COMMENTARY: Medicaid funding needs reforms

Medicaid is a federal program intended to finance health care and long-term care services to those most in need. However, the program’s design has riddled it with inefficiencies, draining taxpayer dollars and failing those who count on it.

The government matches every dollar that states spend on Medicaid, with no limit on the payment. The open-ended reimbursement contributes to enormous spending that does not make us healthier and that lines the pockets of insurers and big hospital systems.

Two primary problems that produce such wasteful spending. First, the federal government pays nearly the entire cost of state spending on able-bodied, working-age adults, compared with the 60 percent or so that it pays for children, pregnant women, seniors and the disabled. This discrimination against traditional Medicaid recipients has diminished their access to care, leading to longer wait times and more Medicaid recipients using the emergency room for nonemergency services.

Second, states manipulate Medicaid to generate federal matching dollars without contributing any real state spending. States have turned much of Medicaid financing into a money-laundering operation.

The most common tactic is the provider tax, a kickback mechanism. States tax providers and use the revenue to fund higher Medicaid payments to those providers. State spending triggers significant federal matching funds. Providers and states benefit at the expense of federal taxpayers.

In 2023, California used a Medicaid tax on insurers to get a windfall of federal dollars with zero state cost. The following year, California significantly expanded Medicaid for illegal immigrants and removed the asset test for Medicaid long-term care, allowing the wealthy to protect their inheritances while taxpayers cover the cost. States copy Medicaid money-laundering practices.

Another common scheme: a government-owned provider sends money to the state, and the state then increases Medicaid payments to the same provider. This raises serious conflict-of-interest concerns and gives government-owned providers an unfair advantage over private providers.

All these tactics let states rake in massive federal dollars without any state cost and reduce the pressure on state policymakers to responsibly govern and weigh trade-offs between spending and tax policies.

The Affordable Care Act made Medicaid’s situation much worse. Because Washington covers 90 percent of the costs for able-bodied, working-age adults, every $1 million in fake spending generates $9 million in federal funds. That’s a much higher return on money laundering than for traditional recipients.

Meanwhile, improper payments have soared since states make money by misclassifying people as Affordable Care Act enrollees. Over the past decade, improper federal Medicaid payments likely totaled $1.1 trillion.

The Biden administration made it harder for states to remove ineligible people from Medicaid. It allowed money-laundering tactics to run unchecked, ballooning Medicaid payments to providers. According to the Congressional Budget Office, projected federal Medicaid spending over the next decade increased $1.2 trillion between 2021 and 2025 estimates.

Even with reforms that Congress is considering, federal Medicaid spending would still be $400 billion higher over the next decade than the CBO projected four years ago, and spending would still rise yearly.

These problems won’t fix themselves. Paragon Health Institute has developed two reforms to reduce wasteful spending and realign Medicaid with its original purpose. First, Congress should equalize Medicaid payment rates for the traditional and expansion populations and move half of the expansion enrollees to a subsidized exchange plan. Second, Congress should reduce state money laundering and cap Medicaid payments at Medicare rates.

A new poll shows public support for these reforms.

States’ ease of access to the federal Medicaid piggybank shackles conservative governance, and poorly designed financing incentives fail the program’s intended recipients. Medicaid reform isn’t about saving money — it’s about restoring fairness and ensuring resources go to those truly in need.

Brian Blase is the president of Paragon Health Institute. He wrote this for InsideSources.com.