Unfortunately, as my colleagues and I document in a new study, Medicaid’s expansion under the ACA, which added millions of low-income, working-age adults to the rolls, deepened the program’s long-standing financing problems, creating a fresh opportunity for states to bilk the federal government. It’s a multibillion-dollar problem that only Congress can fix.
For decades, states and the federal government have tussled over their shared responsibility to fund America’s largest means-tested assistance program, the source of health insurance for more than 74 million people. A core problem is the federal government’s uncapped reimbursement of state Medicaid expenditures, which encourages states to devise elaborate schemes to qualify for as many federal Medicaid dollars as possible. The result: a surge in low-value Medicaid spending that does little to help Medicaid recipients.
The ACA made these incentives even worse. States that opted to expand Medicaid received enhanced federal matching funds for newly eligible adults. From 2014 to 2019, the period covered by our study, states paid about 40 percent of the medical costs for original Medicaid enrollees (including children, people with disabilities and the elderly), but only about 5 percent of the medical costs of newly eligible adult enrollees.
These rules meant that states could slash their per-enrollee costs by more than 80 percent simply by reclassifying members of the original Medicaid population into the new adult group. Consider, for example, an original Medicaid enrollee with medical costs of $10,000 per year. On average, the enrollee’s state would pay about $4,000, with the federal government covering the rest. By reclassifying the individual into the new adult group — perhaps as simple as checking a box on a form — the state could reduce its costs to just $500.
We found strong evidence that states did just that. Beginning around 2014, enrollment in the original Medicaid population plunged in states that expanded eligibility for the program under the ACA relative to states that chose not to expand. From 2013 to 2019, enrollment in the original group declined by 1.7 percent in expansion states. That may sound mild, but consider that over the same period, non-expansion states reported a 19.2 percent increase in such enrollment. Individuals who would otherwise have been enrolled in the original Medicaid population were indeed being reclassified into the new adult group.
Given that Medicaid accounts on average for about one-fifth of a state’s general fund expenditures, reclassifications represent a substantial hidden subsidy from the federal government to states. In 2019 alone, we estimate that 4.4 million Medicaid enrollees were reclassified at a cost to the federal government of $8.3 billion — or nearly three times the National Park Service’s annual budget.
From 2014 to 2019, before pandemic-related changes altered states' reclassification incentives temporarily, nearly $53 billion was distributed by the federal government to states on the basis of reclassifications, inflating the federal cost of Medicaid expansion by more than 18 percent.
While some reclassifications may have been legal (for example, women who enroll in the new adult group before a pregnancy are permitted to retain that classification, even though pregnant women typically belong to the original Medicaid population), there is little doubt that some states skirted the law to maximize revenue. Federal audits of state Medicaid records consistently reveal large numbers of ineligible or inappropriately classified enrollees. Investigations across four states found, for example, that in 2014 and 2015 nearly one in four members of the new adult group may not have been eligible.
While improving federal oversight of Medicaid enrollment practices — and increasing sanctions against states that violate the law — could help to reduce improper reclassifications, the root cause of the problem is the disparity in federal funding levels between different types of Medicaid enrollees. By applying a single federal reimbursement rate for all Medicaid spending, Congress would remove states’ fiscal incentive to engage in this behavior.
Liam Sigaud is an adjunct scholar with the Paragon Health Institute, a former postgraduate fellow with the Mercatus Center at George Mason University and a co-author of the new study “The Hidden Subsidy of the Affordable Care Act.”
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
