“Reforming” Medicaid: What Is the Problem, Exactly? 

Much public policy conflict arises because stakeholders can’t agree on the problem being addressed. Proponents of a policy change are often captivated by the idea and spend their time selling it, working backwards to identify a problem that the change addresses. Opponents to the change focus on defense, with little attention to the problem motivating advocates for change (which may have other solutions). 

Consider ideas currently being bandied about in Congress to “reform” Medicaid, including work requirements for beneficiaries; a reduction in the federal government’s share of the costs; limits on supplemental payments to providers; and per capita budgets (a fixed amount of money per person) that a state can spend on Medicaid. These have stirred the hearts and the fears of Medicaid advocates, catalyzing them into a spirited defense. 

But what’s the problem these reforms would address? At least four are cited: 

• The purpose, manipulation, and effectiveness of the Medicaid program 
• The alleged pervasiveness of fraud and waste in the program 
• The future sustainability of Medicaid 
• The federal budget gap created by tax cut proposals 

With further analysis, some of these problems emerge as more substantive than others. 

Medicaid’s Purpose, Manipulation, and Effectiveness? 

 Reform supporters often lead with principled arguments for Medicaid change, including: 

• Including able-bodied people in Medicaid was not the program’s original intention and creates disincentives to seek and maintain employment 
• Directing supplemental payments to providers through managed care plans benefits providers, not beneficiaries, and permits states to skirt an expansion of Medicaid   
• Augmenting the Federal Medical Assistance Percentage (FMAP) for different populations, including Children’s Health Insurance Program and Affordable Care Act expansion groups, is discriminatory and poor policy. 
• Regardless of intent and manipulation, Medicaid does not “work” 

The evidence against the argument that Medicaid discourages work verges on the incontrovertible. Ninety-two percent of Medicaid enrollees under 65 are either employed and cannot afford or are not eligible for their employer’s health insurance, in school, or cannot work due to disability or caregiving responsibilities. Importantly for members of Congress, they vote.  

The most significant state experiment requiring people to work or be seeking work as a condition of Medicaid coverage, in Arkansas, did not increase employment rates in the target population, but it did result in more interruptions of coverage and more complexity for the program administrators. 

Supplemental provider payments and juiced-up federal matching rates for expansion groups may be disagreeable to some but they are permissible by law. The argument for reform of these provisions is strong: 1) raising payment rates would be a fairer and more transparent way to get more money to providers, and 2) treating some beneficiary groups as more deserving of federal dollars does seem discriminatory. Changing the law to prohibit supplemental provider payments or shrink the federal match, however, could do grievous damage to the finances of states, providers, and ultimately beneficiaries.  

Finally assertions that Medicaid is ineffective ignore an impressive amount of research showing Medicaid coverage, compared to being uninsured, improves a variety of health conditions, including self-reported health status, maternal and child mortality, chronic condition care and mortality, and opioid abuse deaths.  

Medicaid Fraud and Waste? 

Particularly in the Year of the DOGE, government fraud and waste is a high-profile concern for all public programs. Politically, it has the benefits of only harming the bad guys.  

In the case of Medicaid, the Center for Medicaid and Children’s Services estimates that 5% of its payments between 2022 and 2024 — or $31 billion a year — were improper. That sounds mighty fraudulent except that 80% of the figure is attributable to administrative issues, primarily missing documentation on a medical claim. Twenty percent of the figure — or about 1% of total Medicaid spending ($600 million annually) — might be considered fraud, where Medicaid paid for non-covered services or for services to non-beneficiaries. 

As for waste in health care: unnecessary medical services are a matter of clinical judgment and controversy and hardly unique to Medicaid. Your expense is my revenue. Proven and often used tools to reduce excess utilization, i.e., “waste” like prior authorizations, step therapy, and limited provider networks, create consternation for patients, providers, and legislators.    

Medicaid Sustainability?   

A much different discussion exists around the financial future of Medicaid. Political divisions get redrawn; fiscal hawks and Medicaid advocates may agree on the problem of the program’s long-term sustainability if not the solution.    

Medicaid is 8% of the federal budget; Medicare is 12%. So long as people keep getting older (and use more health care), or keep getting priced out of employer health insurance, these programs will consume a greater share of public budgets. In the case of Medicaid, is there an alternative to higher taxes or shifting the program’s costs from the feds to states and then to patients and providers? 

The answer is yes, and it comes from Oregon. Since 2012 that state’s Medicaid program has operated under a waiver agreement with the federal government in which the state receives a fixed amount per Medicaid beneficiary (adjusted for demographic factors) and operates within agreed-to guardrails around provider rates, enrollment and eligibility rules, annual increases, and benefit design. The results have been mutually satisfactory. The feds get budget certainty, and the state gets more flexibility to design its benefits and means of delivering them. 

“Per capita caps” like Oregon’s have been proposed in the current Medicaid reform discussion. They are a potentially promising solution to the problem of Medicaid’s future sustainability — the monster in the basement people choose to ignore. But they do not save money in the short run. And in the long run, any law that Congress considers regarding per person allocations to states that eliminates or weakens the guardrails developed in Oregon’s agreement will result in smaller, weaker state Medicaid programs serving fewer people.  

Filling a Tax Cut-Induced Budget Gap? 

This leaves the ultimate problem current Medicaid reform proposals are being asked to address given that it is priority for the president and thus among Congressional Republicans: identifying ways for people to retain more of their wealth to stimulate the economy without worsening the budget deficit.   

Whether or not one agrees that taxes should be cut, elections have consequences, so extending the President Trump’s Tax Cuts and Jobs Act, which has increased the income of the top 1% of earners by an estimated 3.2% and the middle class by 1.3%, is a priority for the majority party.   

Decreasing the size of the tax cuts or increasing revenue collections through more (not less) IRS enforcement are off the table. Instead, the spending targets in the budget resolution passed by the House of Representatives last month set forth the amount of savings the House Energy and Commerce Committee is supposed to find to cover the budget gap — nearly $900 billion over 10 years. Medicaid is far and away the largest source of spending in the committee’s jurisdiction, so attention has focused there, leading to the promotion of the ideological problems with Medicaid discussed above.  

Medicaid and its beneficiaries are in the crosshairs because it is large and its beneficiaries are perceived to be less politically powerful than other stakeholders in health care that could finance these tax cuts, including health systems, Medicare insurers, and pharmaceutical manufacturers. 

Any changes to the Medicaid program, however, should prioritize maintaining coverage for beneficiaries. There is a moral argument: Medicaid has been shown to improve child and maternal health and decrease mortality. There is also a political argument: 80% of adults oppose funding cuts to Medicaid. For all the concern of Medicaid “reform,” the real problem here is how to pay for tax cuts — ones that increase income disparities — in the hopes of stimulating the economy. Low-income Medicaid beneficiaries should not foot the bill.