Medicaid is now squarely in the sights of Republicans looking to reduce federal spending. The program purchases health care for the poorest Americans, but it does so indirectly, through open-ended matching funds given to states. Some states’ profligacy has yielded expansions of benefits and eligibility that don’t just fill unmet needs but increasingly displace private payment for health care. Though President Trump has promised not to cut Medicaid benefits, Congress should at least stop states from further expanding the program’s responsibilities.
Federal and state spending on Medicaid totaled $894 billion in 2023, having nearly doubled over the past decade. Republicans are looking to trim the program’s spending by 10 percent to help finance a renewal of Trump’s 2017 tax cuts. Some suggest that this will be a simple task. In his confirmation hearing, Secretary of Health and Human Services Robert F. Kennedy Jr. argued that “the poorest Americans are now being robbed” and questioned whether “the $900 billion that we’re sending to Medicaid every year” is making its recipients healthier.
A wholesale rejection of the program is over the top. The program’s initial establishment clearly filled an unmet need. A recent study of states’ introduction of Medicaid from 1966 to 1970 found that children made eligible for the program experienced lower rates of mortality and disability that lasted throughout their lives. This result contrasts with Medicare, whose establishment had no discernible effect on mortality rates of the elderly.
Subsequent expansions of Medicaid have not demonstrated the same value, however. A randomized expansion of Medicaid to able-bodied adults in Oregon yielded “no statistically significant effect on physical health,” though it increased the use of medical services and reduced patients’ out-of-pocket costs.
This is because later expansions of Medicaid have gone disproportionately to wealthier households, many of which already had private insurance coverage. Some Medicaid eligibility expansions saw private insurance enrollment fall by as much as 60 percent of the increase in public insurance rolls. America’s uninsured today also get about 80 percent of the medical care they would receive if covered by Medicaid, due to a combination of out-of-pocket payments and public subsidies for hospitals.
Current Medicaid expenditures are therefore poorly focused on filling unmet needs. This is because the program’s funding is not distributed according to gaps in private insurance coverage; the federal government simply pays states between $1 and $9 for every $1 they spend on health-care services for low-income residents, without any upper limit on available matching funds.
This policy offers all states an enormously lucrative return on their investment, and the wealthiest states have benefited the most. On a per capita basis, New York’s Medicaid program now costs more than three times as much as Florida’s—even though the Empire State has fewer seniors who need long-term care. In 2023, New York’s Medicaid program paid out $9 billion to family members who care for elderly relatives—a practice even Governor Kathy Hochul called “a racket.” But rather than reining in Medicaid spending, Hochul proposed a further 17 percent increase for the program in her recent budget.
Though state Medicaid programs must cover essential health benefits for core groups of low-income residents, they can also claim federal matching funds to extend benefits and eligibility even further. Sixty-three percent of Medicaid spending now goes to such optional expansions of the program. Whereas the program’s mandatory benefits are specified by federal law, the nature of its “optional” benefits varies greatly between states, so their relative value and effectiveness is hard to assess.
All states artificially inflate the federal reimbursements they receive for Medicaid services by imposing taxes on hospitals and insurers. These tax revenues allow states indirectly to spend on purposes specifically prohibited for the program. In some cases, states have simply captured federal overpayments for health-care services to inflate their own general revenues. In 2022, Medicaid insurers received monthly payments from the government to cover millions of Americans who did not even know they were enrolled.
Medicaid’s byzantine funding mechanisms mean that many of the program’s dollars fail to reach their intended beneficiaries. But this entanglement of financing makes waste hard to cut. The American Hospital Association argues that “even small adjustments [to Medicaid payment schemes] would result in negative consequences for Medicaid beneficiaries as well as the broader health care system.” When President Trump sweepingly pledges that “the people won’t be affected” by cuts to “abuse or waste” in Medicaid, he effectively rules out any substantial reforms of existing payment arrangements.
Even if Republicans don’t want to cut Medicaid benefits, they should at least curb its further growth. To do this, Congress could simply prohibit high-spending states from unilaterally expanding optional Medicaid benefits or eligibility beyond current levels. The rate at which states are expanding their programs has been so substantial that this reform alone could generate much of the fiscal savings the GOP is looking for.
States are already subject to various “maintenance of effort” requirements, which stop them from cutting Medicaid benefits too much. Equivalent regulations should be established to prevent states from expanding their programs too fast.
Photo: Ariel Skelley / DigitalVision
