Forging a Consensus on Medicaid Reform

With the House having passed the American Health Care Act (AHCA), the complex task of forging a consensus ACA-repeal-and-replace bill has moved to the Senate.  If, as expected, Senate Democrats unanimously oppose any repeal-and-replace legislation, supporters would need to garner 50 out of 52 available Republican votes (with Vice President Pence presumably on hand to cast the 51^st).  This leaves the majority with very little margin of error for defections if they are to pass a bill.  Of late there have been a number of press articles detailing the difficulty specifically of crafting Medicaid provisions that can receive unified Republican support.    

The relevant background here is that the Affordable Care Act (ACA, or so-called “Obamacare”) dramatically expanded Medicaid by increasing the numbers and categories of eligible individuals, as well as by creating an elevated level of federal support for covering the expansion population.  Before the ACA, Medicaid generally covered small children and pregnant women who were either in poverty or just above the poverty line, as well as older children in poverty, and disabled individuals and seniors who were also eligible for the federal SSI program.  The ACA expanded Medicaid coverage beyond these highly vulnerable groups to include childless adults up to 138% of the poverty line.  Importantly, the ACA provided a much higher level of federal support for this expansion population (paying 100% of costs from 2014-16, phasing to 90% in 2020 and beyond) than was given for Medicaid’s historically eligible population (57% of costs on average).  Legislators must decide what to do with these provisions.

The following principles may helpful in considering how Medicaid should be modified in repeal and replacement legislation.

#1:  Distinguish between problems created by the ACA and those that existed before.  Medicaid had a lot of problems long before the ACA was passed, including: unsustainable cost growth rates, care access problems arising from provider scarcity, low value for participants relative to dollars spent, and inefficiencies arising from states not facing the full bill for cost-increasing decisions.  When health policy reform was debated in 2009, CBO was already projecting that Medicaid costs would double as a share of GDP over its long-term budget outlook.  CBO was also then projecting that Medicaid, Medicare and Social Security would between them account for all projected federal non-interest spending growth relative to GDP over the long term, and that Medicaid and Medicare alone would account for 90% of that growth.

Medicaid costs are now growing at an unsustainable rate as shown in Figure 1 – substantially faster than Gross Domestic Product -- but only part of this is due to the ACA.   The portion of cost growth due to the ACA could theoretically be addressed (policy merits aside) by repealing the law’s expanded eligibility criteria and elevated federal match rate.  By contrast, proposals to place per-capita caps on Medicaid spending growth, or to give states increased flexibility and incentives to improve efficiencies, are not really about repairing the ACA per se but about addressing Medicaid’s longstanding structural problems.

Some advocates may believe that pending repeal-and-replace legislation represents a onetime opportunity to enact Medicaid reforms.  Whether it actually is such an opportunity is a tactical evaluation.  It represents an opportunity if including these long-sought Medicaid reforms makes it easier to enact a repeal-and-replace law, or conversely if the perceived necessity of enacting a repeal-and-replace law makes it easier to enact long-sought reforms.  If instead the inclusion of broader Medicaid reforms jeopardizes the prospects of enacting repeal-and-replace legislation, then their inclusion does not represent an opportunity but rather a discretionary complication.  Structural Medicaid reforms will clearly be necessary at some point; the open question is whether they can be agreed to this year in a form that makes broader repeal-and-replace legislation easier to pass.

#2: Distinguish between the ACA’s Medicaid eligibility expansion and its elevated federal match rate.  The ACA expanded the number of individuals whom states could cover under Medicaid, while also providing a higher federal match rate for covering this expansion population.  These are two distinct policy choices and they should be evaluated and communicated separately.

Much of the press discussion surrounding the ACA’s Medicaid expansion has to do with whether individuals who became newly eligible for Medicaid coverage under the ACA (childless adults with incomes up to 138% of the poverty line) will remain eligible.  It is important for those monitoring this issue to understand that maintaining the ACA’s broadened federal Medicaid eligibility requirements does not require (or even suggest) that the ACA’s elevated federal match rates be continued. 

Some argue that resetting the ACA’s elevated match rates to equal those provided for other beneficiaries is tantamount to rolling back Medicaid expansion, because states will not cover the expansion population at historical match rates.  If this is true, however, it is not a persuasive argument for continuing inflated match rates.  It would effectively signal that states do not genuinely prioritize expansion unless virtually the entire bill is picked up by the federal government, to an extent that was not done for Medicaid’s far needier historically eligible population. 

The only way states can make a fair assessment of whether Medicaid should cover the ACA’s expansion population is if they are presented with the same incentives to do so as exist for the rest of the Medicaid-eligible population.  This could be done by preserving the ACA’s expanded Medicaid eligibility criteria while repealing its inflated federal match rate.

#3:  Recognize that the ACA’s Elevated Match Rate is a Problem Warranting Correction.  It is difficult to justify the ACA’s inflated expansion match rate except in terms of a political bargain between the federal government and states.  The match rate is inequitable in that it provides greater federal support for less needy populations (e.g., able-bodied childless adults above the poverty line) than it does for more vulnerable groups (e.g., pregnant women and children in poverty).  It has increased the numbers of needy individuals competing for access to Medicaid’s limited supply of health care services. It has also had the predictable effect of inducing excess cost growth, with states passing on virtually the entirety of any cost-increasing decisions to the federal government.  The inflated match rate is undoubtedly a primary reason why per-capita expansion costs in each of the last two years of 2015 and 2016 came in more than 60% higher than projected in the 2013 Medicaid actuary’s report.

          CMS Medicaid actuary estimates of per-capita costs of newly eligible adults

Reasonable people can differ on how many people should receive their health insurance coverage through Medicaid.  But providing states with far higher reimbursement rates for the expansion population than for other beneficiaries will produce predictable and costly problems for as long as it continues.

Legislators face a number of tactical and substantive choices in crafting the Medicaid provisions of repeal-and-replace legislation.  They must decide whether to focus reforms on problems caused by the ACA or to expand their reach to address problems Medicaid has faced since long before.  They must also decide whether and how to split the issue of the ACA’s Medicaid eligibility expansion from its inflated federal match rates.  The case is strong for separating the two questions so that states thereafter make coverage decisions based on an even-handed assessment of where their citizens’ needs are the greatest.   This would require, no matter how expansive lawmakers ultimately decide Medicaid’s coverage should be, that the federal government phase out the preferential match rate and treat new and old beneficiaries as equals.

Charles Blahous, a contributor to E21, holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center and is a visiting fellow at the Hoover Institution. He recently served as a public trustee for Social Security and Medicare.

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