Medicaid Costs Have Shifted to Washington and Much More

This week’s newsletter starts with several updates on Medicaid, including a new Paragon Pic that shows the large shift of costs from states to the federal government over the past decade and perspective on the so-called trigger states that have laws to drop their Medicaid expansion if Congress reduces the 90 percent reimbursement rate for the Affordable Care Act (ACA) expansion. I also highlight a new policy brief coauthored by Paragon expert Kev Coleman on the use of artificial intelligence in health care, say good-bye to Paragon’s senior policy analyst and resident Medicare expert Joe Albanese who took a key position at the Centers for Medicare and Medicaid Services last month, and welcome John R. Graham to Paragon.

Large Shift of Medicaid Costs to Washington

As Congress weighs Medicaid reform, policymakers need to recognize the significant shift in the burden of financing Medicaid from states to the federal government since 2013. The federal government provides an open-ended reimbursement of state Medicaid expenditures, with the reimbursement percentage dubbed the federal medical assistance percentage (FMAP). As shown by this week’s Paragon Pic (below), the federal government has historically reimbursed about 57 percent of the total bill. Now, the federal government reimburses about 67 percent of the total bill.

The ACA Medicaid expansion is responsible for much of the shift in costs to the federal government. The ACA created a much higher FMAP for the expansion population of able-bodied, working-age adults relative to the rate states receive for traditional Medicaid enrollees like children, pregnant women, seniors, and people with disabilities. In addition, from 2020 through 2023, states received a higher FMAP because of pandemic-era policies. From 2009 to 2011, there was a temporary increase as the 2009 stimulus bill delivered money to states through a higher FMAP.

Importantly, the statutory FMAP does not represent the true ratio of Medicaid expenses borne by the federal government. The reason is that states have developed sophisticated money laundering schemes that result in the federal government reimbursing artificial state expenditures. In short, the federal government provides states with money for state accounting gimmicks that just give the appearance of actual expenditures. Based on previous work from the Government Accountability Office, the effective FMAP was about 5 percentage points greater than the statutory FMAP in 2018. Assuming the schemes raise the federal share by 5 percentage points, the actual historic federal share of expenses would have been about 62 percent and the current rate would be about 72 percent. The growth in financing schemes has increased substantially, meaning the federal government could be bearing about three-quarters of the overall Medicaid bill.

Trigger Laws: A Red Herring Argument Against Medicaid Reform

As a result of the terms of the ACA’s expansion of Medicaid, the federal government currently discriminates against traditional Medicaid enrollees. With expansion, Medicaid resources have been diverted from children and individuals with disabilities to able-bodied, working-age adults. And existing Medicaid enrollees have a harder time obtaining health care appointments after expansion, with a large increase in emergency department use for non-emergency services.

Last year, Paragon developed a proposal to end the federal discrimination against the most vulnerable and promote private coverage over Medicaid. Under Paragon’s proposal, states would save money by being freed from the obligation to finance 10 percent of the expense as roughly half of enrollees are shifted to the ACA exchanges. To eliminate the federal discrimination against the most vulnerable, there would be a gradual shift in costs from the federal government to the states for the other near half of expansion enrollees.

Paragon’s commonsense Medicaid financing reform proposal has attracted some support in Congress, but one argument being raised against this policy is that nine states have so-called “trigger” laws, which would end the expansion if the expansion FMAP drops below 90 percent. This is a specious argument. State law is not set in stone and states can eliminate their trigger laws if they believe there is merit in the expansion. Ultimately, the vast majority of states would likely keep their expansions as they would have a significant financial incentive to do so. The federal government would still reimburse the majority of states’ expenses on Medicaid coverage for expansion enrollees, just at the normal state FMAP and not the 90 percent FMAP.

A Proposal for Regulating AI Medical Devices

Federal and state officials are struggling to regulate artificial intelligence in health care because, unlike traditional software, AI may produce unpredictable results. Paragon’s latest policy brief, “The Regulation of Uncertainty,” explores this challenge and identifies the conditions necessary for AI developers, implementers, and regulators to collaborate effectively on AI medical device safety. Unlike the conventional regulatory paradigm that relies on FDA premarket validation of health care software, the brief suggests a place for targeted post-market performance monitoring to complement the FDA’s premarket work. In essence, stakeholders will continue to evaluate health AI tools by monitoring such products while they are used by physicians and patients, and the FDA may potentially update relevant approvals based on the data collected.

The new policy brief is a collaboration between Paragon’s Kev Coleman and Duke University Professor Michael Pencina. The piece also exhibits Paragon’s continuing commitment to AI policy, which had begun with previous reports Lowering Health Care Costs Through AI: The Possibilities and Barriers and Healthcare AI Regulation: Guidelines for Maintaining Public Safety and Innovation.

Good-bye Joe Albanese

This week, Paragon congratulates Joe Albanese, who has joined the Centers for Medicare and Medicaid Services (CMS) as a part of the Trump administration. Formerly a senior policy analyst with Paragon Health Institute, Joe joined the organization in September of 2022 and was extremely productive, becoming one of the nation’s foremost experts on Medicare policy. Joe wrote eight research papers during his 20 months at Paragon, including Improving Medicare Through Medicare Advantage, Beyond Box-Checking: The Case for Dismantling Medicare’s Quality Bureaucracy, and Turning the Tide on Red Ink: Commonsense Policies to Make Federal Health Programs More Sustainable. Joe testified before Congress twice in 2023, which helped him to quickly establish himself as an expert on MACRA. While we’ll miss Joe’s friendly face and strong work ethic, we’re delighted that Joe will be able to reform government and empower patients in his new role.

Welcome John R. Graham

John R. Graham has joined Paragon as a visiting fellow. Before Paragon, John was in the U.S. Department of Health and Human Services in the first Trump Administration, the House Ways & Means Committee, and the Senate Special Committee on Aging. John earned an M.B.A. from the London Business School and a B.A. in Economics & Commerce from the Royal Military College of Canada. A military veteran and a man of many talents, John is a welcome addition to our team. Already John has published two Paragon Pics and is contributing to the production and review of Paragon’s research.

All the best,

Brian Blase
President
Paragon Health Institute