Despite substantial and growing federal deficits, largely driven by unsustainable healthcare commitments, the Obama Administration is proposing more than $100 billion in new Medicaid spending over the next decade. No major area of federal spending has increased more dramatically since President Barack Obama took office than Medicaid, and recent evidence indicates that the program is failing both enrollees and taxpayers. Instead of spending more on the program, Congress should reject the president's new Medicaid proposals, particularly the three I discuss below, and focus on structural reforms to the program.
Enormous Amount of Low-Value Spending
The following table contrasts inflation-adjusted Medicaid spending in fiscal year (FY) 2008 with spending in FY 2015. Inflation-adjusted Medicaid spending increased 43% in this period, with federal spending on the program up 59%.
Medicaid enrollment exploded for two main reasons: more people qualifying for the program because of expanded eligibility and funding under the Affordable Care Act (ACA) and the weak economic recovery—a contributing factor to which is the ACA. The weak economy has been especially painful for lower-skilled individuals. According to a March 2016 report from CBO, “earnings from wages and salaries are now expected to grow more slowly for lower-income people...result[ing] in an increased share of the population eligible for Medicaid.” While CBO’s estimates are forward-looking, the economy and the number of workers have grown significantly slower than CBO projected back in 2010 when the ACA became law. In fact, the economy is about 7% smaller this year than CBO projected it would be in 2010.
To date, 30 states have adopted the ACA expansion, which primarily covers working-age, non-disabled adults up to 138% of the federal poverty level ($16,243 in 2015). According to CBO, 12 million more people were enrolled in Medicaid in 2015 due to the ACA expansion.
The federal government provides a 100% reimbursement of the cost of Medicaid expansion enrollees from 2014 through 2016. A 100% reimbursement incentivizes states to spend freely on expansion enrollees, which appears to have happened as Medicaid expansion enrollees are costing far more than was expected. According to the 2014 Actuarial Report on the Financial Outlook for the Medicaid program:
Newly eligible adults are estimated to have had average benefit costs of $5,517 in 2014, 19 percent greater than non-newly eligible adults’ average benefit costs of $4,650. These estimates are significantly different from those in previous reports, in which average benefit costs for newly-eligible adults in 2014 were estimated to be 1 percent lower than those of non-newly eligible adults.
An important study looking at the effects of a quasi-experiment in Oregon, in which people were randomly selected for Medicaid, indicates that much of this new spending is of little value. Researchers found that Medicaid coverage resulted in significantly more outpatient visits, hospitalizations, prescription medications and emergency department visits, but had no statistically significant effect on any measure of physical health. (The researchers did find a reduced prevalence of depression among enrollees.) A second study assessing the value of Medicaid found that “Medicaid’s value to recipients is lower than the government’s costs of the program, and usually substantially below.” They estimated the “welfare benefit to recipients from Medicaid per dollar of government spending range from about $.2 to $.4.” In other words, for every $1 of Medicaid spending, recipients valued that spending as little as 20 cents.
Make no mistake. The new health law has disrupted coverage for millions, and driven up costs for millions more.
President’s New Medicaid Spending Proposals
Despite the extraordinarily large growth in Medicaid spending and the evidence that much of that spending is of low value to enrollees, the president is requesting more than $100 billion in additional Medicaid spending over the next decade. Three misguided initiatives account for more than 75% of this request.
1. Enhanced Federal Match Rate for All Medicaid Expansion States
The Obama administration wants as many states to expand Medicaid as possible. The president’s budget proposes to reimburse states for 100% of the cost of expansion enrollees for three years, regardless of when states expand. Under current law, the 100% reimbursement ends in 2016. CBO estimates this proposal will cost $31 billion over the next decade.
In addition to the large federal cost, this policy is misguided. The ACA enhanced reimbursement creates a serious inequity, since working-age, non-disabled adult expansion enrollees receive a much higher federal reimbursement percentage than traditional Medicaid populations such as lower-income children, pregnant women and the disabled. Moreover, when states receive a 100% reimbursement, they have little incentive to consider the value enrollees receive from Medicaid since the federal government picks up the entire tab.
2. Bailout for Puerto Rico
CBO refers to the president’s proposal as “[i]ncreasing federal funding for Medicaid in Puerto Rico and other U.S. territories,” but the proposal is better described as a Puerto Rico bailout. According to CBO, it will cost the federal government $28 billion over a decade.
The federal government provides support for Puerto Rico’s Medicaid program, but the amount is capped. In fiscal year 2014, Puerto Rico received $1.2 billion in federal funding for its program. Part of this amount resulted from the ACA providing Puerto Rico with an extra $6.4 billion in higher Medicaid funding from 2011 through 2019. The administration believes that the cap should be lifted and that federal taxpayers should spend a lot more on Puerto Rico’s program. However, in its “fact sheet,” the administration fails to mention an extremely important detail—Puerto Ricans do not pay federal income tax and federal income taxes finance the federal share of Medicaid spending.
A forthcoming Mercatus research study on Puerto Rico’s crisis discusses a report commissioned by the Puerto Rico Senate on the island’s problems. The report finds many inefficiencies with the island’s Department of Health, redundant healthcare facilities, and excessively high Medicaid administrative costs. These problems and others will likely not be addressed if Puerto Rico receives a bailout.
3. State Option for 12 Months of Continuous Medicaid Eligibility for Adults
The ACA prevents states from renewing Medicaid coverage more than once a year, but enrollees are still required to report changes that would cause them to lose their eligibility, such as an increase in income. The president’s proposal scraps this requirement and allows states the option of 12-month continuous Medicaid eligibility for adults. States already have this option for children. CBO estimates this proposal would cost federal taxpayers $18 billion over the next decade. One problem with this proposal is that it makes it more likely that taxpayers will subsidize people with relatively large income. For example, a college student covered by Medicaid because of relatively low income will still qualify for the program after they graduate and move into the workforce if they are no longer required to report their significant change in income.
Conclusion
As enrollment in the ACA exchanges is only half of initial expectations, President Obama’s healthcare legacy increasingly looks like a massive increase of a poorly performing and low-value Medicaid program. Unfortunately, the administration has backed away from some of its sensible past Medicaid proposals, such as limiting the provider tax accounting gimmick—something Vice President Biden referred to a scam and advocated scrapping. At some point, we will have to deal the fact that the country spends an enormous amount of money, while running large budget deficits, on a program that has such poor results. Unfortunately, it seems like serious grappling by the executive branch with Medicaid’s many problems will have to wait until at least next year.
