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Trump’s Plan Will Expand—Not Gut—Medicaid

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Trump’s Plan Will Expand—Not Gut—Medicaid

February 4, 2020

The expansion of Medicaid to low-income, able-bodied adults was the largest element of the 2010 Affordable Care Act, both in terms of cost and enrollment. But the structure of this expansion – whereby the federal government, without limit, gives $9 to states for every $1 they spend on enrollees – provides little incentive to control costs.

On January 30, 2020, the Trump administration unveiled its Healthy Adult Opportunity initiative, which would give states the option of receiving funds to cover Medicaid expansion enrollees as a pre-calculated grant. The hope is that this would give states more freedom and responsibility to make good use of federal funds, encouraging them to allocate resources in more nuanced, equitable, and better-targeted ways. That may be possible to some extent, but it is unlikely to reduce costs overall.

Medicaid was originally designed to fund medical care for low-income individuals who could not be expected to work for reasons of disability, age, or family responsibilities. By concentrating public assistance on those in greatest need, Medicaid has been able to provide more for each – comprehensive access to medical services – without requiring premiums or out-of-pocket costs from beneficiaries. This allows it to provide better access to care for America’s poor than is available for the middle-class under single-payer health systems, where public funds must be stretched to cover the whole population, and access to specialists, surgical procedures, and cutting-edge therapies is usually rationed or entirely unavailable.

Over recent decades, Medicaid eligibility has repeatedly been expanded. Enrollment has grown from 21 million in 1987 to 74 million in 2017, while spending soared over the same period from $50 billion to $592 billion. Expansions of the program have not always been well focused on covering the uninsured, and have often served to crowd out private insurance (by as much as 60 percent). The Congressional Budget Office estimates that the program’s cost will increase by an additional 78% over the coming decade, even without any further expansion of benefits or eligibility.

The administration’s Healthy Adult Opportunity proposal would allow states to receive federal funds for Medicaid expansion enrollees under a waiver from standard rules, providing a pre-determined block of funds (either as an aggregate amount, or on a per-enrollee basis) based on the previous year’s level of spending and a permitted growth trend. It is hoped that fixing funds for states ex ante would allow states more freedom to design benefits in cost-effective ways, encourage them to reserve resources for the neediest beneficiaries, and eliminate the incentive to expand eligibility and enrollment to individuals who may already have private insurance. Allowing premiums and cost-sharing of up to 5% of income may allow states to stretch Medicaid funds further, and mitigate the poverty trap around 138% of the federal poverty level where Medicaid eligibility for able-bodied adults cuts out. It may also make it easier for states to fund services beyond standard federal eligibility categories or covered benefits.

But the proposed rule is still bound by a web of statutory restrictions. To qualify for the highest amount of federal funds, Medicaid programs would still be required to cover all Essential Health Benefits mandated by the ACA and all eligible individuals up to 138% of the federal poverty level. While the proposal would allow states to drop drugs from Medicaid formularies when more cost-effective alternatives are available, they would still be obliged to cover a drug in all therapeutic classes regardless of cost – unlike Britain’s National Health Service. Non-expansion states wouldn’t be eligible for funds under this option unless they first implement a traditional expansion.

That being the case, the proposal does not step very far beyond what existing Medicaid waivers permit. That alone is reason to temper hopes and to raise some concerns.

While a mandatory block grant or per capita cap would constrain spending, a voluntary arrangement can be expected to have exactly the opposite effect. Although waivers are supposed to be budget-neutral, states have tended to participate in such an arrangement only when they believe it allows them to get more money from the federal government.

Some liberals have complained that the rate of growth of federal grants under the waiver proposed by the administration is too low. If that is the case, then states would simply not opt for them. The cavalcade of Democratic politicians attacking the proposal as an attempt to "rip health care away from millions" is either remarkably ill-informed or willfully misleading.

A more serious concern is that the terms would be too generous – or that they could easily be gamed by states. For instance, if states believed that the federal government had overestimated their trend rate of Medicaid enrollment, due to rising economic prosperity, they could use a waiver to lock in a funding amount that exceeds their actual need. Conversely, as proposals would allow states to receive funds as a per enrollee amount, they might also be able to profit by locking in higher funds if they anticipate an influx of relatively healthier, young, unemployed enrollees in a recession – when per enrollee spending might usually be expected to fall. This being the case, while an equivalent fixed grant may in theory be more fiscally responsible than an open-ended 90% match, in practice there is little reason to believe that a switch by states would yield any savings for federal taxpayers.

The history of Medicaid waivers supports this concern. The US Government Accountability Office has repeatedly warned of lax oversight, and suggested that spending benchmarks were established without rigorous or transparent process. Funding is routinely set at levels exceeding those likely under traditional Medicaid structures, often with no data provided to justify such arrangements. Grants are frequently distributed based on erroneous projections, with minimal oversight. The federal government does not tightly enforce compliance with spending agreements, and states are often allowed to keep savings to which they are not entitled. In testimony to the US Senate, the GAO Comptroller concluded that Medicaid waivers “have increased federal costs without providing results that can be used to inform policy decisions.”

The loose enforcement of waiver agreements owes much to the susceptibility of both ends of Pennsylvania Avenue to political pressure from state officials. In practice, voluntary grants therefore tend to be one-way ratchets to higher spending: states reapply if grants are inadequate, but keep the surplus if too much was provided.

There is much to be said for making Medicaid expansion less of an all-or-nothing proposition in terms of benefit packages and eligibility criteria than the ACA had initially established. But current federal law appears to leave only a small amount of room for the administration to move in that direction. The Healthy Adult Opportunity initiative’s proposals are reasonable as far as they go – though that is not very far.

Voluntary waiver authority was established and designed decades ago to facilitate expansions of Medicaid. Waivers are ill-suited to the task of tightening fiscal constraints on states, and unlikely to advance any such objective.

Chris Pope is a senior fellow at the Manhattan Institute.

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