How to minimize the fiscal impact of federal cuts to Medicaid expansion

In federal fiscal year (FY) 2024, Medicaid’s total expenditures nationally exceeded $926 billion, up from only $440 billion in FY 2013, or a startling increase of 110.6 percent. Concerningly, $618 billion of the funding was provided by the fiscally unstable federal government, which is nearly $37 trillion in debt.

Since I last wrote on this topic, discussions about cuts to Medicaid in Washington, D.C., have rapidly intensified. The remainder of this article will focus on the most probable federal reduction to Medicaid spending and explain what North Carolina and other states can do to minimize the fiscal impact.  

Federal Matching Assistance Percentage

The Federal Matching Assistance Percentage (FMAP) is the share of Medicaid funded by the federal government, which varies state by state and depends on the state’s income per capita. For traditional Medicaid groups, such as the elderly, disabled, single parents, and foster children, this percentage varies from 50 to 83 percent, with richer states receiving less and poorer states receiving more. For example, the FMAP for North Carolina is about 65 percent, meaning the state’s share of Medicaid funding is 35 percent.

Interestingly, the FMAP for Medicaid expansion enrollees, regardless of state, is 90 percent. This means that for every individual in Medicaid expansion, which is comprised of able-bodied adults, the federal government covers 90 percent of the cost; however, for the elderly, disabled, etc., it only pays 50 to 83 percent.

Decreasing the Medicaid expansion FMAP

The most obvious and reasonable cut the federal government can make to Medicaid is to decrease the FMAP of 90 percent for Medicaid expansion recipients to the FMAP each state receives for people in traditional Medicaid groups.

The Congressional Budget Office estimates that this policy change would decrease federal outlays by $596 billion across federal fiscal years 2026-34, with $44 billion in cuts occurring in the first year. While the federal government would be wise in making this decision, it would create a budget shortfall in all 40 states that adopted Medicaid expansion.

The effect in North Carolina

Unfortunately, the amount spent on Medicaid expansion in a fiscal year in North Carolina is somewhat obscure. The North Carolina Medicaid annual report for FY 2024 states that $1.7 billion was spent on Medicaid expansion that year.   

This means that at the current FMAP of 90 percent, the federal government would have funded $1.53 billion of the cost; however, at a 65 percent FMAP, this would drop to $1.105 billion, creating a $425 million gap in the state budget.

However, Medicaid expansion was in effect for only seven months during FY 2024, during which enrollment reached about 480,000 people: roughly 170,000 fewer than the current total. After adjusting for those factors, the budget shortfall would be about $1 billion. It is worth noting that this estimate is conservative, and the budget shortfall could approach $1.5 billion.

Policy options

The 2023 legislation approving Medicaid expansion in North Carolina included a provision to discontinue expansion coverage if federal funding dropped below 90 percent. While it would be prudent for policymakers in North Carolina to follow through with the provision, to do so would be politically perilous. Consequently, an overview of other policy options available is warranted.

North Carolina and other states can utilize the following policy options to minimize the fiscal effect of a reduction to the Medicaid expansion FMAP:

Decrease the income limit: The current income limit for Medicaid expansion is 138 percent of the poverty line, or an annual income of $21,597. Policymakers could decrease the income limit to 100 percent of the poverty line, or a yearly income of $15,650. Using Virginia as a proxy estimate because North Carolina does not provide this data, reducing the income limit would remove approximately 23 percent of recipients from the program.

Implement work requirements: Medicaid expansion is currently available to able-bodied adults from ages 19 to 64 without any work requirement. Policymakers could implement a work requirement that mandates recipients ages 19 to 55 work or volunteer at least 80 hours per month. Recent research estimates that this policy change would decrease Medicaid expansion enrollment nationwide by about 23 percent. The North Carolina Senate’s budget proposal for FY 2025-26 included a provision for work requirements for the entire Medicaid population, pending federal approval.

Increase the age threshold: Policymakers could also increase the minimum age for Medicaid expansion eligibility from 19 to 30. Raising the age threshold to 30 in North Carolina would eliminate approximately 35 percent of people from the expansion population. Also, it is essential to note that this move would minimally affect low-income single parents because many of them qualify for traditional Medicaid enrollment; it would primarily impact young, healthy, childless adults. For instance, pregnant women with incomes up to 196 percent of the federal poverty level are eligible for Medicaid during pregnancy and for up to one year after giving birth. Additionally, single parents with incomes up to 36 percent of the poverty level qualify for Medicaid, while their children are covered at income levels up to 211 percent.

If policymakers wish to ensure that all single parents maintain coverage, they could instead consider increasing the minimum Medicaid expansion age to 30, specifically for individuals who do not have dependents.

Decrease coverage: Policymakers should also consider reducing or eliminating coverage for specific elective procedures and prescription drugs. For example, the current minimum BMI to be eligible for GLP-1 drugs to treat weight loss is 30 (obese); policymakers should consider increasing the threshold to 40 (severely obese). GLP-1 drugs cost about $1,000 per month, and given that roughly 40 percent of Americans are classified as “obese” compared to just under 10 percent as “severely obese,” this policy change would likely decrease the number of people on Medicaid expansion eligible for GLP-1s by hundreds of thousands.

Closing thoughts

As the federal government considers reducing the FMAP for Medicaid expansion, policymakers in North Carolina must prepare for substantial fiscal challenges. While eliminating Medicaid expansion would be sensible, it poses significant political obstacles.

Therefore, elected officials should preemptively consider other policy options, such as tightening eligibility, adding work requirements, and limiting coverage, to preserve Medicaid’s sustainability while minimizing the burden on the state budget.