Gaming the System: How States Exploit ObamaCare Expansion to Maximize Federal Dollars

Overview

The Medicaid program was created to provide a safety net for truly needy Americans—seniors, low-income children, and people with disabilities.¹ In recent years, however, the program’s focus has shifted from its original purpose toward maximizing enrollment, no matter the cost.

Since 2000, total Medicaid enrollment has nearly tripled, reaching a record-high 100 million enrollees in 2023.² Able-bodied adults have been the primary driver of this growth, both for enrollment and costs.³

Under ObamaCare expansion, federal taxpayers foot the bill for 90 percent of the Medicaid costs of able-bodied adults—a financial incentive that states have been exploiting for years.^4-5 States have defaulted to categorizing enrollees into ObamaCare expansion, even when they qualify under a different eligibility category, in order to maximize the dollars they receive from the federal government.^6-10

Federal law is clear that ObamaCare’s enhanced funding only applies to individuals who are not pregnant, not entitled to Medicare benefits, and not eligible under a different eligibility category.¹¹ Unfortunately, CMS guidance has allowed states to continue to receive enhanced funding for enrollees who later become eligible under a different eligibility group.^12-13

To correct the situation, CMS should issue guidance that states may only receive ObamaCare expansion funding for enrollees who are not otherwise eligible under other Medicaid eligibility groups and conduct regular audits to end this illegal funding gimmick.

Enrollment of able-bodied adults on Medicaid has skyrocketed

The explosion in Medicaid enrollment has been driven in large part by able-bodied adults. In 2000 there were only seven million able-bodied adults on the Medicaid rolls.¹⁴ However, that number soared to 34 million by 2024, more than quadrupling.¹⁵

ObamaCare expansion has been the primary driver of this surge, opening Medicaid eligibility to an entirely new class of able-bodied adults that were not previously eligible.¹⁶ Roughly 70 percent of the Medicaid cost growth since 2000 is directly attributable to able-bodied adults enrolled through expansion, and more than one in three Medicaid dollars are spent on able-bodied adults.¹⁷

States have a powerful financial incentive to artificially inflate their ObamaCare expansion enrollment, as federal taxpayers cover 90 cents of every dollar spent on these enrollees—compared to a much lower share under traditional eligibility categories.^18-19

Unsurprisingly, states have been categorizing enrollees into ObamaCare expansion, even when they qualify under a different eligibility category, so that they can maximize the dollars they receive from the federal government. States have been gaming the system in this way for more than a decade.

ObamaCare’s enhanced funding was never meant for all Medicaid enrollees

Federal law clearly states that ObamaCare’s enhanced funding only applies to “newly eligible” individuals.²⁰ In other words, those made eligible through ObamaCare expansion. Individuals who qualify for Medicaid through pre-existing eligibility pathways are not considered “newly eligible” and should not qualify for enhanced funding.²¹

However, CMS guidance has opened the door for states to continue to collect ObamaCare’s enhanced funding for enrollees who later become eligible under a different eligibility category, directly conflicting with statutory requirements.²² Despite years of audits documenting the consequences, CMS has never corrected or rescinded the guidance that allows states to sidestep statutory requirements.

States have exploited this guidance to game the system

Federal audits have uncovered the widespread pattern of states defaulting applicants into ObamaCare expansion to maximize federal funding, even when those applicants were eligible under a different Medicaid category.^23-27 The Office of the Inspector General reviewed newly enrolled expansion groups across multiple states and found ineligible enrollees in each one.^28-32

In California, auditors found that nearly one-quarter of ObamaCare expansion enrollees, roughly 366,000 enrollees, were ineligible for that group.³³ In Colorado, an estimated 30 percent of expansion enrollees were ineligible or potentially ineligible.³⁴ In New York, nearly 43 percent of enrollees were ineligible or potentially ineligible.³⁵ In Ohio, 61 percent of expansion enrollees—approximately 293,000 enrollees—were ineligible or potentially ineligible under that category.³⁶

Some states even put these tactics into writing. Pennsylvania instructs those conducting presumptive eligibility determinations for pregnant women to evaluate eligibility under ObamaCare expansion before evaluating eligibility for pregnancy.³⁷ The state’s own policy manual tells caseworkers to route applicants through the higher-funded ObamaCare expansion group first to maximize the federal reimbursement.³⁸

CMS can hold states accountable

CMS should rescind the 2013 guidance that allows states to circumvent federal law and default enrollees into the expansion group. This Obama-era guidance has enabled more than a decade of illegal cost-shifting.

CMS should issue clear guidance that states may only receive ObamaCare’s 90 percent enhanced funding for enrollees who are not otherwise eligible for a different Medicaid category. New guidance should make clear that any state continuing to claim expansion funding for ineligible enrollees will face consequences. CMS should conduct regular audits of states to catch and stop this illegal funding gimmick. Congress should also codify the restriction to prevent future administrations from exploiting the same funding gimmick.

The Bottom Line:

CMS should prohibit states from ObamaCare expansion cost-shifting.

For more than a decade, states have abused a funding gimmick to maximize their federal Medicaid reimbursements. Auditors have uncovered the consequences in multiple states—hundreds of thousands of enrollees claimed under the ObamaCare expansion group that were improperly categorized, each drawing more federal funds than they should have.

States have exploited this gimmick, draining resources from taxpayers and the truly needy alike. CMS should issue clear guidance that prevents states from continuing to game the system. CMS should also perform regular audits to ensure that only eligible enrollees are drawing the enhanced federal funds. Congress should codify the restriction to prevent future administrations from abusing the same gimmick.

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