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.”

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