State governments are at the forefront of America’s response to the coronavirus. Yet, while they will be required to pay for rising healthcare costs as medical needs increase and unemployment rises, states will likely see their tax revenues plummet. Congress is rightly considering providing additional assistance to help states cope. But simply increasing the rate at which the federal government subsidizes Medicaid spending is a bad idea. It would inflate Medicaid costs in states that have the most funds of their own to contribute, while doing too little for the areas that are likely to face urgent unmet needs.
Although public attention initially focused on the White House and Centers for Disease Control as the coronavirus approached from abroad, state and local governments bear much of the responsibility for dealing with it now that it is widespread across the country. This is most clearly the case with decisions over whether to shut down schools, establish containment zones, and how to deploy the national guard – but it is also often true with respect to paying for medical care.
The Medicaid program is at the center of these challenges. Not only is the coronavirus likely to increase the medical needs of the population, it can be expected to increase the number of Americans that are out of work and therefore dependent on the program for medical care. Medicaid is managed by states, but supported by the federal government, which provides between one and nine dollars for every dollar that states spend on covered medical services for beneficiaries enrolled in the program.
With the coronavirus likely to induce a deep recession, tax revenues will likely fall substantially, while spending on social services for the unemployed, can be expected to rapidly increase. This creates a particular problem for states, as they are required to balance their budgets every year. To help states deal with the fiscal pinch, Congressional Democrats have therefore proposed increasing the ratio of assistance that the federal government provides for funds that states spend on Medicaid.
Policymakers are right to seek an increase in federal assistance to states that would automatically respond in proportion to rising unemployment and medical burdens, without the need for constant appropriation battles. But, while raising Medicaid’s federal matching rate may at first appear to fit the bill, it is an inequitable and poorly-targeted way of distributing assistance. The distribution of additional funds would reflect disparities in the existing Medicaid program, rather than distribute financial assistance in proportion to needs arising from the spread of the virus or its adverse economic impact.
This is because Medicaid’s structure allocates resources according to how much states are themselves able to put in. Under these rules, wealthier states receive consistently more federal Medicaid funding than poorer states – with Connecticut getting more than three times as much federal assistance per resident below the poverty line than Alabama. As Brian Blase has noted, the Democratic proposal to expand the Medicaid matching rate in response to the coronavirus would be even more inequitable and poorly-targeted: providing $7,807 per uninsured Massachusetts resident, but only $646 for each uninsured resident of Nevada. States with few coronavirus cases would stand to receive more funds than those with major outbreaks.
Allocating billions of dollars in additional funding in proportion to spending on existing non-coronavirus Medicaid spending is therefore poorly designed to increase assistance where needed. Yet, it would likely encourage states to inflate general Medicaid caseloads at the expense of private insurance and it would greatly alter the calculations involved in designing payment structures for nursing homes and services that have nothing to do with the current coronavirus. The associated unintended long-term implications would likely be hard to reel in ex post – particularly as Medicaid’s open-ended match has long proven highly-vulnerable to gaming and abuse by states.
A better approach would be to establish a program more closely tailored to the needs expected to arise from the coronavirus, and more specifically tied to changes in economic situations and medical burdens that states may face. This need not mean constructing a new system from scratch, but should instead be built from better-suited existing federal programs.
Generous payment by Medicare for uninsured coronavirus cases would be the best way of ensuring that funds go directly to hospitals that most need them, while expanding unemployment insurance payments would also increase funds flowing into states in proportion to the respective growth of their caseloads. General assistance to states should simply be allocated by all-purpose block grants, rather than in proportion to their ability to inflate Medicaid expenses.
If the federal government is looking to support the provision of specific medical services, it should fund them directly. If it is seeking to provide funds to make it easier for states to balance their books (including more healthcare spending for Medicaid and non-Medicaid beneficiaries, and assistance for other social needs), it should simply give them cash. Routing assistance to states by inflating Medicaid’s matching rates does neither efficiently, and serves only to invite more of the cost-shifting and buck-passing that has plagued American federalism over recent years.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.
Photo by Samuel Corum/Getty Images