By Jay Eisenstock, Founder, JE Consulting
LinkedIn: Jay Eisenstock
As Congress seeks to introduce changes to the Medicaid program, I’ve been reflecting on both its challenges and opportunities. Established in 1965, Medicaid was designed as a safety net for vulnerable populations living in poverty. It was intentionally structured as a federal-state partnership, with states responsible for administering their programs, within federal guidelines, in exchange for federal matching funds. States with lower per capita incomes have a higher federal matching rate.
Medicaid enrollment is highly dynamic, with individuals frequently moving in and out of the program. While changes in employment and access to employer-sponsored insurance are a major driver, eligibility can also fluctuate due to changes in household composition, disability status, pregnancy, or children aging out of specific eligibility categories.
The current program contains several idiosyncrasies.
Payer of Last Resort
Medicaid is the payer of last resort according to federal regulations. This means if a Medicaid recipient has other health insurance coverage during a healthcare encounter, those other insurers are primarily responsible for paying the claim before Medicaid covers any remaining costs. When other insurance is known before an encounter, Medicaid requires providers to bill those insurers first. If other insurance is applicable but not identified, Medicaid pays the costs and seeks to determine the responsible health insurer and recover payments back to Medicaid. Medicaid programs collectively pay billions of dollars annually to healthcare providers and then spend significant resources—often millions of dollars—on cost avoidance and recovery efforts to ensure Medicaid funds are used only as a last resort.
Provider Tax
Another anomaly of the Medicaid program is the use of provider taxes. The states impose an assessment (tax) on certain healthcare providers (e.g., hospitals, nursing facilities, and some managed care organizations). This tax revenue is used to help finance the state’s share of Medicaid spending. The combined federal and state funds are then distributed back to Medicaid providers. This approach enables states to maximize federal Medicaid funding without increasing their expenses. It’s done this way to increase the state’s share of Medicaid funding and at the same time increasing the provider’s share of Medicaid payments. In many cases, providers receive back more than they paid in taxes.
Medicaid Expansion
A controversial provision of The Affordable Care Act (ACA) expanded Medicaid eligibility to adults with incomes up to 138% of the federal poverty level and committed the federal government to cover 90% of the cost. Currently, 41 states, including the District of Columbia, have implemented Medicaid expansion. Political opposition to the ACA, which includes resistance to expanding government-run healthcare, along with concerns about increasing the state’s share of the cost burden, has prevented the remaining states from participating. By many measures, Medicaid expansion has shown to increase access to healthcare for low-income adults, reduce the cost of uncompensated care for hospitals, and improve health outcomes.
The Dilemma
Medicaid represents nearly $1 out of every $5 spent on healthcare in the U.S. and is the major source of financing for states to provide health coverage and long-term care for low-income residents. More than 70 million people depend on Medicaid for health insurance, but as healthcare costs increase and enrollment grows, the current cost structure is unsustainable.
Some policymakers argue that significant reductions to Medicaid funding may be necessary to meet the targets in the House’s recent budget resolution. However, substantial federal funding decreases will likely leave states facing difficult choices to raise revenues, cut spending in Medicaid or other programs, or some combination of both.
Multiple options are under consideration for Medicaid spending reductions including: imposing a per capita cap, reducing the Affordable Care Act (ACA) expansion match rate, lowering the match rate (what the federal government pays the states), limiting the use of provider taxes, imposing work requirements, repealing the incentive for states to adopt the Medicaid expansion, and block grants.
Significant Medicaid funding reductions could result in millions of Americans losing health insurance coverage. Some analysts suggest that a 10% reduction in federal Medicaid funding could lead to approximately 8 million people losing coverage.
Opportunities and Strategies
Reducing Medicaid funding to offset other budget priorities overlooks a significant opportunity. Rather than simply cutting Medicaid’s budget, policymakers could pursue evidence-based reforms that simultaneously enhance healthcare quality and generate cost savings. The Medicaid program can deliver better outcomes by investing in value-based payment models, strengthening care coordination, expanding preventive services, and addressing social determinants of health. In addition, Medicaid should leverage technology to gain administrative efficiencies and to further address fraud and abuse.
States that have implemented such reforms have demonstrated reduced emergency department visits, fewer preventable hospitalizations, and lower growth in per-capita spending. This dual-benefit approach would protect coverage for vulnerable Americans while still contributing to fiscal responsibility—achieving budget goals through smarter healthcare delivery rather than harmful funding reductions that merely shift costs to states and beneficiaries.