Republicans in Congress are moving along with their “big, beautiful bill” to extend tax cuts, create some new tax provisions, and reduce the rate of growth in some spending programs. The Medicaid “cuts” that reduce the rate of growth in future spending have attracted particular attention. Here, I want to focus on what Congress could do with Medicaid and premium subsidies for exchange policies for low-income Americans. A bigger package could align incentives better and cut spending growth just as much, while also undercutting some of the claims being made against the current version of the bill.
Right now, the bill gets a lot of its projected savings from a future work requirement for Medicaid recipients. There’s a real question about whether the costs of implementing a work requirement outweigh the benefits — states will have to hire staff to do the checking — but the evidence from Arkansas, which already has such a requirement, is more positive than you may have heard.
A better way to slow the growth in Medicaid is to leave it up to states whether and how to impose work requirements, but to equalize the federal match rate between “traditional” and “expanded” Medicaid. Traditional Medicaid is targeted toward the very poor who are generally unable to work full-time: the elderly, the disabled, and single parents of young children. Expanded Medicaid under the Patient Protection and Affordable Care Act (“Obamacare”) is available to everyone making up to 138 percent of the federal poverty level in states that have chosen to offer it. The federal match rate for expanded Medicaid is 90 percent — or $9 in federal taxpayer money for every $1 that states kick in — while the match rate for traditional Medicaid is variable but consistently much lower, about 63 percent on average.
Ridiculously, the federal government offers states more money to provide health coverage to relatively wealthier and more able-bodied residents than it offers them to provide coverage to the truly needy and disabled. Almost as bad, Obamacare’s design makes it so that in the 10 states that haven’t expanded Medicaid, many residents don’t qualify for any subsidy, including the premium tax credits that are available to much higher-income Americans to buy coverage on the exchanges.
Along with reducing and harmonizing the Medicaid match rate, Congress could expand Obamacare premium subsidies to Americans below the federal poverty line. That move would incentivize states to shuffle Medicaid recipients off government insurance and onto the regulated private market, and further vindicate those states that have stood strong and refused Medicaid expansion. Overall health spending could go down because Medicaid has extremely strict cost-sharing limits, and many states require no cost-sharing at all, such as copayments, for any Medicaid recipients. As a result, Medicaid recipients seek a lot of healthcare.
I ran some quick numbers to see how to make the math work. If Congress moved to a 65 percent across-the-board Medicaid match, that would cut federal Medicaid spending by $49 billion based on fiscal year 2023 actual data (the most recent complete data). Note that this match is an increase on the traditional Medicaid match, but a reduction compared to the expanded Medicaid (Obamacare) match. But the CBO then standardly assumes that states only backfill half of the lost federal revenue from a decline in Medicaid match rates. As states cut, the federal match would go down, too. So a $49 billion cut would ultimately amount to about $65 billion in federal spending reductions.
Now subtract the cost of premium tax credits to close the coverage gap in states without expanded Medicaid. A Commonwealth Foundation report estimates this would cost $27 billion a year. Combining all these reforms should save the federal government around $40 billion a year, maybe a bit less when accounting for some movement of people from Medicaid to the Obamacare exchanges.
This is more than what the CBO predicts the work requirement will save the federal government in its first year, but the CBO’s estimate also doesn’t include state administrative costs in implementing the work requirement. Once those costs are considered, my alternative proposal looks even better.
To give states flexibility to slow the growth of Medicaid, the bill should explicitly allow them to do more cost-sharing and experiment with work requirements (since there may be less burdensome ways to implement a work requirement). Congress should also consider changing the match altogether to a block grant, a longtime goal of fiscal conservatives.
In short, these proposals will help make healthcare for the poor more rational, while reducing the deficit:
- Equalize federal subsidies to states for providing healthcare to the poor;
- End coverage gaps that exclude the very poor from subsidies;
- Give states more flexibility and autonomy to slow the growth of Medicaid;
- Encourage Americans to move from government-provided insurance to private insurance, albeit in a subsidized and highly regulated form.
