Few components of America's healthcare system are more in need of reform than Medicaid, the joint federal-state public health plan for low-income Americans. And with Republicans set to control the House, Senate, and executive branch next year, there's finally a chance to address the program's considerable problems.
The most serious is cost. In 2023 alone, total spending on Medicaid exceeded $880 billion. That's up from $806 billion the year before, an increase of more than 9%.
In 2023, Medicaid and the related Children's Health Insurance Program together accounted for $1 out of every $10 spent by the federal government. The program is an even bigger expense for states, representing 18% of all state spending.
And Medicaid's costs will only get worse in the years ahead. Total enrollment is expected to fall as several COVID-19-era policies expire. But per-enrollee spending is poised to grow at the highest rate in three decades this year, according to the Centers for Medicare and Medicaid Services.
There are a number of reasons why Medicaid has grown so costly.
For starters, Obamacare significantly loosened Medicaid's eligibility requirements, allowing almost all people earning up to 138% of the federal poverty level — $20,783 for an individual this year — to sign up for the entitlement. Just 10 states have declined to expand their programs in line with Obamacare's diktats.
To encourage states to embrace this policy, the law commits the federal government to covering 90% of the cost for people enrolled under the terms of Obamacare's expansion of the program.
States have responded to Obamacare's incentives.
As of March, the number of people enrolled in Medicaid under the law's more lax eligibility rules exceeds 21 million. All told, nearly 80 million people are enrolled in Medicaid and the related Children's Health Insurance Program.
What's more, states have found ways to inflate the amount they spend on Medicaid expansion patients in order to maximize the matching funds they receive from the federal government.
For example, many states have levied new taxes on healthcare providers — which providers then pay in exchange for an increase in Medicaid reimbursement from the state. In the end, states see an increase in tax revenue from providers as well as more Medicaid funding from the federal government.
These aren't the only perverse incentives Obamacare created.
The federal government covers only between 50% and 83% of the cost of coverage for Medicaid's legacy population — the poor, disabled, and pregnant women. So it's in states' financial interest to prioritize enrolling the able-bodied over the destitute.
Expanding enrollment in the program has also made it harder for legacy enrollees to secure care.
Many providers limit the number of Medicaid beneficiaries they'll see because of the program's low payment rates. So the legacy population is competing with the expansion population for scarce appointments.
Democrats have refused to acknowledge these glaring structural flaws — or the program's unsustainable finances. But with Republicans taking control of Washington in 2025, the outlook for commonsense reform has turned.
One promising idea recently endorsed by Sen. John Cornyn, R-Texas, would replace Medicaid's open-ended federal funding arrangement with a system of block grants. States would receive a set amount from Uncle Sam each year, rather than a blank check.
That would give them a strong incentive to keep Medicaid spending under control and use their resources on patients who actually need government assistance.
Another worthwhile idea is to phase out the current disparity in federal funding between the Medicaid expansion population and legacy enrollees. Doing so would ensure that states are no longer rewarded for diverting resources away from needy patients to the relatively better-off enrollees in the expansion population.
Cracking down on Medicaid fraud would also go a long way toward reining in the program's costs, and without jeopardizing access to care.
The federal government reported improper payments in the program of more than $31 billion in fiscal year 2024. Many scholars believe the true figure is even higher.
Medicaid is on a short road to fiscal disaster. This situation was created by years of misguided policies that seemed tailor-made to run up the program's costs and make more and more Americans dependent on government.
Come January, Republicans must work to reduce fraud in the program and make it more affordable, less wasteful, and more focused on patients genuinely in need of help.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is "False Premise, False Promise: The Disastrous Reality of Medicare for All," (Encounter Books 2020). Follow her on Twitter @sallypipes. Read Sally Pipes' Reports — More Here.
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