Biden Budget: Summary and Assessment of Medicaid Items

More government involvement and no debt reduction in sight.

This week, we are pleased to have Peter Nelson, Senior Policy Fellow at the Center of the American Experiment and former Senior Advisor to the Administrator of the Centers for Medicare & Medicaid Services, lend his expertise to a discussion of the president’s Medicaid budget items.

President Biden’s new budget is finally out. He claims that it will cut budget deficits by almost $3 trillion over 10 years, up from his $2 trillion promise made during the State of the Union address last month. This deficit reduction relies primarily on raising taxes on Americans making over $400,000 a year and on corporations, all without cutting Medicare or Social Security. The math behind the figures has yet to be released, so all numbers have to be taken at face value for now.

The president’s budget is unlikely to survive a divided Congress, so it is perhaps better understood as a reelection campaign tool than a serious deficit-reduction plan. That partially explains why Biden doesn’t plan on reforming Medicare and Social Security, even though the two programs jointly account for more than half of projected spending growth.

Another major driver of debt growth is Medicaid spending, which the president did not promise to protect at all costs. Below we summarize and assess key Medicaid-related budget items.

Medicaid Drug Pricing

The budget proposes giving the Department of Health and Human Services (HHS) authority to “negotiate” additional Medicaid drug rebates on behalf of states. It’s not clear what the new HHS negotiation authority would entail. It could be similar to how some states already combine into larger purchasing pools to increase negotiating power or follow the stronger Inflation Reduction Act (IRA) of 2022 approach, which imposes up to a 95% excise tax on the sales of a drug when the manufacturer does not comply with the law’s Medicare price “negotiation.” By putting HHS in charge of this “negotiation,” the White House claims that HHS will be able to secure better deals from drug manufacturers and save money to the tune of $5.3 billion over 10 years. The budget also proposes to extend Medicaid drug rebates to the Children’s Health Insurance Program (CHIP), saving another $2.3 billion.

Experts warned early on that the IRA’s drug negotiation clauses would disincentivize drug manufacturers from innovating as well as bring about higher launch prices. Those warnings already seem to be materializing.  Giving HHS power to purchase drugs for all 50 state Medicaid programs would further deprive patients of needed treatments and cures. In the long run, treatments and cures will evolve to meet HHS's wishes, hampering development of critical remedies. Additionally, drug manufacturers will shift costs to private payers, as they already do for hospital services.

Rather than putting HHS in charge of purchasing an even greater share of the drug supply and effectively giving it the power to ration care, states are better off experimenting with their own ways of cutting costs.

Medicaid Managed Care

The proposed budget targets Medicaid Managed Care plans, which receive a capitation fee per enrollee every month from the state Medicaid program (which in turn receives partial reimbursement from the federal government). Biden wants to require insurance companies that run Medicaid Managed Care plans to reimburse Medicaid in case the companies charge more than what it cost them to cover the healthcare costs of the Medicaid beneficiaries on their plans. The approach appears to be much like how Medicare Managed Care plans, i.e., Medicare Advantage, must issue rebates to the federal government if their medical loss ratio (MLR) does not reach the required level. He wants to impose the same requirement on Children’s Health Insurance Program (CHIP) plans as well. This proposal, the president asserts, will save Medicaid $20 billion over 10 years.

Medicaid is administered by the states, and each state Medicaid Managed Care program is unique. However, there are federal standards: for example, managed care payments must be actuarially sound. Yet a key feature of Medicaid as a federal-state partnership is the flexibility for states to experiment with their own program design. States have used that prerogative to implement various strategies to help ensure taxpayers are not overpaying private managed care companies. MLR requirements are just one such strategy. Others include competitive bidding, two-sided risk corridors, and other payment adjustments.

States already have strong incentives to guard against overpayments because they are responsible for up to half the cost of Medicaid and, unlike the federal government, must balance their budgets every year. Already, 34 states have minimum MLR requirements of 85%. Nationwide, according to an OIG report released by the Biden administration, 92% of Medicaid managed care plans meet or exceed the federal 85% MLR standard regardless of whether their states enforce a minimum requirement. This points to an already-high level of compliance even in states that don’t penalize plans for falling short of the MLR standard. Furthermore, the federal share of Medicaid was $504 billion in fiscal year 2021; this proposal will purportedly save between $2 billion and $3 billion a year – a drop in the bucket.

Micromanaging program design could limit other state approaches that might be more effective. Thus, federal meddling might actually cost more if it replaces a more effective state approach.

Home and Community-Based Services

The budget proposes an additional $150 billion over 10 years for Medicaid home and community-based services (HCBS). These services continue to represent a growing share of federal spending on long-term care services and supports (LTSS) compared to institutional services. In 2021, HCBS represented 62% of LTSS, up from 49% in 2015. The transition from institutional services to home- and community-based care is a welcome one, but the devil is in the details. The budget indicates that much of the $150 billion will be spent in the final years of the 10-year period it covers, but details are scarce as to how the funds will be used and what savings might be engendered in other parts of the program as a result.

“Medicaid-like” Coverage for Non-Expansion States

The proposed budget would create “Medicaid-like” coverage for states that have not expanded Medicaid to able-bodied adults without dependents making up to 138% of the federal poverty level as authorized by the Affordable Care Act. As of today, 41 states have adopted the Medicaid expansion. The White House estimates that forcing the remaining nine to implement the expansion would cost $200 billion over 10 years. The budget includes financial incentives to get states to maintain existing expansions.

The ACA originally forced the Medicaid expansion onto the states by threatening to withhold federal funding from states that did not adopt it. In 2012, the Supreme Court ruled that the expansion was an unconstitutionally coercive exercise of Congress’ spending power. This proposed Medicaid-like coverage is a way of getting around this ruling. As has been the case with the Medicaid expansion so far, many privately insured people will be pushed onto Medicaid coverage, which offers inferior benefits and costs taxpayers dearly.

12-Month Postpartum Coverage in All States

The proposed budget would force all 50 states to provide pregnancy-related Medicaid coverage through 12 months postpartum. Thirty-six states and DC have already implemented or are planning to implement a 12-month extension. Mandating that all states offer 12-month postpartum coverage will add $2 billion to the deficit over 10 years, according to the budget. The effects on maternal health are unclear. Meanwhile, expanded Medicaid coverage is likely to shift enrollees from commercial to Medicaid coverage, and a JAMA study published in 2022 found that continuous Medicaid coverage was associated with lower rates of primary care and higher rates of emergency department use than continuous commercial coverage, indicating that expanded Medicaid coverage could have unintended consequences.

The Bottom Line

The proposed budget adds hundreds of billions of dollars to the deficit. When we know that Medicaid is a key driver of debt growth and that the president is even less willing to cut Medicare and Social Security than he is Medicaid, we have cause to doubt the sincerity of his intention to curb debt growth. His proposed Medicaid reforms ignore America’s federalist principles and place matters in the hands of regulators. As a recent Washington Post headline put it, through this budget the President “scraps reliance on market for faith in broader government role.” While much of it is likely to stall in Congress, this budget will encourage lawmakers to play an ever greater role in the provision and financing of care, with little regard for the consequences of those changes for Medicaid beneficiaries, healthcare professionals, and present and future taxpayers.