A Better Resolution to the Medicaid Expansion Divide

A Better Resolution to the Medicaid Expansion Divide
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Senate Republicans are divided on how they want to address the Affordable Care Act’s (ACA) expansion of Medicaid. Not surprisingly, Senators from states that expanded coverage under the ACA are pressing to continue that funding as long as possible. Senators from non-expansion states are more willing to roll back federal support without a lengthy transition. Resolving this disagreement is central to finding a way forward to passing a full repeal and replacement of the ACA in the Senate.

It seems unlikely that the Senate will simply accept the House’s approach on the ACA’s expansion of Medicaid. The House-passed version of American Health Care Act (AHCA) terminates higher federal matching rates for the expansion population effective with new enrollment in 2020.

Senate Republicans are expected to unveil legislation soon showing how they will alter the House-passed bill, including its Medicaid provisions. News reports suggest key Senators from states that expanded the program under the terms of the ACA want only to slow the phase-out of the enhanced federal support for the expansion population, perhaps over a three-year period. 

While the motivation for this change is understandable, it would only postpone a decision about the ultimate structure of the program. If the phase-out of enhanced funding over multiple years becomes law, it is near certain that there will be an effort in a future Congress to postpone the phase-out again before it is scheduled to begin in 2020 or 2021. Ultimately, the expansion of the program under the terms of the ACA might never get rolled back.

It would be better if the Senate pursued a change to the House bill that would have a better chance of surviving over the long run. In particular, the Senate should try to establish a more sustainable national standard of program eligibility that is fiscally sustainable and equitable across the states.

Under the ACA, states can elect to expand their programs to persons with incomes below 138 percent of the federal poverty line (FPL). States are not allowed to do a partial expansion; it is all or nothing. The federal government provides enhanced federal matching funds to the states for enrolling this population into the program. From 2014 through 2016, the federal government paid for 100 percent of the cost of the ACA’s program expansion; the federal share is now being phased down until it reaches 90 percent in 2020. The regular state-specific federal matching rates for populations eligible for Medicaid prior to the ACA range from 50 percent to about 75 percent, depending on a state’s per-capita income.

In states that expanded Medicaid under the terms of the ACA, the federal government is now paying for a higher share of Medicaid for persons with incomes well above the incomes  of people who were previously eligible for the program. Critics have rightly pointed out the inequity of this approach.

The House-passed AHCA does not fully resolve the problem. The bill would eliminate the enhanced federal matching amount of 90 percent for persons who become eligible for Medicaid after 2019. Despite this, states could still get substantial federal support for the expansion population at the regular federal matching rate. In practical terms, this means that federal taxpayers will continue to send significant resources to states that retain the expansion, most likely California, Massachusetts, New York, and other states with policymakers supportive of the ACA. Other, lower-income states that have already rejected the ACA’s expansion will continue to receive no federal funding through Medicaid for their sizable uninsured populations. The House-passed AHCA does allow persons who are ineligible for Medicaid to receive federally-financed tax credits to offset the cost of insurance, but the credits are generally worth much less than full Medicaid coverage, and households with incomes below the FPL do not have sufficient resources to pay for the deductibles and cost-sharing requirements of private insurance.

A better, more sustainable, and more equitable solution would establish a new national standard of program eligibility at 100 percent of the FPL. States would not be required to meet this eligibility standard but those that did would be eligible for an annual payment from a new federally financed Medicaid bonus pool. The pool would be funded out of the savings made available by scaling back funding for persons above 100 percent of the FPL, and from moving away from the open-ended federal matching payments of current law.

States could make Medicaid available to persons above 100 percent of FPL (up to the ACA threshold of 138 percent of FPL), but federal support for this enrollment would be only 20 percent of total costs.

Overall, this approach would concentrate federal support in Medicaid much more on households with lower incomes than is the case under the ACA, and that support would be made available to the states in a way that is likely to bring more uniformity to the eligibility rules across the states, and thus also more equity in the distribution of federal funds.

A compromise along these lines would also improve estimates of who will be enrolled in health insurance under the GOP plan. The House-passed bill left large numbers of Americans uninsured, in part because very low-income households could not afford to enroll in private coverage even with the House’s tax credits. Medicaid is the nation’s safety net insurance program. In practical terms, there is no real alternative to Medicaid for a person below the poverty line. Under the approach recommended here, federal Medicaid funding would be dispensed to the states to strengthen the safety net for the poor, even as there would be less support for expanding the program to persons with higher incomes.


James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.

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