Note: This is part two of a two-part series on the Medicaid program. You can read part one here.

In the first part of this two-part research update about Medicaid, I discussed the current state of Medicaid. Spending and enrollment are at all-time highs, and cost projections for the future show a steady increase of year-over-year costs for the program. In addition, recent research has shown that serious issues are plaguing Medicaid, which leads many to question the current integrity of the program. Namely, improper payments and ineligible enrollment threaten the viability of the program.

Medicaid was designed to be a public health insurance program for those most in need. Obamacare’s Medicaid expansion dramatically changed the scope of the program to include able-bodied, working-age adults. As I discussed in part one, the Obama administration was complicit in ignoring the improper enrollment in Medicaid following the implementation of Obamacare. This has led to states enrolling massive numbers of eligible adults and a subsequent spike in the amount of improper Medicaid patients.

This research update will examine one of the structural flaws in Medicaid that makes improper payments so prevalent. Also, this piece will consider one possible solution to the problems in Medicaid: block grants.

Medicaid’s Flawed Reimbursement Structure

The primary flaw in Medicaid is its financing structure. Medicaid is jointly paid for by the federal and state governments. For every dollar a state spends, the federal government contributes a percentage of that dollar. There exists minimal incentive for states to cut costs or crack down on fraud when overall federal match rates are based on how much a state spends in total. North Carolina currently receives 67 percent of Medicaid funding from the federal government.

Consider this example from Avik Roy’s book, How Medicaid Fails the Poor in which he describes a state which receives a 60 percent matching rate from the federal government:

That means that for every dollar a state spends on its Medicaid program, the federal government will kick in an additional $1.50. It’s not every day that a state politician gets to spend one dollar of his constituent’s money and gain credit for spending nearly $2.50 in return. But that’s how Medicaid works. As a result, irresponsible officials in many states have ratcheted up their Medicaid spending, knowing that taxpayers in other states will be forced to foot a good chunk of the bill.

This gives states little incentive to try to moderate spending. Why would any elected official want to publicly advocate for fewer dollars flowing from the federal government to the state? Medicaid’s open-ended enrollment means that as long as someone qualifies for Medicaid, they should receive benefits without any cap on state or federal spending.

Furthermore, the open-ended financing structure of Medicaid also makes it easily susceptible to fraud. This usually manifests itself in the form of a fraudulent provider improperly billing the state Medicaid program for services not rendered. As the authors of the book Overcharged describe it, regulatory oversight of Medicaid becomes a game of whack-a-mole for law enforcement.  As one fraudulent operation is shut down and individuals are held accountable, two more pop up.

Block Grants May Be the Solution

So, how might a state try to eliminate improper payments and improper eligibility in Medicaid? One possible solution may be to transition to Medicaid block grants. Tennessee is already moving forward with a block-grant-like plan.

A Medicaid block grant would segment each state’s Medicaid assistance funds into an individual lump sum given directly to each state. This would change the way Medicaid is funded from the open-ended matching rate to a pre-determined amount based on a state’s per capita income and enrollment.

Medicaid block grants would bring a number of beneficial outcomes for states and the federal government. First, states would have more control and flexibility over how their Medicaid dollars are spent. Many federal restrictions currently used in Medicaid limit the access to and participation of providers. Second, states could offer plans that are more tailored to the individual health needs of Medicaid patients. For example, states could use a prepaid debit card for individuals to pay for direct primary care or other direct health care. Third, states and the federal government would have much more oversight and budget predictability in Medicaid if the federal government were to transition to block grants.

While the federal government has floated the idea in the past, the proposal has never gained any serious traction. However, Tennessee has become the first state to apply for a Medicaid block grant waiver on their own. The Tennessee Medicaid Director Gabe Roberts explains:

This isn’t a traditional block grant. We are calling it a modified approach. Tennessee Gov. Bill Lee has been a fan of the block grant idea for a while but also cares deeply about making sure that any approach isn’t going to reduce enrollment or services or people that we serve. A state law passed this year instructing our administration to file a block grant waiver that would have a floor for federal dollars coming. So if enrollment fell, the money wouldn’t decrease. But if enrollment increased, the amount of federal payments would be indexed to account for that.

Medicaid block grants would represent a major shift in how this country pays for health insurance for low-income and disabled individuals. However, given the problems discussed in parts one and two of this series, something dramatic must happen to restore integrity to Medicaid. For far too long, this country has ignored the fundamental flaws in Medicaid and continued to throw taxpayer money at improper payments and ineligible enrollees. Whether it is block grants or another major Medicaid reform, lawmakers at the state and federal level need to reconsider how Medicaid operates.