Tuesday, May 21, 2019

Folding Medicaid into Medicare for America: Will states pay their share?

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One of the many sweeping transformations of U.S. healthcare mandated by the Medicare for America Act is the absorption of all Medicaid programs -- currently serving some 72 million Americans -- into a revamped Medicare serving all ages. That would occur six years after enactment.

Medicare for America would be available to Americans of all ages and incomes -- and free to everyone in a household with an income below 200% of the Federal Poverty Level (FPL). That's far above the eligibility threshold for Medicaid programs -- with the exception CHIP in some states, for which children in families with incomes as high as 400% FPL may be eligible. Families with incomes between 200% and 400% FPL would have to pay a percentage of income -- probably not higher than 4% -- to insure the whole family. The new program would include comprehensive disability services and 100% coverage for the medically frail and for chronic disease treatment, as well as dental, vision and hearing services.

State governments -- many of them sure to be deeply hostile -- would be subject to two major requirements: 1)  cede control of service for their Medicaid populations, and 2) reimburse the federal government with "maintenance of effort" payments equivalent to their current Medicaid responsibilities, adjusted annually for inflation. Those requirements are certain to be challenged in court, as was the ACA Medicaid expansion.

As originally enacted, the ACA rendered all citizens and most legally present noncitizens* with incomes up to 138% FPL eligible for Medicaid. The federal government footed 100% of the bill for newly eligible enrollees in the first year, ratcheting down gradually to 90% -- well above any state's federal match rate for prior Medicaid programs. The ACA stipulated that states must enact the expansion or else lose federal funding for their existing Medicaid programs. That provision was challenged, along with the ACA's individual mandate, in NFIB v. Sebelius.

In 2012, prior to enactment of the expansion, the Supreme Court ruled the enforcement mechanism for the expansion unconstitutionally coercive and made the expansion optional for states. Acknowledging Congress's right to "induce" compliance with federal requirements to receive federal funds, Chief Justice John Roberts -- joined by liberal justices Breyer and Kagan as well as the conservative bloc -- held that the noncompliance penalty crossed a line from "encouragement" to "coercion." Contrasting the case with a prior dispute, South Dakota v. Dole, in which the state stood to lose 5% of its federal highway funding if it did not raise its drinking age, Roberts wrote:
In this case, the financial “inducement” Congress has chosen is much more than “relatively mild encouragement”—it is a gun to the head. Section 1396c of the Medicaid Act provides that if a State’s Medicaid plan does not comply with the Act’s requirements, the Secretary of Health and Human Services may declare that “further payments will not be made to the State.” 42 U. S. C. §1396c. A State that opts out of the Affordable Care Act’s expansion in health care coverage thus stands to lose not merely “a relatively small percentage” of its existing Medicaid funding, but all of it. Dole, supra, at 211. Medicaid spending accounts for over 20 percent of the average State’s total budget, with federal funds covering 50 to 83 percent of those costs. See Nat. Assn. of State Budget Officers, Fiscal Year 2010 State Expenditure Report, p. 11,Table 5 (2011); 42 U. S. C. §1396d(b). The Federal Government estimates that it will pay out approximately $3.3 trillion between 2010 and 2019 in order to cover the costs of pre-expansion Medicaid. Brief for United States 10, n. 6. In addition, the States have developed intricate statutory and administrative regimes over the course of many decades to implement their objectives under existing Medicaid. It is easy to see how the Dole Court could conclude that the threatened loss of less than half of one percent of South Dakota’s budget left that State with a “prerogative” to reject Congress’s desired policy, “not merely in theory but in fact.” 483 U. S., at 211–212. The threatened loss of over 10 percent of a State’s overall budget, in contrast, is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion (p. 26).
The Supreme Court left states with the option to reject the Medicaid expansion. As of implementation in Jan. 2014, 25 states had adopted the expansion. To date, 34 states have implemented the expansion, with adoption pending -- with proposed changes -- in three more. At present, over 2 million people are shut out of coverage by their states' refusal to adopt the expansion.

The legal scenario would be reminiscent but different if Medicare for America became law. The states are not threatened with loss of Medicaid funding: the bill would end Medicaid, moving enrollees to the new comprehensive federal "Medicare" program. The state requirement is to make "maintenance of effort" payments comparable to their prior contributions to Medicaid. If they don't, they are subject to financial penalties far smaller than their current Medicaid spending. The penalties are succinctly covered in the bill summary:
If states refuse to make the maintenance of effort payments, they will be no longer be eligible for funding under the Mental Health Services Block Grant program, Social Services Block grant program, the Substance Abuse Prevention and Treatment Block Grant program (Federal Health Centers Program), State Targeted Response to Opioid Crisis Grants, Community Services Block grants, Section 330 grants, and the Ryan White HIV/AIDS Program grant program.
These are vital programs, but federal funding for all of them combined amounts to about $13 billion annually,* compared to $405 billion for Medicaid in 2019 (See May 19 projections, Table 5). If loss of Medicaid funding threatens 10% of a state's overall budget, loss of block grant funding would appear to threaten about 0.3% -- comparable to South Dakota's loss in the case cited above.

In fact the implementation problem may lie less in legal challenge than in financial incentive. A state that refused maintenance of effort payments would be a massive financial gainer if it paid these penalties. States could abjure their Medicaid spending, averaging about $8 billion per state and ranging from about $300 million for Wyoming to over $40 billion in California (as of 2017), in exchange for ceding an average of about $260 million in block grant funding (which generally lags inflation and population growth in any case).

Courtesy of University Michigan law professor Nicholas Bagley, that's reminiscent of this deal

Perhaps I'm missing something, but it appears that this part of the bill needs a fix like this one.

The difficulty of compelling states to pay a large share of a sweeping new federal program -- in a way that would hold up in court -- raises the question of whether the bill should even try. Last word to Bagley: "Given the way that Medicaid strangles state budgets, especially during recessions, we should be moving as much of the financial burden as possible to the federal government. Forcing the states to keep paying doesn't make a ton of sense. Let 'em cut their taxes or spend more on education and roads."

UPDATE, 5/22: The maintenance of effort (MoE) problem jogs a memory. In an email discussion of the bill some time ago, Duke's David Anderson wrote: "MoE is a CBO score reducer but has troubling macro-economic implications.  If a crisis like that of 2008-2009 strikes again, we don’t want to increase state constraints at the worst time, when they have no fiscal capacity.  Consider moving everything over to the feds and eating the CBO score -- or providing some kind of automatically triggered state relief in times of crisis.'  Jon Walker, meanwhile, suggests that the apparent  unenforceability (or risk of judicial strike-down) may be intentional:
My read is that it is mostly a CBO con much like bills with sunsets. But since it will take the courts awhile to work out the program would already be in place by that point
* Federal spending for the block grant programs in question was as follows in 2017 and 2018. The 2017 figures are taken from the Center for Budget and Policy Priorities report on the ill effects of block grant funding (it doesn't keep up with inflation and population growth).  Sources for the 2018 figures are embedded in the date.

Program                                                                       Funding (millions of dollars)

Community Mental Health Services Block Grant          532  (2017)

Social Services Block Grant                                         1583 (2017)

Maternal and Child Health Block Grant                         550 (2017)

Substance Abuse Prevention and                                1855 (2017)
Treatment Block Grant

State Targeted Response to Opioid Crisis                   1000 (2018)
Community Services Block Grant

Grants under Sect. 330 Public Health                         4989 (2018)
Services Act (Federal health centers)

Ryan White HIV/AIDS Program Grants                       2340 (2018)

Total (noting 2017/18 mix)                                          12849

More on Medicare for America
Seniors' costs under Medicare for America, cont.
If Medicare for America passes, some seniors will pay more
Would Medicare for America phase out employer-sponsored insurance?
A major fix in Medicare for America 2.0
Which healthcare reform bills offer the most affordable coverage to the most people?


  1. Good points, but I was struck by the assertion that Medicaid spending by the states was $400 billion a year.

    A recent Kaiser study says that the states are spending $221 billion a year....

    Whatever the real number is, I totally agree that this expense should be federalized.

    However, several proponent of single payer have backed away on this issue and still assumed that state spending would continue. I criticized the PERI team for this assumption.

    The reason that some proponents make this assumption is that they dread loading more costs onto the federal government, since that makes an income tax increase on the middle class more likely.

    1. Bob, the $405 billion is federal Medicaid spending, not state -- i.e., what they would stand to lose if fed Medicaid spending were cut off, as the ACA originally threatened. The estimates for state spending for CA and Wyoming are taken from Kaiser's state spending figures, with a check also at Kaiser's match rate chart (50% for both states).