Medicaid’s Financing Merry-Go-Round

Medicaid, which provides health-related welfare benefits to low-income individuals, is jointly financed by the federal and state governments. Before Obamacare, the split was 50/50 for rich states, but low-income states got more dollars. This mechanism is called the Federal Medicaid Assistance Percentage (FMAP). So, if California spent $50 on Medicaid, the federal taxpayer would chip in $50. However, for West Virginia, the split is $28.65/$71.35. That is, for every hundred dollars spent on Medicaid, only $28.65 is spent by the state, and $71.35 comes from federal taxpayers. These dollars are not appropriated by Congress: They just roll out on auto-pilot, as calculated by the FMAP.

Just think of the perverse incentives this gives state politicians and bureaucrats. Every policy that lifts people out of poverty, and away from dependence on Medicaid, causes the state to lose federal funds. That is why so many right-thinking people want to change the federal financing of Medicaid into a block-grant program. Could the incentive be even worse? Of course! There is an “enhanced” FMAP for children. This eFMAP is up to 30 percentage points greater than the regular FMAP. California has to spend only $35 to draw $65 of federal funds, for a total of $100. For West Virginia, the figures are $20.05 and $79.95. Is it any wonder that advocates of Medicaid expansion tend to focus on health care “for the children”?

Hospitals, which lobby consistently for expanded Medicaid dependency, are part of the problem. They long ago figured out that if they lobbied states to tax them, more than enough money would flow back to the hospital. It works like this: The state taxes the hospital, the money recycles back to the hospital in Medicaid payments, and it picks up federal dollars on the way back. Hospitals are the only businesses that lobby for tax increases on themselves!

A new report from the Government Accountability Office has quantified how much this drives up Medicaid costs: From about $10 billion in 2008, these “provider taxes” rose to about $19 billion in 2012. GAO’s conclusion:

Nationally, states increasingly relied on funds from providers and local governments in recent years to finance the nonfederal share, based on GAO’s analysis (see figure). In the three selected states this increase resulted in cost shifts to the federal government. While the total amount of funds from all sources, including state funds, increased during state fiscal years 2008 through 2012, funds from providers and local governments increased as a percentage of the nonfederal share, while state funds decreased. GAO’s review of selected financing arrangements in California, Illinois, and New York illustrates how the use of funds from providers and local governments can shift costs to the federal government. For example, in Illinois, a $220 million payment increase for nursing facilities funded by a tax on nursing facilities resulted in an estimated $110 million increase in federal matching funds and no increase in state general funds, and a net payment increase to the facilities, after paying the taxes, of $105 million.

Amount of the Nonfederal Share of Medicaid Payments from Health Care Providers and Local Governments, State Fiscal Years 2008 through 2012


John R. Graham is a Senior Fellow at the Independent Institute.
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