January 19, 2007

While instructive, the Medicaid Commission's final report on reforming the program does not fully address its deficiencies, particularly the problems with the formula which allocates Medicaid funds to states, says Robert B. Helms, a resident scholar at the American Enterprise Institute (AEI).

That formula, says Helms, is the Federal Medical Assistance Percentage (FMAP), which compares each state's per-capita personal income to the national per-capita personal income.  The problem is there is an inverse correlation between poverty rates and federal per-capita Medicaid reimbursement:

  • States with the highest poverty rates -- such as Alabama, Louisiana, and Mississippi -- receive much lower Medicaid payments per-capita than wealthier states like New York and several New England states.
  • Not only can the wealthier states afford to spend more on Medicaid, the open-ended process of obligating the federal government to match what the state chooses to spend creates an incentive for states to increase Medicaid spending relative to all other priorities.
  • When a state is forced to cut budget expenditures, the FMAP procedure gives the state an incentive not to cut matched expenditures relative to unmatched state expenditures.

Clearly, the FMAP procedure is not successfully achieving the original objective of Medicaid: targeting federal assistance toward the states with the greatest share of poverty. Poorer states today are falling behind as wealthier states are collecting a disproportionate share of federal Medicaid dollars.

Thus, reform to the current FMAP formula is needed to target the poorest and most disabled beneficiaries, by reducing the matching percentage for program extensions beyond current mandatory coverage for those with higher incomes or for optional benefits, says Helms.  This would reduce the incentive for states to game the system, and give incentives to find better ways to help the neediest.  Meanwhile, it would also leave states free to expand their own programs if they wish to do so.

Source: Robert B. Helms, "The Medicaid Commission Report: A Dissent," American Enterprise Institute, January 2007.

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