Does Federal Aid create an Incentive to Expand Medicaid?

by Evan Blauser

A National Overreliance on Federal Grant Money

Medicaid is an open-ended federal match program with a national average match ratio of 60 - 40, meaning 60% of funding comes from the Federal government, and the remaining 40% comes from the states. Due to the open-ended match status of Medicaid, states have a built-in incentive to expand Medicaid coverage to able-bodied, working-age, childless adults making 138% of the Federal Poverty Level. The reason they are incentivized is that they could potentially seek unlimited funding from the federal government, hence the "open-ended" status of the program. Most federal grants are closed-ended match programs, meaning that there is a cap on the maximum federal contribution and states are disincentivized to expand the program in their communities.

Since most states pay an average match rate of 40% to the Federal government, state policymakers are incentivized to expand their Medicaid programs so that they can send a greater portion of their bill to the Federal government. In doing so, they are both expanding Medicaid coverage to their populations and sending the majority of the bill to the Federal government, where it is then added to the burgeoning U.S. National Debt.

We measure the rate at which the Federal government matches state expenditures in Medicaid using a system called FMAP, which stands for Federal Medical Assistance Percentage. This statistic is measured across the country, and varies in ratios from 71.97% in Alabama to a 50-50% ratio in Colorado and Wyoming. Historically, Wyoming's FMAP rate has been lower than the surrounding states, with the exception of Colorado, who has nearly matched our rate since Fiscal Year (FY) 2004.

Proponents of Federal aid programs would have you believe that policymakers in Washington, DC are better at assessing the fiscal needs of the many states, and that federal funding is mostly directed at the lowest income communities in the country. However, according to a study conducted by the Advisory Commission on Intergovernmental Relations, "the record indicates that federal aid programs have never consistently transferred income to the poorest jurisdictions or individuals."

One of the reasons federal dollars do not always end up where they are needed most is that politicians, especially in the House of Representatives, feel the intense pressure to bring federal grants to projects in their home districts. It makes perfect sense for elected representatives to want Congress to invest in their home districts. After all, it satiates their constituents, provides a direct investment into the city or cities they represent, and enables community development programs to operate within their districts. Unfortunately, a side effect of this practice is that communities and agencies that need funding the most will sometimes be sidelined so that politicians can bring the bacon home.

Add to this the fact that the federal government made a deal with the states to make Medicaid Expansion more palatable: the federal government would pay for all of Medicaid Expansion in the first few years. Then they would gradually reduce funding for new enrollees until the match rate (for expansion enrollees exclusively, not the general Medicaid population) was 90%. Now it is clear how so many states were able to justify expanding Medicaid to people for whom it was never intended. If I were a policymaker in California, for example, I would justify expanding Medicaid by saying that it would provide California with a multi-million dollar "investment" from the federal government, and I can say that more Californians than ever will have health insurance. The quality of that healthcare, as well as the over-enrollment problem for California, is another issue that has been addressed before. The detrimental effects caused by California and other states expanding Medicaid can already be felt, and will continue to hamstring the U.S. economy in the near future.

Healthcare Spending, GDP, & the National Debt

In 2017 alone, the National Healthcare Expenditure (NHE) for Medicaid increased by 2.9% to $581.9 billion, or 17% of total healthcare expenditures in the United States. The only other federal benefits program with a higher price tag was Medicare, which grew by 4.2% to $705.9 billion, or 20% of the total NHE for the U.S. in 2017. The future for medical expenditures looks incredibly bleak, with total healthcare spending expected to increase 0.8% faster than Gross Domestic Product (GDP) until it becomes nearly 20% of GDP in the U.S. by the year 2027. That means that for every dollar the United States generates, we would have to spend about $0.20 on healthcare alone. This should put the decisions made by California (and all but 14 states) to expand Medicaid into a better perspective. The formula is simple, but concerning: the more states that expand Medicaid, the higher enrollment totals will be across the nation, which means that healthcare expenditures will continue to rise until every American is paying $0.20 of their taxes to fund Medicaid and Medicare.

Consider whether or not the United States, while flirting with having a trade war with China, should continue to encourage the remaining states to expand Medicaid coverage to able-bodied adults. If you are at all concerned about Medicaid's future in Wyoming and the United States, I would encourage you to reach out to your elected representatives using the links below.

Statewide Elected Representatives: https://www.wyoleg.gov/Legislators

Congresswoman Liz Cheney: https://cheneyforms.house.gov/contact/

Senator John Barrasso: https://www.barrasso.senate.gov/public/index.cfm/contact-form

Senator Mike Enzi: https://www.enzi.senate.gov/public/index.cfm/e-mail-senator-enzi