Fix Medicaid’s Perverse Funding Formula

by Phil Kerpen, Contributing Author: One of the most perverse consequences of the feverish backroom deals used to get Obamacare past the finish line was the funding formula for the law’s Medicaid expansion, which started with the infamous Cornhusker Kickback, a sweetheart deal for Nebraska alone to get 100 percent federal funding for Medicaid expansion that was used to get then-Senator Ben Nelson’s vote.

When the whistle was blown on that dirty deal, Nelson implausibly explained that the Nebraska-only provision was intended to be a “placeholder” for higher Medicaid funding for all 50 states. And that’s what ended up ultimately passing: if a state expands Medicaid to able-bodied adults, the new population is eligible for 100 percent federal funding through 2016, phasing down starting in 2017 until it reaches 90 percent in 2020 and permanently thereafter.

Yet states continue to receive an average of 57 percent federal funding for the pre-expansion Medicaid population of needy families and people with disabilities. In short, under current law, states are given a huge financial incentive to favor able-bodied adults over the truly needy. It’s shameful and it should be fixed.

Here is a good explanation of the problem and a sensible proposal for a solution:“Under current law, States face a patchwork of different Federal payment contributions for individuals eligible for Medicaid and CHIP. Specifically, State Medicaid expenditures are generally matched by the Federal Government using the Federal medical assistance percentage (FMAP); CHIP expenditures are matched with enhanced FMAP (eFMAP); and the ACA provides increased match for newly-eligible individuals and certain childless adults beginning in 2014. This proposal would replace these complicated formulas with a single matching rate specific to each State that automatically increases if a recession forces enrollment and State costs to rise beginning in 2017. This proposal is projected to save $17.9 billion over 10 years.”The author of that paragraph? President Barack Obama.

It comes directly from the budget he submitted to Congress on February 13, 2012, and it was the kind of bipartisan reform that should have been able to pass Congress easily. It would have fixed a serious perverse incentive problem, reduced administrative complexity, and saved billions for federal taxpayers.

Just four months later, however, the Supreme Court struck down Obamacare’s provisions purporting to force states to expand Medicaid to able-bodied adults or lose all of their federal Medicaid funding for their existing programs. It was a resounding 7 to 2 decision, and it set off intense legislative battles over the issue in state capitals.

It also prompted President Obama to completely abandon his proposal for a single matching rate. His apparent political calculation was that dangling 100 percent federal funding for the expansion population would make it irresistible for state legislators and governors to go along with the now-optional expansion.

Yet at present 19 states have rejected Medicaid expansion and four are still considering it. So the 100 percent funding wasn’t irresistible at all, but it does mean that the 27 states that have adopted Medicaid expansion now face budget pressure to cut care for the truly needy while maximizing the number of healthy able-bodied adults they add onto their Medicaid rolls.

A study by Jonathan Ingram of the Foundation for Government Accountability found that 82.4 percent of the expansion population is comprised of able-bodied, working-age adults with no children. Analyzing what he called “the new Medicaid math,” Ingram determined that the current funding formula creates overwhelming pressure on states that adopt Medicaid expansion to cut Medicaid for the poor children and the disabled who are in the traditional Medicaid program. He also found empirical examples of such cuts in state like Arizona and Oregon, which were early to expand Medicaid to childless adults.

Let’s be clear: I disagree strongly with President Obama that Medicaid, a welfare program, should be expanded to able-bodied adults, giving them a disincentive to work and pay their own way. But I couldn’t agree more with his 2012 proposal that each state should have a uniform federal matching rate. This fix should be high on the agenda for the new Congress and the president should sign it.
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Phil Kerpen is president of American Commitment and a contributing author for the ARRA News Service.He is on Twitter and on Facebook.

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