by Katherine Restrepo
Director of Health Care Policy, John Locke Foundation
The Senate’s FY 2014-2015 budget proposal emphasizes a need to rein in Medicaid costs at the state level, which is undoubtedly paramount. Medicaid does cost too much, but a statement such as this needs some explanation.
Historically, the feds pay two-thirds of North Carolina’s Medicaid costs, while the state covers the rest. Medicaid is a jointly funded program, and its federal medical assistance percentage (FMAP), or federal match rate, operates based on a formula dependent on each state’s average per-capita income. By statute, the match ranges from a minimum of 50 percent to a maximum of 83 percent. Wealthier states receive less aid from the federal government, while poorer states get more.
One critical reason for Medicaid’s exploding costs since the entitlement program’s conception in 1965 is that many states rely heavily on federal monies. Medicaid’s financial design paired with the fact that each state’s federal share is not transferred in a block grant package (rather it is renewed every year based on state and federal income data from the previous three years) inevitably brings about spendthrift habits. Avik Roy explains the perverse outcomes of federal match rates in his must-read book, “How Medicaid Fails The Poor.”
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 constituents’ 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.
For more on Medicaid’s fundamental flaw, click here.