Health Affairs

The Medicaid program is facing major new challenges.  The new health care law puts both significant new responsibilities and financial burdens on the program.  At the same time, Medicaid, as one of the three major federal entitlement programs, is a top priority for policy makers trying to address the federal government’s staggering budget deficits.  Unfortunately, as Medicaid heads into this critical period, the old design flaws that have plagued the program for decades have not been fixed. We are hoping to introduce some new thinking on an old problem: Medicaid financing. 

The ideas presented here have not been fully fleshed out or vetted with the relevant stakeholders.  They are an attempt to address a design flaw in the Medicaid program that has haunted federal and state policy makers for decades.

Medicaid is in many ways a well-designed program.  However, there has always been a problem when there is an economic downturn,  States, specifically those with balanced budget requirements, face increasing Medicaid expenses at the very time they have decreasing revenues to pay for them.  This is commonly referred to as the “counter cyclical” problem.  Whenever the ranks of the newly unemployed surge because of economic downturns, the ranks of those newly eligible for Medicaid surge as well.  The states confront fundamental challenges to their budgetary stability.  Tax revenues go down; spending goes up.  States then historically have three main options available to them:  (1) cut Medicaid reimbursement, (2) eliminate Medicaid benefits, or (3) restrict Medicaid eligibility for those not entitled by federal statute.

We have both held senior positions on Capitol Hill and in the Administration.  We have seen and worked on a range of well-designed and poorly designed programs.  Social Security is well designed, with the major exception of an ineffective mechanism to self-correct when demographics and financing come into conflict, e.g., the retirement of the baby boom generation.  Medicare, on the other hand, seems to require ongoing readjustment.  Social Security we reopen once each generation.  Medicare we reopen, at a minimum, every other year.  In some cases, such as the breakdown of Medicare’s physician reimbursement system, Congress has been forced to revisit Medicare payment every few weeks as one short-term payment patch bleeds into the next.

 Medicaid falls somewhere in-between in terms of the need for ongoing legislative intervention. While states have the responsibility for ongoing management of the program within federally established parameters, this counter cyclical financing problem eventually drives states to turn to Washington when confronted with economic downturns.  The most common first response to the problem is for the states to cut spending to the bone, both within Medicaid and more broadly across other state programs.  But Congress has begun to restrict the ability of states to control their Medicaid spending.  New maintenance-of-effort requirements prevent states from scaling back eligibility and a new Medicaid and CHIP Payment and Access Commission (MACPAC) will monitor payment.  

After exhausting internal options, states are forced to pursue special federal legislation to provide supplemental funding from the federal taxpayers – supplemental funding that is typically never paid back to those taxpayers.  This option will become increasingly less viable as the size of the federal debt continues to grow.

The Proposal

Driving the cost-sharing arrangement between the states and federal taxpayers is the “federal medical assistance percentages (FMAP).  This determines what share of the Medicaid cost is paid by the states and what share is paid by the federal government.  States with lower average income per person pay a lower share.  For example, in 2010 California’s FMAP was 50 percent, while Mississippi’s was 74.7 percent.

The proposal we are considering is to adjust downward a state’s share during an economic downturn.  The adjustment would allow states facing economic hardship to make a lower contribution during the downturn, i.e., the FMAP would increase and the federal government would pay more.  However, unlike current practice, the additional federal funds would be paid back using a lower FMAP (therefore a higher state share) once the state’s economy rebounded.  The design would achieve the dual policy goals of providing federal help to states during a downturn, and not adding to the federal debt.

To achieve this, a number of steps would be taken: 

First, there would need to be a trigger mechanism (not controlled by the states) that would indicate economic vulnerability.  Some possibilities might be the state’s unemployment rate rising above 10 percent or an annual reduction in state gross domestic product (GDP) of more than 5 percent

Second, there would need to be a sliding scale emergency FMAP adjustment where the federal government picks up a higher percentage based on how bad the state’s economy is.  For example, a 1 percent increase in the federal share for every 1 percent of the state’s unemployment rate beyond 10 percent.

Third, the adjustment should not occur until the next fiscal year.  This lag is designed to serve two purposes.  First, this mechanism is not intended to address short-term dips in a state’s economy.  That is for the state to manage.  Second, accessing federal relief should not be an option of first resort.  Instead, states should exercise the program management tools they possess (not that those are easy or desirable) before asking federal taxpayers for help.

Fourth, the difference between the regular FMAP and the emergency FMAP would be treated as a loan with a five-year payback window.

Fifth, as the state’s economy recovers, the five-year payback window would start.  This could be designed to have the payback start within five years of the initial triggering event.  The result is a maximum payback period of 10 years.

Sixth, the payback mechanism would be a higher percentage share from the state until the additional federal money is repaid, plus an amount equal to the market rate for federal borrowing during the time period of the emergency FMAP.

Even with such mechanisms in place, Congress may still choose to step in and pass some form of state debt forgiveness measure, but if this provision can effectively deal with the counter cyclical financing problem, the states will not be quite as vulnerable on the front end and Congress will have more options at its disposal on the back end.  There may be some states whose laws or constitution will not allow them to participate in such a program.  Those states would need a different solution. 

Still, something has to be done.  The mechanism used in the past is less and less viable every day.  This proposal allows states a path out of their problems, without shifting an ever-growing burden onto federal taxpayers.

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This entry was posted on Wednesday, September 1st, 2010 at 8:56 am and is filed under All Categories, Health Reform, Medicaid, Policy, Spending, States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.