Reduce Federal Medicaid Matching Rates

Background

Medicaid is a joint federal-state program that pays for health care services for low-income people in various demographic groups. State governments operate the program under federal statutory and regulatory oversight, and both the federal and state governments share in the cost of the program, with the federal government's share varying by state, by the type of cost (that is, costs for administrative or medical 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 for by the federal government is determined according to the federal medical assistance percentage (FMAP). The FMAP is based on a formula that provides higher federal reimbursement to states with lower per capita incomes (and vice versa) relative to the national average. By law, states can receive an FMAP rate of no less than 50 percent and no more than 83 percent. The national average matching rate is 57 percent, with states contributing the remaining 43 percent.

The federal government's share of costs for medical services is considerably higher for enrollees who became eligible for Medicaid as a result of the optional expansion of that program under the ACA. For that eligibility category, the federal government's share of Medicaid costs was initially set at 100 percent—a rate that was in effect from 2014 through 2016. As required by statute, that federal share began declining in 2017 and will reach 90 percent in 2020, where it will remain thereafter. The federal government's share for enrollees made eligible by the ACA does not vary by state.

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 general administrative expenses of operating Medicaid are evenly divided between the federal and state governments, but 25 specified categories of administrative costs have rates that vary 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 75 percent of the cost of operating such systems. The overall average federal share for administrative expenses was 64 percent in 2017.

Option

This option consists of three alternatives, each of which would go into effect in October 2020.

• 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 for medical services for enrollees not made eligible by the ACA would be removed, causing FMAP rates to fall below 50 percent for states with the highest per capita incomes.
• 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. The Congressional Budget Office estimates that under the first alternative, setting all categories of administrative spending to 50 percent, would reduce mandatory spending by $55 billion from 2021 through 2028. Under the second alternative, eliminating the 50 percent floor on the FMAP rate, mandatory spending would be reduced by $394 billion between 2021 and 2028. 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.

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 Medicaid spending by $492 billion between 2020 and 2028, CBO estimates. The savings arising from this alternative would be partially offset: Specifically, 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 and all states that would have adopted such coverage in the future would no longer choose to do so. (A reduction in the deficit would occur in 2020 because this alternative would become law in 2019, and CBO expects that some of the states that would have opted to expand coverage would have done so in 2020.) As a result, CBO and the staff of the Joint Committee on Taxation estimate that outlays other than those for Medicaid would increase by $98 billion and revenues would decrease by $36 billion because some people who did not receive Medicaid coverage would instead receive subsidies through the health insurance marketplaces established by the ACA or obtain employment-based coverage. In addition, CBO estimates that there would be an increase in outlays of $13 billion for Medicare "disproportionate share hospital" payments to inpatient facilities that serve a higher percentage of low-income patients because such payments are determined on the basis of the uninsured rate, which would increase. On net, this alternative would reduce the deficit by $345 billion from 2020 through 2028. The net reduction in the deficit would increase over time in line with projected increases in health care spending and with projected increases in the rate of additional state coverage expansions under current law.

For all three alternatives, reducing the share of total spending by the federal government would shift additional financial responsibility to states for the cost of Medicaid. Lower federal spending would require additional spending by states in order for them to maintain the same eligibility levels, covered services, and provider payment rates in their Medicaid programs. However, the amount of savings from these alternatives would also depend on the extent to which states chose to adjust their Medicaid programs in response to reduced federal spending. Under each alternative, states would need to decide whether to continue spending the same amount—and make up the difference out of other revenues—or to cut spending by the difference in the amount of lost federal spending. If states chose to spend the same amount, they might replace reduced federal spending by raising taxes or by reducing spending elsewhere in their budgets and transferring those amounts to Medicaid spending. In either of those cases, the federal government would save the amount that resulted from the change to the federal share. Alternatively, if states decided not to replace the lost federal spending, they could instead shrink their Medicaid programs sufficiently to keep their spending more consistent with prior levels. States could do so by limiting optional eligibility and services and by lowering provider payment rates, as long as minimum federal standards were met.

CBO expects that different states would respond to lower federal spending in different ways. Most states would probably not replace all of the lost federal spending with state spending because full replacement could place substantial pressure on state budgets. However, most states would probably not cut Medicaid spending by the full amount of the lost federal spending because they would deem other choices to be preferable. CBO anticipates that, on average, states would replace half of the lost federal share, which would reduce federal spending even further because the federal government would be contributing its share, as lowered under the alternatives, on the basis of smaller programs.

For the first two alternatives, CBO anticipates that states would not limit eligibility. Under the first alternative, the loss in federal revenues would be modest when compared with total Medicaid spending and would be insufficient to induce states to restrict eligibility. Under the second alternative, most of the affected states would be unlikely to seek savings by reducing eligibility because they have a history of expanding Medicaid coverage. By contrast, under the third alternative, CBO anticipates reductions in the optional ACA expansion because states adopted the expansion expecting the higher matching rate, and a number of them expanded coverage on the basis of the enhanced FMAP. However, the expectations for all three alternatives are highly uncertain, and actual savings would vary on the basis of states' actions.

Other Effects

There are different arguments for implementing the alternatives. One argument for the first alternative, setting the federal share for all administrative categories to 50 percent, is that the higher rates under current law were designed to encourage states to develop and support particular administrative activities that the federal government considered important for the Medicaid program. Once those administrative systems were operational, however, there might be less reason to continue the higher subsidy. However, a reduced federal share might cause states to cut back on some activities that the federal government would still want to encourage.

An argument for the second alternative, removing the 50 percent floor on the FMAP, is that it would reduce payments to states with the greatest financial resources available to fund their programs. The floor of 50 percent raises a number of states' FMAP rates well above the rates they would receive in the absence of the floor, and removing the floor would require states with higher per capita income to pay a greater share of Medicaid costs. However, an argument against this alternative is that it would concentrate significant spending reductions among only 14 states.

An argument for the third alternative, applying the FMAP formula to the ACA eligibility category, is that the income of enrollees in that eligibility group does not differ substantially from that of adults in other nondisabled, nonelderly eligibility categories—both within states that have adopted the ACA and those that have not. Therefore, it could seem inequitable to pay more for the ACA eligibility group than other groups. However, lowering the federal share for that group would lead to significant reductions in federal spending for most of the 32 states that adopted the expansion as of 2018 and did so partly because they expected to receive the higher federal share.