Over the past 60 years, Medicaid has morphed from a targeted safety net for America’s most vulnerable citizens into a bloated program plagued by fraud, inefficiency, and poor results — and a price tag of more than $800 billion per year. It’s not just that Medicaid’s spending levels are unsustainable. The deeper problem is that federal funding for Medicaid is distributed in a way that incentivizes excessive spending and undermines the program’s core mission.
For traditional Medicaid enrollees (children, people with disabilities, and the elderly), the proportion of a state’s Medicaid spending that is reimbursed by the federal government is largely determined by the federal medical-assistance percentage (FMAP). States with lower average incomes get more federal Medicaid assistance — higher FMAP rates — than do wealthier states. The typical state receives an FMAP rate of about 65 percent. However, Congress has imposed an artificial 50 percent floor on FMAP rates, meaning that all states, no matter how wealthy, have at least half of their Medicaid costs covered by the federal government. As a result, instead of narrowing the differences in the ability of different states to support their Medicaid programs, the federal government often amplifies those differences.
