The Affordable Care Act (ACA) is performing worse than expected when it became law: plans are less attractive, enrollment is lower, premium increases are higher, and risk pools are sicker. The Senate is now considering a reconciliation bill that contains several significant policy changes to the ACA, including repealing its new taxes like the individual and employer mandates as well as much of its new spending. One important change is to end the ACA’s elevated federal reimbursement rate for state Medicaid spending for generally able-bodied, working-age adults. It has been reported that some opponents of the bill plan to attack this provision. People who believe in better health policy should welcome this debate because the ACA’s Medicaid expansion is a key problem with the law. Medicaid needs large scale reform so that it provides better value for both enrollees and taxpayers.

Medicaid is the joint federal-state health care program traditionally for lower-income children, their mothers and pregnant women as well as seniors and people with disabilities. The ACA expanded Medicaid to include all people in households with income below 138% of the federal poverty level, an amount equal to about $16,240 for a single person and $33,470 for a family of four. In the 2012 case that generally upheld the constitutionality of the ACA, the Supreme Court made the Medicaid expansion optional for states.

The main problem with Medicaid, which existed before the ACA took effect, is that enrollees receive little value from the program. A study by a team of renowned economists found “that Medicaid’s value to recipients is lower than the government’s costs of the program, and usually substantially below.” They estimated that recipients only benefit by 20 to 40 cents for each dollar of spending. Instead of the benefitting lower-income people, the research suggests that large institutions, like hospitals, nursing homes, and insurance companies, receive the most benefit from Medicaid. The same researchers found that Medicaid expansion in Oregon, several years before the ACA’s expansion took effect, had little, if any, beneficial effects on health.

A large body of research shows that Medicaid enrollees tend to suffer worse outcomes than similar patients without Medicaid. Medicaid enrollees have less access to providers and tend to receive worse care, such as being assigned to less-skilled surgeons. Moreover, Medicaid recipients receive a disproportionate amount of non-emergency care in emergency rooms. Medicaid expansions prior to the ACA did not reduce the number of uninsured people as much as intended because the expansions resulted in large crowd-out, meaning that people who already had insurance simply replaced their private coverage with Medicaid.

While some who support federalism believe Medicaid’s federal-state partnership is a program strength, in fact, Medicaid represents the worse type of federalism. As noted by Michael Greve in recent Mercatus research, Medicaid is the epitome of cartel federalism in which states compete for federal subsidies to carry out Washington’s agenda. According to Greve, cartel federalism “promotes the growth of government at all levels, creates impenetrable intergovernmental bureaucracies and a torrent of transfer payments, and destroys political accountability.”

Medicaid exemplifies cartel federalism because of the open-ended federal reimbursement of state spending. On average, the federal government reimburses 60% of state Medicaid spending; states with lower per capita incomes receive greater assistance. When states spend more on Medicaid, they get larger amounts of federal taxpayer money. The incentive for states to spend more on Medicaid has resulted in states spending less on education, transportation, infrastructure, and other public priorities. Moreover, states have created a complex set of financial schemes to leverage as much federal tax money as possible.

Numerous Washington rules prevent states from having the freedom to try different approaches to improve their Medicaid programs at the same time the federal bureaucracy fails to adequately protect taxpayer dollars from being wasted. In 2015, Washington will spend an estimated $320 billion on Medicaid, equal to nearly 9% of all federal spending, nearly triple the percentage of all federal spending consumed by Medicaid in 1990. States are projected to spend an additional $209 billion on Medicaid in 2015.

The ACA’s Medicaid expansion exacerbated the program’s perverse incentives by providing a 100% federal reimbursement of Medicaid spending on the expansion population from 2014 through 2016 before ratcheting down to a permanent level of 90% starting in 2020. The large match rate further disincentivizes states to care about the value that Medicaid enrollees receive from the program and will undoubtedly lead to large additional spending on behalf of people who obtain little value from it. Moreover, the elevated match rate for expansion population is not equitable as the federal government now provides much greater support for the able-bodied, working-age, and generally childless adult population than for the more vulnerable traditional Medicaid populations. 

According to the Associated Press, states adopting the ACA Medicaid expansion have experienced much larger enrollment and spending increases than expected. More than twice as many people enrolled in Kentucky as expected, more than doubling the expansion’s cost to the state. Nearly three times more people than expected enrolled in California, and was more than twice what Washington expected. In Michigan, estimated costs are 50% higher, and Ohio’s estimated costs are more than 100% higher. Recent data also suggest that the Medicaid expansion has made the problem of emergency room overcrowding worse.

The United States is projected to spend more than $6.5 trillion on Medicaid between 2014 and 2023. While the ACA is responsible for only about one-eighth of this overall amount, it made the structural problems of the program worse. Given the low value existing enrollees received from the program as well as the general poor results of the program, Medicaid needed reform not expansion. Ending the enhanced federal reimbursement for the ACA expansion population is a good first step toward broader Medicaid reform that delivers more choices and better health care services to lower income people and saves taxpayers’ money.