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Medicaid Match Rates Incentivize Waste

As the mandatory piece of federal expenditures consumes an ever-increasing percentage of the overall federal budget, Medicaid spending continues to rise within this mandatory piece. Many factors have contributed to skyrocketing Medicaid expenditures by the federal government, but much of this has not been to the benefit of those that Medicaid was enacted to help.

Intended to function as a state and federally funded program to provide low-income Americans with health insurance, it is by all counts a welfare program -- a government program to provide support to low-income Americans. However, throughout time, it does not even function as so. This is due in no small part to the backwards incentive structure created by the calculations and statutory requirements of the federal medical assistance percentage (FMAP).

The FMAP is used to determine the federal match rate to a state for every dollar that state spends on Medicaid, and is calculated by a formula that bases the match rate on average per capita income in a state relative to the national average. Therefore, those states with lower average per capita incomes receive a higher match rate than do those that have higher average per capita incomes.

The intention here is for states with a higher population of low-income Americans to receive more funding to make it easier for them to provide health insurance through Medicaid to this low-income population. However, one key component of the FMAP is the statutory floor of 50 percent. This means that, no matter how wealthy a state may be, the lowest matching rate it may receive from the federal government for Medicaid funds is 1:1, as an FMAP of 50 percent means that the federal government will fund 50 percent of a state’s total Medicaid expenditures.

It comes as no surprise, then, that those states that would otherwise fall below this statutory floor are incentivised to expand Medicaid dramatically. Some of these states, such as California which currently receives 15 percent of federal Medicaid funds alone, would have an FMAP significantly lower than 50 percent.

With the statutory floor at 50 percent, however, these states need only spend $1 to get that dollar matched by the federal government, instead of having to spend $2 or $3 of state funds to get a dollar of federal money. At such an advantageous match rate, and being wealthy states to begin with, Medicaid expansion is an obvious choice for these states to take advantage of federal assistance. They not only have the funds with which to expand Medicaid, but also get more favorable match rates from the federal government relative to their average per capita income than do those poorer states whose FMAPs are true to the formula.

As a result, the massive increase in federal spending on Medicaid has not meant -- as proponents of the welfare state might hope -- increased federal spending on low-income Americans. It has actually meant a shrinking percentage of federal Medicaid funds for low-income Americans, while at the same time drastically increasing the national debt with rapidly rising spending on Medicaid, all for the benefit of high-tax, high-income blue states.

The explosion in Medicaid costs is self-evident. As $1.2 billion of the $40.7 billion in mandatory spending in 1967 two years after Medicaid’s advent, federal spending on Medicaid consumed just 3 percent of mandatory spending. Twenty years later in 1987, $27.4 billion of $421.2 billion constituted 6.5 percent of mandatory spending that year. Fast-forward another 20 years, and 2007 saw this percentage double to over 13 percent. The Congressional Budget Office projects that federal yearly Medicaid spending will only continue to grow, with its estimate for 2027 of $655 billion more than tripling the $190.6 billion spent in 2007.

Not only is the rate at which federal Medicaid spending is growing absolutely unsustainable, but Medicaid spending is not even serving the purpose that it was meant to serve. Looking at expansion states and where federal Medicaid funds have increasingly been funnelled makes this point clear -- it has disproportionately funded wealthy, not low-income, states.

The Department of Health and Human Services recently put out its new FMAPs for states for fiscal year 2019. Those states whose FMAPs would fall below 50 percent by the formula, but instead are put at 50 percent due to the floor, are overwhelmingly high-tax blue states, including: California, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, and Washington. The states with the highest FMAPs, all above 70 percent -- thus theoretically intended to receive the most benefits of federal matching -- include Alabama, Idaho, Kentucky, Mississippi, New Mexico, South Carolina, and West Virginia.

Unsurprisingly, however, the seven aforementioned 50 percent FMAP states combined received $123.9 billion of the total $348.9 billion federal dollars spent on Medicaid in fiscal year 2016, or 35.5 percent. The seven aforementioned states with FMAPs above 70 percent combined received, by contrast, received only $28.3 billion in fiscal year 2016, constituting only 8 percent of total federal Medicaid expenditures -- less than one-fourth that given to the wealthiest states.

Medicaid is inherently problematic just by virtue of the welfare state it has promulgated in the United States since its 1965 advent, leading to $368.3 billion -- 10 percent of the entire federal budget -- being spent on Medicaid alone in fiscal year 2016. Its problems go beyond simply this fact, though, and should raise serious concerns even for supporters of Medicaid as a program.

If the intention of Medicaid is to effectively provide health insurance to low-income Americans, it is not even fulfilling this intention, despite the astronomical amount of money being spent on the program. Spending more than one-third of all federal Medicaid expenditures on only seven states that have an average per capita income far above the national average, and less than one-tenth on seven states with the lowest average per capita income is decidedly not effectively providing health insurance to low-income Americans.

In fact, the direct result of FMAP funding as it stands with the 50 percent floor, is literally hundreds of billions of dollars of waste every single year, spent on insuring Americans that Medicaid was never intended to insure. It also incentivizes bad behavior by states, encouraging them to raise taxes in order to spend more money on Medicaid so that they get more matched back. Between wasteful spending, ballooning debt, and higher taxes, none of this is good.

Republicans in Congress attempted to address some of these problems with Medicaid funding in their ObamaCare “repeal and replace” bill last summer, H.R. 1628, including the excessive waste driven by the unlimited federal matching allotted for in current Medicaid law. The bill that failed to pass in the Senate would have changed Medicaid funding from the current open-ended matching program to a per capita funding structure.

This structure would have alloted states a fixed amount of money per Medicaid enrollee, based on categories that enrollees fall into, dramatically reducing federal funds given to states -- especially those that expanded Medicaid simply to take advantage of the unlimited matching funding structure. However, as last summer’s “repeal and replace” effort ultimately failed, the current FMAP funding structure is still in place, continuing to allow high-tax, wealthy blue states to to fund Medicaid expansions with federal taxpayers’ money.

It remains known that Medicaid alone poses a significant financial risk to the United States, along with the rest of mandatory spending that now consumes over 60 percent of the total federal budget. Adding billions of dollars to our national debt every year, Medicaid as it stands wastes taxpayer money by disproportionately funding already-wealthy states, and contributes in no small part to the looming fiscal crisis the United States will face if it fails to reign in its out-of-control spending.

Addressing the funding structure of Medicaid, including the detrimental impact of the FMAP floor, must be part of the conservative effort to cut spending and return our country to fiscal responsibility.