Paragon’s proposals for Medicaid Reform

Stopping Discrimination Against the Most Vulnerable and Reducing Bias-Favoring Wealthy States

1. Starting in 2026, the 90% federal match for the expansion population would be phased down until it is level with each state’s traditional enrollees in 2034. States would still be able to maintain the expansion population, but with a new cutoff of 100% poverty — while those earning more would be eligible for ACA plans.

2. The minimum amount of spending covered by federal dollars would be reduced from 50% to 40%, also starting in 2026 and ending as of 2034… Wealthier states, like New York, California and Massachusetts, would have matches rates between 45% and 50%.

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Executive Summary

What’s the Problem?
No major government program has grown as much over the past generation—and with such poor results—as Medicaid. The reason for the substantial growth: the federal government provides an open-ended reimbursement of state Medicaid expenditures. Despite the intent of the federal financing formula—the federal medical assistance percentage (FMAP)—to provide greater federal support in poorer states, richer states have developed more profligate Medicaid programs and thus receive far more federal funding per person in poverty than poorer states. Part of the problem is that the FMAP formula has an arbitrary floor on the federal reimbursement for the wealthiest states. Medicaid’s financing structure leads states to spend more on Medicaid relative to other areas like education, infrastructure, and policing and leads states to develop financing schemes and gimmicks in order to obtain as much federal money as possible.

The Affordable Care Act (ACA) significantly expanded Medicaid over the past decade, worsening the program’s structural problems. The ACA created a new eligibility category for Medicaid—able-bodied, working-age adults—with a much higher federal reimbursement percentage for these enrollees. This has led to a host of problems, including: 1) a diversion of resources away from traditional Medicaid enrollees, particularly low-income children and people with disabilities, that has reduced their access to health care services; 2) a near quadrupling of Medicaid’s improper payments; and 3) a surge of spending that has significantly contributed to large and growing federal deficits.

How Do We Propose to Fix the Problem?
Most importantly, our proposal would end the discrimination against low-income children, pregnant women, seniors, and people with disabilities by equalizing the percentage that the federal government reimburses state Medicaid expenditures for them and for ACA expansion enrollees. Starting in 2026, our proposal would begin phasing down the 90 percent FMAP for expansion enrollees until it would reach parity in 2034 with each state’s FMAP for traditional enrollees. We permit states to keep Medicaid expansion and reduce eligibility to only households below the poverty level, while households earning above the poverty level would be eligible for tax credits for ACA exchange plans. This policy would better protect services for traditional enrollees, better align state incentives to get value from expenditures and eliminate their incentive to enroll as many people under the expansion as possible, and significantly increase enrollment in the exchanges relative to Medicaid.

We include a second proposal that would add an important reform to the phasedown of the ACA expansion FMAP. The second proposal reduces the FMAP floor that benefits wealthy states from 50 percent to 40 percent. The only jurisdiction affected by the 40 percent floor would be the District of Columbia, the U.S. jurisdiction with the highest per capita income. States with the highest per capita incomes, such as California, Connecticut, Massachusetts, and New York, would have FMAPs between 45 and 50 percent, based on their state per capita income. This policy would create greater equity in the federal support across the country—reducing the gap in federal funding per person in poverty—although wealthy states would still receive more federal funding per person in poverty after our proposal takes full effect. The phasedown of the standard FMAP would also start in 2026 and be complete in 2034.

What Would Result?
We estimate state baselines of Medicaid expenditures and show the impact of our proposals relative to that baseline for each state. We also pegged our federal estimates of savings to how the Congressional Budget Office (CBO) would likely score the proposal, which included feedback we received from CBO.

Effect on States

1. We expect and we model states lowering Medicaid expansion eligibility from 138 percent of the federal poverty level (FPL) to the FPL in both proposals.
2. We estimate the total costs to states from proposal #1 would be $110.1 billion between 2026 and 2034, which includes costs from the reduction in the 90 percent FMAP for Medicaid expansion enrollees with income below the FPL, somewhat offset by savings to states from not having to pay the 10 percent share for enrollees with income above the FPL. For these estimates, we assume all states maintain the expansion up to 100 percent FPL. If states drop Medicaid eligibility, they would accrue additional savings. Moreover, we do not assume states take steps to run more efficient programs when the enhanced FMAP phases down even though they would have a strong incentive to become more efficient.
3. We estimate the total costs to states would be $171.5 billion from proposal #2, with the added costs absorbed by wealthy states and the District of Columbia picking up a greater share of the costs for traditional enrollees with the lowering of the FMAP floor.

Effect on the Federal Government

1. Assuming all states maintain their expansion and all individuals in households with income between 100 and 138 percent FPL maintain coverage with the switch from Medicaid to the subsidized exchanges (in essence no behavioral changes from our proposals), we estimate that the federal government would save $251.7 billion from proposal #1 and $314.2 billion from proposal #2.
2. There would be three sources of federal savings. First, we estimate $40.3 billion in savings because current non-expansion states would not expand their programs under our proposals, and CBO assumes some degree of non-expansion states expanding in the baseline. Second, we estimate $171.5 billion in savings from the phasedown of the 90 percent expansion FMAP for people with income below the FPL and for proposal #2, we estimate an additional $57.1 billion in savings from reducing the FMAP floor for traditional enrollees. Third, the federal government accrues about $45.3 billion in savings because, on average, federal spending per Medicaid expansion enrollee exceeds the premium tax credit for the lowest-income exchange enrollees and we estimate around 4.5 million enrollees switch from Medicaid to the exchanges.
3. We also account for two behavioral assumptions that CBO would assume in its projections: 1) states dropping Medicaid expansion when the 90 percent expansion FMAP declines and 2) some people losing Medicaid and not enrolling in a subsidized exchange plan. Based on conversations with CBO and other experts, we estimate that about a quarter of people living in current expansion states would live in a state that pulls back its expansion and that about one-in-five expansion enrollees with income between 100 and 138 percent FPL will not enroll in a subsidized exchange plan. We estimate that the respective federal savings from these two factors would be: $185.6 billion and $92.6 billion.
4. Thus, we expect CBO would estimate that proposal #1 would save $529.9 billion from 2026-2034 and proposal #2 would save $592.4 billion over this period.

Source: STAT (gated) and Paragon Health Institute paper.