Medicaid’s Blue State Bailout

In discussing future coronavirus legislation, Senate Majority Leader Mitch McConnell (R-Ky.) has taken a skeptical view towards additional subsidies to states, including a potential “blue state bailout.” But current law already includes just such a mechanism, giving wealthy states an overly generous federal Medicaid match that results in bloated program spending by New York and other blue states.

Section 1905(b) of the Social Security Act establishes Federal Medical Assistance Percentages, the matching rate each state receives from the federal government under Medicaid. The statutory formula compares each state’s per capita income to the national average, calculated over a rolling three-year period. Poorer states receive a higher federal match, while richer states receive a lower match.

However, federal law sets a minimum Medicaid match of 50 percent, and a maximum match of 83 percent. No poor states come close to hitting the 83 percent maximum rate, but a total of 14 wealthy states would have a federal match below 50 percent absent the statutory minimum. (In March, Congress temporarily raised the federal match rate for all states by 6.2 percentage points for the duration of the coronavirus emergency.)

Absent the statutory floor, Connecticut would receive a match rate of 11.69 percent in the current fiscal year, according to Federal Funds Information Service, a state-centered think-tank. At that lower federal match, Connecticut would receive approximately one federal dollar for every eight the state spends on Medicaid, rather than the one-for-one ratio under current law.

Federal taxpayers pay greatly because the overly generous match rate for wealthy states leads to additional Medicaid spending. In fiscal year 2018, Connecticut spent far more on its traditional Medicaid program ($6.5 billion in combined state and federal funds) than similarly sized states like Oklahoma ($4.9 billion) and Utah ($2.5 billion). Those totals exclude the dollars Connecticut received from Obamacare, which guarantees all states a 90 percent Medicaid match for covering able-bodied adults.

The budget crisis in New York that preceded the pandemic stems in large part from Washington’s overly generous match for wealthy states. Absent the statutory floor, the state would receive a Medicaid match of 34.49 percent this fiscal year, meaning it would have to spend approximately two dollars to receive an additional federal dollar.

But the one-to-one Medicaid match guaranteed under federal law led New York to expand its program well beyond most states’. At more than $77 billion in 2018, New York Medicaid cost taxpayers more than three times the $23.4 billion spent by the larger state of Florida. And a federal audit last summer concluded that New York Medicaid spent $1.8 billion on more than 600,000 ineligible enrollees in just a six-month period. Little wonder that Gov. Andrew Cuomo in January called the state’s fiscal situation “unsustainable” after the state announced a $6 billion budget deficit, most of which came from Medicaid.

To his credit, Cuomo proposed changes to crack down on Medicaid fraud and enact other program reforms. He also criticized Congress when it passed legislation to block New York and other states from changing their Medicaid programs during the pandemic. But he has not acknowledged the underlying flaws in federal law that, by encouraging profligate blue state spending, created the problem in the first place.

Of the 14 wealthy states that benefit from the guaranteed 50 percent minimum Medicaid match, Hillary Clinton won 11. If the dramatic drop in oil and commodity prices in recent weeks persists, the three traditionally red states—Alaska, North Dakota, and Wyoming—that benefit from the statutory floor may no longer do so, should those states’ income decline. In the number of states affected and overall spending levels, the 50 percent minimum Medicaid match encourages overspending by blue states at the expense of federal taxpayers in red states.

In December 2018, the Congressional Budget Office estimated that removing the guaranteed 50 percent Medicaid match would save $394 billion over ten years. If McConnell and his colleagues want to tackle rising federal debt while stopping blue state bailouts, they should amend the Medicaid statute accordingly.

This post was originally published at The Federalist.