Medicaid Expansion’s Three Flaws – Part III


This is the third in a three-part series on the flaws in the ObamaCare expansion of Medicaid. Part I addressed The Enhanced Federal Matching Rate. Part II addressed the Failure to Alter Medicaid’s Open-ended Matching Rate Structure. Today we will address The Lack of Integration with Private Health Insurance.

It is established fact in academic circles that private health insurance is superior to Medicaid in terms of access to care and health outcomes. The reasons for this is beyond the scope of this post but can be found in my book, The ObamaCare Reality, and in others such as Priceless by John C. Goodman.

With this in mind, Chris Conover, Duke economist, asks an important question:

“Why do we believe in separate but equal in health care when we long ago abandoned that notion in education?”

If we want to provide equal treatment in healthcare, Conover says we must address three issues that are relevant in evaluating Medicaid:

  • Medicaid Crowd-Out
  • Medicaid Churn
  • Perverse Work Incentives


Medicaid Crowd-Out

The first issue is that Medicaid tends to crowd out private coverage, meaning that many people effectively trade superior private coverage for inferior Medicaid coverage. How big is this problem?

The Urban Institute, a liberal think tank, has estimated that if Medicaid expansion occurred in all 50 states, instead of just 31, there would be an additional 13.4 million people enrolled in Medicaid. But, 2.1 million of these already have private insurance on the ObamaCare exchanges and 6.4 million others have either employer-provided or non-group private insurance.

In other words, crowd-out of private health insurance exceeds 60% under the Medicaid expansion. If the Supreme Court had failed to strike down the mandatory expansion of Medicaid, about 8.5 million Americans would have been stripped of their private insurance and dumped on Medicaid!

This phenomenon is not new. The RAND Corporation estimated nearly 40% of the Medicaid expansion population ended up dropping other forms of health insurance to be enrolled in Medicaid. ObamaCare architect Jonathan Gruber even stated:

“Our results clearly show that crowd-out is significant; the central tendency in our results is a crowd-out rate of about 60%.”

Conover asks the relevant question: “So why are we so eager to shovel 8.5 million Americans into second-class coverage?” He calls for a system designed to integrate Medicaid with private insurance instead of replacing it. This is currently happening in states that received waivers including Florida, Texas, and Indiana.

Medicaid Churn

ObamaCare actually disallowed enrollment for subsidized private insurance if your income fell below the Federal Poverty Level (FPL) – even in states that declined to expand Medicaid. The Obama administration used this lever and the attempt to force all states to expand Medicaid in a deliberate effort to move people from private insurance to Medicaid.

In doing so, they created a “coverage gap” for those unfortunate Americans who found themselves just above the poverty level but living in states that declined to expand Medicaid. These people received neither Medicaid nor subsidies to purchase ObamaCare Exchange insurance. This decision created a coverage gap for 2.6 million people. This is depicted in the graphic below:

However, a much larger group is affected routinely by Medicaid Churn, where they move back and forth between private insurance and Medicaid depending on their fluctuating income. Any change that puts them above 138% of FPL causes them to fall off Medicaid and requires them to enroll in ObamaCare Exchange insurance. Likewise, any fall below that level dumps them back onto Medicaid.

It is estimated that each year approximately 6.9 million Americans are affected by churn. Even liberal economists Benjamin Sommers and Sara Rosenbaum have estimated that over a given year, 50 percent of adults below 200 percent of FPL (28 million individuals) would experience a shift from the exchanges into Medicaid or vice versa. Clearly this is not a trivial problem.

Perverse Work Incentives

Lastly, we must consider the perverse work incentives of Medicaid. A National Bureau of Economic Research study calculate that if 21.3 million additional adults gain Medicaid coverage following the ObamaCare expansion, approximately between 511,000 and 2.2 million fewer individuals will be employed as a result of the labor supply response.

Conover summarizes: “In short, for every 1,000 people who gain Medicaid expansion coverage, anywhere from 24 to 103 end up losing their job. This is a tragic loss to the economy as well as the self-esteem of Medicaid recipients.”

Stanford economist Lanhee Chen put it this way: “This research provides strong evidence for the contention that enrolling in Medicaid traps people in poverty and makes it harder for them to make their way into the middle class.”

What Does AHCA Do About Medicaid’s Lack of Integration With Private Coverage?

The AHCA gives states flexibility in administering their Medicaid programs. If a state chooses to maintain eligibility for the expansion population, any new enrollees in that eligibility category after January 1, 2020 will receive the state’s matching rate computed according to traditional rules. That means reverting to the pre-ObamaCare matching rate.

Those who previously qualified for the expansion will be grandfathered in. However, due to the churn we discussed above, eventually most of these people will revert to the traditional matching rate like the newly eligible. Thus the AHCA will likely dramatically reduce the adverse effects of Medicaid on work effort and crowd-out of private insurance coverage.

The flexibility of the AHCA will incentivize states to enhance the integration between Medicaid and private insurance. This is already happening in many states that requested ObamaCare waivers (see Democratic Demagoguery Over Medicaid). This will allow states to experiment with new programs that adjust cost-sharing requirements allowing higher co-pays for ER visits that should decrease the over-utilization of these facilities for primary care visits. It will also allow states to introduce work requirements without federal approval to motivate able-bodied adults to reduce their dependency on the government.


The AHCA has been criticized by proponents of ObamaCare, but it substantially improves upon the status quo. It does so in the following ways:

  • Abolishes the enhanced federal matching rate of ObamaCare
  • Redresses many of the most severe problems with Medicaid’s matching rate structure
  • Increases state flexibility to offer improvements to reduce the lack of integration of Medicaid with private insurance


No system is perfect but the AHCA will be a big improvement over ObamaCare.

Medicaid Expansion’s Three Flaws – Part II


This is the second in a three-part series that discusses the three flaws in the ObamaCare Medicaid expansion. In Part I we discussed The Enhanced Federal Matching Rate. Today we will discuss the Failure to Alter Medicaid’s Open-ended Matching Rate Structure.

Failure to Alter Medicaid’s Open-ended Matching Rate Structure

As I discussed in Part I, Medicaid has traditionally had a matching rate structure that fuels excess spending: its open-ended matching rate. For every dollar that states choose to spend on Medicaid, the federal government matches that with anywhere from $1 to $3 federal dollars, depending on that state’s specific matching rate.

Chris Conover, Duke University economist writing in Forbes, says this has been proven to fuel excessive spending. An analysis by Thad Kouser at UC Berkeley showed that all other things being equal, shifting a state from the lowest to highest federal matching rate increases discretionary Medicaid expenditures by 22 percent.

In other words, states spend more the more you match their spending. The consequence of such incentives is that in 2014 we spent 93 times as much on Medicaid as we did in 1970, less than 50 years earlier. The formula encourages states to expand their programs as much as possible, knowing that at least half the cost or more will be picked up by the taxpayers of other states.

This problem has been exacerbated by ObamaCare which has given us The Enhanced Federal Matching Rate that was discussed in Part I of this series. Now states can expand their Medicaid spending knowing their neighboring states will help pick up $9 dollars of the added expense for every $1 dollar they spend.

The Impact of Medicaid Spending

States must balance their budgets by law, unlike the federal government. They can’t print money when they run out. Therefore, they must make hard choices to balance Medicaid spending with other critical expenses like K-12 education, higher education, transportation, corrections, public assistance and others. It is easy for them to be irresponsible in their spending when someone else is picking up most of the tab.

Despite this open-ended matching rate, Medicaid is gobbling up more and more of state budgets while education and other needs go lacking. This chart shows how the portion of state spending on Medicaid has changed since 2000 and how this has affected other state spending. The result has been a steady decline in state spending on education, transportation, and public safety.

Shares of Total State Spending by Category – 2000 and 2014


Medicaid Benefits Wealthy States

The matching formula is intended to provide more help for poor states and less for wealthier states – but the opposite is true. This has been true even before ObamaCare but it is worse now. The following graphic shows how the three highest income states – The District of Columbia, Connecticut, and Massachusetts – are among the 6 states receiving the largest amounts of federal Medicaid dollars.

Medicaid is a Boondoggle for Wealthy States


Calculations by Christopher J. Conover

Georgia, on the other hand, falls in the bottom fifth of states in terms of per capita income, yet Washington, D. C. gets nearly 5 times as much federal funding per poor person despite being the wealthiest “state” in the union.

The reason for such disparity is a floor on the federal match rate for Medicaid (FMAP) where even the wealthiest states get a 50% discount on their Medicaid spending. Without this floor, a wealthy state like Connecticut would get only a 10.81% match rather than the 50% they actually get. Most egregious is the District of Columbia, which by law receives matching funds at a 70% discount, even though they have the highest per capita income of all. This gives wealthy states a strong incentive to expand coverage to many people who are not poor because the additional cost will be shared with other states.


This significant bias toward wealthy states was well-known before ObamaCare. Now the situation is even worse. With the Enhance Federal Matching Rate these wealthy states get a 90% match to cover the non-disabled adults they have added to their Medicaid rolls.

The Urban Institute, a liberal think tank, says their research showed that 10 states actually would make money on the Medicaid expansion – a net reduction in the total amount of Medicaid spending financed with state dollars compared to what they would have spent under ObamaCare had they not expanded. None of the states depicted in the graphic below is among the poorest quintile of states based on per capita income.

10 Lucky States That Literally Made Money by Expanding Medicaid

Calculations by Christopher J. Conover


What Does AHCA Do About the Medicaid’s Open-ended Federal Matching Rate?

The AHCA completely eliminates the federal matching rate formula starting in 2020 by giving states options for a per capita cap or block grant. The year 2016 is used as a base to prevent states from ratcheting up spending before 2020. The cap would vary by eligibility category and state, reflecting the enormous variation that now exists on both dimensions.

The block grant option is available to states only for the eligibility groups that are not disable or aged. Conover anticipates most states will choose this option rather than the per capita caps since there is less risk. The per capita cap is more generous than an earlier proposal by President Clinton because it allows spending to grow by the more generous yardstick of medical inflation (4%) rather than real growth in GDP (about 2%).

In summary, Conover says, “the good news is that shifting to per capita caps would save money by controlling Medicaid spending at a more sensible rate than the current open-ended matching rate does. The downside is that the new system largely will preserve rather sizable inequities across the states.”

Medicaid Expansion’s Three Flaws – Part I


Medicaid is a flawed healthcare system for the poor. If you’ve followed this blog for long you know I’ve said that many times. Today I want to begin a three-part series that addresses the three major flaws of the ObamaCare Medicaid expansion. It is crucial to understand these flaws because they are the source of the major debate going on now in the Senate that will determine the future of the healthcare system.

Before we begin, it is necessary to understand how Medicaid operated before the passage of ObamaCare and then see how it changed.

Medicaid Before ObamaCare

Before the passage of ObamaCare, the federal government support of this cooperative program with the states was about two-thirds of the expense. The federal government paid about 2 of every 3 dollars spent and the state picked up the third dollar. In theory, the program was designed to redistribute federal taxpayers’ dollars from wealthier states to poorer states by giving poorer states a higher match for every dollar they spend. (In reality the system actually benefits wealthier states more as we will discuss in Part II.)

This federal support varies significantly from state to state and so does state eligibility. In Minnesota, where the income threshold is the highest in the nation, you are eligible to be on Medicaid even if you earn up to 275% of the Federal Poverty Level (FPL). In Alabama, which has a much lower average income, you are only eligible for Medicaid if your income is less than 25% of the FPL.

Medicaid After ObamaCare

ObamaCare is mostly about the expansion of Medicaid. Originally, it tried to force all the states to expand Medicaid or lose their federal matching funds. The Supreme Court struck down this involuntary expansion and made it voluntary. The end result was only 31 states plus the District of Columbia expanded Medicaid.

The ObamaCare Medicaid expansion changed the rules about Medicaid. First, it changed the eligibility rules making anyone eligible up to 133% of the FPL. Second, it agreed to pay 100% of the additional costs of these newly eligible enrollees for three years, then reduced the federal support in stages down to 90% in 2020 and indefinitely thereafter. Third, it made it unlawful to be uninsured and therefore forced many people previously eligible for Medicaid, but not enrolled, to enroll in the system to avoid paying a tax.

The result of these changes is about 15 million more Americans enrolled in Medicaid. The cost of this expansion is now $574 billion when last measured in 2016.

There are flaws in the system that threaten to bankrupt it. Chris Conover, healthcare economist at Duke University, writes in Forbes that he believes there are three flaws in the Medicaid expansion:

  • The Enhanced Federal Matching Rate
  • The Failure to Alter Medicaid’s Open-ended Matching Rate Structure
  • The Lack of Integration with Private Health insurance – especially the new health care Exchanges created under the law

Today we will address the first of these flaws and the others in Parts II and III.

The Enhanced Federal Matching Rate

The “carrot” that lured states into expanding Medicaid was the 100% match in the first three years declining to 90% after 2020. However, the concept that the federal government can actually meet these expectations in the face of a federal deficit that reached $20 Trillion this year, is delusional, in Conover’s opinion. But even if we could afford it, it is a spectacularly bad idea for these reasons:

  • States Vary Greatly in Altruistic Willingness–to-Pay – If we use state Medicaid dollars per $100 of taxable resources as a crude measure of differences in the willingness-to-pay for the health needs of their poor, there is literally a four-fold difference between the states of Ohio and Washington.

States Vary Greatly in Altruistic Willingness-to-Pay

  • ACA Privileges Able-Bodied Adults Over Historically-Favored Vulnerable Populations – Medicaid was originally intended for pregnant women, infants, children, the elderly, and the disabled. Privileging able-bodied adults makes no sense. Extending government-paid healthcare to these adults only encourages them to remain on government dependence rather than become productive members of the work force. ObamaCare tried to make it look like the lion’s share of this expanded Medicaid coverage would be born by the federal government, in short to over-ride the historic judgment against such a policy.


  • ObamaCare’s 90% Enhanced Match Rate Put a One-Way Cost-Driving Ratchet on Steroids – This change in the matching formula only encourages wasteful spending and in Conover’s words: “discourages states from economizing; creating a one-way ratchet effect that fuels ever-rising Medicaid spending. The 90% federal matching rate under the expansion puts such incentives on steroids; now, states that save $1 of Medicaid funds get to pocket only 10 cents of those savings, while states that waste $1 pay only 1 dime more.”


Last year’s annual report on Medicaid issued by the HHS showed that the average cost of the ACA’s Medicaid expansion enrollees was nearly 50% higher in 2015 than HHS projections. An important factor was that states faced with such weak incentives to contain costs were not nearly as tough as they usually are in negotiating good rates with managed care companies.

The most recent CBO projections show federal Medicaid costs will increase another 67% over the next decade.

How Does the AHCA Alter the Enhanced Federal Matching Rate?

The American Health Care Act (AHCA) being debated in Congress now currently calls for continued enhanced federal matching through 2019 but in 2020 it replaces the program with per capita caps on federal spending that will vary by state and eligibility category. States will get a higher amount for elderly Medicaid recipients.

In short, the enhanced federal matching rate of ObamaCare ends in 2020. States that chose to continue their expansion of Medicaid to include able-bodied adults would continue to receive a federal subsidy to cover them after 2019 but it would be based on the traditional matching rate.

The CBO estimates that the AHCA will reduce Medicaid spending by $834 Billion in the next decade but does not divulge whether this is attributed to spending caps or the elimination of the enhanced federal matching rate. Either way, it is a huge step forward toward containing the runaway costs of Medicaid.