The Challenges With Medicaid

In recent issues, I’ve addressed the huge financial challenges facing Social Security and Medicare. This issue I’ll address the third of the big three “entitlement” programs,

Medicaid.

Like Social Security and Medicare, Medicaid is in trouble. Unlike the problems with Social Security and Medicare, these problems are not really driven by the population pyramid issue that is at the root of those challenges – fewer working people per retiree. Medicaid is a jointly funded Federal/State program; it is NOT funded from payroll taxes, but instead from general taxes. In addition to being a huge part of the federal budget, Medicaid is a huge part of state budgets.

There are multiple parts to Medicaid. The original program, created in 1965 for very low-income households, also includes coverage for disabled folks and long-term care for seniors who have exhausted their assets. CHIP, the Children’s Health Insurance Plan, created in 1997, provides coverage for children in households with higher income than the original programs. The Basic Health Plan, also known as Medicaid Expansion, was created in 2014 as part of the Affordable Care Act, and gives states the option to expand Medicaid beyond “very-low income” adults.

All of these are separate from the Obamacare “Exchange” health plans for all Americans who do not get their health care through their employers, and from the Covid-era subsidies to middle-income participants in Exchange health programs that were at the root of the recent government shutdown. Those are yet-different challenges for health care.

There are a few key challenges for Medicaid:

1. The original program is costing more due to medical cost inflation; this is the same issue that is one of the key challenges for Medicare;

2. The “Medicaid Expansion” that was a part of the Affordable Care Act added millions of additional beneficiaries and tens of billions of dollars of additional cost, split between the states and the Federal government;

3. A huge part of the Medicaid budget pays for long-term care for elders who have exhausted their personal financial resources; because we are an aging society, these numbers are growing.

4. The 2025 Trump tax package creates a work requirement for certain Medicaid recipients.

The Basic Medicaid Budget

Medicaid provides health services to 77 million people: 30 million children in low-income families; 13 million very low-income adults (historic Medicaid enrollees); 18 million adults who qualified for the Medicaid expansion under the Affordable Care Act; 10 million older adults, mostly in long-term care; and 9 million people with disabilities, many of whom are cognitively challenged.

But the money does not correspond to the number of people, because younger beneficiaries have fewer health issues. As the graphic below shows, the 17 million aged and disabled – one fourth of the enrollees – receive half of the benefits. CHIP (for children0 is 38% of the recipients, but only 16% of the budget.

Unlike Medicare and Social Security, Medicaid is NOT funded from payroll deductions, but rather from general appropriations. So, that means that the “population pyramid” issue is not causing a decline in revenues. But the increasing aged population does create serious pressure, as more and more people outlive their assets. Indeed, the most heart-rendering fears of federal Medicaid funding cuts is that “grandma will be dumped out on the sidewalk”.

The Medicare Expansion

One part of the Affordable Care Act (Obamacare) was to allow states to expand Medicaid beyond the original “very low income” group of the original Medicaid, and the children covered by CHIP. Most “blue” states readily joined, and most “red” states did not. However, an increasing number of “red” states joined later.

The table below shows the total state and federal funding for both traditional Medicaid and the Medicaid expansion. This is really big money, for both the Federal and State budgets.

The federal cost of the expansion was a big deal in states like Washington, for which the total STATE cost of Medicaid is about $7 billion per year, more than twice what the state spends on higher education. Here, in the state biennial budget the cost of Medicaid and Long Term Care are each bigger than higher education, and together, about half of the cost of K-12 Basic Education.

The Medicaid Provider Tax Gimmick

States quickly figured out a gimmick to deal with the huge cost of Medicaid to state budgets. They started taxing Medicaid providers. A lot. The Medicaid providers then raised their fees to cover the tax. Since the Federal budget picks up a percentage of the total cost (including state taxes on Medicaid providers), the effect of these provider taxes is to shift more of the state share of Medicaid to the federal government. Republicans in Congress, particularly those from non-expansion states, have sought to limit Medicaid provider taxes in order to reduce outflows to other states from the Federal budget.

The Kaiser Family Foundation estimates that 68% of the state share of Medicaid is paid from general taxes, and 32% is paid through provider taxes that drive up the total cost on which the federal percentage share is based. The biggest part of this is taxes on skilled nursing/long-term care facilities that serve the most destitute seniors.

This is a gimmick. The providers have gone along with this, because it’s the only way that the states are willing to fund the state share that creates the program in the first place. They get to sell more services at an inflated price—a portion of that price is taxed away, the Federal share increases, and the providers collect enough to stay in business.

Medicaid Long-Term Care Funding: Another Gimmick

Medicaid is by far the largest funding source for long-term care in the United States. Once eligible patients have exhausted their personal assets (defined as no more than $2,000 remaining), they are eligible for Medicaid to cover their care. And millions of seniors participate, creating the $144 billion annual cost for seniors shown above.

Here there is another gimmick. It is possible for a married couple to separate their assets, so that if one of the two needs long-term care, the other can assume all of the assets, creating a “destitute” senior entitled to Medicaid benefits. A cadre of lawyers and accountants in every state assist couples with this separation of assets every year.

The “Red State” Enrollment Issue

While Republicans are often vociferous in opposition to funding for programs that help the poor, including Medicaid, it turns out that red states have the highest enrollment levels. The reason is simple: as a group, the red states are poorer than the Blue states.

The map below shows the percentage of children in each state who are enrolled in Medicaid programs. Ten red states and two blue states have over 61% of all children in the state enrolled. Which means that these red states are receiving far more funding from Medicare than those states pay into the program. And, some of the Medicaid expansion states, like Kentucky where voters approved expansion, now have Senators and Representatives who are defending high levels of federal funding, in order to reduce the level of state funding required.

Where Do We Go From Here?

The United States is the only major economic power which does not have universal health care coverage. We also spend a higher percentage of our GDP on health care than any other country – about 17% of every dollar of spending in the US goes to health care. And our outcomes are no better than other rich countries that spend far less per patient for universal coverage. The poor are a big part of this cost, and these expenses are a source of severe pressure on both state and federal budgets.

A portion of our excess cost for health care is insurance company related, but that’s not the case for Medicaid, where there are private health care providers, but no private insurers. The “Medicare For All” movement would address the private insurer cost, but not the underlying health care cost. Because in the common form advocated by Bernie Sanders and other proponents, it has no co-pays, no co-insurance, and no premiums, it should really be called Medicaid-For-All. Medicare has lots of patient payments required. About $4,000 this year for this Medicare recipient.

The solution – as for Medicare – must involve some limits on what is covered. “Rationing” of healthcare is unpopular, but we have learned to do so much that even well-managed costs (like Social Security and Medicaid) are extremely expensive. Whether this rationing means denying cancer treatment to terminally-ill patients (and providing compassionate end-of-life care), refusing organ transplants to people with poor prognoses, or excluding the very elderly from knee and hip replacements, the entire process of rationing health care is repugnant to many of us.

The Medicaid part of this equation – where there is essentially no patient contribution – will likely come to a head in many ways in coming years, simply because of the state government burden. While the federal government can borrow (massively; see my earlier article on government debt) to pay its share, most state budgets must be balanced every year. As shown in the table above, this comes down to a competition between basic education, higher education, criminal justice, and health care; together these comprise the vast majority of state spending. And it’s hard for states to raise taxes.

I won’t predict the outcome, but it will definitely involve some denial of care in some form at some point for some patients.

Studies of the cost of Medicare-For-All show that it is cheaper than the current system, and would fill in the gaps in coverage where millions of people are excluded. But that will take a massive shift of how health care financial contributions are collected, and how they are disbursed. In a deeply divided Congress and a deeply divided nation, that would not come easily. It will take a major crisis. And that crisis is not too far away.

Jim Lazar is a retired economist.