by John Daniel Davidson · March 10, 2017
The Republican Study Committee is backing two proposed changes to the Obamacare repeal and replace bill now under consideration in the House, both of which concern Medicaid. The first amendment would freeze Medicaid enrollment under Obamacare’s lavish funding rates at the end of this year, two years sooner than the GOP repeal bill. The second amendment would impose work requirements on able-bodied, childless adults enrolled in Medicaid (the Obamacare expansion enrollees).
For non-health policy wonks, those two provisions might not sound like much, but both of them strike at the heart of Obamacare’s fundamentally flawed approach to health care, which seeks above all to expand state control of health care. If President Trump is really open-minded about negotiating changes to the Republicans’ already-beleaguered repeal and replace bill, these amendments are a good place to start.
Obamacare Bribed States to Enroll More Dependents
Let’s start with the first one. Under Obamacare’s Medicaid expansion, the federal government paid states more for newly eligible enrollees than for those who were already enrolled in the traditional Medicaid program. The funding formula varies by state, but on average the federal government pays 60 percent of the cost of covering Medicaid enrollees and the state pays the rest.
Obamacare’s Medicaid expansion sweetened that deal for states. Anyone earning less than about $16,400 a year could sign up for Medicaid and the federal government would pay for the entire cost of these new enrollees for the first three years, gradually ratcheting down to 90 percent by the year 2020.
For many states, that was an offer they couldn’t refuse. It amounted to an influx of billions of federal tax dollars that went first to state coffers and then to insurers and hospitals. Blue states like California and New York jumped at the offer, and eventually even some Republican-controlled states signed on. To date, 31 states and the District of Columbia have expanded Medicaid, including 16 states with GOP governors—including Vice President Mike Pence, who at the time was governor of Indiana.
Since 2014, these states have raked in billions in federal funds. Progressive think tanks and advocacy groups have issued various briefs claiming that expansion states are saving money and non-expansion states are losing out.
Medicaid Is a Giant Boondoggle For States
But there’s a problem with this analysis. Of course expansion states are saving money—if by “saving money” you mean “receiving billions in federal tax dollars they wouldn’t otherwise receive.” The problem is, even without repealing Obamacare, states were always going to assume more of the cost of Medicaid expansion. Even under a Democratic administration, it was unlikely the federal government would fund 90 percent of the cost of expansion enrollees indefinitely. (Obama tried to shift expansion costs onto states as early as 2012.)
Hence, states were always going to need to come up with ever-more funding for Medicaid. But Medicaid was gradually swamping state budgets even before Obamacare. Ask any state lawmaker on any budget appropriations committee what their most pressing problem is, and you are likely to hear it’s the state Medicaid program.
It doesn’t matter whether a state has expanded or not. In Texas, which didn’t expand and maintains a comparatively lean program, Medicaid now accounts for 30 percent of the state budget. This wasn’t always the case. In 2000, Medicaid only consumed 20 percent of Texas’ budget (PDF). In California, Medicaid is 27 percent of the state budget, and the majority of state taxes go to pay for the program, which now covers nearly 12 million people—a third of the state’s residents.
To make matters worse, the coverage Medicaid provides is notoriously poor, in part because Medicaid doesn’t really improve enrollees’ health, as the Oregon Health Insurance Experiment showed. Moreover, the billions in federal and state tax dollars don’t primarily go to patients but to hospitals and insurers, which is probably why so many hospital groups have come out against the Republican plan.
In this context, forcing millions of abled-bodied, working-age adults into this program is a recipe for out-of-control Medicaid spending. Keep in mind that Obamacare’s Medicaid expansion fundamentally transformed what had been a narrowly tailored welfare program into a broad-based entitlement. Created in 1965 alongside Medicare, Medicaid was originally meant to cover the indigent elderly, low-income pregnant women and their infant children, and the disabled. In other words, people who couldn’t work.
Obamacare threw Medicaid open to an entirely new population that most state programs had never covered. For example, expansion means that a 35-year-old man with no disabilities and no children is entitled to health coverage he doesn’t have to pay for under a state’s Medicaid program as long as he doesn’t make more than $16,400 a year.
Trump Could Negotiate an Historical Reform of Medicaid
That brings us to the second amendment the Republican Study Committee backed: work requirements for the expansion enrollees. As a matter of principle, this makes sense. After all, that able-bodied 35-year-old doesn’t really need Medicaid, he needs a full-time job so he can purchase his own health coverage or get it from his employer.
But as a matter of policy, it’s a bit tricky. If our 35-year-old bachelor worked a full-time job at the federal minimum wage of $7.25 an hour, he’d earn $15,080 a year and still qualify for Medicaid. But if he gets a small raise, say to $8 an hour, he’d earn too much to qualify for coverage. It’s easy to see how such work requirements contain strong incentives to earn less, not more—a pitfall of all means-tested welfare schemes.
These are the kinds of reforms states have been wanting to try for a long time, but the federal government has refused. All that federal Medicaid funding comes with strings attached, and states have been incredibly restricted in the kinds of rules and requirements they can impose on Medicaid enrollees.
Medicaid’s problems go back decades, and Obamacare made them worse. Trump and congressional Republicans have a chance to change all that. If they manage to wind down Obamacare’s enhanced Medicaid expansion funding while giving states meaningful control over their programs, then the GOP repeal and replace plan might just turn out to be an unexpected success.