How Congress Can Fix the Flawed Financing Structure for Medicaid Expansion and Reprioritize the Truly Needy

Overview

Medicaid expansion has exploded the program’s enrollment and costs

Medicaid was originally designed to cover individuals with disabilities, low-income seniors, low-income children, and pregnant women.⁴ ObamaCare’s sweeping expansion opened Medicaid eligibility to include able-bodied adults, prioritizing them over the truly needy by covering most of their costs. This has led to surging enrollment and a skyrocketing price tag.

Total Medicaid enrollment hit a record-high 100 million enrollees in 2023.⁵ And while enrollment has declined since the unwinding of pandemic-era restrictions on removing ineligible enrollees, there are still 10 million more people enrolled in Medicaid today than there were before
the pandemic.^6-7

The enrollment explosion has largely been driven by the ObamaCare expansion population. In total, nearly 85 percent of the enrollment increase over the last 10 years is directly attributable to able-bodied adults.^{8, 9, 10}

Notably, most of these able-bodied adults are not working at all.¹¹ Data from state agencies revealed that roughly 62 percent of able-bodied adults on Medicaid reported no earned income.¹² Medicaid’s lack of a federally mandated work requirement encourages enrollees to remain trapped in government dependency. Lawmakers should champion work for the able-bodied to build self-sufficiency, not provide a long-term handout.

State officials grossly underestimated how many able-bodied adults would enroll in Medicaid through expansion.¹³ The cost to taxpayers has also exceeded expectations.¹⁴ Medicaid expansion cost taxpayers more than $1 trillion between 2014 and 2023—$574 billion more than expected.¹⁵ After expansion, improper payments, driven largely by eligibility errors, also skyrocketed.¹⁶

Financing for the Medicaid expansion population creates perverse incentives for states. While traditional Medicaid is based on a formula that provides varying levels of reimbursement to states, states receive significantly more federal money for the expansion population. In this way, ObamaCare was intentionally designed to entice states to expand.

Medicaid expansion’s financing structure creates perverse incentives and prioritizes able-bodied adults over the truly needy

The Medicaid program is unlike other federal-state partnerships. The financing structure is open-ended—when states spend more, the federal government directs more money to the state. States can tap into an essentially limitless supply from the federal tax base. This certainly discourages states from acting prudently with Medicaid funds. Unlike other government programs, states get more than they pay for with Medicaid. The result is a growth in Medicaid spending that eclipses and crowds out other state priorities.

For traditional Medicaid enrollees, the federal government reimburses states according to a formula that accounts for the state’s per-capita income, with a floor of 50 percent.¹⁷ For fiscal year 2025, reimbursement rates to states vary from 50 percent in California to 77 percent in Mississippi.¹⁸ States with lower per-capita incomes are supposed to receive more federal support than states with higher per-capita incomes. The federal government’s share of Medicaid financing is called the federal medical assistance percentage (FMAP).¹⁹ The FMAP is generally determined annually and is designed to provide greater financial support to states with a lower tax base to fund the program.²⁰

The passage of ObamaCare brought an elevated FMAP to the expansion population, compounding the problems in Medicaid’s financing. Notably, the federal government covers 90 percent of the cost for able-bodied adults enrolled through expansion.²¹ This diverts resources away from the traditional Medicaid population—the truly needy.

The expansion FMAP creates a perverse incentive for states looking to constrain rapidly growing Medicaid costs. In order to generate $1 million in state-funded Medicaid savings, policymakers in expansion states must reduce total Medicaid costs by roughly $2.3 million.^22-23 However, if policymakers sought to find that same $1 million in savings among expansion enrollees instead, they would need to reduce total Medicaid costs by $10 million.²⁴

Ultimately, this funding structure prioritizes welfare for able-bodied adults over the truly needy. More than 700,000 individuals with disabilities are stuck on waiting lists for needed home- and community-based services.²⁵  In the early years of ObamaCare’s Medicaid expansion, from 2014 to mid-2018, roughly 22,000 vulnerable Americans in expansion states died on waiting lists while millions of able-bodied adults were added to the Medicaid rolls.²⁶ Medicaid is failing those it was designed to help. Reform is long overdue.

Congress has options to fix the flawed financing structure for Medicaid expansion

Medicaid must refocus on the truly needy. Fortunately, Congress has options to reprioritize low-income children, individuals with disabilities, and seniors, and curb incentives for wasteful spending. Below are four options that would prioritize those the program was intended to help and save more than half a trillion taxpayer dollars over 10 years.

Option 1: Immediately eliminate the ObamaCare FMAP.

This is the strongest option and results in the most savings. Reducing the 90 percent ObamaCare FMAP to states’ traditional FMAP would result in massive federal savings and immediately end federal financing discrimination against the truly needy. Immediately ending the ObamaCare FMAP would save a whopping $561 billion.²⁷

Option 2: Eliminate the ObamaCare FMAP for new enrollees and grandfather in existing enrollees.

A less-immediate option would be to eliminate the ObamaCare FMAP for new Medicaid enrollees while grandfathering in the current expansion FMAP for existing enrollees. Assuming normal levels of attrition in the program, this option would save federal taxpayers $358 billion over the budget window.²⁸

Option 3: Reduce the ObamaCare FMAP by five percentage points per year until reaching parity with states’ regular FMAP.

A third option would be to reduce the supercharged ObamaCare FMAP by five percentage points per year until reaching parity with states’ regular FMAP. This option would save federal taxpayers $378 billion over the budget window.²⁹

Option 4: Phase down the ObamaCare FMAP over 10 years until reaching parity with states’ regular FMAP.

A final option would be to gradually phase down the ObamaCare FMAP over 10 years until reaching parity with states’ regular FMAP in 2034. This option would save federal taxpayers $318 billion over the budget window.³⁰

Bottom Line: Congress should fix the flawed financing structure for Medicaid expansion to prioritize the truly needy and save billions.

Medicaid’s financing structure is broken. The program is no longer about maximizing value for the truly needy. Instead, dollars are diverted to able-bodied expansion enrollees at the expense of low-income children, seniors, and individuals with disabilities. The Medicaid Leviathan seeks to maximize federal dollars, not prioritize the most vulnerable or improve health outcomes.

The federal government should not pay a higher percentage of expenses for able-bodied expansion enrollees than it does for low-income children, seniors, and individuals with disabilities.  Fortunately, Congress has the power to fix this broken system. By eliminating or phasing down the ObamaCare FMAP, Medicaid can once again work for the truly needy, and taxpayers can benefit from more than half a trillion dollars in savings.

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