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.

No comments yet. You should be kind and add one!