Niklas Kleinworth is the Director of the State Health Reform Initiative and a Policy Analyst at the Paragon Health Institute, focusing on Medicaid and state policy initiatives. He has served in state and federal policy roles since 2021.
Emma Gallutia is a former research assistant for Paragon Health Institute.
Mark Howell is a Research Assistant at Paragon Health Institute. He is passionate about advancing free-market solutions to improve healthcare access and affordability.
Total Medicaid spending is nearly $900 billion annually, with federal spending projected to be above $650 billion in fiscal year 2025. It is the nation’s fastest growing program and in vital need of reform so it can best serve the truly vulnerable.
Americans know that Medicaid needs substantial reform because it is rife with waste, fraud, and abuse and often provides lower quality care at higher cost. As policymakers in Congress and in the White House try to reform the program, they face a broken program protected by entrenched interests who profit from dysfunction. Now, more than ever, policymakers need to tune out the rhetoric and return the focus of Medicaid to the poor and vulnerable. In this Prognosis, we’ll uncover the truth beneath the deceptive claims that are being deployed to undermine crucial improvements to protect both the truly needy and the hard-working families that finance the program.
The American people support fixing the problems in Medicaid. Nevertheless, some pollsters claim that broad support for Medicaid means the program is a proverbial third rail that policymakers cannot touch. These pollsters point to majorities that generally support the Medicaid program and claim that few want to see funding decrease.
But these claims fall apart when polling is open and honest about options for improving the program. Paragon commissioned a poll of 1,000 Americans and found that broad support for an improved Medicaid program fuels a desire for specific reforms.
Americans overwhelmingly want the program to have integrity. A large majority of Americans — more than 90 percent — support eliminating waste, fraud, and abuse in Medicaid. And nearly two-thirds of respondents want to ensure that only eligible people enroll in the program.
Americans aren’t opposed to reducing the rate of Medicaid spending either. The reforms Congress is considering are far from the definition of a “cut.” Rather, these reforms would flatten the growth in the program from five percent per year to three percent. In all, Medicaid baseline spending will still be nearly $450 billion higher than projections before the Biden spending spree in 2021 — not the funding free fall portrayed by critics.
What the majority really cares about is assurance that the dollars that are spent are going to support the needy. They do not support financing schemes that enrich big hospitals or prioritize able-bodied, working-age adults over the poor, children, and the disabled. This means that Congressional Republicans seeking reform to reduce the much higher federal payment rate for the ACA expansion population or limit state financial gimmicks are broadly supported. Such strong public support for Medicaid reform should inspire Congress to take meaningful steps toward reform — and to communicate confidently that changes will benefit the most needy.
Traditionally, Medicaid was intended to serve the most vulnerable, including children, the pregnant, the disabled, and the elderly. But the program has since expanded to not only serve but to favor able-bodied, working-age adults by providing seven times more federal financial support for them than traditional enrollees. It works like this: states receive $9 in federal funds for every $1 of state spending on able-bodied, working-age adults versus an average of only $1.33 in federal funds for every $1 of state spending on children, pregnant women, seniors, and individuals with disabilities.
This change means Medicaid has shifted away from its focus on providing health care access to those who truly need it. The first step to correcting these inequities is to restore balance between what the federal government pays for the expansion population and what it pays for America’s most vulnerable.
With these realities in mind, let’s look at some of the other claims from powerful interests that distort the policy action needed for Medicaid’s future.
Claim:
“Medicaid cuts would result in widespread coverage losses, which could lead to 15,400 deaths due to work reporting requirements or roughly 34,200 deaths from reduced federal funding each year.”
Source: Center for American Progress (CAP)
Reality:
A 2023 study from the National Bureau of Economic Research contradicts these claims from CAP. Using a larger sample of states, more years of data, and improved methods, the NBER study finds:
“… no evidence that Medicaid expansions affect [adult mortality] in any of the treated states or all of them combined. Moreover, there is no clear pattern in the signs of the estimated treatment effects.”
These results are consistent with a large research literature showing that health insurance coverage, especially for working-age adults, has little effect on physical health.
On the other hand, CAP’s analysis suffers from several flaws. First, it makes the unrealistic assumption that all states will roll back their expansions if Congress approves a reduction in the federal matching rates for expansion enrollees. But CAP is contradicted by their own sources, acknowledging “state responses are hard to predict” and considering the all-states-roll-back scenario an “extreme” outcome. On May 7, the Congressional Budget Office predicted that most states would maintain their expansion and only 2.4 million new uninsured would result from a policy that immediately reduced the expansion reimbursement rate to the regular reimbursement rate. So, even if you accepted CAP’s methodology, their estimates are still 4.5 times reality.
Even if we assume all states repeal expansion, CAP’s numbers are unreliable. CAP relies on a single, unreplicated study by health economist Benjamin Sommers to drive their estimate of mortality, which claims Medicaid saved at least one life annually for every 316 individuals gaining insurance. CAP then applies these results across 10.8 million adults and extrapolates that about 34,200 additional deaths would occur in the U.S. each year.
But Sommers’ research is not generalizable. His one study is based on only three states — Arizona, Maine, and New York. In the early 2000s, when Sommers conducted his study, all three states altered their eligibility rules to allow some childless, low-income adults to enroll in Medicaid, well before 2014 when Medicaid expansion was in effect across the country.
Claim:
“Eliminating the enhanced FMAP for adults in the Medicaid expansion… could result in 20 million people losing coverage.”
Source: Kaiser Family Foundation (KFF)
Reality:
Under the Affordable Care Act, the Federal Medical Assistance Percentage (FMAP) — also known as the federal match — was structured to favor the able-bodied, working-age adults. The KFF analysis makes the extreme assumption that all states will drop their Medicaid expansion coverage in response to a reduction in the expansion FMAP.
The Congressional Budget Office (CBO) recently provided a more realistic assessment of states’ responses to a reduction of the expansion FMAP. They estimate only 5.5 million able-bodied, working-age adults will lose Medicaid expansion coverage by 2034, with most finding alternatives in the health insurance exchange plans and employer sponsored insurance. Heavily subsidized health insurance exchange plans, in particular, offer better network access than Medicaid, cost less to the federal government — even after accounting for the cost of federal subsidies — and cost states nothing.
Paragon also recently conducted an analysis of such a policy and came to similar conclusions regarding the impact to patients and the federal budget.
Claim:
One report argues: “…in over a quarter of the states that have expanded Medicaid, state law will require that millions of people quickly lose coverage because of existing ‘trigger’ provisions in state law.”
Source: Georgetown University
Reality:
State laws are not permanent as legislatures have the flexibility to repeal so-called “trigger” laws should they not be in the state’s best interest. If Medicaid is truly popular, states will have every incentive to repeal those laws. In fact, Illinois already has a bill readied for such a purpose and Michigan repealed its trigger law last year. A recent analysis from CBO found the majority of those who would lose Medicaid coverage would move to either employer-sponsored insurance or ACA exchange coverage.
Medicaid program integrity is crucial to ensure those who belong on the program receive the services they need. But policies that enable financing gimmicks, ineligible enrollment, and other forms of abuse cost taxpayers and enrollees alike. As Congress considers reforms in this vein, some groups are attempting to scare policymakers into maintaining the status quo.
Claim:
“Congressional changes to the funding structure of the Medicaid expansion will leave millions of individuals with SUD [substance use disorder] and OUD [opioid use disorder] without access to life-saving care.”
Source: National Health Law Program (NHeLP)
Reality:
In an earlier Paragon Prognosis, our team revealed:
“Although the evidence on treatment is mixed, more troubling is evidence suggesting the Medicaid expansion may have worsened the opioid crisis by creating new addicts. New enrollees could use their insurance to gain access to low-cost prescription opioids, potentially increasing rates of abuse.”
The piece goes on to cite a 2018 congressional report which uncovered an inordinate amount of Medicaid fraud involving opioids in expansion states. Evidence shows states have far more success with federal block grant programs to address the crisis, suggesting states should seek alternatives to expanding Medicaid to address the crisis.
Claim:
One report asserts, “restricting the use of provider taxes would significantly cut state funding for Medicaid.”
Source: Georgetown University
Reality:
States have successfully used money laundering schemes like provider taxes to offset virtually all of their share of the growth in Medicaid spending for the last 15 years. The issue is so pervasive, leaders from across the political spectrum agree on the need to address these schemes. Former Vice President Joe Biden called it a “scam.” And the previous Trump administration expressed its opposition to provider taxes in its 2019 budget proposal.
States exploit these schemes to fund controversial policies like California’s Medicaid for illegal aliens and the wealthy. New York uses these schemes to patch multi-billion-dollar holes in their state budget.
Congress has been fighting against these money laundering schemes for more than 30 years — almost as long as the provider tax schemes have existed. They raise the cost of health care for American patients and drive up the national debt for federal taxpayers — benefiting hospital systems, insurers, and state coffers.
Claim
“States are currently permitted to tax health care providers up to 6% to help fund the state share. A potential Medicaid reform would lower this threshold — potentially to 0% — and thus reduce federal Medicaid funding for many states.”
Source: Hilltop Institute
Reality:
Federal regulations do not place a cap on the rate states may tax providers. The six percent threshold refers to the “indirect guarantee test” by which the federal government determines whether states are illegally guaranteeing to return tax dollars to providers. Put plainly, this is the legal limit for the size of a tax used for money laundering schemes. States may choose to tax providers more, but they would have to make the politically unpopular decision to not guarantee providers will be held harmless in the scheme.
Six percent is plenty of room for states to implement money laundering schemes, as evidenced by the fact that no state taxes providers above that rate today. Lowering the threshold for the indirect guarantee test would reduce the kickbacks states could pay to providers as part of their schemes to draw down additional federal money.
Claim:
“The money [provider taxes and supplemental payments] helps the state pay higher Medicaid reimbursements to hospitals, which reduces their need to charge higher rates to private insurers….”
Source: Kaiser Family Foundation
Reality:
Contrary to critics’ claims, money laundering schemes through provider taxes actually work to increase the cost of services for all patients, not reduce them. Since provider taxes are a function of patient revenues, increased costs to patients drive more taxes to fund the money laundering schemes. As an added effect, more than half of all states base their supplemental payments on average commercial rates — which are calculated and verified by the states. This incentivizes both states and providers to raise the cost of care for all patients in order to draw-in additional state directed payments.
North Carolina has a particularly perverse scheme that uses state directed payments to cover bad debt and charity care costs for hospitals, generating windfall profits for those providers. The State Treasurer of North Carolina, Dale Folwell, penned a letter asking CMS reject the Tarheel State’s provider tax and supplemental payment scheme due to its negative impact on healthcare costs.
Public support for helping the poor and most vulnerable is not an argument against Congress reforming Medicaid — it is a strong reason for Congress to confidently advance reform. The evidence is undeniable that Medicaid has been printing money for states and hospital systems through financing gimmicks while they siphon resources from the truly needy. The American people support the program for what it was intended to be, not what it is — and it is up to this Congress to return the program to its first mission.
To do this, policymakers must reject the myths from the special interests that want to perpetuate a failed status quo. Progressive claims obscure real solutions and preserve policies that harm the most vulnerable and taxpayers. Continued inaction will abandon Medicaid enrollees, patients, and the American health care system in favor of special interest profits. It is time to consider common-sense, evidence-based reforms that reorient Medicaid to better serve its original purpose of assisting the truly needy.
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