Reduce Federal Medicaid Matching Rates

Background

Medicaid is a joint federal-state program that covers acute and long-term health care for groups of low-income people, chiefly families with dependent children, elderly people (those 65 or older), nonelderly people with disabilities, and—at the discretion of individual states—other nonelderly adults whose family income is up to 138 percent of the federal poverty guidelines. State governments operate the program under federal statutory and regulatory oversight, and both the federal and state governments share in the costs of the program. The federal government's share varies by state, by the type of cost (that is, costs for medical or administrative services), and by eligibility category.

For medical services used by most Medicaid enrollees—those who were not made eligible by the Affordable Care Act (ACA)—the share of Medicaid costs paid by the federal government is specified by the federal medical assistance percentage rate (FMAP rate). The FMAP rate is determined by a formula that provides a higher rate of federal reimbursement for states with lower per capita income relative to the national average and a lower rate for higher-income states. By law, a state's FMAP rate can be no less than 50 percent and no more than 83 percent. The national average matching rate over the 2024–2032 period for services provided to those enrollees is projected to be 60 percent, with states contributing the remaining 40 percent. In 2021, federal spending governed by the FMAP formula was $397 billion, or about 75 percent of total federal Medicaid spending. Federal spending for states with FMAP rates set at the 50 percent floor accounted for 38 percent of that amount.

The federal government's share of costs for medical services is considerably larger for enrollees who became eligible for Medicaid because of the optional expansion of eligibility under the ACA. That law allowed states to expand eligibility to all adults under age 65 (including parents and adults without dependent children) who have income below 138 percent of the federal poverty guidelines. (Thirty-eight states and the District of Columbia have adopted the expansion.) For those who are eligible as a result, the federal government's share of Medicaid costs is fixed at 90 percent and does not vary by state. That higher matching rate was made available—even though those enrollees' health risks are typically lower than the health risks of some other eligible groups, such as the elderly and disabled—in order to lower the financial cost to states of covering a group that had not generally been covered previously. In 2021, federal spending for services provided to those newly eligible enrollees was $99 billion, or about 20 percent of total federal Medicaid spending.

The federal government's share of administrative expenses is also specified by statute and varies by the category of such costs, but not by state. The federal government's share of general administrative expenses is 50 percent; however, for 25 specified categories of administrative costs, the federal share ranges from about 70 percent to 100 percent. For example, the federal government pays 75 percent of the cost of employing skilled medical professionals for Medicaid administration, 75 percent of the cost of utilization review (the process of determining the appropriateness and medical necessity of various health care services), 90 percent of the cost of developing systems to manage claims and information, and 100 percent of the cost of prescription-drug monitoring programs. The overall average federal share for administrative expenses was 62 percent in 2021. That year, federal spending for Medicaid administration was $20 billion, or about 5 percent of total federal Medicaid spending.

Option

This option consists of three alternatives, each of which would go into effect in October 2023.

• Under the first alternative, the federal government's share for all categories of administrative spending would be 50 percent.
• Under the second alternative, the 50 percent floor on the FMAP rate that applies to medical services for enrollees not made eligible by the ACA would be removed. Consequently, FMAP rates would fall below 50 percent for states with the highest per capita income. The Congressional Budget Office estimates that this alternative would affect 13 states, and the new matching rates for those states would be between 4 percent and 49.75 percent.
• Under the third alternative, the federal share of medical expenditures for enrollees made eligible by the ACA would be based on the same FMAP formula that applies to all other enrollees.

Effects on the Budget

The amount of savings resulting from each alternative would vary significantly. CBO estimates that under the first alternative—setting the federal share for all categories of administrative spending at 50 percent—the net effect would be a reduction in spending of $68 billion from 2024 to 2032. Under the second alternative—eliminating the 50 percent floor on the FMAP rate—the net effect would be a reduction in spending of $667 billion from 2024 to 2032. Savings in 2032 would amount to about 1 percent of projected federal Medicaid spending under the first alternative and 11 percent under the second. For both of those alternatives, CBO estimates that the reductions in spending would increase over the period in line with the projected growth in Medicaid spending.

Under the first two alternatives, CBO anticipates, states would probably respond by reducing the rates they pay providers and cutting coverage of optional medical services, but not by limiting eligibility. Under the first alternative, the reduction in federal funding would be modest when compared with total federal Medicaid spending and would be insufficient to induce states to restrict eligibility. Under the second alternative, most of the affected states would probably not seek savings by reducing eligibility because they have a history of expanding Medicaid coverage.

CBO estimates that the third alternative—setting the federal share of medical expenditures for enrollees made eligible by the ACA so that it equals the rate used for other enrollees—would reduce the deficit by $604 billion from 2024 to 2032. That estimated reduction in the deficit reflects a decrease of $752 billion in federal Medicaid spending; in 2032, those savings would amount to 12 percent of projected federal Medicaid spending. Medicaid's savings would be partially offset because some people would lose Medicaid coverage and subsequently obtain other federally subsidized health insurance. CBO anticipates that, in response to the reduced federal share for enrollees made eligible by the ACA, some states would discontinue coverage for that category of enrollees. States adopted the expansion expecting the higher matching rate, and several of them expanded coverage because of the enhanced FMAP rate. In addition, CBO expects that all states that would have adopted such coverage in the future would no longer choose to do so.

People who did not receive Medicaid coverage because of reductions in the optional expansion would instead receive subsidies through the health insurance marketplaces established by the ACA, obtain employment-based coverage, or become uninsured. CBO and the staff of the Joint Committee on Taxation estimate that, from 2024 to 2032, the resulting subsidies for coverage obtained through the health insurance marketplaces and for employment-based coverage would increase outlays by $121 billion and decrease revenues by $27 billion.

The net reduction in the deficit would increase over time in line with projected increases in health care spending. It would also increase over time because the additional state coverage expansions that are projected to occur under current law would be discontinued under the third alternative.

The estimated savings for all three alternatives depend on expectations about how states would respond to the loss of federal funds. As a result of less federal funding, states would have to spend more of their own funds to maintain the same eligibility levels, covered services, and provider payment rates that they have in their current Medicaid programs. Therefore, states would need to decide whether to spend additional funds from other state sources or to cut spending by some, or all, of the amount of lost federal funding. If states chose to maintain their current programs by replacing the lost federal funding with their own, the federal government would save the amount resulting from the change to the federal share. Alternatively, if states decided not to replace the lost federal funding, they could instead reduce the size and scope of their Medicaid programs sufficiently to keep their spending more consistent with previous levels. That would reduce federal spending even further because the federal government's share, as lowered under the alternatives, would be based on smaller programs.

CBO expects that different states would respond to less federal funding in different ways. Most states would probably not replace all of the lost federal funding with state funding because full replacement could put substantial pressure on state budgets. However, most states would probably not cut their share of Medicaid funding by the full amount of the lost federal funding because they would deem other choices to be preferable. For the purposes of these estimates, CBO anticipates that, on average, states would replace half of the lost federal share.

All three of the alternatives could be adjusted to achieve different amounts of savings.

• Under the first alternative, the federal government could pay larger or smaller shares of administrative costs.
• Under the second alternative, smaller savings could be achieved by setting a floor that was lower than the current-law rate of 50 percent, but without eliminating the floor entirely.
• The third alterative could achieve smaller savings by specifying a share of federal payments for enrollees made eligible by the ACA that was smaller than the current-law rate of 90 percent but larger than the share for other enrollees. For larger savings, the federal share for those enrollees could be made smaller than the share for other enrollees.

Uncertainty About the Budgetary Effects

The amount of savings from all three alternatives is uncertain because the savings would be partly dependent on how states responded to the loss of federal funds. The estimate that states would replace half of the lost revenues with other revenue sources or reduce spending in other areas is uncertain. To the extent that the average state response was to make larger cuts to Medicaid, the savings would be greater, and to the extent that the average state response was to make smaller cuts to Medicaid, the savings would be smaller. For the third alternative, it is similarly uncertain how many of the people who lost Medicaid coverage would become uninsured and how many would obtain coverage from other subsidized sources.

Distributional Effects

In its distributional analysis, CBO allocates reductions in spending directly to the beneficiaries of that spending program. Most Medicaid enrollees' income is under 138 percent of the federal poverty guidelines, so the effects of reduced Medicaid spending would fall principally on households toward the bottom of the income distribution. (In 2022, the federal poverty guideline is $13,590 for single-person households in the 48 contiguous states and the District of Columbia and increases by $4,720 with each additional household member.)

Medicaid enrollees would not be the only group affected by a reduction in federal Medicaid spending. Medicaid payments from the federal and state governments go directly to health care providers, health care plans, and companies that sell prescription drugs. If states responded to the lower matching rates for Medicaid by reducing providers' payment rates, discontinuing coverage for optional services, or covering fewer people, compensation throughout the health care industry would fall, affecting people across the income distribution, including some health care providers at the top of the distribution.

For both enrollees and providers, the effects of the second alternative would occur only in states whose FMAP rates fell below the 50 percent floor. The effects of the third alternative would fall only on those states that have expanded coverage under the ACA or that would choose to do so in the future.

For the purposes of these estimates, CBO anticipates that, on average, states would replace half of the lost federal funds; however, the agency does not project how individual states would respond to the change. To replace lost federal funding, states could reduce spending in other areas, increase existing taxes, or introduce new taxes. Each of the potential responses would have its own specific distributional effects, and the net effect of the option would reflect the impact of reduced Medicaid spending and the consequences of those other changes.

Economic Effects

In addition to having the behavioral effects reflected in conventional budget estimates, such as the ones shown above, the reduction in Medicaid spending could affect the labor supply and people's saving; those effects would apply both to enrollees and to employees in the health care industry. For enrollees, a reduction in Medicaid spending could lead to poorer health outcomes and thus reduce the number of able-bodied workers and their productivity. Because many enrollees are disabled, elderly, or children, and do not or cannot work, the decrease in the labor supply would most likely be small. But, for those who do work, a loss of benefits could increase the number of hours they work to compensate for the need to spend more of their own resources on health care. Whether the combination of those two effects would increase or decrease the total number of hours that enrollees work is uncertain, but the economywide effect on hours worked would probably be small.

A reduction in benefits that caused people to increase their own medical spending could cause them to cut back on other types of consumption and on saving. Because lower-income households have lower saving rates, which can be zero or even negative, the effect on such households' finances could be consequential, possibly leading to a significant increase in medical debt and bankruptcies. Economywide, the effect on saving would probably be small.

Across the health care industry, the effect of Medicaid cuts would vary widely and would depend on each provider's mix of Medicaid patients and other types of patients. The labor supply of health care workers and the amount they save could be reduced because of a decrease in their income. That decrease in income would result if there was a drop in the demand for services or a reduction in Medicaid payment rates. Reductions in Medicaid eligibility and enrollment could also lead to increased enrollment in higher-paying private plans, increasing some health care workers' income, the number of hours they work, and the amount they save. Across the health care industry, the effect of Medicaid cuts would vary widely and would depend on each provider's mix of Medicaid patients and other types of patients. Economywide, the net effect on hours worked and saving would probably be small.

As with distributional effects, CBO does not project how individual states would respond to the changes and does not estimate the specific economic effects of each potential response. The net effect of the option would reflect the impact of reduced Medicaid spending and the consequences of those other changes.

Other Considerations

The second and third alternatives would affect enrollees in various ways if states reduced providers' payment rates or payments to managed care plans or cut covered services. If states reduced payment rates, fewer providers might be willing to accept Medicaid patients, especially given that, in many cases, Medicaid's rates are already significantly below those of Medicare or private insurance for some of the same services. If states reduced payments to Medicaid managed care plans, some plans might reduce the size of their provider networks, curtail quality assurance, or drop out of the program altogether. If states reduced covered services, some enrollees might decide either to pay out of pocket for medical services or to forgo those services entirely.