Medicaid Financing Reform: Stopping Discrimination Against the Most Vulnerable

Today, Paragon released a new report, Medicaid Financing Reform: Stopping Discrimination Against the Most Vulnerable and Reducing Bias Favoring Wealthy States. Today’s newsletter highlights the paper and the recommendations, previews two Paragon events next week, and reviews last week’s virtual event where Theo Merkel and I discussed our paper, Follow the Money: How Tax Policy Shapes Health Care.

Medicaid is a rapidly growing federal-state program that finances health care services for lower-income Americans. The federal government provides an open-ended reimbursement of state Medicaid expenditures. Despite the intent of the federal financing formula—the federal medical assistance percentage (FMAP)—to provide greater federal support in poorer states, richer states have developed more profligate Medicaid programs and thus receive far more federal funding per person in poverty than poorer states. Part of the problem is that the FMAP has an arbitrary floor for the wealthiest states.

The Affordable Care Act (ACA) created a new eligibility category for Medicaid—able-bodied, working-age adults—with a much higher federal reimbursement percentage for these enrollees. This has led to a host of problems, including 1) a diversion of resources away from traditional Medicaid enrollees, particularly low-income children, and people with disabilities, that has reduced their access to health care services; 2) a near quadrupling of Medicaid’s improper payments; and 3) a surge of spending that has significantly contributed to large and growing federal deficits.

This week’s Paragon Pic (below) is the first figure in the new report. The figure shows how the per-enrollee cost of the Medicaid expansion is more than 50 percent above expectations; indicating both the inefficiency of Medicaid expansion and how states have diverted resources away from the most vulnerable. For a full explanation of the Pic and the issues, click here.

Another problem: despite the intent of the federal financing formula—the federal medical assistance percentage (FMAP)—to provide greater federal support in poorer states, richer states have developed more profligate Medicaid programs and thus receive far more federal funding per person in poverty than poorer states. Part of the problem is that the FMAP has an arbitrary floor for the wealthiest states.

How Do We Propose to Fix the Problem?

Proposal #1 would end the discrimination against low-income children, pregnant women, seniors, and people with disabilities by equalizing the percentage that the federal government reimburses state Medicaid expenditures for them and for ACA expansion enrollees. Starting in 2026, our proposal would begin phasing down the 90 percent FMAP for expansion enrollees until it would reach parity in 2034 with each state’s FMAP for traditional enrollees.

We permit states to keep Medicaid expansion and reduce eligibility to only households below the poverty level. Households earning above the poverty level would be eligible for tax credits for ACA exchange plans. This policy would better protect services for traditional Medicaid enrollees, better align state incentives to get value from their expenditures, and significantly increase enrollment in the exchanges relative to Medicaid.

This policy would also lead about 4.5 million people to replace Medicaid with an exchange plan. Importantly for these enrollees, both states and the federal government would save money. The states would save their 10 percent share of Medicaid expenses. The federal government would save money because the average spending per Medicaid expansion recipient is about 20 percent higher than the average premium tax credit for the lowest-income exchange enrollees.

We include a second proposal that includes a reduction of the FMAP floor. The District of Columbia, the jurisdiction with the highest per capita income, would move to 40 percent. The wealthiest 10 states would have FMAPs between 45 percent and 50 percent. This policy would create greater equity in federal support across the country—reducing the gap in federal funding per person in poverty—although wealthy states would still receive more federal funding per person in poverty after our proposal takes full effect.

What Would Result?

1. Assuming states maintain Medicaid expansion at 100 percent FPL and everyone with coverage between 100 percent and 138 percent FPL switches from Medicaid to the exchanges, we estimate the total costs to states from lowering the 90 percent expansion FMAP would be $110.1 billion between 2026 and 2034. Under these assumptions, the federal government would save $251.7 billion. The federal savings are greater than the state costs for several reasons that we detail in the paper.
2. Federal savings would increase to $314.2 billion by adding in the reduction of the 50 percent FMAP floor in the wealthiest 10 states and the District of Columbia.
3. The combined proposal would shift only about 2.7 percent of the combined costs of Medicaid and the premium tax credit for enrollees below 138 percent FPL who switch from Medicaid to the exchanges from the federal government to the states.
4. We also account for two behavioral assumptions that the Congressional Budget Office would assume in its projections: 1) about one-quarter of states dropping Medicaid expansion when the 90 percent expansion FMAP declines and 2) about one in five people losing Medicaid not enrolling in a subsidized exchange plan. We expect CBO would estimate that proposal #1 would save $529.9 billion and proposal #2 would save $592.4 billion.
5. Accounting for these two assumptions, we project a decline in Medicaid enrollment by 8.3 million people, an increase in exchange coverage by 4.5 million people, an increase in the number of people with employer coverage by 0.8 million people, and an increase in the uninsured by 3.0 million people

Site Neutral Event with HHS Secretaries Azar and Sebelius

On Monday, July 29, Paragon is hosting an event on Medicare site neutral payments with the Brookings Institution, the American Enterprise Institute, and the Center for American Progress. I will be moderating a discussion between former Health and Human Services secretaries Alex Azar and Kathleen Sebelius, and Joe Albanese will provide remarks. That event will be at Top of the Hill from 10 am-11:30 am EDT and you can register here.

Paragon’s Artificial Intelligence Event

On Wednesday, July 31 at 2:30 pm EDT, Paragon’s Kev Coleman and Dr. Joel Zinberg will host a virtual discussion with three of the nation’s leading entrepreneurs bringing artificial intelligence to health care. Register for this event here. One topic of discussion will be Kev’s recent Paragon report, Lowering Health Care Costs Through AI: The Possibilities and Barriers.

Event Recap: Paragon’s Event on Health-Related Tax Policy

On Wednesday, July 17, Paragon hosted a virtual event featuring Theo Merkel, Alye Mlinar, and me where we discussed the impact of tax policy on health care in the United States. We covered the ACA tax credits, Paragon’s research on fraudulent exchange spending, the tax exclusion for employer-sponsored insurance, health savings accounts, ICHRAs, and more. If you were unable to attend , you can see the entire event video on our website here.

All the best,

Brian Blase
President
Paragon Health Institute