Medicaid Consuming Federal Assistance to States

1. In fiscal year 2014, federal Medicaid spending was $276 billion – a $42 billion increase (18 percent) from the year before. Now more than half of the money Washington sends to state governments goes for Medicaid.
2. Exploding Medicaid rolls are busting state budgets and crowding out spending on other priorities like transportation and education.
3. Obamacare’s perverse Medicaid expansion to able-bodied adults has exacerbated the program’s numerous problems. Recent reports show poor oversight and misspending.

Over the past few decades, Medicaid spending has increased more than any other major part of the federal budget. The root of the problem is a financing structure that provides states with an uncapped reimbursement of program expenditures. Poor oversight from Washington allows tens of billions of dollars in misspending each year. Obamacare adds to the program’s many problems.

Medicaid’s spending crowding out other programs

According to the National Association of State Budget Officers, Medicaid spending in fiscal year 1989 was $52 billion – or $99 billion in 2014 dollars. In 2014, total Medicaid spending was

In 1989, state governments collectively spent $880 billion in 2014 dollars. Of that amount, $198 billion came from Washington. About $56 billion, or 28 percent, of the money Washington sent to states that year was for Medicaid. By 2014, state governments collectively spent $1.79 trillion. Of that, $541 billion came from Washington. About $276 billion, or 51 percent, of that money was for Medicaid.

The open-ended federal reimbursement of nearly 57 percent of average state Medicaid spending has caused federal spending on Medicaid to explode. Total annual federal funds sent to states for all purposes increased by nearly $350 billion in 2014 dollars between 1989 and 2014. Federal spending for Medicaid – which grew by $220 billion – was responsible for 64 percent of that increase. In contrast, federal spending on elementary and secondary education, higher education, and transportation increased by $31 billion, $13 billion, and $17 billion, respectively.

In April, Moody’s Analytics reported a dismal outlook for state higher education funding “in large part to the continued crowding-out of discretionary budget categories by Medicaid.” According to Moody’s, “states that will have the largest increases from opting into [Obamacare’s] Medicaid expansion provisions … will experience Medicaid spending growth faster than average with no corresponding uptick in revenues to offset growth.” Moody’s projects that higher education funding will be hurt the most in states that accepted Obamacare’s Medicaid expansion as Medicaid crowds out other state priorities.

Obamacare’s flawed Medicaid expansion to able-bodied adults

Medicaid suffered from many serious problems prior to Obamacare’s enactment. These included: low provider participation; poor quality of care; large crowd-out of private sector coverage; and perverse incentives that discourage working and saving. In December 2014, the inspector general at the Department of Health and Human Services released a report showing that half of Medicaid managed-care providers, particularly primary care providers, did not offer appointments to Medicaid enrollees. Of those who offered appointments, more than a quarter had wait times exceeding one month. The program needed reform, not a blanket expansion.

The Center for Medicare and Medicaid Services has reported that 70.5 million people were enrolled in Medicaid and CHIP in February 2015, a 20.3 percent increase above its July-September 2013 baseline. Enrollment is up more than 30 percent in 13 states – Arkansas, California, Colorado, Kentucky, Maryland, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, Washington, and West Virginia. Because of a decline in both non-exchange individual market enrollment and workplace coverage, Medicaid expansion accounted for around 89 percent of the net increase in the number of people gaining health insurance last year.

In many states where Medicaid was expanded under Obamacare, enrollment has far exceeded initial projections. For example, Illinois had 541,000 people sign up last year, nearly two-and-a-half times the number the state projected. Washington signed up nearly three times the number of people that the state projected, and Michigan and Kentucky have signed up twice the number of people that they originally projected. In addition to increasing federal spending, these increases have caused a surge in state spending because states receive their traditional reimbursement rates, not the Obamacare elevated rate, for people who signed up for coverage and were eligible under the previous state eligibility rules.

Last year’s massive Medicaid enrollment spike appears to be causing other problems as well. In a survey of more than 2,000 emergency room doctors, three-quarters of them said that ER visits have risen since January 2014. According to the American College of Emergency Physicians, Medicaid recipients newly insured under Obamacare are struggling to get appointments or find doctors who will accept their coverage and consequently end up in the ER. “There was a grand theory the law would reduce ER visits,” said Dr. Howard Mell, a spokesman for ACEP. “Well, guess what, it hasn’t happened. Visits are going up despite [Obamacare], and in a lot of cases because of it.”

In addition to placing more people into a failing Medicaid system, the federal government now reimburses states substantially more for providing Medicaid services to able-bodied, working-age adults than for the disabled and for low-income children, pregnant women, and seniors. These were the people traditionally covered by Medicaid. In contrast to the 57 percent average reimbursement for traditional Medicaid enrollees, the federal government now reimburses states for 100 percent of the cost of care for the newly covered, able-bodied, working-age people. This funding mechanism will likely lead states to provide generous services to relatively healthy people, while skimping on care for the more needy.

Poor federal oversight of Medicaid

A 2013 report by the House of Representatives detailed tens of billions of dollars misspent by New York’s Medicaid program. It found Medicaid payments of $5,100 per patient per day to state-operated facilities to care for people with developmental disabilities. Because of manipulation of funding formulas by the state and poor federal oversight, New York received $15 billion in federal payments in excess of allowable costs for a two decade period just through these state-operated facilities. Essentially, this amounted to a huge slush fund for the state at the expense of federal taxpayers. 

On May 11, 2015, the Government Accountability Office released a report detailing more examples of Medicaid payments well in excess of cost. GAO found that payments made to many government hospitals in both Illinois and New York were in excess of costs. Two government hospitals in New York City received Medicaid payments exceeding their costs by nearly $400 million.

GAO also learned that the federal government lacks basic information about how states spend Medicaid funds despite sending hundreds of billions of dollars to states for the program each year. GAO has found that many states make large supplemental payments to health care providers. GAO was not able to assess the appropriateness of payments in California because the state lacks accurate and complete Medicaid payment information. 

In a separate report released on May 13, 2015, GAO found that the HHS authorized billions of dollars in Medicaid expenditures not allowed by law and “only tangentially related to improving health coverage for low-income individuals.” According to GAO, “[w]ithout clear criteria for assessing how proposed expenditure authorities states are seeking will promote Medicaid objectives, and without clear documentation of the application of these criteria, the bases for HHS’s decisions involving tens of billions of Medicaid dollars are not transparent to Congress, states, or the public.”