Why Haven’t More States Reformed Medicaid to Save Money? A Perverse Federal Relationship

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Posted by Paul Blair on Saturday, August 23rd, 2014, 2:33 PM PERMALINK


Twenty-seven states including Washington, D.C. have expanded Medicaid under Obamacare over the past three years. New Hampshire was the most recent state to expand the matching-grant program, which is jointly funded by the federal and state governments. Missing from the debate in many states is how to save the safety net by reforming the program, which consumes nearly a quarter of all state budgets.

The Congressional Budget Office projects that under Obamacare, Medicaid enrollment will increase by 30 percent over the next decade at a cost of $574 billion annually by 2024. While reform at the federal level will take a new Administration and Republican majority in the House and Senate, at the state level, reform can be achieved far sooner. Unfortunately, a perverse incentive exists for states to find budget savings elsewhere (if anywhere), instead of through this program. 

The federal medical assistance percentage (FMAP) for Medicaid services is the formula used to determine the federal government’s share of a state’s Medicaid costs. The rate ranges from 50% to 73%, meaning that for every dollar spent in a state on Medicaid services for an enrollee, the federal government picks up the tab for between 50-73 cents. FMAP is the formula that makes a legislator’s task of saving money on the state Medicaid program complicated.

Because the federal government picks up part of the Medicaid tab, they also get their cut of any dollar saved. A state like Virginia receives 50% from Uncle Sam. In order to save one million dollars for state coffers, they would have to cut/save two million on the program. Mississippi, which receives a 73.4 percent match would have to find $3.8 million in savings in order to save $1 million in state dollars because the federal government gets their match as a percentage of all savings.

There is a perverse incentive to cut any money from state Medicaid programs. As the Mercatus Center’s “The Economics of Medicaid” concluded, “The financial terms facing a state seeking to cut its Medicaid spending are unfavorable. In most cases, a state reducing its spending will cut other programs that are paid for by funds covered entirely by the state rather than Medicaid.”

Click here to read “The Economics of Medicaid: Assessing the Costs and Consequences.” 

Stay tuned to our website for more components of the Medicaid expansion and reform debate in the coming days and weeks. 

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