Republican Medicaid Reform Would Save $110 Billion to $150 Billion in 5 Years

money-rollsArguably more important than repealing and replacing Obamacare, a longstanding Republican proposal to change how Congress finances Medicaid would reduce the burden on taxpayers by $110 billion to $150 billion over five years, according to a new analysis by consultants at Avalere.

Currently, state spending on Medicaid is out of control because Medicaid’s traditional funding formula incentivizes the political class to overspend. For every dollar a state politician spends on Medicaid, the federal government pitches in at least one dollar via the Federal Medical Assistance Percentage (FMAP). This actually rewards states for making more residents dependent on Medicaid.

Before Obamacare, FMAPs ranged from 50 percent (which means the federal government adds one dollar to every state dollar) to 74.63 percent (which means the federal government adds $2.94 to every state dollar). Obamacare expanded Medicaid eligibility to higher-income residents, at an FMAP originally set at 100 percent, now at 95 percent and dropping to 90 percent in 2020. So, for every dollar the state spends on the higher-income residents made eligible through the Obamacare expansion, the federal government adds $19 this year! This creates a horrible prisoner’s dilemma for state politicians.

They pretty much cannot stop themselves from increasing Medicaid spending. According to the Kaiser Family Foundation, Medicaid accounted for over 28 percent of total state spending for all items in the state budget, but under 19 percent of all state general fund spending in 2015. Medicaid is the largest single source of federal funds for states, accounting for almost 57 percent of all federal transfers.

There is no way to get this spending under control without removing states’ incentives to ratchet up federal handouts. There have been a number of proposals in Congress to fix federal Medicaid funding by some measurement of a fair allocation to each state, either by the size of the state or the number of Medicaid beneficiaries in each state. What they have in common is the amount would be fixed by Congress, and state politicians could not increase it.

Avalere’s consultants examined what Medicaid spending would have been under these proposals going back to 2001, and extended the results through the next decade. They conclude savings to taxpayers would amount to 3 percent to 5 percent of federal Medicaid spending. However the benefits are far greater than that. Accountability and efficiency would surely increase dramatically.

Comments (8)

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  1. Jimbino says:

    One implication of your calculations is that the uninsured undocumented worker who shows up for treatment at the ER has already paid for at least 57% of his cost of treatment, by his share of federal taxes.

    • John Fembup says:

      “has already paid for at least 57% of his cost of treatment, by his share of federal taxes”

      Jimbino, you seem to be saying that the average individual share of federal taxes supporting Medicaid paid by undocumented, uninsured individuals is equal to or greater than the average individual share paid by all other Americans. Or if that is not what you are saying – what are you saying?

      (I suspect the average income of undocumented, uninsured persons is less than average Americans. Which would mean the undocumented persons pay less taxes than average Americans pay, and therefore their share of anything that is tax-supported is also less.)

  2. Devon Herrick says:

    The main problem with Medicaid is it encourages wasteful spending. States have little incentive to go after fraud when they only bear 30% of the cost and the feds bear 70%. Also, some of the providers are politically-connected, like hospitals. States like New York consider Medicaid a jobs / economic development program.

  3. Bob Hertz says:

    Most of the discussion on Medicaid focuses on the ACA expansion of the program to non-disabled poor people up to 138% of poverty in 31 states.

    And this is worth debate, but over 60 percent of Medicaid spending is for the disabled and the poor elderly.

    See attached from the Kaiser Foundation:

    …..more than 10 million children and adults who qualify for Medicaid based on disability include individuals with physical impairments and conditions such as cerebral palsy, epilepsy, HIV/AIDS, and multiple sclerosis; spinal cord and traumatic brain injuries; severe mental health conditions, such as depression and schizophrenia; intellectual and developmental disabilities, including Down Syndrome and autism; and other functional limitations.

    For the majority of dual eligible beneficiaries, Medicaid also covers services that Medicare does not cover – most notably, long-term services and supports and, in some states, dental care, eyeglasses and vision care, and hearing aids and services. About 40% of all Medicaid beneficiaries with disabilities are dual eligible enrollees.1 These roughly 4 million individuals, who have involved needs for both acute and long-term care, are among the most vulnerable beneficiaries in both Medicare and Medicaid. Although Medicare is the primary payer for dual eligible beneficiaries, Medicaid finances all their long-term care and about 40% of combined Medicare and Medicaid spending for all the services they receive, not including Medicaid payments for Medicare premiums.

    I am not sure that these kinds of expenses have a lot of fraud or misincentives in them, I just do not know.

    • Barry Carol says:

      I’ve read of fraud in nursing homes that’s primarily designed to drive revenue for the home. For example, providing physical therapy for someone highly unlikely to benefit from such therapy. There is also quite a lot of fraud in the whole home health care category such as providing more care than is needed and even billing for services never provided. Ambulance services to doctors appointments when a cab would do is another area. So is durable medical equipment like grossly overbilling for wheelchairs and related accessories. A relative of mine received a (needed) manually operated wheelchair that Medicare was billed over $3,500 for. Similar chairs were available online for private purchase for around $700. A simple seat cushion probably not worth more than $10 was billed at $400. I have no idea what Medicare actually paid though.

      Your underlying point is valid though which is that a very significant percentage of Medicaid spending goes to serve the aged, blind and disabled who account for a very small percentage of the total Medicaid population.

    • Allan says:

      Bob, is there any doubt in your mind that there isn’t a tremendous amount of fraud in both Medicaid and Medicare along with a lot of waste and marginal care?

      Check 60 Minutes on their expose of Fraud.

  4. Bob Hertz says:

    I am certain there is a lot of fraud, I think an author named Malcolm Sparrow documented much of this.

    I do wonder how much marginal care and waste there can be in caring for a person with traumatic spinal injuries or cerebral palsy. My very limited experience with such cases teaches me that they need a lot of expensive care no matter how much we try to be efficient.

    • Allan says:

      High cost diseases do not mean that marginal care doesn’t exist. It does. The marginal care costs might be drowned out by very high disease costs.