Learning from Obama‘s Medicaid Reform Proposals

The genesis of two of Paragon’s significant Medicaid reforms – ending the discrimination against traditional Medicaid enrollees and limiting Medicaid money laundering by reducing abuses of provider taxes (forthcoming Paragon paper to be published in March) – were proposals made by President Obama. This newsletter reviews President Obama’s proposals to: 1) limit the provider tax scam (a reform endorsed by The Washington Post editorial board) and 2) equalize the Medicaid reimbursement rates between the Affordable Care Act (ACA) able-bodied, working-age adult enrollees and traditional enrollees of children, pregnant women, seniors, and people with disabilities.

Obama Wanted to Limit the Medicaid Provider Tax Scam

Next month, Paragon will be releasing a paper that will provide recommendations for how to reduce the pervasive amount of money laundering in the Medicaid program, which the federal government currently permits. This is generally how they work: states overpay providers with Medicaid funds, that payment triggers federal Medicaid matching funds for the state, and the state requires the provider to return a portion of the overpayment. In essence, the state and the provider both reap a financial windfall from the scheme at the expense of the federal taxpayer. For an in depth discussion of provider taxes, see a 2016 report I authored for Mercatus.

Proposals to limit Medicaid money laundering are not new, but the urgency of the problem is more severe as the schemes are expanding and now threatening access to care for seniors as Medicaid now pays some providers two to three times what Medicare does. In the course of our research, we found that The Wall Street Journal also coined the term “Medicaid Money Laundering” in a 2008 editorial, which bemoaned how Congress was choosing not stop this “blatant fraud.”

In both his fiscal year (FY) 2012 and FY 2013 budget proposals, President Obama proposed phasing down states’ ability to use provider taxes. His FY 2012 budget “proposes limiting State financing practices that increase Federal Medicaid spending, starting in 2015, as recommended by the National Commission on Fiscal Responsibility.” The National Commission on Fiscal Responsibility and Reform, also known as the Bowles-Simpson commission, proposed to eliminate provider taxes.

Obama’s FY 2013 budget specified that the Medicaid provider tax threshold would phase down from 6 percent to 3.5 percent over a three-year period. Here was the rationale:

…the Budget seeks to make Medicaid more efficient by streamlining financing and reimbursement policies. Specifically, the Budget proposes to reduce the Medicaid provider tax threshold beginning in 2015 to promote integrity of Federal-State financing.

Budgets from both President George W. Bush and President Donald Trump proposed limiting provider tax schemes as well.

Provider taxes also emerged as an issue during the 2011 budget negotiations between the Obama administration and Congress. As reported by Bob Woodward, then-vice-president Joe Biden was clear that they should be eliminated.

It’s a scam, Biden agreed. The states were gaming the system, taxing doctors and hospitals so they could get federal reimbursements and then returning the money to the providers. Let’s call it like it is, and let’s just do this. … ‘If we can’t do this—’ the Vice President said, ‘come on!’

Washington Post Endorsed Provider Tax Reform

In a November 2012 editorial, The Washington Post wrote that provider taxes “enable states to manipulate [Medicaid’s] statutory funding mechanism, adding to the federal deficit.” The Post quoted former Democratic Whip of the Senate, Dick Durbin:

“A bit of a charade,” as Senate Majority Whip Richard J. Durbin (D-Ill.) described it Tuesday.

As Mr. Durbin’s remark suggests, reform is a bipartisan idea. President Obama’s last budget would have reduced the maximum permissible provider tax to 3.5 percent, saving $21.8 billion over 10 years. A deficit plan by Sen. Bob Corker (R-Tenn.) includes a 10-year phaseout, at a projected savings of $50 billion.

States might have to tighten their Medicaid budgets. But phased-in reform need not lead to sudden or drastic service reductions, or any — if states enact efficiencies that the provider tax enabled them to avoid. Meanwhile, federal and state taxpayers would have a clearer idea of who is paying for what, as the law intends.

Obama’s Medicaid Blended Rate Proposal

Last summer, Paragon released a Medicaid financing proposal that would end the ACA’s discrimination against traditional Medicaid enrollees and equalize federal reimbursement rates for all Medicaid enrollees over a decade and move nearly half of expansion enrollees into the ACA exchanges with a subsidy. As last week’s Paragon Prognosis discussed, there is significant evidence that expansion has harmed the access and quality of care of traditional Medicaid enrollees. Previous Paragon research has also demonstrated that the much higher federal reimbursement rate for the expansion population has led to a surge of improper spending and did not improve health outcomes for Americans.

In his FY 2013 budget, President Obama proposed equalizing the federal reimbursement rates between Medicaid enrollees within states. According to that budget, “The Administration also proposes a single blended matching rate for Medicaid and CHIP spending to replace the current complicated patchwork of matching formulas starting in 2017.” As this budget implicitly acknowledged, there is simply no good reason for Washington to pay states a much higher percentage of expenses for able-bodied adults than children, seniors, pregnant women, and people with disabilities on the program.

Medicaid Reform More Urgent Now than During Obama’s Presidency

At a February 2010 White House health care summit, then-President Obama acknowledged the specific budgetary problems presented by the rising costs in government health care programs:

Almost all of the long-term deficit and debt that we face relates to the exploding costs of Medicare and Medicaid. Almost all of it. That is the single biggest driver of our federal deficit. And if we don’t get control over that we can’t get control over our federal budget.

With respect to Medicaid, the situation is much more dire than when President Obama made these remarks. In fiscal year 2008 (the last year before President Obama was president) the federal government spent $201 billion on Medicaid and total Medicaid spending was $333 billion. In fiscal year 2023, the federal government spent $616 billion on Medicaid with total Medicaid spending of $860 billion. The federal share of total Medicaid spending increased from 60 percent to 72 percent between 2008 and 2023.

As demonstrated by this week’s Paragon Pic (below), in terms of real economic output, federal Medicaid spending increased from 1.36 percent of GDP to 2.28 percent of GDP—a 67 percent increase—between fiscal years 2008 and 2023. The state share of spending stayed at the same percentage of GDP over this period—at 0.90 percent. This means that the entire cost increase of Medicaid (in terms of economic resources) over this period was borne by the federal government—a key consideration for Congress as it evaluates various Medicaid reform proposals.

All the best,

Brian Blase
President
Paragon Health Institute