Medicaid is a flawed model. Meant to provide a safety net for medical access to low-income, vulnerable population groups, it has evolved into a costly entitlement program enrolling over 72 million by 2016, approximately 20 percent of the U.S. population. Overall spending has reached $600 billion, growing over 90 percent in the past decade alone.

Medicaid is a partnership between the federal government and the states with the states administering the program and the federal government paying a percentage of overall spending based on the state’s per capita income relative to the national average.

Recent GOP efforts to repeal and replace Obamacare included a proposal to change the funding formula from open-ended financing to a block grant based on each states’ enrollment. Meant to introduce fiscal discipline into a program that encourages overspending (or at least does not encourage restraint), failure of the repeal effort has left Medicaid, as we know it, unchanged. Our 50-year relationship with the program has provided enough time to reveal its many warts and blemishes. The remainder of this post will look at ten of these flaws.

• Medicaid provides poor access to medical care.

The passage of the Affordable Care Act (ACA) increased the number of Americans covered with some form of insurance by almost 16 million. However, access to insurance does not mean access to medical care. The ACA did little to increase physician supply making it increasingly difficult for the current physician workforce to meet the increased demand. Almost 90 percent of the overall increase in the number insured was due to increased Medicaid enrollment. These new enrollees are now competing with those already covered for a dwindling number of physicians willing to accept new Medicaid patients. Prior to the new legislation almost one-third of office-based physicians were not accepting new Medicaid patients. Because Medicaid pays physicians barely 50 percent of what private insurance pays, it should not be surprising that physicians are refusing to accept new Medicaid patients.

• Medicaid is associated with worse outcomes than private insurance.

Eligibility expansion since the 1980s has focused primarily on enrolling pregnant women and children. A number of studies looked at the impact of eligibility expansion and health outcomes for these two groups. Most notably Currie and Gruber authored two studies (1996a, 1996b) that found evidence of improved prenatal care utilization resulting in a reduction in low-birth-weight deliveries and lower infant mortality rates.

There are numerous examples of research based on observational data that seem to indicate that Medicaid patients experience inferior medical outcomes compared to privately insured patients. For example, LaPar et al. (2010) find that Medicaid coverage is associated with longer lengths of hospital stays, higher health care spending, and greater risk of death relative to privately insured patients. In addition, Gaglia et al. (2011) find cardiology patients with Medicaid coverage are more likely to suffer from major adverse cardiac events than privately insured patients do. These results themselves do not indicate that Medicaid is inferior as a payment mechanism, only that the Medicaid delivery system is inferior.

Using quasi-experimental techniques, Sommers, Baicker, and Epstein (2012) were able to report that Medicaid coverage (relative to having no insurance) significantly improved self-reported health status. However, they were not able to show causality between Medicaid coverage and mortality rates, only a correlation between the two. Baicker et al. (2013) took advantage of a 2008 experiment by the state of Oregon where a random lottery expanded Medicaid coverage to previously uninsured residents. Results of the experiment two years later show better access to primary care, higher emergency room use, and higher spending for those receiving Medicaid, compared to those who did not, but no significant improvement in the quality of life related to measured physical health (Baicker et al., 2013). In other words, Medicaid recipients did no better in terms of physical health than the uninsured.

• Medicaid provides relatively low value to its recipients.

In their welfare analysis of the Medicaid expansion in Oregon, Finkelstein, Hendren, and Luttmer (2015) found that Medicaid recipients valued the medical services they received less than the total cost of the program. According to their estimates, the overall welfare benefits received by its recipients is only 20-40 percent overall medical spending, indicating that approximately 60 percent of Medicaid spending is simply an income transfer from government to providers.

• Medicaid creates a disincentive to work.

The expansion of public insurance depresses the employment rate of childless adults. Dague, DeLeive, and Leininger (2017) take advantage of a regression discontinuity to estimate that the enrollment expansion in Wisconsin reduced the employment rate from 45 to 40 percent (a 12 percent decrease). Applying these findings nationwide, the ACA Medicaid expansion resulted in an increase in enrollment of 14 million, indicating that upwards of 1.7 million childless adults dropped out of the labor force.

• Medicaid expansion without reform was a bad policy decision.

Medicaid was established in 1965 to provide medical services to certain vulnerable population groups. Historically, the program served low-income individuals in certain categories – the elderly, disabled, pregnant women, and children of impoverished parents. Since passage of the ACA, eligibility has shifted from categorical membership to a standard based purely on income.

Most states did not cover healthy, working-age adults without dependents. Prior to 2010 only seven states had secured waivers offering coverage to childless adults making less than 100 percent of the federal poverty level (FPL). These seven states were Arizona, Delaware, Hawaii, Maine, Massachusetts, New York, and Vermont. Not only did the ACA extend coverage to this group, it provided a larger subsidy than the one provided for the more vulnerable groups with no clear justification.

• The Medicaid FMAP disproportionately benefits wealthy states.

The Federal Medical Assistance Percentage (FMAP) determines the amount of federal matching funds for each dollar the state spends on medical care for its Medicaid enrollees, the federal share of Medicaid spending in each state. Each state’s FMAP is determined annually based on the state’s per capita income relative to the national average. The FMAP formula is meant to reflect a state’s financial capacity to provide medical care to its low-income residents.

The statute sets a floor on the minimum federal contribution to total Medicaid spending at 50 percent. If a state’s FMAP is 50 percent, for every dollar the state spends, the federal government provides a dollar. Likewise, an FMAP of 75 percent implies a federal contribution of $3 for every dollar the state spends. The 13 states with per capita incomes greater than 105.5 percent of the national average (referred to as floor states) receive the 50 percent federal subsidy even though the formula would set the state’s FMAP at less than 50 percent. Mississippi with the lowest per capita income receives the highest FMAP (75.65 percent).

The floor actually favors high-income states (and the District of Columbia that receives an FMAP of 70 percent). Without it, these states would receive lower matching rates and pay more than 50 percent of their spending using state funds.

• Medicaid is characterized with extensive fraud and abuse.

Waste, abuse, and fraud (WAF) in Medicaid amounted to $41 billion in 2016, over 11 percent of federal program payments. The WAF rate has almost doubled since passage of the Affordable Care Act in 2010 and is still trending upward. Activities that contribute to the rate include fraudulent claims and excess billing. Despite the magnitude of the problem, the federal government devotes less than 0.2 percent of the federal share to combatting the problem.

• Medicaid crowds out private insurance.

Gruber and Simon (2008) estimated the impact of past changes in Medicaid eligibility criteria and concluded that up to 60 percent of new enrollees in public insurance were previously covered by private insurance. Crowding out has been found to be more significant when Medicaid eligibility is expanded to higher income adults (Kronick and Gilmer, 2002). In the latest expansion of Medicaid eligibility (resulting from the passage of the ACA), at least 11 percent of the new enrollees in the first two years were previously covered by employer sponsored insurance. Another 50 percent had other state-sponsored insurance, including TRICARE, veterans insurance, and CHAMPUS (Carman, Eibner, and Paddock, 2015).

• Medicaid crowds out other state spending.

Medicaid has become the number one spending priority in many states, surpassing education, transportation, and public safety. On average over 15 percent of a state’s budget is devoted to its share of Medicaid spending. In some states, the percentage is significantly more. Florida devotes 21 percent of its spending to Medicaid; Texas devotes 19.7 percent.

• Medicaid expansion disproportionately benefits high-income states.

By ignoring the states’ capacity to fund services for the newly eligible, the expansion FMAP favors high-income states. The expansion rules compensate high-income states more than low-income states, especially true for the 11 floor states that expanded. The share of federal Medicaid payments received by states that expanded the Medicaid eligibility criteria grew from 65.44 percent in 2013 to 70.36 percent in 2015. This 4.92 percentage point increase translated into an additional $16.45 billion in 2015. The 11 floor states that expanded eligibility received over two-thirds of this increased spending.

Final Thoughts

All states had and still have the option to expand Medicaid eligibility, so what are the reasons that the 19 holdouts choose not to expand? The choice is more than politics.

• Fiscal concerns go beyond the 10 percent cost sharing that would eventually come due for the newly eligible population if a state expanded. Those states that hesitated to expand eligibility were concerned the expansion might serve as a welcome mat and encourage enrollment of those already eligible under pre-ACA criteria. Under the existing FMAP, the state’s share of expenses would be substantially higher for those previously eligible. As it turned out the concern was well founded. Over one-half of the newly enrolled Medicaid population is attributed to individuals eligible under pre-ACA criteria.
• There is no obvious policy rationale for the FMAP disparity between new enrollees and those previously eligible. Originally, there was no need to incentivize state participation with a 100 percent FMAP; expansion was mandatory. It was not until 2012 that the Supreme Court determined that mandatory expansion was overly coercive and ruled instead that states could voluntarily participate. The FMAP disparity introduced two inequities. First, it rewards states more generously for providing medical assistance to one category of recipients (healthy, working age adults) over more vulnerable categories who need more assistance (aged, disabled, pregnant women, and children of poor parents). Second, it overlooks differences in states’ capacity to finance medical assistance for the new population (see point 10 above).

Even former President Obama recognized that merely expanding Medicaid was not wise when he said: “As we move forward on health care reform, it is not sufficient for us simply to add more people to Medicare or Medicaid to increase the rolls, to increase coverage in the absence of cost controls and reform. And let me repeat this principle: If we don’t get control over costs, then it is going to be very difficult for us to expand coverage. These two things have to go hand in hand. Another way of putting it is we can’t simply put more people into a broken system that doesn’t work” (Public Papers of the Presidents, 2011, p. 754). Albert Einstein gets the credit for saying: “The definition of insanity is doing the same thing over and over again, but expecting different results.” The craziness must stop.

References:

Katherine Baicker et al., “The Oregon Experiment – Effects of Medicaid on Clinical Outcomes,” New England Journal of Medicine 368(18), May 2, 2013, 1713-1722.

Katherine G. Carman, Christine Eibner, and Susan M. Paddock, “Trends In Health Insurance Enrollment, 2013–15,” Health Affairs 34(6), June 2015, 1044-1048.

Janet Currie and Jonathan Gruber, “Saving Babies: The Efficacy and Cost of Recent Changes in the Medicaid Eligibility of Pregnant Women,” Journal of Political Economy 104(6), December 1996a, 1263-1296.

_______, “Health Insurance Eligibility, Utilization of Medical Care, and Child Health,” Quarterly Journal of Economics 111(2), May 1996b, 431-466.

Laura Dague, Thomas DeLeive, and Lindsey Leininger, “The Effect of Public Insurance Coverage for Childless Adults on Labor Supply,” American Economic Journal: Economic Policy 9(2), May 2017, 124-154.

Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttmer, “The Value of Medicaid: Interpreting Results from the Oregon Health Insurance Experiment,” NBER Working Paper No. 21308, Cambridge, MA: National Bureau of Economic Research, June 2015.

Michael A. Gaglia, Jr., et al., “Effect of Insurance Type on Adverse Cardiac Events After Percutaneous Coronary Intervention,” American Journal of Cardiology 107(5), March 1, 2011, 675-680.

Jonathan Gruber and Kosali Simon, “Crowd-out Ten Years Later: Have Recent Public Insurance Expansions Crowded Out Private Insurance,” Journal of Health Economics 28, 2008, 201-217.

Richard Kronick and Todd Gilmer, “Insuring Low-Income Adults: Does Public Coverage Crowd-Out Private?” Health Affairs 21(1), January/February 2002, 225-239.

Damien J. LaPar et al., “Primary Payer Status Affects Mortality for Major Surgical Operations,” Annals of Surgery 252(3), September 2010, 544-551.

Public Papers of the Presidents of the United States: Barak Obama, 2009, Book 1, Government Printing Office, April 28, 2011.

Benjamin D. Sommers, Katherine Baicker, and Arnold M. Epstein, “Mortality and Access to Care among Adults after State Medicaid Expansions,” New England Journal of Medicine 367, September 13, 2012, 1025-1034.

The opinions expressed in this blog post are mine alone, and do not reflect the opinions of Baylor University.   Baylor is not responsible for the accuracy of any of the information provided in this post.