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The Federal Budget: Spending, Taxes, and Debt

Reconciliation Option: End Medicaid Funding Bias Against Most Vulnerable Americans

The Federal Budget: Spending, Taxes, and Debt Policy Rapid Response BlogApril 2, 2025 By David Ditch
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Medicaid was created in 1965 as part of the “Great Society” group of welfare programs. Its focus was on children, pregnant women, the disabled, and low-income seniors.  But now Medicaid is biased against the most vulnerable Americans because it subsidizes able-bodied, working-age adults at a higher rate.   The Affordable Care Act, aka. Obamacare, expanded eligibility for Medicaid to include able-bodied adults and households with incomes above the federal poverty line. This has brought far more people into the program than initially expected, and at far greater cost.   This has become one of the prime examples of perverse incentives in human history. 

Putting Healthy Adults Ahead of Babies and the Disabled

Medicaid Graph Because Medicaid is a federal-state partnership, any state choosing to expand eligibility to able-bodied, working-age adults would face higher costs. To coax states towards expansion, Obamacare set the Federal Medical Assistance Percentage (FMAP) for the expansion population at 90%. This is far higher than the roughly 60% average FMAP that states receive for the traditional Medicaid population.  For the expansion population, the 90%-10% split means that the expansion population has become welfare for state governments. Increasing the Medicaid expansion enrollment means maximizing “free” federal handouts, with politically influential medical providers reaping a windfall.  Both state governments and medical providers have limited resources. As a result, the shift of Medicaid to a broad welfare program means that traditional recipients, such as pregnant women, children, and individuals with disabilities, face delays in getting appointments, slower ambulance response times, and longer lines at emergency rooms. 

Waste, Fraud, and Abuse

While states have used various policies to launder money through Medicaid for decades, this abuse has ramped up because of the excessively high expansion FMAP rate. The provider tax gimmick is especially pernicious, with California using federal Medicaid payments as a backdoor funding mechanism to provide benefits to illegal immigrants.  Improper payments in Medicaid have surged since Obamacare’s enactment. States now have an incentive to avoid strict eligibility enforcement due to the enhanced payout they get for adding expansion enrollees.  

FMAP Fairness Saves Over Half a Trillion

While overhauling Obamacare in its entirety would be ideal, modest changes can have a real impact on the nation’s finances.  According to the Congressional Budget Office, protecting Medicaid for the vulnerable by setting the FMAP rate for the expansion population at the same level as the traditional population would reduce deficits by a net $561 billion between fiscal years 2026 and 2034.   It is important to note that with Medicaid spending set to grow by a cumulative $2 trillion through 2034, this change would merely slow the growth rate. Complaints that any savings are “cuts” are an example of “Washington Math,” where spending increases are taken for granted regardless of how unsustainable they are.  Legislators who want to save America from being crushed by debt should embrace this commonsense reform to end Medicaid bias against the most vulnerable Americans. 

Author

David A. Ditch

David A. Ditch

David A. Ditch is Senior Analyst in Fiscal Policy at the Economic Policy Innovation Center (EPIC). Ditch has over a decade of experience analyzing federal spending and fiscal policy, including appropriations, infrastructure, agriculture, and needed reforms for dozens of agencies and programs. He has appeared on radio stations across the country and has written for FoxNews.com , the Los Angeles Times , the Chicago Tribune , and many other publications. Prior to joining EPIC, Ditch was a Senior Policy Analyst at The Heritage Foundation, where he was a founding staffer for the Grover M. Hermann Center for the Federal Budget. He managed the Federal Budget in Pictures chart portfolio, was responsible for creating dozens of policy options for the Heritage Budget Blueprint, and produced several groundbreaking reports on federal spending and governance. Ditch was also previously an analyst for the Senate Budget Committee, where he oversaw budgetary enforcement for appropriations legislation. Ditch graduated from the University of Rochester with degrees in Economics and Political Science, and received a Master's in Political Management from George Washington University.

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