why there is such complacency over such disturbing high numbers: “Fundamentally, politicians and government officials have no incentive to root out fraud and abuse, because completely eliminating fraud and abuse means investigating and hassling their constituents: doctors and hospitals who game the system by prescribing unnecessary treatments, or by diagnosing patients with more severe conditions than they actually have, in order to reap richer reimbursements.”
- Last year’s annual report on Medicaid’s finances issued by the US Department of Health and Human Services (HHS) showed that the average cost of the ACA’s Medicaid expansion enrollees was nearly 50% higher in FY 2015 than HHS had projected just 1 year previously. Why? An important factor was that states faced with such weak incentives to contain costs were not nearly as tough as they usually are in negotiating good rates with managed care companies.
- Just a few years ago, North Carolina’s auditor, Beth Wood—who, by the way, is a Democrat–found $1.4 billion in Medicaid overspending over the 3 years she examined. Her report was replete with instances of how Medicaid funds were being mismanaged.
In light of these perverse incentives to overspend, it should be no surprise whatsoever that adjusted for inflation, Medicaid spending increased more than 250% from 1990 to 2012. And the most recent Congressional Budget Office (CBO) projections show federal Medicaid costs will increase another 67% just over the next decade. If so, Medicaid’s share of potential GDP will be nearly 4.9 times as high in 2027 as it was 50 years earlier , showing just how quickly Medicaid has been outstripping economic growth for decades.
What Does AHCA Do About the Enhanced Federal Matching Rate?
The AHCA continues enhanced federal matching through 2019 and then in 2020 replaces the entire federal Medicaid matching system with per capita caps on federal spending that will vary by state and eligibility category ( children without disabilities, nonelderly adults without disabilities, people with disabilities, elderly people). Thus, not only will states get a higher amount for elderly Medicaid recipients compared to children, but states that historically have received higher federal amounts for a given eligibility group. I will explain these caps and their implications further in Part 2 of this series.
With respect to those now affected by the enhanced rate, AHCA contains two important provisions. As summarized in an Urban Institute report:
- “For people eligible for Medicaid under the ACA expansion who enrolled by the end of 2019 and maintain that coverage without gaps, the federal match rate is 90 percent until they disenroll or experience a gap in enrollment.
- “States can choose whether or not to maintain Medicaid eligibility for the ACA expansion population. If a state chooses to maintain eligibility for the expansion population, any new enrollees in that eligibility category after January 1, 2020, will receive the state’s matching rate computed according to traditional rules.”
In short, the enhanced match ends in 2020. The second provision above does not imply that Medicaid’s open-ended match rate will continue for expansion enrollees at the traditional match rate. Instead, per capita spending for non-elderly adults without disabilities is calculated using a 2016 base year. This is then multiplied by the federal match rate traditionally calculated (i.e., 50% for the highest income states, but as much as 75% in the poorest states such as Mississippi) to determine the base year per capita federal payment cap.
After the base year, each state’s per capita caps increase by the percentage growth in the medical component of CPI (M-CPI) in that year relative to 2016.
Thus, states that chose to continue their expansion of Medicaid to include previously-ineligible able-bodied adults would continue to receive a federal subsidy to cover them after 2019, but it would be based on the traditional match rate rather than the enhanced match rate. This means that their federal payments would not be artificially inflated by the 100% federal matching rate for such individuals that actually was in place in 2016.
The CBO estimates that AHCA will reduce Medicaid spending by $834 billion in the 10 years between 2017 and 2026, but as Avik Roy has elsewhere explained in detail, the agency offers no guidance on how much of this can be attributed to spending caps or the elimination of the enhanced federal match rate. Urban Institute calculates a reduction in federal Medicaid spending of only $457 billion between 2019-2028, but estimates that 57% ($260 billion) of this will come from the elimination of the enhanced match rate.
In short, AHCA is saving taxpayers at least several hundred billion dollars by eliminating an enhanced federal match rate that was both inappropriate and unfair . From where I sit, that’s great progress.
READ CHRIS’ BOOK, The American Health Economy Illustrated (AEI Press, 2012), available at Amazon and other major retailers. With generous support from the National Research Initiative at the American Enterprise Institute, an online version complete with downloadable Powerpoint slides and companion spreadsheets has been made available through the Medical Industry Institute’s Open Education Hub at the University of Minnesota.