Medicaid’s Financing Merry-Go-Round Exemplifies Need for Block Grants

Published August 20, 2014

Medicaid, which provides health-related welfare benefits to low-income individuals, is jointly financed by the federal and state governments. Before Obamacare, the split was 50/50 for rich states, but low-income states got more dollars. This mechanism is called the Federal Medicaid Assistance Percentage (FMAP). 

So, if California spent $50 on Medicaid, the federal taxpayer would chip in $50. For every hundred dollars spent by West Virginia on Medicaid, however, only $28.65 is supplied by the state, and $71.35 comes from federal taxpayers.

These dollars are not appropriated by Congress: They just roll out on autopilot, as calculated by the FMAP. 

Perverse Incentives 

Just think of the perverse incentives this gives state politicians and bureaucrats. Every policy that lifts people out of poverty, and away from dependence on Medicaid, causes the state to lose federal funds. That is why so many people want to change the federal financing of Medicaid into a block-grant program. 

Could the incentive be even worse? Of course! There is an “enhanced” FMAP for children. This eFMAP is up to 30 percentage points greater than the regular FMAP. California has to spend only $35 to draw $65 of federal funds, for a total of $100. For West Virginia, the figures are $20.05 and $79.95. Is it any wonder advocates of Medicaid expansion tend to focus on health care “for the children”? 

Taxes on Hospitals

Hospitals, which lobby consistently for expanded Medicaid dependency, are part of the problem. They long ago figured out that if they lobbied states to tax them, more than enough money would flow back to the hospital. It works like this: The state taxes the hospital, the money recycles back to the hospital in Medicaid payments, and it picks up federal dollars on the way back. 

Hospitals are the only businesses that lobby for tax increases on themselves.

A new report from the Government Accountability Office quantifies how much this drives up Medicaid costs: From about $10 billion in 2008, these “provider taxes” rose to about $19 billion in 2012. GAO’s conclusion: 

“Nationally, states increasingly relied on funds from providers and local governments in recent years to finance the nonfederal share, based on GAO’s analysis…. In the three selected states this increase resulted in cost shifts to the federal government.

While the total amount of funds from all sources, including state funds, increased during fiscal years 2008 through 2012, funds from providers and local governments became more significant, as state funds decreased.

GAO’s review of selected financing arrangements in California, Illinois, and New York illustrates how the use of funds from providers and local governments can shift costs to the federal government.

John R. Graham ([email protected] ) is a senior fellow at The Independent Institute. Reprinted with permission of the Beacon Blog,

Internet Info

“GAO Report: Medicaid Financing: States’ Increased Reliance on Funds from Health Care Providers and Local Governments Warrants Improved CMS Data Collection,” United States Governmental Accountability Office: