“Equitable Support for Certain States”

December 30, 2009

Some of the much publicized quid pro quos in the Senate’s health care bill include increased federal support for Medicaid (under the Orwellian title of “Equitable Support for Certain States” in the manager’s amendment). In a recent Fiscal Fact I explained what a great deal it seems for state governments to tax health providers and use that money to draw in matching federal funds for Medicaid, often promising an increase in Medicaid payments to those providing it. The health care bills would make this deal more attractive to a couple of states. It would also leave the rest in need of ways to fund their required expansion in Medicaid.

The FMAP (federal medical assistance percentage) matching system provides perverse incentives for the (over)supply of Medicaid. One dollar spent at the state level for police gets the state around one dollar of police services. But one dollar spent by a state on Medicaid, with the added federal funding, can get them as much as $5 dollar in Medicaid services. Of course, the other $4 comes from somewhere—namely taken in taxes or borrowed by the federal government. But those costs are dispersed throughout the country. And then some doctors that do not see many Medicaid patients within the state will see a tax but no benefit. But those costs are concentrated on a minority.

What does it mean to oversupply a public service like Medicaid? A dollar spent on Medicaid is a dollar not spent on police or a dollar that remains in one’s pocket. The optimal supply of Medicaid is determined by its price and benefit and opportunity cost relative to other public goods. But one might argue that a state spends less, rather than more, on Medicaid because the government is picking up part of the tab. While the overall level of Medicaid supplied is greater, the state spends less than they would have without federal support. Maybe. But another consideration is: What should the overall supply of Medicaid be according to its benefit? Providing Medicaid might crowd out private alternatives and foster dependency on the state. Of course, this argument means little to someone who wants complete and publicly provided health care. What is certain is that our federal/state Medicaid programs greatly increase the supply of Medicaid spending.

Anyway, there might be tax implications because of these Medicaid deals. The ARRA increased temporarily—though recently extended—the FMAP for states on average more than 8%. During this time several states took advantage of the new rates and taxed health care providers to rake in extra federal funds. Now for some the deal might get even sweeter. Vermont and Massachusetts will get increases in their FMAP’s by 2.2% and .5% respectively. The Vermont increase will last six years and the Massachusetts three. Because those rates are set to decreases in a period of time, it would make sense if Vermont and Massachusetts tried to take advantage of the situation.

Of course in Nebraska Senator Ben Nelson got the federal government to pay for 100 percent of his state’s increase in Medicaid spending. Forever. Good news for Nebraskans. Both Senate and House health care bills expand eligibility for Medicaid. This means states-excluding Nebraska-will need to find ways of expanding their programs. That will likely be through tax increases or spending cuts. That is unless other states wrangle a Nebraska type deal around election time. From Politico:

Sen. Ben Nelson (D-Neb.) said today that three senators have approached him to say they understand why he worked to ensure that the federal government picks up his state’s tab for reform’s Medicaid expansion. And they told him they want in.

Nelson is open to spreading the wealth.

“I’ve had three senators come in and say, ‘Now I understand what you did.’ They weren’t angry about it, but now they understand and said, ‘We’ll be seeking that for our states as well.’ And I said, ‘Absolutely, you should,'” he said.

In more Medicaid news: New York auditors claim the state’s Medicaid program wasted $92 million “to improper payments, billing errors and poor recordkeeping during the last five years.” Certainly New York is not the only one. States looking for money to fund their Medicaid program should look first in their Medicaid program.


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