Capping Federal Medicaid Funding Would Save $110 Billion to $150 Billion in 5 Years

Arguably more important than repealing and replacing Obamacare, a longstanding Republican proposal to change how Congress finances Medicaid would reduce the burden on taxpayers by $110 billion to $150 billion over five years, according to a new analysis by consultants at Avalere.

Currently, state spending on Medicaid is out of control because Medicaid’s traditional funding formula incentivizes the political class to overspend. For every dollar a state politician spends on Medicaid, the federal government pitches in at least one dollar via the Federal Medical Assistance Percentage (FMAP).

This funding match actually rewards states for making more residents dependent on Medicaid. Before Obamacare, FMAPs ranged from 50 percent (which means the federal government adds one dollar to every state dollar) to 74.63 percent (which means the federal government adds $2.94 to every state dollar). Obamacare expanded Medicaid eligibility to higher-income residents, at an FMAP originally set at 100 percent, now at 95 percent and dropping to 90 percent in 2020. So, for every dollar the state spends on the higher-income residents made eligible through the Obamacare expansion, the federal government adds $19 this year!

This creates a horrible prisoner’s dilemma for states. They pretty much cannot stop themselves from increasing Medicaid spending. According to the Kaiser Family Foundation, Medicaid accounted for over 28 percent of total state spending for all items in the state budget, but under 19 percent of all state general fund spending in 2015. Medicaid is the largest single source of federal funds for states, accounting for almost 57 percent of all federal transfers.

There is no way to get this spending under control without removing states’ incentives to ratchet up federal handouts. There have been a number of proposals in Congress to fix federal Medicaid funding by some measurement of a fair allocation to each state, either by the size of the state or the number of Medicaid beneficiaries in each state. What they have in common is that the amount would be fixed by Congress, and state politicians could not increase it.

Avalere’s consultants examined what Medicaid spending would have been under these proposals going back to 2001, and extended the results through the next decade. They conclude that savings to taxpayers would amount to 3 percent to 5 percent of federal Medicaid spending. However, the benefits are far greater than that. Accountability and efficiency would surely increase dramatically.

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For the pivotal alternative to Obamacare, see Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America, by John C. Goodman, published by Independent Institute.

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