Paragon’s new report, Medicaid Financing Reform: Stopping Discrimination Against the Most Vulnerable and Reducing Bias Favoring Wealthy States, contained two proposals to reform the Medicaid program. The first, and the subject of last week’s Pic, would end the current discrimination that favors able-bodied, working-age enrollees over children, pregnant women, seniors, and the disabled. The second, and the subject of this week’s Paragon Pics, is that wealthy states receive more federal Medicaid money per person in poverty than poorer states.
The intent of the Medicaid financing formula—the federal medical assistance percentage (FMAP)—was to deliver greater federal support in poorer states with the federal government reimbursing a greater share of expenses in states with lower per capita income. Part of the problem is that the FMAP formula has an arbitrary floor on the federal reimbursement for the wealthiest states and the District of Columbia. This week’s first Pic shows what the FMAP would be for these states and D.C. in the absence of the floor.
This week’s second Pic plots federal Medicaid spending per person in poverty with state per capita income. Despite the intent of the FMAP formula to provide greater federal support in poorer states, federal Medicaid spending per person in poverty is positively correlated (r=0.51) with state per capita income. If the formula was working as intended, the correlation would be negative. The reality is that, whether due to economic or political reasons, wealthier states have grown much larger Medicaid programs—with higher eligibility levels and more expansive benefits—and receive far more federal funding per person in poverty than poorer states receive.
Policymakers should base the distribution of federal Medicaid funds on a more accurate measure of state needs and fiscal capacities and not to reward wealthy states with more expansive Medicaid programs.
Although the most important part of Paragon’s Medicaid reform would end the discrimination against the most vulnerable, we also propose to reduce the FMAP floor that benefits wealthy states from 50 percent to 40 percent. The only jurisdiction affected by the 40 percent floor would be the District of Columbia, the U.S. jurisdiction with the highest per capita income. States with the highest per capita incomes, such as California, Connecticut, Massachusetts, and New York, would have FMAPs between 45 and 50 percent, based on their state per capita income. 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. We propose that the phasedown of the standard FMAP floor would start in 2026 and be complete in 2034.
