Red states dodge a Medicaid bullet

Under-the-radar attempt to repeal entitlement unlikely to go away

REPUBLICANS IN WASHINGTON couldn’t cobble together enough votes in March from their own party to repeal and replace Obamacare. President Trump learned that health care is more complicated than he thought and quickly put the Affordable Care Act in his rearview mirror. House Republicans, who had symbolically voted dozens of times to repeal the ACA, backed away as members confronted the reality that, this time, it could actually happen. The tricky politics of health care became impossible as they tried to balance their cost-cutting goals with Trump’s promise of better, cheaper insurance for everyone. The Congressional Budget Office prediction that the GOP alternative to Obamacare would cost 24 million people their health coverage by 2026 was a bullet to the heart of the proposal.

Yet the furor over the potential loss of coverage drowned out an even higher-stakes debate over Medicaid, the health insurance program for the poor and elderly whose cost is consuming more and more of state and federal budgets. Changing traditional Medicaid was not essential to repealing the Affordable Care Act, but the heated debate provided an irresistible opportunity for Speaker Paul Ryan and other House conservatives to obscure the impact of dramatic cuts in Medicaid funding, which would have affected far more than 24 million people. The debate on Capitol Hill is over for now, but, given the dollars involved, it’s likely to return.

Obamacare is a public policy experiment less than seven years old and even its advocates acknowledge that its needs refinement. Medicaid has existed since 1965 and has become a core feature of the social compact in the United States by providing access to health care for poor, disabled, and elderly citizens. While there may be ways to improve and modernize Medicaid, eliminating the entitlement profoundly alters the relationship between our society and its poorer members, between the federal and state governments, and among the various states. Such a change merits a careful reflection, broad debate, and a full grasp of its consequences.

GOP leaders such as Speaker Ryan, Vice President Mike Pence, Health and Human Services Secretary Tom Price, and Office of Management and Budget Director Mick Mulvaney each have a lengthy public record advocating policy changes that would curtail Medicaid, limit federal appropriations, and significantly reduce the number of Americans who have health care under the law. Trump, whose health care policy pronouncements are vague, has nevertheless specifically endorsed and advocated Medicaid retrenchment.

The Medicaid program is enormous, complex, and not well understood by the public. Twenty percent of the people in the United States receive their health benefits through Medicaid. In Massachusetts, where it is called MassHealth, it is even higher, at more than a quarter of the population. That means 1.9 million citizens of the Commonwealth are beneficiaries. Across the country, participation rates range from a low of 10 percent of the population in Wyoming to a high of 29 percent in West Virginia. Total combined Medicaid expenditures in fiscal 2015 were $532 billion, or 17 percent of all US health spending. On average, the cost was 60 percent paid by the federal government and the balance by state governments, which administer the program.


That large portion of Medicaid paid by the federal government is what drives the commitment among Washington Republicans to change the program. As Medicaid has grown over the years, its impact on federal spending has increased significantly. Under the law, which has been in effect for more than a half century, the federal government is obliged to pay a certain percentage of each state’s Medicaid expense even though the state has wide discretion in determining the generosity and cost of its program. Thus, much of the federal cost is determined in state capitals rather than in Washington, a source of frustration to Speaker Ryan and others. They argue that uncapped funds flowing from Washington have made states inattentive to costs.

The consensus Republican approach endorsed by Trump is to cap federal Medicaid funding and to limit its growth in the future. This would occur by switching to block grants with a hard limit that would eliminate the current open-ended system. To the extent that states decide to cover more people, expand benefits, or pay higher rates to providers, they would have to absorb the additional cost rather than off-load a significant portion to the federal government.

Converting Medicaid to a block grant is an idea that advocates of smaller government have pushed for a long time. President Reagan made such a proposal in 1981. The Newt Gingrich-led Congress passed a bill, called “Medigrant,” in 1995 before it was vetoed by President Clinton. The concept was raised again by President George W. Bush in 2003. Ryan has made the idea a hallmark of his tenure in Congress both in his current role and in his previous job as chair of the House budget committee. Newly appointed HHS Secretary Price, Ryan’s successor as budget chair, included the block grant plan in each of the last two budget proposals adopted by the House. Last year’s version added a “per capita” option under which states could choose to receive a fixed amount of money per Medicaid enrollee instead of the overall block grant. Under either option, the federal contribution is capped. Had that budget made it to then-President Barack Obama’s desk, he would have vetoed it. The difference now is we have a president who made the idea one of the few specifics of his promise to create a great health care system.

The goal of the policy change is to limit federal exposure to Medicaid costs, to reduce the rate at which those costs grow in the years ahead, and to transfer more responsibility to state governments. Proposed legislation that emerged from the House under Ryan and Price over the past several years would have achieved that goal. They followed the same path this year. The Congressional Budget Office reported that, as compared with current law, the proposed American Health Care Act would have reduced Medicaid spending by $880 billion over the next 10 years and result in 14 million fewer enrollees by 2026. This is consistent with Ryan’s stated goals to “reduce federal funding over the long term” and achieve “budgetary certainty.”

Supporters of capped funding argue that less money will not substantially harm Medicaid recipients because states will have enhanced flexibility to innovate, to bring greater focus to cost control, and to eliminate waste, fraud, and abuse. Opponents assert that block grants will shift too much cost to state governments where already constrained budgets cannot absorb the rising health care costs of an aging population. They argue that the new limits will force states to cut services to recipients, especially to elders and disabled people who account for almost half of Medicaid spending even though they only constitute 21 percent of the enrollment. Three out of five nursing home patients are paid for by Medicaid. Most significantly, the current “entitlement” would disappear, replaced by triage decisions made state by state.

The conversion of Medicaid to a capped system would also raise profound questions that go beyond health care policy. The adoption of Medicaid and other Great Society programs in the 1960s was part of the war on poverty that, like other wars, had the effect of concentrating greater control in the federal government. Social, political, and civil rights movements in the US had exposed great disparities in economic opportunity, education, housing, and health. Disadvantaged populations existed across the country but were especially concentrated in large cities, in Appalachia, and in the South. The liberal paradigm that reached its apogee in the wake of Lyndon Johnson’s landslide election in 1964 saw it as essential that the federal government assume responsibility for solving the problems of poverty and inequity because the efforts of state governments were not adequate. The product of this movement was not only Medicaid but many other programs based on the assumption that wealthier parts of the country should support the effort to elevate the poorer parts.

The Medicaid financing formula in effect for 50 years captured that principle. While funding is shared between federal and state governments, the proportion of sharing varies from state to state. The federal government pays a larger share of the costs in poorer states and a smaller share in wealthier states. The creators of Medicaid readily accepted the idea that this on-going transfer of money from one place to another was part of the responsibility of our common American citizenship.

Specifically, the formula in the Medicaid law ties the federal portion, called the Federal Medical Assistance Percentage, to each state’s per capita income as compared to national per capita income. If the citizens of a state have per capita income below the national average, that state’s federal assistance is higher than a state where the opposite is true. Depending on the state, the law allows federal assistance to range from a low of 50 percent to a high of 83 percent. For example, relatively prosperous Massachusetts has the lowest permissible federal assistance level of 50 percent, meaning that every state dollar spent on basic Medicaid is matched by one federal dollar. Relatively poor Mississippi, where federal assistance is currently the highest at 74.6 percent, receives $2.94 in federal money for every state dollar spent. If Medicaid financing is capped, it is unclear how the federal government will determine the size of the allocation to each state. The bill drafted by the House leadership this year simply based the new caps on last year’s federal spending.

The core question that proponents of capping Medicaid have failed to address is whether the sizing of the new fixed grants should recognize the relative prosperity of states, as Medicaid has traditionally done. Should a state have the level of federal assistance to its Medicaid population penalized because some of its other citizens do well? To ask the question another way: Why should Mississippi receive almost triple the percentage of federal assistance that goes to Massachusetts? The traditional answer to that question arose from the 1960s ethic underlying the Great Society programs. But if the federal government requires states to bear more of the cost of supporting needy citizens, then it is logical for state governments to resist financial concessions made for the benefit of other states. Such concessions impede the ability of even relatively wealthy states to assist their own citizens. This is where the politics get complicated, even among supporters of capping Medicaid.

As is shown in the accompanying chart, many of the states benefiting from higher federal assistance are the same states that elected Trump and other conservative politicians who seek to constrain federal funding for Medicaid and similar programs. If they eventually get their way, the people who represent Mississippi would want the new approach to incorporate their traditional enhanced support. The people who represent Massachusetts would likely argue that the new constrained federal funding means that the Commonwealth cannot accept lesser treatment than other states. It is not possible for Mississippi and Massachusetts both to win this argument. This is a high-stakes fight that will engage every state on one side or the other.

The argument has already begun. Recent headlines focused on legislators in California who, in response to President Trump’s threat to cut federal funding, described California as a “donor state” that should consider curtailing financial transfers to Washington. Like California, Massachusetts and most of the other low federal assistance states voted blue.


The debate over how to curb federal Medicaid funding puts progressives and liberals in an agonizing position. They traditionally advocate the use of the federal government as a vehicle to transfer tax proceeds from wealthier states to poorer states to mitigate poverty. That posture will conflict with the best interests of their own blue states if funding ceilings are adopted. If a new system is based on the current level of federal funding for each state, Massachusetts would be unable to sustain its MassHealth program without significant new taxes. A financing program that treats all states equally is better for Massachusetts but will decimate recipients in states such as Mississippi which have relied heavily on their disproportionate federal funding. If something like block grants become reality, the first responsibility of representatives from donor states is to insure that those states are positioned to protect their own less fortunate citizens. Massachusetts progressives will have to choose between helping poor, disabled, and elderly people in Mississippi or those in Massachusetts.

Meet the Author

Edward M Murphy

Guest Contributor

About Edward M Murphy

Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Educational Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.

About Edward M Murphy

Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Educational Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.

Block grants and the repeal of the Medicaid entitlement signify a departure from Great Society principles and the reduction of federal money for social programs. Less federal funding and fewer entitlements is a policy that Republicans have promoted for decades. While they control Washington, we can expect sustained efforts to achieve those goals. If entitlements are eliminated, some states will work to support their citizens who need help. Others will not, resulting in more disparity across the country. Progressives may deplore that potential reality but it nevertheless requires a different framework within which to design programs to help people in need. That framework is the state. The old concept of “state’s rights” takes on new meaning in this context. If we do not share a national commitment to an entitlement like Medicaid, decisions about the existence and design of “welfare state” programs will devolve to each state. “Great Society” programs were premised on the use of the federal government to redistribute wealth and thereby elevate living standards for citizens regardless of where they resided. Under the Ryan/Trump ethos, geography may again become destiny.

Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Education Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.