Obama’s Plan and Medicaid: Promising Structural Changes But Worries About Cost-Shifting to States

In President Obama’s new deficit reduction plan, he makes the following promise:

“Most importantly, we can make modest adjustments to strengthen Medicare and Medicaid in a way that does not undermine the fundamental compact they represent to our Nation’s seniors, children, people with disabilities, and low-income families. The Administration’s proposals will save approximately $320 billion over the next decade. As these reforms save money, they also will strengthen these vital programs so that they are robust and healthy to serve Americans for years to come.”

Saving money through modest adjustments while strengthening vital programs—sounds like a perfect vision for the future of government health care. But will this actually be the case for the beleaguered, but extremely necessary, Medicaid program?

Obama proposes to save $66 billion from Medicaid by taking the following actions: “limit State financing practices that increase Federal spending, replace complicated matching formulas with a single matching rate specific to each State, and strengthen Medicaid program integrity.”

The most significant savings would come from the following actions:

  • $26.3 billion in savings would come from addressing a convoluted financing practice in which states collect taxes from providers who participate in Medicaid programs. Some 46 states now collect these taxes and then most turn around and use these revenues to increase the state’s portion of reimbursement for treatments and services delivered by these same providers. The idea, according to the National Conference of State Legislators, is to generate new in-state funds that are then matched with federal funds, resulting in the state receiving additional federal Medicaid dollars. It’s an officially-sanctioned way to game the system—although providers pay a tax initially, they get it back (and more) in Medicaid reimbursements.

Obama’s deficit reduction plan calls for limiting this practice “by phasing down the Medicaid provider tax threshold,” from the current level of 6 percent in 2014, “to 4.5 percent in 2015, 4 percent in 2016, and 3.5 percent in 2017 and beyond.”

  • $14.9 billion would be saved by using a single “blended” federal match rate for each state—rather than the current system which calculates a different match rate for CHIP enrollees, standard Medicaid, and once the Affordable Care Act kicks in, those newly enrolled in Medicaid programs, including single, childless adults.

“Beginning in 2017 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,” according to the plan.

  • $14.6 billion in savings would come from fixing a glitch in the Affordable Care Act that changed Medicaid rules so Social Security benefits would no longer count as income, as they do now. According to the Washington Post, under the new rules, “married early retirees making $64,000 a year could qualify for Medicaid.” The article continues, “Medicare’s top number cruncher, Richard Foster, said that situation didn’t make sense but policymakers weren’t interested in addressing it.”

Other cost-cutting measures in Obama’s plan include reducing over-payments for so-called durable medical equipment (DME), reforming the generic drug approval process to allow cheaper versions to get to the market faster, and enacting a range of efforts for reducing waste, fraud and abuse in Medicaid programs.

If you consider the proposed cuts in Obama’s plan, what really jumps out is that most of the federal deficit savings will come from shifting more of the costs of Medicaid to states. This is far from ideal as states are already struggling to finance ballooning programs. That’s not to say that the structural changes being proposed don’t make sense; they simplify federal Medicaid financing and make the program less open to fraud and abuse. For example, Matt Salo, executive director of the National Association of State Medicaid Directors, told Kaiser Health News that simplifying the federal Medicaid rate is a good idea, “but not in the context of deficit reduction because it can mean only one thing: cost shifts to states who simply cannot shoulder any more burden in this area.”

We have to be clear that Obama’s fixes, while welcome, will result in an overall decrease in federal funding for Medicaid—a result that will undoubtedly lead to a reduction in benefits, enrollment, and provider fees at the same time that persistent unemployment increases the number of Americans (especially children) in need of public coverage.

The Kaiser Commission on Medicaid and the Uninsured estimates that from June 2007 to June 2010, Medicaid enrollment increased from 42.3 million to 50.3 million as unemployment roughly doubled. At the same time, state revenues experienced the largest declines on record. These trends continue today.

As part of the Recovery Act passed in 2009, the federal contribution to state Medicaid programs increased, with the caveat that to receive this “enhanced” matching rate, states must maintain current eligibility requirements (i.e. they couldn’t cut enrollment or benefits in the program to below 2008 levels.) According to Kaiser, without these maintenance of effort requirements and enhanced federal funding, “many states almost certainly would have needed to turn to cutbacks in coverage in 2010 as a result of continuing budget pressures.”

The enhanced federal matching rates for Medicaid expired in June 2011. States continue to face growing Medicaid rolls as more residents experience long-term unemployment and an end to employer-sponsored insurance. Shifting more costs for the public insurance program to states will only stress the safety net further—and inevitably lead to cuts in services, enrollments and the already meager fees paid to most Medicaid providers.

Streamlining Medicaid and ridding it of convoluted funding practices that leave the program open to fraud and inefficiency will save money in the long run. Obama’s plan can help achieve this goal. But along with enacting the structural changes outlined in his deficit reduction plan, in the shorter-term, the President must also keep federal support for state Medicaid programs strong. Reinstating the enhanced federal matching rates; at least until the economy shows real signs of recovery, is the best way to do this and should be part of any larger plan for dealing with the deficit.

3 thoughts on “Obama’s Plan and Medicaid: Promising Structural Changes But Worries About Cost-Shifting to States

  1. I”ll tell you something: I really gained quite a bit from this post. I was honestly pretty confused about this whole matter before discovering not only this post, but the entire site. A veritable blessing indeed!

  2. We have to be clear that Obama’s fixes, while welcome, will result in an overall decrease in federal funding for Medicaid—a result that will undoubtedly lead to a reduction in benefits, enrollment, and provider fees at the same time that persistent unemployment increases the number of Americans (especially children) in need of public coverage.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>