Making Medicaid Fairer for Its Most Vulnerable Participants
Reimbursing states differently for the care of original vs. expansion beneficiaries creates bad incentives.
The federal government pays a larger share of states’ expenditures for the care of expansion beneficiaries than for the care of original beneficiaries.
The inflated reimbursement for the care of expansion beneficiaries creates incentives to increase spending and neglect original beneficiaries.
After the public health emergency ends, federal reimbursement will decrease to its pre-pandemic levels. For the rate to be equitable, it should be the same for original and expansion beneficiaries.
Medicaid is a means-tested welfare program that provides free and subsidized healthcare coverage to low-income individuals, families and children, pregnant women, elderly people, and people with disabilities. The federal and state governments fund the program, and it is administered by the states.
The federal government reimburses states for the care they provide to beneficiaries at different levels, the principle being that wealthier states should pay a greater share themselves than less economically strong ones. This rate is called the Federal Medical Assistance Percentage (FMAP).
The FMAP is at least 50% and up to 83%, with the percentage adjusted every year based on a formula whose only independent variable is per capita income. The average rate is 57%.
In 2010, Congress passed the Patient Protection and Affordable Care Act (ACA), which mandated that, starting in 2014, states expand Medicaid eligibility to non-disabled, non-elderly people earning up to 138% of the federal poverty line. In 2012, the Supreme Court struck down the mandate, making the expansion optional. Starting in 2014, states began implementing the expansion. As of today, all but 12 states have adopted the expansion.
The ACA gave states an enticing reason to expand Medicaid. It offered them full reimbursement for all expenses on expansion beneficiaries for the first three years of participation in the program (2014-2016), decreasing gradually to 90% in 2020, where it is scheduled to remain. The practical implication is the following: in 2014, when a Medicaid beneficiary in California received $100 worth of services, California paid $50 and the federal government $50 if the patient was an original beneficiary; California paid nothing and the federal government, $100 if the beneficiary was newly eligible thanks to the expansion.
The inflated reimbursement for expansion beneficiaries creates two bad incentives for states:
It undermines states’ incentive to invest in effective eligibility verification processes. Indeed, if adding new beneficiaries is virtually free to the state, there is little reason to ensure that new beneficiaries are genuinely eligible for Medicaid. Research indicates that between 18 and 27% of the expansion population earns more than the maximum income for eligibility.
It encourages states to misclassify previously covered individuals as newly eligible. A study in the New England Journal of Economics found that most initial enrollees in the expansion were previously eligible.
The expansion of Medicaid eligibility to able-bodied people with higher income than original beneficiaries has downsides for beneficiaries and for taxpayers:
It adds beneficiaries without ensuring that there are enough medical professionals to meet the new demand. The ACA included an increase in physician reimbursement to encourage doctors to accept Medicaid patients, but the incentive ended at the end of 2014. When we know that around one third of primary care physicians do not accept Medicaid patients and that they have been facing a surge in demand since January 2014, there are reasons to worry that beneficiaries are not able to adequately access services.
It traps people in poverty. Given that eligibility is tied to income, the expansion traps able-bodied people in poverty by disincentivizing their search for better jobs. Losing Medicaid acts as an extremely regressive tax on even modest income gains.
The surge in enrollment due to poor eligibility rule enforcement is making the expansion a lot less affordable than anticipated for states. Even when states pay just 10% of the bills, the cost of the Medicaid expansion adds up when states add tens or hundreds of thousands of people to their Medicaid program.
During the pandemic, FMAPs were bumped up by 6.2 percentage points across the board, where they will remain through the end of the public health emergency—likely into 2023. Current FMAPs are displayed below. States enacting Medicaid expansion under these circumstances should prepare to face the consequences once the rates go back to pre-pandemic levels.
The two different types of FMAPs—lower for original beneficiaries, higher for new beneficiaries—make for an inequitable distribution of federal resources, favoring able-bodied people over more impoverished, more elderly, and sicker ones. A fairer Medicaid program would equalize the rates so that, to the extent that we want to cover people who fit in those categories, all beneficiaries are treated the same. Instead of paying a 90% reimbursement rate for the expansion population and an average 57% rate for the most vulnerable participants in the program, we should pay the same—62% on average.
Read more on our proposal for a fair FMAP in this policy brief, which one of us (Elise) co-wrote with Mercatus Center senior research fellow Chuck Blahous.