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Fixing Medicaid’s Financing Structure to Reduce Waste, Fraud, and Overspending

Cato Institute Capitol Hill Briefing

Moderator: Romina Boccia, Director of Budget and Entitlement Policy, Cato Institute Panelists: Michael F. Cannon, Director of Health Policy Studies, Cato Institute; Chris Pope, Senior Fellow, Manhattan Institute; Brian Blase, President, Paragon Health Institute

Opening Remarks

Rachel: All right. Thank you all for being here and being nice and cozy together. I appreciate you all joining us for a great discussion on Medicaid. I know that there’s no food, unfortunately — that’s not our choice, it’s due to the nature of the room. But there will definitely be more opportunities to have the Cato Institute feed you, both intellectually and literally. Congressional staff should have gotten an email today about our Congressional Fellowship in Economic Policy Studies. So if you’re interested in that, it’s going to be about eight weeks of discussions with scholars such as these that we get to hear from today. And it will be over heavy hors d’oeuvres at Ambar on Capitol Hill. So we hope that you all can apply and join us there — we’ll have lots of food for you at a future Capitol Hill event. But let’s get started today. I’m going to introduce briefly our moderator, Romina Boccia, who’s our director of Budget and Entitlement Policy at the Cato Institute. Hi. And she’s going to have a great moderated discussion with our speakers. Thank you all here.

Panel Discussion

Romina Boccia: Thanks so much, Rachel, and thank you for coming. I want to dive right in, because what instigated this event is when I saw that Chris Pope and Michael Cannon might just have a slight disagreement about how we should finance Medicaid. I thought, “Oh, this is going to be a juicy discussion.” So here we are today, and thank you, Chris, for coming down all the way from New York, and congratulations to you on your new book. Do you want to share the title real quick for people who want to pick up a copy?

Chris Pope: Well, thanks. The book is The American Way of Welfare, and it’s about the welfare state — how it developed, how we should think of it doing, and what we should do about it in the future.

Romina Boccia: Thank you. And then I’m also excited to be joined by my colleague, Michael Cannon — did you bring any books today, or do you want to tell everyone about your recent book?

Michael Cannon: My book, Whatever It Is, Is Available in the foyer.

Romina Boccia: Oh, yes, fantastic — definitely pick up a copy. I just finished reading mine this weekend in preparation for this. Excellent book, it’s also very short. And then I invited our friend Brian Blase, the founder and president of the Paragon Health Institute, who was a special assistant to the president for economic policy at the White House National Economic Council, to act as a discussant summarizing for us what we hear during this mini debate, and also to point us to some changes that Congress could be making right now.

So I want to dive right in, because this is a really, really big topic. I want to talk about how Medicaid’s financing structure encourages states to overspend, shifting costs to federal taxpayers, including with a variety of financing gimmicks, and also some of the problems around waste, fraud, and abuse — some of which we heard our health secretary talk about on Fox News less than an hour ago — that this contributes to. And also, with affordability being all the rage, how Medicaid’s policies worsen healthcare affordability, and the impacts that has on patients and taxpayers.

And we don’t want to just talk about problems, but we also do want to talk about solutions, of course. So this is a question I’ll pose to the panel — let’s try not to repeat ourselves, but give us a quick primer on Medicaid. What is this program, who does it serve, and what are some of the services that people can expect from the program? Michael, do you want to start us off?

Michael Cannon: Sure. So the Medicaid program is — and thank you, Romina, and Chris, and Brian, for putting this together and for being here on the panel — but the Medicaid program is now a 60-year-old program Congress created in 1965 to provide subsidies to healthcare, or healthcare, to low-income people. It covers about 75 million people right now: one out of six non-elderly adults, one out of three disabled people in the country, two out of five children in the country. And you may have heard about a surge in Medicaid enrollment during COVID — it surged by about 20 million people. It’s down another 20 million now, although it was up 22 and down only 20, so it has grown by about two million enrollees in the past six years. It covers 41% of childbirth, 44% of nursing home spending, and it is a state-run program in every state, but it operates under federal rules because most of the money comes from the federal government — about 69% of the $1 trillion that Medicaid spends each year. And those federal dollars come with federal rules. States have to provide mandatory subsidies for what we call mandatory services — things like hospital subsidies, physician subsidies, subsidies for nursing homes — but also optional subsidies for services like dental care, vision care, private nursing care, hospice, and so forth.

But the most important thing about Medicaid’s structure and finances — that it gives rise to all of the problems that we’re seeing in terms of rapid growth of the Medicaid program, in terms of crowd-out of private health insurance, and the massive amounts of fraud that we find in the Medicaid program (it’s been on the GAO’s high-risk list for fraud for about 23 years in a row now) — is because of the system that the federal government uses to decide how much money to give to states to run their Medicaid programs. It’s not a fixed amount of money that Congress gives each state — it is what we call a matching grant. And to illustrate how this works, I brought some visual aids. Now, for the younger folks in this room, this is what we call paper money — this is a dollar bill. If you’re a state legislator and you raise a dollar in taxes, and you put that dollar toward police, toward education, toward roads, you get to hand out a dollar’s worth of benefit, okay? So that’s nice — people don’t like paying taxes, but they like getting a dollar’s worth of benefit. If you spend that dollar on Medicaid, however, the federal government matches that with another dollar, and you get to hand out $2 of benefit. And isn’t that nice? That’s a pretty big incentive — it doubles the incentive to spend on Medicaid versus other things. But that’s if you’re a high-income state. If you’re a low-income state, you can get even more than a dollar. And if we’re talking about Obamacare’s Medicaid expansion, you can transform that dollar into $10, because the federal government will match that one state dollar with $9, and then you can give out $10 of political benefit. And by the way, the incentive to spend money on people in the Medicaid expansion versus people in what we call the old Medicaid program comes out to seven times the incentive to spend here. You can see why states want to devote more money to their Medicaid programs, why Medicaid would grow so rapidly. And this is also the root, by the way, of a lot of the fraud that we see in Medicaid — and I would include in the category of fraud the provider taxes and the state-directed payments, and other sorts of scams that states run so that they can get that $10 of federal money, or the $9 of federal money, without putting out $1 of their own.

Romina Boccia: Thank you, Michael. Chris, anything you’d like to add about how Medicaid is run, or, since we’re already down the road on the matching grant system, do you want to share your perspective on that system?

Chris Pope: So I think what comes out from the points that Michael made is that this is really a double kind of benefit. It’s a benefit for low-income people — politicians will always talk about how Medicaid is a benefit for low-income, disabled, low-income elderly, children, families — but it’s also a benefit for states, and those two things happen separately. The states, when they think about balancing their budgets, increasingly think about Medicaid. New York now gets more money from the federal government every year from the Medicaid program in terms of revenue than it does from its state income tax. Medicaid is a big part of the state budget, and, as Michael was suggesting, it’s an increasingly influential part of your budget, because if you’re thinking about whether to spend on transportation, you have to increase your state income tax — that’s very unpopular. But if you can increase your Medicaid expenditure, you can get other people in other states to pay for it. If you’re New York, you can find ways to get taxpayers in California, taxpayers in Texas, taxpayers in Georgia to pay for it. That’s much less of a political problem.

Now, if you think about Medicaid the way that politicians often talk about it, we’re thinking about essential healthcare services for low-income people. That gets a little blurry at the edges, and states have a very big incentive to accentuate the blurriness at the edges. They have an incentive to increase the amount of Medicaid that’s healthcare benefits for people who may be also poor. The ability to claim federal matching funds has no limit. When matching funds were first created during the New Deal, President FDR was very clear about it — every single grant program had an upper limit. He actually literally said, “If we get off the 50/50 basis, there’s no limit to how much the states are going to fleece the federal government.” Well, when Medicaid was created in the 1960s, they got rid of the cap, and it basically became an open-ended invitation to states — not just to inflate benefits, but also to inflate the amount that they pay different providers. States will pay hospitals a little bit more, because they can get the federal government to kick in more. The states will then tax the hospitals, and that’s money for themselves. States can get insurers to run Medicaid — they can then tax the insurers, say, “Oh, our Medicaid program costs more,” and basically the states can tax the federal government.

What we’ve seen over the past half-dozen years or so is states saying, “We’re going to do things that, you know, aren’t really healthcare — maybe it’s housing, maybe it’s food benefits, maybe it’s other social services.” But these have an incidental impact on health — if people don’t have a house, maybe they’re going to be sicker, or poorly nourished; this might influence their health. And so states have become increasingly recategorizing things that aren’t healthcare, calling them healthcare, saying, “Well, these are social determinants of health, and so we get to claim this nice Medicaid matching money for things that aren’t healthcare.” And so we’ve seen this very rapid growth of the Medicaid program on things that aren’t really healthcare for low-income people. It’s just become this money machine for states to get the federal government and people in other states to pay for things that the states want to do but don’t really want to tax their own residents for.

Romina Boccia: I hear a lot of agreement that the way Medicaid is currently financed isn’t working very well, at least not from the perspective of federal taxpayers. Michael, I want to come back to you. What is your view for how Medicaid should be financed? What role should the federal government play versus the states? And if you could adjust this arrangement, what would you do?

Michael Cannon: So I think one of the reasons the Cato Institute is so valuable is that Cato is probably the only organization in Washington, DC, that will say there should be no Medicaid program. The way Congress should finance Medicaid is it should not finance Medicaid at all — it doesn’t have the constitutional authority to do that. And also, the most important things to understand about the Medicaid program are that it exists not to correct market failures, but government failures — it addresses government failures; that’s what gave rise to it. It exists not because it’s popular, but weirdly because it is unpopular with voters. And enrolling people in the Medicaid program is not compassionate — it’s actually kind of dangerous for low-income people.

So why do I say that it corrects government failures? By the time Congress created Medicaid in 1965, it had spent 40 years basically penalizing people for every dollar of income they don’t spend on healthcare, through something we call the tax exclusion for employer-sponsored health insurance. That drove up healthcare prices, created gaps in health insurance, and a lot of low-income people fell through those gaps. Medicaid was created in part to address those gaps. But states had also done a lot to interrupt the normal market processes that would have brought healthcare within the reach of more and more people — here I’m talking about regulation of clinicians and regulation of health insurance. Medicaid was a response to that government failure.

It’s not actually popular. In 1965, a lot of states were providing subsidies to low-income people — not as much as Medicaid advocates wanted, but they couldn’t provide more. Why? Because people didn’t want to pay the higher taxes associated with higher subsidies, and states that tried to do that would lose their tax base to states that didn’t. So Medicaid was an effort by those states basically to form a cartel that the more conservative states couldn’t opt out of, using the power of the federal government to enforce that cartel. And it also created this matching grant system that we mentioned, which not only forced the conservative states to participate in the Medicaid program, but also encouraged them to expand their Medicaid programs beyond what voters would choose if they had the ability to avoid the states that had the more comprehensive Medicaid programs and the more generous subsidies and higher taxes.

And how is it dangerous? If you want to see how Medicaid is unpopular, look at how supporters talk about any reduction in federal spending on Medicaid — they assume states will cut the programs. That’s an implicit admission that voters in states don’t want to support those higher taxes. And it’s also dangerous to the poor, because the federal government is running trillion-dollar deficits every year. We have a debt-to-GDP ratio of one hundred percent — we’re in uncharted territory. Medicaid is one of the main components of that, and the OBBBA debate shows that if Congress has to cut spending, it’s going to go to Medicaid, because it’s unpopular, because poor people don’t vote in the same numbers that seniors do, and because that’s where the money is. So every time we expand Medicaid and bring more people onto the Medicaid rolls, we’re putting them in a very dangerous situation, where, if and when the federal government finally faces a budget constraint, they are going to lose their access to care because the government has made them dependent on these very unpopular subsidies for their care.

So what we need to be doing is scaling back the Medicaid program with the sort of reform that Congress enacted — that passed in 1996, that President Clinton vetoed — which is, rather than a matching grant system, a block grant system that says to every state, “You’re going to get a fixed amount of money, and your policy decisions are not going to be able to increase the amount that you get from the federal government. You’re not going to be able to double your money by running provider tax scams or that sort of thing.” States will spend that money much more responsibly and will get a much closer match between voter preferences and Medicaid spending and taxing levels. Thank you.

Romina Boccia: Thank you. Brian, what should we do about Medicaid — sorry, I keep calling Chris Brian. I am so sorry, my brain’s not working today.

Brian Blase: So that’s not for me yet?

Romina Boccia: No, no — sorry, sorry, you’ll come in, you’ll come in. I want Chris to give his position. But Michael says, “Let’s get rid of Medicaid.” Yeah, if we have to keep it, block grant it. What do you say, Chris?

Chris Pope: So, firstly, I think it’s good to have an idea of what pre-1965 healthcare looked like. The standard of care if you had a heart attack in 1960 was: you go to the hospital, they’d look at you very sternly, and say, “What you need is bed rest and maybe some painkillers, and we’ll have the nurse check on you every now and again.” That’s pretty cheap — that’s a really cheap thing to do, and it was something that local government, cities, could basically do with their property taxes and a little bit of charitable donations. It wasn’t going to cost anyone very much money. The standard of care in healthcare has increased enormously since the early 1960s. That’s the main reason why healthcare is extremely expensive.

Now, that’s not to say that the way the Medicaid program currently works is well designed or a good response to the situation, but there is certainly a certain portion of the population that’s going to be unable to afford what is a basic level of care that most people would like to assure to people. And I think, if we’re trying to have a sustainable political situation and a sustainable policy in healthcare, we need to fill the unmet need. That basically means we want a program that provides targeted assistance, targeted benefits, to people who aren’t able to afford them — people who can’t work, like the low-income disabled, low-income families, elderly people. There are certain kinds of people who are never going to be able to afford what is basically a standard of care that we want to assure them.

What is the problem with Medicaid? It’s fundamentally very poorly focused at this — it’s really poorly targeted. In a rationally designed safety-net healthcare system, you would think: where are most poor people, can we provide healthcare benefits to them? What Medicaid does is basically say, we’re going to give each state money according to how much states put in themselves. And who puts in the most? Because it’s a really, really lucrative return on investment, the wealthier states put in more money. If you can put in ten dollars, you can potentially get ninety dollars back. If you can put in five dollars, you can potentially get forty-five dollars back. And so the wealthier states are going to take more advantage of this extremely lucrative arrangement for everybody. That means that most of the money is going to the states that need it least. It’s the complete opposite of what we want to be doing — we want to be sending the money to the states that have the greatest unmet needs, not basically the greatest ability to claim federal matching funds.

The idea of block-granting funds to states is something we’ve tried with a number of programs. We tried it in welfare reform with TANF in 1996 — we basically said, “Okay, we have AFDC, which was a matching-fund system like Medicaid is currently,” and we said, “We’re going to freeze the amount of money that’s going to each state and give the state whatever money they’ve claimed in the past, regardless of how irrational the distribution of past money was.” The fact that, I think, DC gets something like twenty times as much as Mississippi per poor person — we’re just going to accept that and freeze it like that. That’s worked really poorly, because a couple of things happened. Firstly, it doesn’t really respond to unmet needs. Secondly, the states said, “Oh, well, this is great — we get this money regardless of what benefits we’re providing to people. Let’s take all the money from TANF.” We have the Brett Favre scandal, where he said, “Let’s spend this all on college volleyball and give it to lots of institutions who don’t really need the money.” And then with all the people that were going to get the TANF money, let’s put them on SSI, and they can get the federal money from SSI, from SNAP, from other programs. I think this would happen with Medicaid.

And then we also have this problem, even more acute with Medicaid, which is that Medicaid enrollment really fluctuates with the business cycle. The amount of low-income people, the amount of people who are out of work, the amount of people who can’t afford their own healthcare — that changes over time. During a deep recession, states’ ability to pay for this goes down because their tax revenues go down, but their caseloads go up. So what happens in every recession is the states come begging to Washington for a bailout, and so the Medicaid program gets bailed out. But this actually makes things worse, because the amount of money in the Medicaid program increases. Then the economy recovers, the caseload goes down — the states don’t say, “Okay, federal government, you can have your money back.” What they do instead is, as the economy recovers, they expand their Medicaid program, and then by the time the next recession comes along, their benefits have expanded, their caseloads have expanded, but their revenues drop off, and they come for another bailout at a higher level. So we have this business-cycle problem with the Medicaid program that ratchets up every single time there’s a recession. And the block-grant financing mechanism would exacerbate the bailout pressure, and anyone who’s been in Congress during a recession knows how irresistible that bailout pressure is going to be. It’s not just Democrats — it’s going to be red states as well, and the governors of red states are going to go to every single Republican office and say, “We need a bailout.” A block grant is just not a politically sustainable situation.

Romina Boccia: So what would you recommend, if we want to address all the problems you both identified? If block-granting is not the solution, what would you propose?

Chris Pope: I think the federal government has to recognize, and Congress has to recognize, that there are certain things Medicaid is on the hook for. There is a core of the program that Congress is going to want to assure — essentially the mandatory benefits for a core set of beneficiaries, and we can define these beneficiaries. The federal government can basically say, “This is what we’re providing — these are the low-income people, these are the core healthcare services, and this is what we’re going to pay for, and we’re going to own that — we’re going to take care of it, and it’s going to be a federal program.” And all the other stuff — the housing benefits, the food benefits, all the things that are potentially incidentally related to healthcare, the ways in which states want to inflate payments for healthcare — if states want to do that, that’s their own business; they do that with their own money. But the federal money is going to be on this core safety net that we want the Medicaid program to provide, and the federal government is going to have to end the moral hazard of basically saying to states, “We’re going to give you money for whatever obligations you incur,” and then, “You got yourself into this mess, you can’t come back to us for a bailout for services that you incurred by yourself.”

Romina Boccia: Michael, would this increase or decrease federal government spending on the Medicaid program?

Michael Cannon: So, if you’re moving the state dollar basically to the federal budget, then that is going to increase federal spending. The federal government is assuming responsibility for spending that the states had been doing. And so I think that we should just categorically rule out all such proposals — even if they might have some merit — for this reason: if our proposal is driving the federal government even closer to a debt crisis, or getting us there faster, we should not be considering that as a serious Medicaid proposal, because it’s going to put Medicaid enrollees in even greater jeopardy of losing their access to care.

I don’t know if Chris has proposed some sort of financing mechanism or an offsetting budget constraint, but I think my first response would be that. My second response is that it’s very easy to come up with ideas — whether it be Chris’s or mine — and say, “I can draw this on a blackboard and it would work just so, if all the money went exactly where I wanted it to go, and all the rules stayed exactly the way I wanted them to be.” But we have this thing called the political process, and lots of political actors all pursuing their own aims — some just financial, some ideological — and we have to take all the existing political preferences and forces into account when we’re crafting these proposals, because when they go to work on what I wrote on the blackboard and what Chris wrote on the blackboard, our designs might look very different at the end of the day.

One of the ways I think Chris’s — well, my proposal might go wrong is one that Chris identifies: if we block-grant the Medicaid program, states will come to the federal government if they “run out of their allotment,” or run into a recession and decide the federal money was not “enough,” and they will ask for a bailout. The states have done this with the Children’s Health Insurance Program. I believe Canadian provinces do this with the national government in Canada. That risk will always be there. I think the way you address that risk with regard to block grants is you just say to states, “No, this was the deal that we made. You have the ability to put aside rainy-day funds for this sort of eventuality,” and then you try to hold the line when it comes to federal spending. And that’s not going to be easy, certainly not when Congress is willing to spend the way that it is right now, until there’s some sort of budget constraint. I don’t know how to fix that problem other than to push for Congress to do the right thing.

When it comes to shifting the state spending to the federal government, the danger is that, yes, you’ll have the federal government spend more money, but the state money won’t go away — you’ll have that spending as well. So instead of substituting federal spending for state spending, you’ll be adding federal spending on top of state spending. That’s, I think, the most likely outcome. I can envision the process this proposal would follow through Congress — in order to get more votes, say, in the Senate, they’ll have to increase the amount of federal spending until every single state is held harmless. And we probably won’t achieve any budgetary savings at all with this sort of proposal, and we’ll probably just end up substituting federal spending for state spending and end up with greater government spending overall.

Romina Boccia: Thank you, Michael. This time I actually mean Brian. Brian, I want to invite you in on this discussion — both from the perspective of what do you think about these two different approaches for financing Medicaid, and then also, as someone who’s deeply steeped in the political process and has experience and continues to influence the policies of this administration, what do you think is a realistic path forward for addressing the many, many problems that both Michael and Chris agree on, even if the solution might not look like either of their preferred options?

Brian Blase: Yeah, thanks, Romina, and great to be here with Chris and Michael — two people who, of all the health policy experts, I think do excellent work, and I agree with them the vast majority of the time. I got my first job in health policy sixteen and a half years ago. It was at the organization that shall not be named — the Heritage Foundation. I was proud of working at the Heritage Foundation, but they had us write an essay on the one problem we saw in health policy that we would want to correct, and I wrote about the structure of the Medicaid matching grants and endorsed a block grant proposal. The problem is now far worse than when I wrote that essay for them sixteen years ago.

From a state perspective — and all of the interests in the states know this, and go to the state capitals and lobby — this is federal money, this is free money, they should of course engage in money-laundering schemes to give the appearance of an actual expenditure that is just a fictional creation on paper, to get federal money for nothing. In the aggregate, a state spends $3 and gets $7 from the federal government. That means they only have to get 30 cents of value in order to make a dollar of expenditure. What we want is to maximize value from all of our spending. A block grant, in my view, does that — it gives states a set amount of money, and anything above that money, the state is on the hook for 100% of the cost. So they would have to determine: does it make sense for Medicaid to function as inheritance insurance, so that wealthy seniors can protect their assets for their heirs? They would have to confront that. Now, they don’t really have to confront that — they just pass most of the cost to the federal government.

So I think Obamacare made the situation much worse. Obamacare, by providing 100% reimbursement of state spending for able-bodied working-age adults for the first three years of the program, led to a spending explosion. Like Michael said — I have a handout with a couple of figures — one of the main problems we see in Medicaid financing is that the federal government provides seven times more money for every dollar a state spends on an expansion enrollee than they do on a traditional enrollee. What’s that going to lead to? States over-providing for able-bodied working-age adults on the program and under-providing for traditional enrollees. It’s also going to lead them to be very insensitive to getting eligibility determinations correct — they make a lot of money if they enroll people who are eligible under traditional criteria as eligible under the expansion instead. So what’s the number-one problem in terms of improper payments in Medicaid? It’s eligibility determinations — both incorrect eligibility determinations, and people put on the program who aren’t eligible for it.

That said, while I’ve historically embraced block grants, and I do think block grants are the conservative solution to Medicaid reform, I think there’s a lot to be said for Chris’s solution as well. Right now the matching-grant structure is so perverse, and the incentives within states are so perverse, and what we are seeing states do is so perverse. If you are in a state capital and you have budgetary concerns, there are basically three options: you could raise revenue, you could cut spending, or you could engage in a legalized money-laundering apparatus to draw down more federal dollars. And if you’re a state policymaker, whether progressive or conservative, raising state taxes is unappealing, cutting state spending is unappealing, and passing the bill off to the federal treasury becomes much more appealing. So all states have this incentive.

We’ve seen a dramatic shift — this is the second figure in what I presented — in the share of Medicaid borne by the federal government. The lower line shows the federal share on paper, but much of the state share is illusory because of the provider tax, because of the IGT. If you discount the gimmick state spending, the top line shows the actual federal share. We’ve gone from 60% to 70% over the last 15 years. It’s a trillion-dollar program — that means each year we’ve shifted $100 billion in costs from the states to the federal government.

So I think we’ve got to address Obamacare’s enhanced match rate — that, to me, is the number-one priority. It’s not politically easy; a lot of members of Congress tried very hard to address that disparity and equalize those match rates. During the debate over the One Big Beautiful Bill last year, that got close but didn’t get included in the reconciliation bill. I think that should be the number-one priority for Medicaid reform. The number-two priority is to implement the provisions of the One Big Beautiful Bill that restricted provider taxes — we can get into more detail — but also restricted the corporate-welfare payoffs through provider taxes.

I highly recommend you read Chris’s — I haven’t read Chris’s book yet, I’m going to read it — but Chris has an excellent piece on reining in Medicaid managed care, and the growth of Medicaid managed care is another real problem. In part because there are limits on the fee-for-service side of Medicaid — historic limits that, in the aggregate, it’s complicated, they don’t work perfectly, but set Medicaid limits at Medicare rates — those limits don’t apply to the managed-care side. So as more Medicaid spending has gone through managed care, that has allowed hospitals to develop schemes — they hire lots of consultants, develop schemes that result in provider taxes with the payoff, something called state-directed payments, where Medicaid is now a much better payer for hospitals than Medicare. It’s really a new phenomenon in the last five years, where the Medicaid welfare program is now reimbursing hospitals at double what Medicare pays on average. So I think the provisions in the One Big Beautiful Bill that cap the payments through the insurers at Medicare rates are extremely important, and it’s the most important thing, in my view, that CMS is going to do with the rest of the Trump administration — implement those caps and make sure they take effect.

Michael Cannon: Thanks, Romina—

Romina Boccia: No, no, Michael — sorry, I’m in charge today, but we’ll get to you. I want to give Chris a chance to respond, and you tapped me, and then I want to talk about the OBBBA provisions and how that implementation is going. And we can either weave in affordability as you’re giving your response, or I want to make sure we get to that as well. Chris?

Chris Pope: So I think the core question for all of us here is: what is the fat that we can cut out, and where we don’t want to cut to the bone — we want to cut the excess. I think a simple way to think of the problem we face with Medicaid is ultimately my state versus Brian’s state. New York gets three times as much per poor resident from the federal government than Florida does. Florida provides the same set of mandatory benefits to the same set of mandatory enrollees that New York does. The difference between these states is that New York has expanded optional eligibility, expanded optional benefits — it is doing a bunch of things that aren’t the core purposes of the Medicaid program. So that is the place we want to rein in — it is the difference between the optional benefits and the mandatory benefits, and I think, politically, that’s fundamentally the issue: we don’t want states unilaterally expanding their optional benefits.

The way to do that, I think, is fundamentally you slow the growth path of all these things according to the degree of overspending. New York has had a very high level of optional benefits relative to Florida. States should no longer be able to expand their optional benefits unilaterally. When we look at what constraints in the program are working, it’s not really financing mechanisms, not really varying the matching rate, not really limits on aggregate amounts of spending — it’s limiting. What was effective was saying to states, “You can’t claim more than the Medicare fee schedule for a procedure.” We created some loopholes to that — we said that if you route the money through managed care, you can claim in some cases six times as much as Medicare rates for money routed through a managed care organization. These limits were effective. They went away, and you have $140 billion this year of state-directed-payments money being claimed by states, because we got rid of limits that were tied to specific provision of specific services that had existed, and basically created a loophole to it.

The effect of limits on Medicaid spending had been the limits basically tied to what you can claim for a specific procedure, tied to specific payments for what is allowed, what is a covered benefit for a covered enrollee. And if we want to narrow and limit the, frankly, quite arbitrary growth of the program, that’s where we’re going to be effective — by having more federal micromanagement of what states are doing, saying, “You can claim this amount for this service for this beneficiary,” and ultimately federalizing increasingly the management of the program, rather than assuming the good faith of states, which frankly is just not there. States just want to claim money out of the federal government — they see this program as a cash machine for all purposes, and the federal government is basically ultimately going to say, “It’s our money, this is what we want it spent for, and these are the purposes we’re looking to do it for.” It’s not a traditionally conservative approach to the way states have done it — it goes against a lot of the prejudices I think conservatives have had over the past, basically since the New Deal era. But it’s ultimately what needs to be done: the federal government’s got to say, “This is our money, and we want it spent this way and not that way.”

Romina Boccia: Arguably, the One Big Beautiful Bill Act does some of this micromanagement. What are some of the most impactful provisions when it comes to reining in Medicaid spending and cost growth, and how is the implementation going? I’m wondering if this is something Brian, maybe you can best speak to.

Brian Blase: Yeah — can I respond to one thing Chris said? I think the inequity between states is really an important feature here, and Chris is from — the Medicaid abuser state in the country, where I think DOJ just brought suit against the Medicaid director last week. So what happens in New York’s Medicaid program is crazy, but the cost is mostly paid by people outside of New York. So what I like about your proposal is that it gets rid of the matching-grant structure, right? You’re splitting it into two programs, one of which would be a federal program, one of which would be a state program. States would be in charge of optional benefits. It raises a lot of implementation questions that would get sorted out through the political process, as would a block-grant structure — how do you deal with Obamacare’s expansion would be one major issue; does that count as an optional or mandatory group? That would be very controversial. And then how do you divide the money among the states?

To come to your question on the One Big Beautiful Bill, Romina, there were three major Medicaid reforms. Work requirement — work and community-engagement requirements for able-bodied individuals on the program. Our preferred approach was equalizing the match rate; Congress didn’t do that. They did, I think, protect the equity of the federal government in that it’s funding 90% of the cost, by saying — which I think reasonably — that to be an enrollee, you need to meet certain requirements for the state to enroll that individual and get this much federal support. So really, the requirements are not that extensive — it’s 80 hours of work, or less in states like Chris’s that have much higher minimum wages, or volunteering, community service, job training. I’m not going to spend more time on that.

The reforms I’m most excited about are the limits on provider taxes and state-directed payments. Starting July 4th last year, Independence Day, there are no new or expanded provider taxes anywhere. States can’t think about expanding Medicaid using financing gimmicks so the federal government’s on the hook for it — they can’t do that anymore. There’s also, starting in 2028, a phase-down of the provider-tax safe harbor that Congress adopted. What that means is states can still engage in the provider-tax scheme, but the revenue they raise from that, that they put up for a federal match, is going to decline over time.

But the most important reforms are the limits on state-directed payments. The growth path of state-directed payments was unbelievable — projected to go from a program that four years ago was $40 billion, to last year projected to be $150 billion, with CMS estimating it could have been $400 billion by the end of the decade. Having Medicaid pay hospitals at average commercial rates is such an insane health-policy outcome, and being able to cap those at Medicare rates was a huge win. The Trump administration is implementing it, in my view, as well as they can. There was a flood of SDP proposals that came in late last year that they have approved, that are very high. It’s incumbent on them to enforce it — and they put out a rule on this a few weeks ago that sets how they’re going to bring these limits down to Medicare rates in expansion states, and 110% of Medicare rates in non-expansion states. And the other thing I should say: states that did not expand Medicaid are still not subject to the phase-down in provider taxes. I think that’s a reasonable compromise, in that the money laundering has a much higher rate of return when you can put it up for a nine-to-one match rather than for, on average, a $1.33 match. But overall, the Medicaid reforms are projected to slow the growth rate in federal Medicaid spending by about a trillion dollars over the next decade. And the third figure in your handout shows the projected reduction in the federal growth rate for Medicaid spending from the reconciliation bill.

Romina Boccia: Thank you, Brian. Michael, thank you for your patience — the mic is back to you, I think.

Michael Cannon: Well, what I was going to say was — to echo Brian and say, if you’re in welfare or health policy, you should read everything that Chris Pope writes. So…

Romina Boccia: Could you tell us a little bit about how Medicaid contributes to the affordability challenges that the American people are experiencing when it comes especially to affording healthcare? Also feel free to chime in — there are a lot of stories out there about the expired Obamacare subsidies from the COVID era, and how that might be affecting affordability, as well as any spillover into Medicaid.

Michael Cannon: Yes. So, consistent with the story I was telling before about how Medicaid is a response to not market failure but government failure — government does things, healthcare prices go up, people can’t afford healthcare, government creates a Medicaid program to subsidize the now-unaffordable care, the care made unaffordable. There’s another piece to that story, though: those subsequent interventions then end up having unintended consequences that make healthcare more expensive still. There are some small ways — the Medicaid program ends up crowding out private health insurance and making those markets smaller, so if you have a thinner market for health insurance, there’s going to be a marginal impact on premiums; they’re going to be a little more expensive as a result.

But there are more direct mechanisms by which Medicaid makes private health insurance more expensive. One is the way Medicaid pays for goods and services, like prescription drugs. If any of you are working in health policy, you’ve heard about the 340B program — that’s adjacent to this problem of how Medicaid pays for drugs. Medicaid says to drug companies, “We’ll pay basically a percentage of what you charge private payers.” So the drug companies say, “Wow, you drive a really hard bargain, okay, we’ll do that,” and then they increase the prices they charge to private payers, so they can get more money out of private payers and state governments. What that means is that private health insurance is becoming more expensive. One estimate says Medicaid’s drug-pricing rules increase the price of prescription drugs for private payers by about 13%. That’s one example.

What’s another example? You’ve heard of the phenomenon of crowd-out, where, because government payers, Medicare and Medicaid, pay less than private payers — I’m saying crowd-out, I mean cost-shifting. Cost-shifting, where because Medicaid and Medicare used to pay less than commercial payers, providers have to shift the cost of care for those patients onto private payers. That’s actually not true — that’s not how it works. What’s happening is more like crowd-out and price discrimination. I can explain the precise mechanisms if anyone cares and has that sort of attention span, but what ends up happening is prices do rise for commercial payers, for hospital services and other things, as a result of Medicare and Medicaid being there. Providers can increase their prices and not lose as many customers, because they have so many subsidized customers, and therefore prices for private payers, and private health insurance premiums, end up being higher because of the Medicaid program. And all of these problems — the enrollment fraud, state-directed payments, provider taxes — are much, much worse because of the matching-grant system. Everything about Medicaid ends up being worse because of the matching-grant system, including its impact on the affordability of healthcare for private payers.

Romina Boccia: Thank you so much. Brian, I know you have another event at 1:30, so feel free to jump out at any point, and I really appreciate you joining us. I want to open the floor to questions, and thank our panel for a very enlightening and spicy discussion. Thank you.