Medicaid, a joint state and federal medical care program, already costs more than national defense. And despite $1.1 trillion in improper payments over the past decade, Congress is sheepish about reforming it. Without major changes, Medicaid will accelerate the growth of the deficit, propelling the US towards a debt crisis. The program is overdue for an overhaul.
The Medicaid program is massive and growing rapidly.
Over the last decade, Medicaid has outpaced the growth of the other two largest federal entitlement programs: Social Security and Medicare. This year, the federal government will spend $656 billion on Medicaid. Including state funding, total Medicaid spending ($873 billion) exceeded national defense this year. The program will continue to grow over the next decade, with federal spending exceeding $1 trillion by 2035.
Medicaid’s rapid growth can be traced, in part, to the program’s imbalanced financing structure. For every dollar a state spends on Medicaid, the federal government provides anywhere from $1 to $9 in additional funding. In general, poorer states receive a higher “match” rate than wealthier states.
As a result of this matching scheme, states have a significant incentive to expand the Medicaid program, shifting most of the costs to federal taxpayers. When Congress launched Medicaid in 1966, the financing burden was roughly equal, with states covering half of the budgetary costs of the program. Today, states only cover a quarter of the costs of running the Medicaid program.
When Washington picks up the tab, states lose incentives to spend wisely. Returning responsibility for funding state-administered programs like Medicaid to the states would bring greater discipline to program operations, reduce overspending, and ensure the program prioritizes the most vulnerable.
Obamacare illustrates the risks of abandoning this federalist framework. Originally, Medicaid subsidized only low-income children, the disabled, pregnant women, and elderly individuals. After 2014, Obamacare expanded Medicaid eligibility to able-bodied, childless adults. To encourage states to adopt this expansion, the federal government finances $9 for every $1 states spend on the Obamacare expansion population. That’s about 7 times the matching rate states receive for providing care to the poor, disabled, and pregnant (~$1.33). In effect, Medicaid privileges able-bodied adults over the neediest due to federal funding strings. That’s not a just or efficient use of taxpayer resources.
Together, the underlying financing structure and subsequent Obamacare expansion have created huge disincentives to curb excessive and wasteful spending. Because state officials reap the political rewards of administering a massive benefit program but pay a fraction of its costs, there is little reason to rein in spending. Unsurprisingly, waste is rampant as a result. Official government reports conservatively estimate that improper Medicaid payments total half a trillion dollars over the last decade, but outside estimates place that figure closer to $1.1 trillion. On top of this, states engage in a variety of financing gimmicks, such as provider taxes, to secure additional federal funds without spending any money themselves, effectively defrauding federal taxpayers. Rampant waste and blatant financing gimmicks should motivate major structural reform.
Unfortunately, Republicans will not actually cut Medicaid spending.
Despite media coverage to the contrary, Republicans are not considering cutting Medicaid spending. The deficit reduction target laid out by the committee responsible for Medicaid (Energy and Commerce) requires at least $880 billion in savings. Even if 100 percent of that $880 billion target came from reduced Medicaid spending (it won’t), year-over-year Medicaid spending will continue to grow.
Only in Washington can you call slowing the growth in a program’s spending a cut, even if taxpayers’ burden will still rise by hundreds of billions.
Assuming $880 billion in Medicaid savings are gradually phased in over the next 10 years, federal spending will still increase by about 3 percent annually compared to 4.5 percent annual growth under baseline assumptions. Given the program is projected to be running a more than $1 trillion annual budget, $88 billion less in annual federal Medicaid spending barely qualifies as real reform, let alone a major cut.
But even the above spending reduction is probably an overestimate of the changes Republicans will eventually make to the program. Intraparty fights between big government conservatives and deficit hawks are likely to yield some middle-of-the-road compromise. Medicaid spending will continue to grow, albeit slightly slower than baseline, as will the program’s size.
Look no further than the most recent slate of Medicaid reforms under consideration by the Energy and Commerce Committee. Changes include tightening enrollment, work requirements, a moratorium on new provider taxes, and limiting supplemental directed payments. Some of these changes, particularly the provider tax and supplemental payments reform, have real merit, but leave in place underlying financing gimmicks that plague the program. The work requirements, on the other hand, reportedly start their implementation in January 2029, after Trump is out of office. That is a shameful budgetary sleight of hand and will not generate the savings needed to put the program on a sustainable fiscal path.
In any case, whatever Republican plan eventually emerges should be seen as a very modest course correction rather than major (needed) reform or draconian austerity.
As reconciliation debates heat up, lawmakers should keep this simple fact in mind: deficits today are deferred taxation. Accordingly, failing to reform Medicaid means accepting unchecked spending, rising debt, slower economic growth, and fewer resources for future generations.
For a deeper dive on Medicaid, check out my blog with Michael Cannon and Krit Chanwong, titled “Congress Must Cut and Reform Medicaid.”
FREOPP Medicaid Event
I’ll be speaking on a panel today, May 13, at a Capitol Hill lunch briefing on the future of Medicaid and budget reform, alongside Avik Roy and Matthew Dickerson. The event will be held from 12:00 to 1:00 PM at the Capitol Hill Club. To register, please reach out to Tabetha (ea@freopp.org).
