Counterpoint

In the aftermath of the COVID-19 pandemic, the American public has lost trust in government officials and health economy stakeholders.

Perhaps the most shocking fact is that the decline was not more severe since policymakers’ pandemic response directly contravened long-established evidence while few health economy stakeholders objected.  

Americans are also rarely happy with Congress. 

Knowing that, efforts by government officials and health economy stakeholders to promote the demonstrably false narrative of “Medicaid cuts” is certainly curious and potentially unwise. Contrary to recent media reports, there are exactly zero discussions about Medicaid “cuts,” in the actual meaning of the word.  

What is being discussed are reductions in the rate of increase in the Federal share of future Medicaid spending. In every scenario currently being considered, the Federal government is projected to spend more on Medicaid than it does today.

In fact, only once in the past 50 years has total Medicaid spending been cut, from $315.9B in 2005 to $315.1B in 2006, a 0.25% decline. 

The hysteria about “Medicaid cuts” calls into question whether those people are badly misinformed or nakedly partisan or merely complicit in the confidence game between the Federal government and every state (except Alaska) to pad state budgets at the cost of the increasingly unsustainable Federal deficit. 

Cornell Law School’s Legal Information Institute defines a confidence game this way: 

“A confidence game is when a person defrauds a victim of their money, property, or information through tricks. The perpetrator is able to defraud the victim of their possessions through gaining the victim’s trust.”¹ 

With respect to Medicaid, the “person” is Federal and state legislators, the victim is every American taxpayer, the trick is “Medicaid provider taxes” and the co-conspirator of the perpetrators is the media. A primer on Medicaid financing helps to expose the Medicaid confidence game.  

The Medicaid and CHIP Payment and Access Commission (MACPAC) provides this overview: 

“The vast majority of state Medicaid spending (95 percent) is for health care services provided to Medicaid enrollees, and the federal share for most of these expenditures is determined by each state’s FMAP. The FMAP formula provides higher matching rates to states with lower per capita incomes relative to the national average (and vice versa) and is intended to account for states’ differing abilities to fund Medicaid from their own revenues...FMAPs have a statutory minimum of 50 percent and a statutory maximum of 83 percent… 

Overall, there has been a general shift towards greater federal financing of the Medicaid program, independent of how states raise the nonfederal share. Between SFY 2012 and SFY 2018 the share of Medicaid spending financed by the federal government increased from 57 to 63 percent, primarily because of the Medicaid expansion to the new adult group added under the Patient Protection and Affordable Care [sic] (ACA, P.L. 111-148, as amended). The new adult group was initially 100 percent federally funded and now receives a 90 percent FMAP in most states. In 2020 and 2021, the federal share of Medicaid spending is expected to increase further because of the temporary 6.2 percentage point FMAP increase during the COVID public health emergency (PHE) enacted by the Families First Coronavirus Response Act of 2020 (P.L. 116-127). 

Since Medicaid’s inception, states have had flexibility to generate their share of Medicaid expenditures through multiple sources, including state general revenue, contributions from local governments (including providers operated by local governments), and specialized revenue sources such as health care-related taxes. Although 40 percent of non-federal financing must come from the state, up to 60 percent may be derived from local sources (§1902(a)(2) of the Act). The three most common sources of non-federal financing are: 

• General revenue. Most state financing for Medicaid is through general revenue collected through income taxes, sales taxes, and other state and local sources…
• Health care-related taxes. In fiscal year (FY) 2019, all but one state (Alaska) had at least one health care-related tax (sometimes referred to as a provider tax, fee, or assessment) in place (KFF 2019). In SFY 2018, these taxes, typically levied on institutional providers, accounted for about 17 percent of the non-federal share (GAO 2020, MACPAC 2021b).
• Other local sources of non-federal share…

Federal policy regarding permissible sources of non-federal Medicaid expenditures has its origins in the patchwork of state and local financing of health services for low-income individuals that existed before Medicaid’s enactment. Although the Medicaid program centralized administration at the state level, the program’s financing structure allowed preexisting local programs to maintain primary responsibility for service delivery and to contribute non-federal funding towards services that now qualified for federal matching funds (HCFA 2000, MACPAC 2012).  

At various points, particularly beginning in the early 1990s, this multisource approach to financing has been the subject of federal scrutiny (GAO 2014, 2004, 1994).”² (Emphasis added)

Sixty years later, Congress might wish to reconsider its decision to preserve “the patchwork of state and local financing” to allow “preexisting programs to… contribute non-federal funding towards services that now qualified for federal matching funds,” an illustrious example of the septic nature of status quo thinking.

In 2010, Congress could have addressed the “multisource approach to financing” along with other systemic flaws if the Affordable Care Act (ACA) had focused on Medicaid reform to ensure health equity for every low-income American instead of expanded Medicaid coverage for some of them. In 2025, Congress could do the same.

In theory, replacing 50 heterogeneous state Medicaid programs with one Federal program for low-income Americans based on a single set of eligibility criteria would be more equitable and more efficient than what currently exists. In practice, Congress’ failure to address Medicaid’s fundamental flaws means that technocrats merely lament, and occasionally scrutinize, the “multisource approach to financing.” In reality, the share of Medicaid spending financed by the Federal government has increased from 63% in 2018 to 71% in 2022, which is largely attributable to the implementation of the ACA.

That the ACA would increase Medicaid spending was well-known since that was part of its raison d’etre, as the Social Security Administration explains:

“Before 2014, Medicaid did not offer health care services for all poor persons. To qualify for the program, an individual needed not only to have low income; he or she also had to be a child (or the parent or adult caretaker of an eligible child), an aged adult, or disabled.

Beginning in 2014, the Affordable Care Act expanded eligibility to include all individuals younger than age 65 in households with income up to 138 percent of the FPL, as explained in more detail below. Under this legislation, many of the pre-2014 Medicaid eligibility criteria no longer applied for most persons. However, a 2012 Supreme Court ruling had made expanded eligibility effectively optional for each state's Medicaid program. In response, some states chose not to implement expanded eligibility.

States generally have broad discretion in determining which groups their Medicaid programs will cover and the financial criteria for Medicaid eligibility. To be eligible for federal funds, however, states are required to provide Medicaid coverage for certain individuals who receive federally assisted income-maintenance payments, as well as for related groups not receiving cash payments.”³

For all these reasons and more, it is unsurprising that Medicaid has grown dramatically since it was established on July 30, 1965. As noted above, the share of Medicaid spending funded by the Federal government has consistently increased, but it is the amount of that funding that is so revealing.

The historical growth in Medicaid spending can be characterized by this “up and to the right” curve that investors call “hockey stick growth.”

Note that Medicaid spending per enrollee exceeds the aggregate per capita spending of comparable OECD countries.

As a result, Medicaid spending, which was zero in 1965, now represents 10% of the Federal budget.

While the current “talking points” about “Medicaid cuts” are linked to extending tax cuts enacted in 2017, the real issue facing America is net interest expense on the Federal debt, which increased from $345B in 2020 to $882B in 2024 and is projected by the CBO to increase to $1.8T in 2035.^4,5 Similarly, aggregate Medicaid expenditures are projected to exceed $1T in 2026.

With its joint Federal-state funding mechanism, the variable amount of Medicaid funding is left to the states. In 1985, state governments underwrote 45% of Medicaid spending on average, which declined to 29% in 2022. Even as the state government share of Medicaid spending has declined by more than a third in the last 40 years, Medicaid spending constitutes a significant percentage of state budgets.

Lost in the conversation about aggregate Medicaid spending is a discussion of how Medicaid spending varies by eligibility group and category and also by state.

Between the passage of the ACA in 2010 and 2023, the state-funded share of Medicaid spending has decreased in 31 states. Notably, the state-funded share of Medicaid spending has increased in every “non-ACA expansion” state except Alabama, which declined slightly from 23.85% in 2010 to 22.96% in 2023.

Regardless of the Federal portion of Medicaid spending, the challenge is that, to paraphrase Marc Andreessen, Medicaid and education are eating every state’s budget, consuming more than 40% of the budget in 43 states and more than 60% of the budget in 15 states.

As the economist Herb Stein famously noted, “if something cannot go on forever, it will stop.” Over the last 60 years, the Federal government has perennially increased both the amount and the percentage of Medicaid spending. If, and when, the Federal government stops doing that, the long-running confidence game of using “multisource financing” to limit state funding of Medicaid programs will come to an end.

In a November 2012 editorial, The Washington Post wrote this:

“Any serious plan to reduce the federal debt has to deal with spending, and, given the foregoing numbers, any serious plan to deal with spending has to address Medicaid. The question is how.

A health-care program for low-income people should not be first on the chopping block when substantial savings can be had by trimming entitlements that benefit better-off Americans…

What can be justified are changes that trim costs while making the hideously complex program more transparent and accountable. We refer specifically to reforming the so-called provider taxes that 46 states and the District use to fund increased payment rates to Medicaid providers – and to shift the cost to the federal government.

Congress and the Department of Health and Human Services limited the worst provider-tax abuses when they first came to light a couple of decades ago. But provider taxes still enable states to manipulate the statutory funding
mechanism, adding to the federal deficit.”⁶ (Emphasis added)

What in 2012 was a question of “how” has become a matter of “now.”

From a policy standpoint, those who are most panicked about “Medicaid cuts” know that any reduction in the projected growth rate of the Federal government’s share of Medicaid spending would force each state to allocate even more of its budget to Medicaid. Politicians love to be loved, which is why it is easier to lie about complicated issues rather than tell the truth and face the consequences. But it was his willingness to face the consequences of telling the truth about difficult circumstances that made Sir Winston Churchill legendary.

As we all know, the Federal government is not statutorily required to balance its budget and is apparently incapable of even passing a budget, a result of which is the current Federal debt of $36T. To paraphrase Herb Stein, no government’s debt can increase forever, as Greece most recently demonstrated, and a poll released this week found that 68% of Americans believe that the Federal debt is unsustainable. As George Jones sang, the voters know the cold hard truth that the U.S. government must actually reduce its spending even if not legally required to do.

In contrast to the Federal government, according to the Tax Policy Center, “45 states required the governor to submit a balanced budget to the legislature; 44 states required the legislature to pass a balanced budget; 41 states required the governor to ultimately sign a balanced budget; and 35 states required the budget to be balanced at year-end (that is, the state cannot “carry over” a deficit).”⁷ For avoidance of doubt, each state could choose to increase the state funding of Medicaid, as 90% of the non-ACA expansion states have done since 2010. However, in every state with a balanced budget requirement, allocating more funding to Medicaid would require a reduction to other programs or higher taxes. Whether each state will increase Medicaid spending, and at what cost, is the question.

What do the policy implications of the (inevitable) slowing growth in Medicaid funding mean for health economy stakeholders?

In business, it is axiomatic that “you can’t cut your way to prosperity.” In healthcare, “No margin, no mission” is also axiomatic.

Every health economy stakeholder must address two fundamental flaws: first, their opiate-like addiction to rate increases, and second, their belief that “cost cuts” are sufficient to survive healthcare’s negative sum game.

For the last decade, it has been avant-garde among health economy stakeholders to discuss “innovations” and “transformations” like “digital front doors” and “patient engagement” and, more recently, “AI.” Instead of dreaming that a healthcare caterpillar can become a butterfly with a little more technology from Silicon Valley or Wisconsin, most health economy stakeholders require radical restructuring, like a phoenix rising from the ashes. Tragically, and ultimately fatally, a cult-like devotion to the status quo blinds health economy stakeholders to the urgent need for a phoenix-like rebirth instead of a “nip and a tuck.”

In fairness, the default mindset of being all things to all people is not entirely the fault of health economy stakeholders, particularly hospitals. The significant penalties for violating the Emergency Medical Treatment and Active Labor Act (EMTALA) create a logical path, but a slippery slope, to think that being all things to all people is necessary. The increasing frequency of state and local governments to offload societal issues on first responders and hospital emergency departments amplifies that mindset.

For avoidance of doubt, the mindset of being all things to all people is fatal to every business, especially healthcare businesses. Despite their massive scale and retail presence, Amazon, CVS, Walgreens and Walmart have waved the white flag on primary care. Despite multibillion dollar investments in multiple sectors of the economy, including life sciences, Google’s bread and butter is still advertising.

The degree to which your organization is concerned about future increases to Medicaid is a barometer of your organization’s need for radical restructuring. Every health economy stakeholder would benefit from a “first principles” approach to every aspect of their business. Every hospital should eliminate one or more service lines, most logically those that generate financial losses or deliver little value for money. Every payer should actually deliver a high value network, which by definition would not be limited to a select group or system. Every life sciences company should follow the lead of GE under Jack Welch and abandon therapies and devices that are not first or second in market share. If, miraculously, every health economy stakeholder did that, some of that “30% of healthcare is waste” might disappear.

The choice is yours: will you lead your organization through the coming dark hours like Churchill, or will you simply hope like Chamberlain that the dark hours will pass?