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
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.
