The federal government traditionally provided Medicaid funds for states to deliver covered healthcare benefits to eligible low-income beneficiaries. But the bulk of the program’s spending now occurs under a waiver from its standard terms – permitting states to evade constraints on the expenditures. States have used waivers to inflate the program’s costs, to expand eligibility for covered benefits, and to fund services from abortion, to housing, and gun violence prevention, which depart increasingly from the program’s defined purpose.
Medicaid is operated by states under broad federal rules. For every $1 that states spend on healthcare services for eligible beneficiaries, the federal government provides an average of $2.45 in matching funds, without upper limit. Because federal aid is distributed in proportion to state spending, all are eager to claim as much assistance as they can. From 2000 to 2022, Medicaid spending increased from $205 billion to $824 billion, and the program now covers 94 million beneficiaries.
The federal government can waive Medicaid’s standard terms of payment to allow states to procure healthcare services in innovative and cost-effective ways. But states tend to spend any savings generated, because the federal funding to which they are entitled would otherwise be reduced.
A new Manhattan Institute report documents the extent to which waivers have served to eliminate spending constraints in Medicaid. Waivers allow states to claim federal aid for benefits, services, and beneficiaries beyond the normal scope of the program – fueling its continual expansion, without approval or scrutiny by Congress.
Prior to the Affordable Care Act, Massachusetts used waivers to expand Medicaid to able-bodied adults. Under the ACA expansion, Arkansas claimed a waiver to set Medicaid payments to physicians at 167% of its normal rates, so that it could make the most of 9-to-1 federal matching aid available for that cohort. New York and other states have repeatedly used waiver payment demonstrations to steer Medicaid funds to publicly owned hospitals, where they can be captured for general state budgets.
States increasingly use Medicaid waivers to obtain federal funds for non-healthcare purposes. North Carolina claimed waiver funds to remedy “housing instability, transportation instability, interpersonal violence, and toxic stress” – citing their incidental impacts on the health of beneficiaries. California recently requested a waiver to allow it to steer funds to abortion providers – sidestepping restrictions under the Hyde amendment. Illinois has used a waiver to distribute funds to a gun violence prevention group led by former Secretary of Education Arne Duncan.
In order to claim the broadest waiver of Medicaid program rules, states are supposed to demonstrate that program changes do not increase costs to federal taxpayers. But these “budget-neutrality” requirements are easily gamed. States can claim waivers for idiosyncratic or overlapping purposes, and may shift expenditures in and out of waiver categories to manipulate baselines. Some have made illusory payments to public hospitals to inflate projected costs, and then claimed savings against them.
It is hard for the federal government to determine true counterfactual levels of spending, and they in practice defer to state claims in doing so. The Department of Health and Human Services is rarely strict in enforcing budget constraints on states, and has repeatedly allowed ad hoc mid-course corrections to baselines – particularly for political friends and allies. A Government Accountability Office investigation found that Medicaid funding provided to Arizona under its comprehensive waiver exceeded budget neutrality by 57%. Even where abuse is clearly identified, the federal government lacks the capacity or motivation to claw back overpayments.
Over recent decades, Medicaid waivers have evolved from narrow payment demonstrations to comprehensive funding packages. In 2019, 75% of Medicaid spending was distributed under waivers. But the growing reliance on broad omnibus waivers could make them a valuable instrument for the program’s broader reform.
In return for approving waivers, the federal government should insist that each state be subject to a single unified cap on total federal Medicaid funding. Limits would not just apply to spending that states selectively categorize under waiver applications, but to expenditures that states leave out of them.
This would allow the federal government to independently set limits on state expenditures, according to objectively discernable metrics, such as caseloads or medical costs. But it would also free states from the administrative burden and rigidity associated with futile attempts to police multiple overlapping waiver benchmarks.
Chris Pope is a senior fellow at the Manhattan Institute.
