The newly elected Republican Congress seems set to place Medicaid reform at the top of its legislative agenda. Previous reform attempts have stumbled due to fears that cuts would leave the poorest beneficiaries uninsured. But, rather than cutting payments for core services, Congress can best curb rising Medicaid costs by limiting high-spending states’ further expansions of benefits and eligibility.
To claim federal Medicaid funding, states must provide a core package of healthcare benefits to low-income parents, children, and elderly and disabled people. But 63% of Medicaid spending comes from states opting to expand benefits and eligibility beyond what is required by federal law.
Federal Medicaid spending surged from $265 billion in 2013 to $616 billion in 2023. This increase was partly due to COVID-19, but mostly because states exploited an extraordinarily lucrative revenue opportunity: For every $1 that states spend on most beneficiaries, the federal government will normally provide between $1 and $3 in matching funds. For beneficiaries made eligible by the Affordable Care Act, the federal match is $9 for every $1 spent, with no upper limit.
Although low-income states are entitled to more federal aid per dollar they spend, the wealthiest states with the deepest tax bases can put up many more dollars and claim more federal funding. For example, Delaware obtained $24,639 in federal Medicaid funding per poor resident in 2021, whereas Alabama received only $7,052.
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Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here. This piece is based off a recent issue brief.
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