New Report: How Congress Can Cap Optional Medicaid Spending 

NEW YORK, NY— Medicaid, the fastest growing federal program, saw expenditures surge from $41 billion in 1985 to $824 billion in 2022. It’s no surprise that with a new Congressional majority, Republican lawmakers are eager to reform it. Previous attempts to cap Medicaid matching funds faltered over concerns that cuts would leave the poorest beneficiaries uninsured and states underfunded in recessions, when they need help most. But in a new Manhattan Institute report, senior fellow Chris Pope shows that by limiting increases in optional spending, the federal government could create significant savings without threatening existing services. 

Pope finds that while Medicaid is a healthcare benefit for the poorest Americans, 63% of Medicaid spending goes to benefits and eligibility beyond the program’s core function. Over recent years, states have increasingly used Medicaid waivers to claim federal funding for non-medical services that supposedly yield incidental health benefits to their low-income residents. States have also expanded eligibility to other low-income adults and higher-income families—leading to an astonishing enrollment increase over the past four decades from 20 million to 94 million.  

States understand that for every $1 they spend on beneficiaries, they may claim between $1 and $9 in “matching funds” from the federal government—without limit. This presents an extraordinarily lucrative incentive, especially for wealthy states with the deepest tax bases, able to put up more dollars, and thus claim more federal funding. As long as Medicaid’s financing is largely separate from its administration, states will continue to inflate the program’s cost. 

While full matching funding for the program’s core services should be preserved, Pope argues Congress should limit the annual increase in funding which states may claim to further expand Medicaid benefits—with the highest-spending states subject to tighter caps. This reform would make states responsible for paying for whatever expansions of expenditure they choose to make.   

Click here to view the full report.