A Path to Better Health Beyond Medicaid

Most right-of-center criticism of Medicaid comprises a mix of the following: The program’s spending incentives stimulate demand while restricting supply. They encourage state officials to maximize their capture of federal matching dollars rather than focus on a better balance of efficient, effective, and equitable health care services for their most vulnerable populations. When the states eventually must economize on the margins, they primarily resort to underpaying health care providers to even greater degrees. This hollows out seemingly generous benefit promises in their Medicaid programs.

Expansion in enrollment equates to dilution in value delivered to the neediest. The push-pull dynamic between overstimulated demand and constrained supply encourages wasteful practices, delivers lower-quality care, and polices fraud poorly (even while driving up administrative burdens on providers).¹ It crowds out private-market alternatives and discourages work. Medicaid coverage also fails to be integrated effectively with other coverage, which disrupts ongoing relationships with physicians and care coordination during transitions in beneficiaries’ eligibility status.

Medicaid in practice is far less about maintaining and producing better health and much more about delivering superficially higher coverage numbers in the cheapest and most expedient ways, or at least enough to overlook what is actually happening to beneficiaries over the long term.

There is a long and daunting to-do list of substantial repairs that are sometimes desired but rarely delivered. It’s not a new one, either. This chapter could try to recount a host of past, and likely future, attempts to chip away at those chronic problems (and it does, briefly), but their track record and future prospects remain bounded by the political, economic, and social pressures that have sustained a dissatisfactory status quo across our health care system despite its outcomes. More of the same, more or less, remains likely to produce . . . more of the same.

A Different Mix of Initial and Slower Developing Structural Reforms

Where to begin again? Perhaps somewhere else, to demonstrate different initial routes for planting the seeds of more dynamic change over a longer time horizon. Most notably over the past decade, passage of the Affordable Care Act (ACA) in March 2010 further propelled decades of inefficiencies and disappointments in the Medicaid program for low-income Americans into a new era of rapid growth. Although an unexpected Supreme Court ruling in National Federation of Independent Business v. Sebelius in 2012 provided states with choices over whether to agree to the ACA’s Medicaid expansion terms, various right-of-center efforts to resist or revise the terms of those federally prescribed changes fell short or short-circuited by the end of 2020. In the meantime, the COVID-19 pandemic triggered an even more rapid expansion of Medicaid over the past two years, primarily as the most readily available platform to dispense new layers of care quickly, if not effectively, for a health care system under extraordinary stress.

These facts on the ground have altered the political window for policy reform. Medicaid has grown larger than ever and captured a greater share of the health care market. These latest layers of Medicaid spending have been financed even more disproportionately by federal taxpayers and federal government debt.

However, the fiscal effects are symptoms that reflect deeper distortions than budgetary imbalances per se. Before succumbing to the lazy political temptation to rinse and repeat with another dose of rewarmed rhetorical stances, we should reexamine other options. They may begin with another round of modified, incremental policy steps but need a much bolder reframing of key issues, particularly for a post-pandemic policy landscape ahead.

Without preempting others’ efforts to try to succeed finally with approaches that have often failed to be adopted in the past, let alone implemented successfully, here are several different approaches to pursue.

First, in the short term, stop the misdirected bleeding of resources through pandemic-related mis-incentives of enhanced federal matching rate subsidies combined with mandatory maintenance of effort restrictions on state Medicaid policies and practices.

Second, reopen some different windows for state, local, or even beneficiary-driven innovation, primarily through reconfigured combinations of Medicaid Section 1115 waivers that work in closer coordination with ACA Section 1332 individual market waivers. These so-called mega-waivers could provide better timelines, tools, and incentives to produce actionable and measurable results.

Third, reframe trade-offs more transparently to prioritize what must be done better, and what might have to be done less, to move in that direction. Medicaid habitually promises to do far more than it can, and it achieves even less as a result. Opportunistic expansion, driven by funding flows and political ambitions, overshoots the sustainable runway. It leaves victims and debris behind even well before it risks crashing more spectacularly. We won’t change that until we first acknowledge a number of constraints that narrow the path for more conventional “reforms.” This still could leave open some other less-explored doors for structural, slower-developing change.

Assembling an effective coalition in favor of more market-based alternatives to expansion of an unreformed Medicaid program will require more than a recitation of budget projections that suggest “it costs too much” and “we can’t afford it.” Those statements may contain accurate mathematical projections, but they fail to offer better, realistic alternatives that can address low-income Americans’ health care needs more effectively, without preempting their opportunities to achieve other important life goals too. If we want better answers, we first will have to ask better questions from perspectives beyond the confines of the Medicaid program alone.

The more far-reaching reforms posited here still must first start on a smaller, proof-of-concept basis. Over time, they then can redirect the demands of current and future beneficiaries and voters to insist on higher-valued uses of resources in other ways to improve their overall lives as well. For these reasons, federal-state mega-waiver mechanisms that combine more of the individual health insurance market with the recent Medicaid expansion cohort could help unlock current commitments and invest more productively in producing improved health outcomes, upward mobility, and more self-sufficient Americans.

Recent Factors Inflating the Medicaid Bubble

Before fleshing out these alternative pathways, I pause for the obligatory, abbreviated review of recent Medicaid history from the spending-side perspective, even though that is not really where results-driven reform should begin or end. A further caveat is that many studies and statistics for the program tend to be incomplete, not fully comparable, subject to revision later, and often lagging significantly behind real-time overviews.²

The most recent estimates of Medicaid enrollment available from the Centers for Medicare & Medicaid Services (CMS) report that 81.9 million individuals were enrolled in Medicaid in May 2022. Another 7.1 million were enrolled in the Children’s Health Insurance Program (CHIP), which somewhat complements Medicaid in covering many lower-income individuals below age 18.³ If one uses the combined Medicaid and CHIP enrollment figures, those covered by the two income-related insurance programs increased by 18.3 million individuals (25.9 percent) from pre-pandemic February 2020.⁴ However, Medicaid enrollment grew far more rapidly, increasing by 17.94 million individuals (28.0 percent) from February 2020 to May 2022. CHIP enrollment increased by only 347,900 individuals (5.2 percent) during that period. This rapid enrollment expansion actually followed combined enrollment declines in 2018 and 2019 and relatively flat enrollment growth in early 2020.⁵

Total Medicaid spending similarly increased by over 9 percent in 2020, to $649 billion.⁶ By one recent historical yardstick, Medicaid spending grew by over 50 percent since 2013, compared to overall national health care spending growth of 44 percent during that same period. (This is contrary to a longer-term trend, in which annual Medicaid spending grew slower than the average annual national rate by about 0.5 percent each year from 1971 to 2010.) The ACA’s Medicaid expansion was implemented primarily in 2014 and 2015, and the pandemic-related surge in Medicaid enrollment began mostly in the second half of 2020. These spending increases were driven more by periodic surges in Medicaid enrollment (up 16.5 million individuals, or about 28 percent, since 2013) than by increased spending per enrollee (up 18 percent).⁷

This frame of reference highlights the primary source of “recent” spending growth. It remains true overall that a smaller share of total Medicaid beneficiaries in other eligibility categories—the “dual-eligible aged” and the disabled of all ages—are much more expensive to finance on a per capita basis, whether or not the care they receive is delivered in adequate quality and quantity.⁸ However, both the fiscal and qualitative problems in those portions of the Medicaid program are even more persistent and resistant to market-oriented reform efforts. They offer meager prospects for structural change over the foreseeable horizon (as explained further below).

The federal government’s share of overall Medicaid spending also increased, to 67 percent, in fiscal year (FY) 2020. Before the ACA’s Medicaid expansion, the average federal share was around 57 percent.⁹ However, the ACA provided a much higher federal matching rate for individuals enrolled under its expanded eligibility provisions (starting at 100 percent in 2014 and declining over several years to 90 percent). A special enhanced matching rate boost of 6.2 percent in the Family First Coronavirus Response Act (FFCRA) in 2020 drove the federal share of Medicaid spending higher again.

In short, Medicaid grew significantly over the past decade, and federal taxpayers picked up more of those costs. The two developments are not unrelated. They happened despite various right-of-center critiques of the program’s design and operations and lingering resistance to the ACA Medicaid expansion in a (shrinking) number of Republican-governed states. The combination of enhanced levels of “free” federal money for state officials, private-insurance losses during economic downturns, and short-term emphasis on Medicaid coverage as the quickest fix during the COVID-19 pandemic seems to have overpowered those concerns.

Spending mis-incentives produced by Medicaid’s open-ended Federal Medical Assistance Percentage (FMAP), in which each dollar of state Medicaid spending is matched by at least one dollar (and usually more) from federal taxpayers, are not new. They undoubtedly discouraged previous state efforts to control spending more effectively in previous decades, but they only grew stronger due to enhanced rates under the ACA expansion and the FFCRA.

Proposals to cap federal funding levels through block grants or per capita allotments were rejected on Capitol Hill in 2017 (following resistance from several Republican governors).¹⁰ Trump administration efforts to encourage state waiver applications to pursue similar objectives failed to produce significant responses or results. Lesser initiatives to experiment with increased cost sharing and account-based savings incentives for Medicaid beneficiaries were hemmed in by statutory restrictions, funding limits, and administrative challenges.

Secondary Effects from Fiscal Pressure

At some point, most states still manage to exhaust creative ways to maximize federal funds beyond their nominal percentage levels and run up against their own budget constraints. Then, their most common policy response has been to lower payments to Medicaid providers, even further below their actual costs to supply such services and products. Cutbacks in optional Medicaid benefits and limits on eligibility offer less-immediate savings to state policymakers. They also are more transparent to voters and Medicaid beneficiaries and hence less politically attractive.

Decrying state Medicaid programs for inadequate reimbursement levels, by itself, is more of a facile political talking point, absent any indication of new political willingness to pay more to improve access to quality care in better ways.¹¹ Although higher spending by itself does not ensure better-quality care, below-market payments certainly can reduce physician participation in the program and aggravate gaps in timely access to necessary care.¹²

Limited data indicate a mixed picture. By several older measures, Medicaid may pay most physicians a little over 60 percent of private insurance rates and about 75 percent of Medicare rates.¹³ However, the payment gap between Medicaid and Medicare appears to be far less, if any, for hospital payments, once supplemental Medicaid payments are included.¹⁴ Physicians are less likely to accept new patients insured by Medicaid (71 percent) than those with Medicare (85 percent) or private insurance (90 percent).¹⁵

Although Medicaid acceptance rates remain highly sensitive to the level of reimbursement, they do not appear to have been affected by ACA implementation or by a state’s decision to accept the Medicaid expansion. Moreover, a July 2015 Government Accountability Office report concluded that “Medicaid enrollees report access to care that is generally comparable to that of privately insured individuals and better than that of uninsured individuals.”¹⁶

Rinse and Repeat?

The overall effect of Medicaid’s conflicting financial incentives is to increase demands on a program that already struggles to do more with less—and often fails at both goals. Making exaggerated benefit promises to more beneficiaries while trying to deliver them below their actual costs merely produces less value per taxpayer dollar.

The political course of least resistance for would-be Medicaid reformers on the right has been to rinse and repeat some of these familiar formulas and hope for different results than seen thus far. However, a few concessions to harder realities plus more nuanced modifications would appear to be advisable, even if the current political balance of power changes enough to make new substantive legislation somewhat more viable.

Assuming a Solution: Much Easier Than Implementing and Producing One. Formulaic block grants and capped budgetary allotments are part of the conventional Medicaid reform tool kit on the right. They look much better as budget gimmicks that are “scorable” on paper than as enduring commitments in political practice. At best, they require more substantial front-loaded spending inducements along with the discipline to enforce often mythical out-years’ savings. Spending-rate reductions by formula also generate anecdotal anomalies and mis-targeted side effects that erode any initial base of political support. They often lack more-resilient rationales that extend beyond the short-term goal of claiming to reach aggregate numerical targets.

Broader federalist swaps between Washington and state governments of larger components of the Medicaid program (such as splitting off long-term care for the elderly from responsibilities to assist low-income individuals below age 65) have an even longer history of unwilling buyers.¹⁷ State officials remain far more innovative (and energetic) in finding new ways to extract more dollars from Washington than in developing more efficient and effective systems of care for their low-income residents.

The Limits of Contractual Outsourcing. Further efficiency gains from state government contracting with private managed-care insurers also face diminishing returns. As of FY2019, roughly 70 percent of all Medicaid beneficiaries were enrolled in comprehensive managed-care arrangements, including more than 80 percent of the newer ACA expansion group for adults under age 65.¹⁸ However, applying private-sector managed-care techniques to more complex and expensive population groups such as disabled, institutionalized, or elderly Medicaid enrollees has proven far more difficult. Moreover, budgetary savings through increased managed-care contracting appear to be limited to the smaller number of states in which previous fee-for-service Medicaid reimbursement levels already were comparable to those paid by private insurers.¹⁹

In any case, managed care for an increased share of Medicaid beneficiaries is far from a simple cure-all. Its effects on costs and quality depend on how well it is executed in practice and the setting in which it occurs.²⁰ The standard tool kit for reducing Medicaid costs on the health care delivery side (besides paying providers less) is well-known in theory but more difficult to implement consistently:

• Move more health care treatment encounters to less-sophisticated settings and lower-cost providers.
• Keep beneficiaries out of higher-cost hospitals, emergency rooms, and nursing homes as much as possible.
• Catch potential health problems sooner through preventive care, early diagnoses, and better coordination across multiple health care providers.
• Ensure that Medicaid funding follows the beneficiary across the multiple settings where they need and choose care, rather than locking them into more siloed care-delivery processes.

Can these be done better by well-motivated and adequately staffed state administrators pushing the envelope of competitive bidding incentives for private Medicaid managed-care contractors? In some cases, yes, but further gains look less substantial, at best.

What Did Not Work and Why

Medicaid work requirements used to provide another rhetorically comfortable resting place for right-of-center reformers. However, they were attempted far too clumsily in various states during the Trump administration. They needed to be targeted to a much smaller portion of the ACA expansion population—as part of agreements with holdout states to open such Medicaid eligibility—and implemented with far more advanced administrative planning and better support services to facilitate realistic pathways to employment and economic independence. Instead, they often looked like expedient mechanisms to either trim eligibility or provide political cover for yielding to older terms of Medicaid expansion.

These work-requirement provisions were usually tied to critiques of Medicaid for increasing disincentives to work. At the official income margins for program eligibility (when enforced), beneficiaries risk losing all their coverage benefits if they begin to earn too much money. This common trait of welfare programs whose eligibility is pegged to specific income cliffs usually can be dampened, but not eliminated, either by setting income-eligibility tiers much lower or phasing them out more gradually at much higher income levels.

Instead, the Trump administration overinvested in encouraging states to pursue Medicaid waivers with broad work-requirement provisions. The near-term results were legal and administrative fiascos. Federal courts ruled consistently (except for one late-developing federal district court ruling in the 11th Circuit on August 19, 2022,²¹ as discussed below) that those waivers failed to match up with Medicaid’s statutory authority and were approved arbitrarily and capriciously. In practice, early state government adopters failed to target the waivers more narrowly and then implement them with sufficient administrative resources. Hence, by the early months of 2021, none of the approved waivers remained in active operation.

Older Chronic Problems: Still Resistant to Uncomfortable Solutions. The most expensive Medicaid beneficiaries are those with long-term disabilities and health impairments needing near-constant care, sooner or later accompanied by severe limits on their ability to generate and maintain self-supporting income. Hypothetical policy approaches to incentivize advance planning through private-insurance protection and reduce future claims on Medicaid as the eventual payer of last resort for long-term care services have found relatively few supporters for multiple reasons. Although substituting more use of private resources to safeguard against larger claims on the program’s funding is a worthy goal, finding workable and sustainable policies to accomplish that objective remains elusive.²²

Tighter eligibility standards are unpopular and difficult to enforce. Mandating the equivalent of prepaid protection even for those who can afford it more, such as through a tax or deductible pegged to one’s lifetime income near the age of retirement eligibility in the absence of such pre-committed resources, remains far more theoretical than practical. Instead, the vast majority of young and middle-aged Americans will wish for better luck ahead or new magic medicines to stave off the more debilitating ailments of longer lives. Medicaid’s long-standing role as the payer of last resort, in theory, also ensures that it increasingly is the payer of first resort for these services, in practice.²³

Elderly dual eligibles comprise the most expensive cohort of the Medicare program. Efforts to better integrate the Medicaid and Medicare portions of care for this population have languished, and more-limited programs to provide coordinated care have made minor inroads, at best. In theory, designating either the federal government’s Medicare program or state Medicaid programs to take the primary, if not exclusive, role in administering such care makes sense, but structural change remains tangled up in financing and turf quagmires.

Competing Differently to Succeed Politically. Decades of failed Medicare and Medicaid reforms attempted by conservatives, along with occasional signs of modest progress, suggest several lessons. It remains hard to beat Medicaid advocates at their own fiscal game, which is delivering the lowest-quality care at the cheapest per capita cost to the most people. Administered prices and hollow delivery of promised benefits consistently trump the mostly formulaic fiscal tools standardly offered by right-of-center proponents. It also remains far easier to redirect taxpayer subsidies to newer benefits packages than to reduce them in older ones. Even then, long-term reforms cost more upfront. (See, for example, the Medicare Advantage program on both points.)

Reforming long-standing health care entitlement programs requires the treacherous advancement and implementation of structural reform well before any sustainable savings can be expected. Focusing more on reshaping the size and nature of future demands on such programs, and then facilitating new modes of supply to better address those demands, still extends the eventual payoff beyond conventional budgetary scoring windows.

Stepping Up Incremental Reforms Another Notch. What might the next round of improved incremental policy reforms involve? One initial step would be to end the enhanced Medicaid matching rates under FFCRA as soon as possible, as part of phasing out related maintenance of effort requirements on states that have frozen redeterminations of eligibility and encouraged even higher levels of Medicaid fraud.²⁴

Although nominally tied to renewed findings of a federal public health emergency (PHE) dating back to early 2020, both provisions have been exploited as political levers to keep more money and enrollees flowing into the Medicaid program. President Joe Biden has renewed these findings a number of times for 90-day intervals, most recently on October 13, 2022, to extend the PHE until at least January 11, 2023. Further extensions remain likely, but cutting such an artificial cord to the federal government’s borrowing capacity and winding down the related Medicaid maintenance of eligibility requirements on states as soon as possible are minimal first steps.

If policymakers return to more-nuanced caps on future federal funding, they could consider several different layers of annual per capita allotments for distinct categories of Medicaid beneficiaries (such as children, working-age adults, the elderly, and the disabled) whose average annual costs and spending patterns differ significantly. Even then, the shaky political sustainability of any such budgetary “deals” could be destabilized if their underlying assumptions prove inadequate to provide promised levels of Medicaid services and health care quality.

Allowing for too many, or too few, adjustments in setting per capita block grants ex ante (or in later years) within and across states poses uncertain trade-offs between need-based payment accuracy and administrative and political feasibility. However, simply transferring large, predetermined amounts of revenue from one level of government responsible for collecting it to another level of government left relatively free to spend it and then hoping for the best also dilutes political accountability for balancing tax decisions with spending ones.

Hence, greater emphasis on federalism in health policy instead should travel a two-way street that focuses more on outcomes than inputs. Each state Medicaid program seeking greater operational flexibility should be accountable for achieving intermediate performance metrics, rather than just for close compliance with remaining federal rules and regulations.

The federal government’s primary role should extend beyond serving as the least-constrained source of other people’s money. It should ensure true accountability and responsibility for producing results by those states given greater freedom in spending federal dollars—in other words, reviewing and rewarding “what” is achieved instead of dictating “how” it is supposed to be accomplished.

The federal government should offer every state the opportunity to enter into a simplified compact that sets outcome measures and benchmarks and then requires a participating state to report periodically (perhaps quarterly) on its performance toward meeting them. Federal oversight would be triggered when there is a significant deviation in the reported versus projected performance. The number of measures should be limited to no more than 10 key indicators of health care, including cost, quality, and access. This will simplify or eliminate the state plan approval process, allowing states and their constituents to concentrate more on what matters most: better health outcomes, better value, and lower costs.

The federal government should allow states adopting this option to:

• Determine their own eligibility categories and income threshold levels for Medicaid;
• Establish rates and service delivery options;
• Design benefit packages that best meet each state’s or region’s demographic, public health, and cultural needs (whether that involves adding, deleting, or modifying benefits); and
• Use cost sharing to promote individual responsibility for personal health and wellness.

To enhance such executive branch offers, Congress also should consider providing bonus payments for each state that achieves appropriate benchmarks and holding some of the base allotment “at risk” in the event of poor performance.

Going Further with Reality-Bounded, Direct-to-Consumer Medical Empowerment. Even the best versions of block-grant-style Medicaid reform essentially hand off many important Medicaid decisions concerning health benefit levels²⁵ from one set of federal government officials to other state-level policymakers. Individual beneficiaries remain largely on the sidelines instead of becoming more engaged and empowered.

A more consumer-focused Medicaid reform would develop a defined-contribution alternative for Medicaid financing and coverage at the individual level. This personalized mechanism could help hold taxpayer costs and program-eligibility rules relatively more constant, by allowing the nature, level, and quality of Medicaid’s health benefits to become more variable and more freely selected by Medicaid enrollees.

Defined-contribution payments are made more directly and transparently to beneficiaries than traditional financing that diverts the amount and nature of defined-benefit promises through other third-party intermediaries. The overall goals are to empower and encourage consumers and patients to make better health care choices while stimulating more innovative and accountable competition by health care providers. One can pay more for health care when it delivers more value but redirect resources to other investments in well-being when it delivers less.

Although defined-contribution public dollars from taxpayers to support such coverage would be limited, the spending of additional private dollars to enhance or expand coverage would not be restricted. Supplemental benefits (paid for exclusively with private dollars) could vary widely, beyond a baseline definition of core coverage (and its actuarial equivalents) that would be supported wholly or partly through taxpayers’ defined contributions.

The better version of defined-contribution health benefits must go beyond the simple fiscal mathematics of placing initial control of how to spend those taxpayer subsidies in the hands of beneficiaries. It also would provide an enhanced infrastructure of health information and connections to intermediary agents to assist those beneficiaries in making their health care choices more actionable and effective. This approach would reward insurers, health care providers, and state policymakers for raising the quality of health care, the value of health benefits, and the satisfaction of Medicaid patients instead of just for keeping the apparent costs of the program lower (or hidden).

States pursuing more market-based, consumer-choice reforms also should acknowledge that executing these ambitions can be more expensive and require different types of oversight. They may have to decide to cover fewer people and leave more details of health-spending decisions to those beneficiaries who are ready and eager to make them while paying participating health care providers for the full costs of care and measuring quality of delivered care more accurately.

Reconciling the wildly theoretical with the practical, however, also means presenting this as an opt-in alternative for interested beneficiaries and ensuring alternative access to more conventional Medicaid benefits (particularly for higher-risk cohorts). Of course, implementing this sort of straddle complicates financing assumptions and adjustments and the pace of change substantially.²⁶

These policy reform paths will have to overcome preexisting hurdles in current law. Comprehensive legislation theoretically could clear them away, but that involves assuming one’s solution in advance.

Going Bigger Instead of Going Home

A slower, incremental path to similar reforms also could be attempted via more-comprehensive Medicaid and ACA mega-waivers for states willing to step forward earlier and experiment with integrating their healthier Medicaid expansion populations with their predominantly ACA-subsidized individual market health exchange enrollees. This policy option could be transformative over time, but it would be bounded initially by a substantial number of technical, financial, and political hurdles. They would include redefining budgetary baselines, extending timelines for evaluation, gaining buy-in from states willing to be accountable for overcoming implementation challenges and delivering measurable results, powering through executive branch resistance by career staff, dampening risk-pool distortions, guaranteeing access to statutorily mandated Medicaid benefits, overcoming opposition from influential health care providers, and managing the political optics of disruptive change. Coordinating the sequencing of parallel Medicaid and individual market reform waivers to maximize resource reallocations and optimize budgetary projections will remain a necessary cost of doing business. Aside from all of the above, it would be mostly a piece of cake.

The best places to start for an initial mega-waiver would involve states that have not agreed to the ACA’s Medicaid expansion terms for their lower-income, childless, adult population. More precise targeting also would focus on states with less of a differential in reimbursement rates for providers in the state’s Medicaid program and those in its commercial individual insurance market. Attempting to restructure and merge other Medicaid program populations into a state’s reformed (and expanded) individual market would be far more complex and unwise. Initial objectives should emphasize attracting potentially eligible Medicaid enrollees who can be rewarded for becoming more economically independent in stages, as opposed to disrupting legally mandated specialized services to the most at-risk current Medicaid beneficiaries.

Revival of a more carefully constructed mega-waiver mechanism would allow at least one state (and perhaps more over time) and a dedicated president’s executive branch to get this process started and incentivized in more targeted directions. Even under better circumstances, several recent executive branch rules would need to be altered to expand the policy reform playing field. An unnecessarily restrictive interpretation of “budget neutrality” that originated in the Obama administration in 2015 guidance²⁷ and was echoed by the Trump administration in 2018 guidance precludes combining budget savings from related non-Medicaid waivers for the ACA-regulated individual market with Medicaid waiver-funding reallocations as part of a single reform package.²⁸ Moreover, a new administration would have to reverse some of the Biden administration rule finalized in September 2021, which rescinded the Trump administration’s interpretation of statutory guardrail enforcement for Section 1332 waivers and restored the previous interpretation of the Obama administration.²⁹ (Yes, this does operate somewhat like a regulatory yo-yo, depending on who sets the latest “rules.” But it also demonstrates the malleability and impermanence of such administrative practices.)

Recent limits on the duration for which past waiver-related budget savings can be accumulated should also be reconsidered. The recent Medicaid and ACA individual market policies noted here, particularly those involving definitions of “budget neutrality,” are discretionary creations of CMS administrators and not required by statutory law. A new White House regime would have the authority to change them if it decided to do so.³⁰

Maneuvering around current legal interpretations of Medicaid’s statutory purposes³¹ plus embedded political expectations of maintaining current insurance coverage levels adds other constraints on the pace and scale of such reform. The most feasible path requires keeping up nominal coverage numbers while changing what a reconfigured individual market covers and how it does so. As long as total coverage (as redefined) remains approximately similar and health outcome gains are demonstrated, other trade-offs in “how” this is done can be lost in the wash, provided that most of the earlier Trump administration rules for Section 1332 waivers are reinstated.³²

Why Bother to Build a Better Political Narrative for Medicaid Reform?

A new round of successful Medicaid reform also must transcend the current political mindset accentuated by the COVID-19 pandemic. Medicaid became a catch-all mechanism for targeting new funding for care and coverage as an available expedient while fiscal constraints evaporated. If the overriding political goals remain simply to cover as many people as cheaply as possible, regardless of their needs or the health outcomes produced, then the current Medicaid program will face few challenges from potential alternatives. Getting beyond this dead end will require a better story that inspires hope for improved lives, not just expedient and illusory savings.

The political case for Medicaid reform needs to reflect the core values of the political constituencies that will support it. Hence, it should combine firm commitments to provide financial assistance to the most vulnerable Americans with greater reliance on more decentralized, market-based choice and competition to carry out those goals more effectively and efficiently. The ultimate test is whether such interventions improve the health outcomes of the poor. Spreading more health care services across a wider base of new beneficiaries further up the income ladder, as the ACA and Biden administration enhancements envision, is more likely to dilute their value.

The political forks in the road involve several trade-offs:

• Addressing substantial medical needs versus closing income-related difficulties in paying for care;
• Choosing between Medicaid assistance that focuses on improving the health of low-income populations versus serving as an all-purpose vehicle to pursue broader objectives such as reduced societal disparities, more-extensive income redistribution, and greater federal government control of health care resources and practices; and
• Recognizing that changing the structure of Medicaid incentives and decision-making, with higher upfront investment costs, is a prerequisite for any lasting opportunities for long-term budgetary savings.

Better targeting of Medicaid assistance toward disabled, very low-income, and medically impoverished populations is overdue. Able-bodied adults without the resources to pay for basic medical bills may merit short-term financial relief while in extreme duress, but public policy interventions need to be far more focused on helping them regain independence and self-sufficiency. Taxpayer-subsidized health coverage should be aimed at establishing a politically acceptable floor below which no one should be allowed to fall.

However, individuals subject to short-term economic dislocations or uncomfortable circumstances need to know that their access to better health care in the future is tied to how well they fare eventually in the overall economy. Better jobs and higher incomes, stable families, enhanced educational opportunities, and improved health habits, rather than larger taxpayer-subsidized transfer payments, must remain their primary ticket out of unmet medical needs and less-satisfactory health care.

This sort of reframing of priorities and commitments runs counter to conventional political incentives to serve other, more numerous, less needy constituents on a less expensive, wider, and thinner basis. The temptations remain strong to use changes in Medicaid eligibility and subsidy levels to reward one’s most favored constituencies, when not simply propping up the bottom lines of local health care providers. But not everyone can win at this political auction, and the most vulnerable populations tend to lose the most.

Even the most optimistic vision of improvements in the efficiency and quality of Medicaid’s health care delivery should regain some broader perspective, by reconsidering the effects of slow or stagnant economic growth, rising levels of disabling health conditions, and lack of improvement in the ratio between working taxpayers and beneficiaries dependent on publicly financed health entitlement programs. Hence, health policy should support broader economic policy incentives to work, save, and invest more effectively to protect the most vulnerable Americans without increasing their numbers. One of the strongest arguments for limiting, or redirecting, the future growth of Medicaid spending should be how it will free up public and private resources to more effectively improve the lives of all Americans, particularly poorer ones.

The lower bounds of necessary reform certainly should include realistic limits on taxpayers’ commitments to finance necessary health care services for low-income Americans. But they also should allow more flexible trade-offs in better targeting of scarce resources. Those objectives are accomplished best through decentralized decision-making, market-based delivery mechanisms, and more transparent accountability.

The upper bounds of Medicaid reform suggest that the program would perform better by concentrating more on its core mission of ensuring improved health outcomes for those most in need, rather than aiming at covering as many people as imaginable as thinly and cheaply as possible. These bounded Medicaid goals should open fiscal and political space for a broader focus on other areas of public policy that could reshape the magnitude and nature of the demand for its assistance and the likelihood of the program’s success—in short, policies that produce fewer poor people with persistent and expensive medical conditions.

Starting points with the best returns include investing far more in early childhood interventions, targeting the roots of the most costly and persistent medical conditions before they take hold, and executing basic practices before attempting more elaborate ones. Medicaid needs to be far more of a partner with other contributors to building health and human capital, rather than expanding its already-overstretched domain of disappointing performance in paying higher medical costs on the back end. It should join with larger health reform efforts to engage other policy instruments that promote healthier behavior and improve the capabilities of individuals over their entire life cycle of health, such as those improving education, nutrition, family, culture, and early childhood development.

We cannot afford the long-term consequences of habitually trying to do even more of the same badly. Results-driven reorganizing of the many tools to achieve those goals, while improving the overall ratio between independently productive citizens and those who must depend on them, offers the best insurance policy of all.

Keeping Score in Washington

The better versions of Medicaid reform do not deliver early savings or simplify into a handful of bullet points for future legislation. They will take longer to mature and involve layers of interconnected uncertainties that resist standard budgetary estimates or procedural shortcuts.

The main structural reforms recommended here include short-term termination of the pandemic “emergency” increase in the FMAP rate for Medicaid and its interconnected continuous enrollment mandate (part of state maintenance of effort requirements) that preclude changes in state Medicaid eligibility rules and effective enforcement of current ones. Because this policy operates under short-term, though recurring, presidential declarations of a PHE under Section 6008 of the FFCRA, it appears that such higher spending is not embedded in the Congressional Budget Office (CBO) budget baseline. Thus, ending it through either executive or new legislative action is unlikely to produce any “scorable” budget savings.

The other primary policy change recommended here involves redeveloping mega-waiver options for states. Because they would be voluntary, slower to develop even under a new presidential administration, contingent on several moving parts coming together closer in time, not yet fully delineated in terms until fully approved, and more likely to deliver measurable savings beyond even an initial five-year waiver period, any potential CBO-scored budgetary gains would not yet be measurable through standard processes.

The Best Case for Renewed Pursuit of Mega-Waiver Tools: Means to More-Transformative Ends

State policy innovation in the most malleable and actionable portions of the Medicaid program needs to extend beyond new ways to extract more federal dollars. It should aim higher. Waivers combining reforms of the ACA expansion portion of Medicaid with individual market reforms within willing states can provide larger scale, more resources, better-integrated tools, and sufficient stakes to pursue more-consequential reforms that include at-risk accountability for outcomes.

Several technical challenges remain but are not insurmountable if the larger political case can be made for greater interest in overcoming them. This can enable a more market-oriented state to try to do something better, with accountability for producing it. An evolutionary approach means opening doors to states and their constituents that are receptive to change, rather than forcing it on those more wedded to the status quo.

Related spillover benefits from more-dynamic incentives include new opportunities to redirect the operating rules and taxpayer subsidy distributions for the individual insurance market and ACA exchanges in interested states. The ability to move Medicaid savings into a more consolidated, restructured individual market would ensure more continuity and integration of insurance coverage and health care arrangements for enrollees as their income and health status change.

More fundamentally, creative uses of federal-state waiver paths could unlock long-standing program silos and resource commitments to expand the playing field for reform, by facilitating different metrics, incentives, and feedback loops that redefine “success” in health policy. It might even make receiving less in health insurance subsidies more politically appealing, if those resources can be unlocked and redirected to serve other, higher-valued preferences of current Medicaid and ACA exchange enrollees.³³ Of course, the key political ingredients for accomplishing such calibrated but sweeping change involve purpose, patience, and persistence—commodities in scarce supply during our current era of rhetorical theatrics.

Winning the political battle for future market share in how health care resources are deployed and shaped—subordinate to centralized, politicized means or more responsive to competitively accountable and patient-centered signals—will require more aspirational goals and deliverable results best pursued by the latter, particularly for lower-income Americans. Despite many problems across the health policy and social mobility landscape, this one needs to move up in agenda-setting priorities.