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What Is Medicaid – How It Works, Criticisms & Future

You could describe the Medicaid program as the glue that holds the American health care system together. This public health insurance program takes on the lowest-income, sickest, highest-risk individuals in the country — those who don’t have coverage at work, can’t afford  private insurance, and don’t qualify for Medicare. It is America’s ultimate safety net.

Unfortunately, it is also extremely costly. According to the Centers for Medicare and Medicaid Services, this program cost the government $597.4 billion in 2018. That was roughly 1 out of every 6 dollars spent on health care in the country and nearly 3% of the total gross domestic product.

Funding for Medicaid comes partly from the federal government and partly from the states. According to a 2019 issue brief from the Kaiser Family Foundation (KFF), Medicaid was the third-largest mandatory spending program in the federal budget in 2018, accounting for 9% of total spending. In state budgets in 2017, spending on Medicaid was an even more significant expense, accounting for 26.5% of total expenditure. However, the matching funds the program brought in from the federal government were also a major source of revenue for states, making up 14.2% of their income, which offsets a large portion of the program’s cost.

But the Medicaid program is a major bone of contention in Congress. Republicans generally want to cut it, arguing that it’s too expensive and inefficient. Democrats, by contrast, want to expand it to provide better coverage for more Americans. To understand their arguments, you have to take a closer look at how this program works, how it’s funded, and how many people it helps.

How Medicaid Works

Medicaid was created in 1965 by an amendment to the Social Security Act. Over the decades, Congress has altered and expanded it several times, most recently with the passage of the Affordable Care Act (ACA), commonly known as Obamacare, in 2010. Today, Medicaid is the primary source of health insurance coverage for low-income people and families. Millions of Americans would be uninsured without it.

Funding for Medicaid

The Medicaid program is a partnership between the federal government and individual states. The United States Department of Health and Human Services (HHS) sets standards for the program. However, within those limits, each state runs its own Medicaid program. State legislatures and administrators set the eligibility rules and decide which health care services are covered. They also figure out how health care providers — such as doctors, hospitals, nursing homes, and pharmacies — get paid for those services.

Unlike Social Security and Medicare, which are funded by payroll taxes, Medicaid funding comes out of both federal and state governments’ general tax revenues. Each state sets its own level of spending for Medicaid, and then the federal government provides grants to match a portion of that spending. The match rate varies by state. According to a 2019 KFF fact sheet, all states get at least 50% of their spending matched, and the poorest states get nearly 75%.

Another part of the funding for Medicaid comes from the people it serves. Under federal rules, states can charge premiums to people with incomes of at least 150% of the federal poverty level. They can also charge copayments for various types of medical services. Unfortunately, a 2017 KFF report found that these costs often discourage people from seeking medical care when they need it.

This funding structure is flexible, allowing states to adjust their spending on Medicaid to meet changing needs. For instance, they can raise or lower spending if more or fewer people in the state need coverage. They can also increase spending in response to natural disasters or public health emergencies, such as the opioid crisis. Thanks to federal matching funds, states don’t have to bear the entire burden of increased costs during a recession, when more people need benefits.

The downside of funding Medicaid this way is that there’s no designated revenue source for the program on either the state or the federal level. It’s just another item in the budget. That means lawmakers can wrangle over funding it the way they do with any other program that costs money.

For instance, in 2017, Republicans in Congress proposed and nearly passed a cap on federal funding for Medicaid, according to the 2019 KFF fact sheet. States have also tried various approaches to limit their Medicaid spending. Some have applied for and received waivers that allow them to bypass the federal government’s rules. States have used waivers to impose work requirements, raise premiums for low-income people, and cut off access to coverage for those who fail to pay their premiums.

These waivers can reduce costs for states by reducing the number of people who receive Medicaid. However, the downside is that fewer people in need benefit from the program.

Who Benefits From Medicaid

Initially, Medicaid provided health insurance only to people who were receiving other government aid through Supplemental Security Income or child welfare. Over the decades, Congress has gradually expanded the program to provide assistance to more people. According to Medicaid.gov, as of July 2020, Medicaid provided health coverage for more than 68.8 million Americans. According to KFF, the program covers roughly 1 in 5 people in the country.

People who benefit from Medicaid include:

  • Children. In 2018, Medicaid served 32 million children in any given month, according to the Center for Budget and Policy Priorities (CBPP). Children make up two-fifths of all Medicaid enrollees but only one-fifth of the program’s spending. According to KFF, Medicaid spends about $2,500 per year on each child enrolled in the program. It provides insurance for 83% of all children below the federal poverty level and 48% of children with special health care needs, such as physical or mental disabilities. A separate program, the Children’s Health Insurance Program (CHIP), provides health coverage for children who don’t meet Medicaid’s income limits. Together, Medicaid and CHIP provided coverage for more than 36.6 million American children in 2020, according to HHS.
  • Adults. The CBPP says Medicaid covered 28 million adults in 2018. Most of them were parents from low-income families. According to KFF, 17% of all parents in the U.S. get their health insurance coverage from Medicaid. Nearly half of all pregnant people rely on the program to cover childbirth costs. The program also covers roughly 4 in 10 nonelderly adults with opioid addiction. Most adults on Medicaid are employed, but their jobs do not provide benefits, so Medicaid is their only source of affordable health insurance. The average adult costs the program a bit more than the average child, at $3,200 per year.
  • Senior Citizens. There were 6 million senior citizens enrolled in Medicaid in 2018, according to the CBPP. KFF says Medicaid helps nearly 1 in 5 Medicare recipients cover their premiums and cost-sharing expenses, such as copayments. In particular, many seniors rely on Medicaid for long-term care, which is not covered under Medicare. More than 60% of nursing home residents depend on Medicaid coverage. The average older person on Medicare costs the program $13,300 per year, with about two-thirds of that cost going toward long-term care.
  • People With Disabilities. A significant share of Medicaid’s costs is for adults with disabilities. According to the CBPP, the 9 million blind individuals and people with disabilities in the program in 2018 made up 8% of its enrollment and 32% of its total costs. People in this category can require years of care, often in specialized facilities. According to KFF, 45% of all nonelderly adults with disabilities receive health benefits from Medicaid. The average person with disabilities costs the program $17,000, including 6,300 for long-term care.

Until 2010, Medicaid was open only to people who were members of certain groups. These included the elderly, children, pregnant people, people with disabilities, and low-income parents. In 2010, the ACA extended Medicaid coverage to all nonelderly adults with income up to 138% of the federal poverty level ($36,156 for a family of four in most parts of the country, as of 2020). People no longer had to be part of a designated group to receive coverage.

However, in 2012, a court ruled that states did not have to expand their Medicaid programs if they chose not to. According to HealthInsurance.org, there are currently 14 states that have opted out of the expansion. (Two of these states, Missouri and Oklahoma, will expand their programs in 2021.) In these states, people may still need to be part of a designated group to get medical care.


Criticisms of Medicaid

Critics of the Medicaid program argue that the program costs the government billions each year yet provides little actual benefit to those who use it. They also say the federal government imposes too many restrictions on how state governments use their Medicaid funds, such as making it too hard to involve private health insurers in providing coverage for low-income people, though at least one state (Arkansas) has done just that. They say loosening these restrictions would save money and improve health outcomes.

However, the expansion of Medicaid under the ACA provided a natural experiment, allowing researchers to observe directly how increased access to Medicaid has affected both people’s health and state budgets. Although the results have been somewhat mixed, a majority of them point to positive effects.

Health Outcomes Under Medicaid

Critics often argue that Medicaid does nothing to improve the health of its enrollees. Scott Gottlieb, a physician and resident fellow of the conservative American Enterprise Institute went so far as to claim in a 2011 Wall Street Journal article that Medicaid was “worse than no coverage at all.”

To support this view, many critics point to a 2013 study published in The New England Journal of Medicine (NEJM). The study examined the effects of Oregon’s 2008 expansion of its Medicaid program. It found that those who received coverage showed no improvement in physical health measurements within the first two years. These measurements included blood pressure, cholesterol, and blood sugar levels for people with diabetes.

However, the full picture is a little more complicated. For one thing, some health outcomes clearly do improve with Medicaid coverage. Even the 2013 NEJM study found that those who received benefits were more likely to see a doctor, had better rates of diabetes detection, and had lower rates of depression. They were also less likely to suffer from financial strain.

According to a policy brief from the Robert Wood Johnson Foundation, enrolling people in Medicaid tends to result in more use of health care services and preventive care, better self-reported health status, and fewer people delaying health care due to cost. It also lowers mortality rates for infants, children, and adults. In three states that expanded access to Medicaid for adults before the passage of the ACA — Arizona, Maine, and New York — the death rate from all causes for adults under 65 declined by 6%.

Studies done since the ACA expanded Medicaid show that it improved health outcomes as well. For instance, a 2017 study published in Health Affairs compared health outcomes in three states after the ACA passed. Kentucky expanded its Medicaid program, Arkansas expanded access to private insurance for low-income adults, and Texas did neither.

The study found that in Kentucky and Arkansas, the uninsured population fell by 20 percentage points more than it did in Texas. It also found that low-income people in these states were 41 percentage points more likely to have a primary care provider and 23 percentage points more likely to report being in excellent health.

And that isn’t an isolated finding. According to a 2020 meta-analysis by KFF, the overwhelming majority of studies on state Medicaid expansion since 2014 have found that it had mostly positive effects on health outcomes. These included fewer uninsured people, an increase in access to and use of care, and an improvement in people’s reports of their own health.

Use of Costly Services

A follow-up to the 2013 study appeared in the NEJM in 2016. It found that people who gained access to Medicaid tended to receive health care in a wide variety of settings, including the hospital emergency department (ED). They even often went to the ED for problems a doctor’s office could have dealt with more cheaply. As such, some critics argue Medicaid encourages the inappropriate use of expensive health care services.

However, other studies contradict this finding. One 2016 study published in Health Affairs looked at the number of patients who visited the ED and the number who used it as their primary source of care both before and after the Medicaid expansion in Kentucky and Arkansas. It found that both numbers had declined. Moreover, they fell by even more in Kentucky with its expanded Medicaid than they did in Arkansas with its expanded access to private health insurance.

Interestingly, the Health Affairs study found that while fewer patients relied mainly on the ED for care, a larger number of patients reported going to the ED because they were unable to get an appointment with a doctor. The authors concluded that it was most likely due to increased demand. After Medicaid expansion, more patients were seeking care than before, leading to longer waiting times at doctors’ offices.

Another study, published in the Annals of Emergency Medicine in 2017, looked at the effect of Maryland’s Medicaid expansion on ED visits in the state. It found that the number of visits from Medicaid patients increased — but the number of visits from uninsured patients fell by about the same amount. That was definitely a good thing for hospitals since uninsured patients often don’t pay their bills.

Access to Care

In 2016, former House Speaker Paul Ryan published a white paper, “A Better Way for Health Care” (reproduced on publishing platform Scribd), that argued for cutting Medicaid funding. In it, he argued that Medicaid beneficiaries don’t get good access to health care. To back up this claim, he pointed to a 2015 paper by the Centers for Disease Control and Prevention (CDC) that found fewer doctors were accepting new Medicaid patients than new patients with Medicare or private insurance. One reason for the lower acceptance rate was that doctors at the time earned less for treating Medicaid patients than for those with other insurance. According to a 2013 paper published in Health Affairs, on average, doctors earned only 61% as much for each Medicaid patient as they did for each Medicare patient.

However, according to the same paper Ryan cited, a majority of doctors — roughly 69% — did accept new Medicaid patients. Moreover, the paper noted that the number could grow in the future. And the ACA had a provision requiring doctors to receive the same payment rates for services to Medicaid patients as for Medicare patients. Once this change went into effect, the CDC predicted, doctors could become more willing to accept new Medicaid patients.

In any case, a lack of access to care is not a huge problem. According to a 2017 KFF report, about 11% of Medicaid patients have trouble finding a doctor who both accepts their insurance and has openings for new patients compared with only 6% of privately insured patients. However, less than 3% are actually unable to find one. That’s about the same as the rate for privately insured patients.

According to the KFF’s 2019 fact sheet, people on Medicaid receive most types of health care at about the same percentage rates as those with private insurance. They also report being equally satisfied with their care. Both groups receive care at far higher rates than people with no insurance. And based on the KFF’s 2020 meta-analysis, most studies show that Medicaid expansion has significantly improved people’s access to care.

Work Incentives & the Poverty Trap

Another argument some critics make against Medicaid is that by giving people something for nothing, it discourages them from working. In a 2017 interview with “CBS This Morning” (covered in Politico), Ryan claimed Medicaid and other welfare programs were “trapping people in poverty” rather than “getting them in the workforce.”

This belief has led to the development of work requirements for people receiving Medicaid. In 2018, President Donald Trump’s administration announced it would begin helping states request waivers allowing them to require Medicaid beneficiaries to work a certain number of hours per week. According to KFF, by 2020, 19 states had requested waivers of this type. Most of them require 20 hours of work per week or 80 per month, but some require up to 35 hours per week.

However, there’s little evidence to support the view that Medicaid stops people from working. According to a 2019 KFF issue brief, 63% of Medicaid enrollees already work either full-time or part-time. Most of those who do not work are full-time caregivers or students or unable to work due to illness or disability. Only 7% can work and do not, and some of them are either retired or unable to find a job.

Moreover, there are studies showing that Medicaid can make it easier for people to work. A 2018 Journal of Internal General Medicine-published study of Medicaid recipients in Michigan found that over half of newly enrolled Medicaid recipients who were out of work said the program had made it easier to look for a job. Among those who had jobs, around 69% said Medicaid helped them do their work better, though the study didn’t ask them to explain how.

Likewise, in a 2018 study by the state of Ohio, over 80% of working Medicaid beneficiaries said the program made it easier to keep working, and 60% of those who were unemployed said Medicaid made it easier to look for work. Many interviewees noted that Medicaid had helped them get treatment for health problems that had once kept them from working.

Other studies show that over the long term, Medicaid can help people out of poverty rather than trapping them in it. A 2015 paper by the National Bureau of Economic Research found that the longer low-income children had access to Medicaid, the more income they earned as adults (and the more they paid in income taxes). A 2017 study published in Health Affairs found that Medicaid was “among the most effective antipoverty programs,” lowering poverty rates for the entire population by nearly 4 percentage points. It did more to reduce poverty than health care subsidies, tax credits, or non-health-related benefits for low-income people.

Restrictions & Lack of Flexibility

One of the biggest complaints about Medicaid is that the federal government places too many limits on how state programs can use Medicaid funds. In a 2017 Forbes op-ed, editor Avik Roy argued, “The reason that Medicaid’s health outcomes are so poor is because the outdated 1965 Medicaid law places a laundry list of constraints on states’ ability to manage their Medicaid programs.”

Ryan and other Republicans have repeatedly proposed converting Medicaid to a block grant program instead. Under this plan, the federal government would simply provide a fixed sum of money to each state. State governments could then make their own decisions about eligibility, benefits, and payments to providers. Supporters argue this plan would give states more freedom to tailor their Medicaid programs to meet their residents’ specific needs.

However, the current Medicaid program already offers quite a bit of flexibility through federal rules waivers. That’s how Arkansas was able to expand coverage under the ACA through private insurance rather than by adding more people to the Medicaid rolls. According to the KFF, 45 states have already received a total of 58 waivers, and another 26 waivers across 21 states are pending.

A bigger problem is that most block grant proposals would significantly cut the amount states currently receive for Medicaid. For instance, a 2012 analysis by the Congressional Budget Office (CBO) found that one of Ryan’s proposals would have reduced federal spending on Medicaid, CHIP, and health care subsidies more than 75% by 2050.

The CBO concluded that under Ryan’s plan, even if states were able to improve their plans’ efficiency a great deal, they would either have to spend more out of their own budgets or make significant cuts to their programs. They might be forced to strike people from the Medicaid rolls, cover fewer services, reduce payments to providers, or require  people to pay more for their own care. In all these scenarios, access to care would get worse, not better. And having so much less money to work with would give states less flexibility to meet users’ needs, not more.

High Costs for Government

The most serious critique of the Medicaid program focuses on its cost. According to a 2020 report published in Health Affairs, Medicaid spending topped $597 billion in 2018 and is projected to rise to over $1 trillion by 2028. Although Medicaid costs aren’t currently growing as fast as overall health care costs, they still pose a danger to both federal and state budgets.

When the ACA first passed, many state officials worried that Medicaid expansion would put a heavy burden on their state budgets. Although the federal government covers 90% of the new enrollees’ costs, states feared that even the remaining 10% share would be more than they could afford. It might force them to raise state taxes or cut other expenses, such as education, to cover the cost.

However, according to a 2017 report published in Health Affairs, the Medicaid expansion has not increased states’ costs. Although Medicaid spending increased, states saved in other areas, so the added funds from the federal government more than covered the cost. According to a 2020 KFF policy paper, 20 out of 20 studies on the subject found that state economies improved after Medicaid expansion. Unpaid bills for hospitals and clinics fell, and in some cases, employment grew.

However, these perks for state economies have come at a cost to the federal government. Already, federal Medicaid spending makes up 9% of the total U.S. budget. Based on the estimates published in Health Affairs, that number is likely to grow over time as both Medicaid enrollment and per-person costs rise.

In his 2017 interview, Ryan argued “we can’t really get a handle on our future debt” without controlling the costs of entitlement programs like Medicaid. The difficulty is figuring out how to do this without cutting off coverage for millions of Americans.

Limitations on Coverage

One final complaint about Medicaid tends to come from the left rather than the right. These critics say the program doesn’t help enough people. The ACA opened up Medicaid benefits to all Americans up to 138% of the poverty level. And those earning more were supposed to have access to affordable health care through ACA subsidies, which applied to people making between 100% and 400% of the poverty level.

However, in states that didn’t expand their Medicaid programs, the income limit for Medicaid eligibility can fall well below the poverty level. According to the KFF, the average cutoff for parents to receive benefits is just 40% of the poverty level.

As a result, parents in these states who earn between 40% and 100% of the poverty level don’t qualify for either Medicaid or subsidies. Moreover, childless adults in these states can’t get coverage no matter how low their income is. These people simply have no access to affordable health care. According to the KFF, more than 2 million American adults currently fall into this “coverage gap.”

The coverage gap is gradually narrowing as more states opt to expand their Medicaid programs. In 2015, there were 20 states that had opted out of Medicaid expansion, according to Healthcare.org. By 2021, that number will fall to 12.

However, some states that have expanded their Medicaid programs have also received waivers allowing them to impose work requirements. That makes it harder for people in those states to get coverage. Other states requested different types of waivers that would have restricted coverage, such as a lifetime cap on benefits. However, so far, the federal government has not approved any of those requests.


Medicaid Realities & Outlook

At the end of 2019, the future of Medicaid looked pretty bright. With the economy booming, Medicaid enrollment had declined in 2019 and was expected to stay flat through 2020. Medicaid spending growth was also low. And as opposition to Medicaid expansion declined in previously opposing states, the coverage gap was gradually closing.

But the coronavirus pandemic of 2020 and the resulting recession changed this outlook — at least temporarily. Between February and July 2020, Medicaid enrollment increased by nearly 4.3 million people nationwide, according to the KFF. The number of new people on the rolls will increase costs for both federal and state governments in the short term.

Even if enrollment declines again as the economy recovers, the program’s cost will most likely continue to rise. The same factors driving overall health care costs — such as rising prescription drug costs, an aging population, and costly new treatments — will also increase Medicaid costs.

To keep Medicaid solvent for the long term, policymakers on the left and right will have to find ways to resolve their differences. Previous conservative proposals, such as block grants and cutting funding, have gone nowhere. However, liberals have offered few alternatives for controlling rising costs.

Possible approaches for the future of Medicaid include:

  • Higher Payments. Medicaid beneficiaries could cover more of their own costs through higher premiums or cost-sharing. However, according to a 2017 KFF summary, studies show that raising premiums can lead people to drop out of the program, so revenues actually fall. And while cost-sharing can reduce the use of low-value health care, there’s little evidence it lowers overall Medicaid costs.
  • Complex Care Management. According to the KFF, about 5% of Medicaid users account for more than half the program’s spending. These “super-utilizers” typically have complex medical, mental health, and social needs. In theory, Medicaid could reduce costs through focused care programs that help these people control their health and reduce their care needs. The KFF summary notes that some trial programs of this type have had some success in reducing ED visits, hospital admissions, and overall Medicaid costs. However, others have shown no effect. Further studies could help determine what types of programs are most useful for cutting costs.
  • “Homes” for Patient Care. Patient-centered medical homes, or PCMHs, are a new approach to providing Medicaid patients with primary care. Each patient has access to a team of providers who coordinate their care across the local health care system. As of 2020, 26 state Medicaid agencies have PCMH programs. The KFF reports that some studies find they help lower ED and hospital use and lower total costs of care. However, others find little benefit. A similar concept, called health homes, focuses specifically on people with chronic conditions. There are 22 states using health homes. A five-year HHS study of their effectiveness is currently in progress.
  • Long-Term Care Insurance. According to KFF data, over 20% of Medicaid spending goes to cover long-term care costs. Medicaid could lower these costs if more people bought long-term care insurance instead. However, because this insurance is so expensive, selling it to more people would likely require subsidies that could cancel out all the savings.
  • Home- and Community-Based Services. Another way to cut long-term care costs is to increase the use of home- and community-based services (HCBS) as an alternative to costly institutions. The KFF found that, in general, studies show this approach can lower Medicaid expenses, though the results vary by program. It also tends to produce better health outcomes for elderly and disabled people. Medicaid programs are increasingly shifting their focus from institutional care to HCBS, and this trend is likely to continue.
  • Medicaid Buy-In. Some states are seeking to give people who don’t currently qualify for Medicaid the option to buy into the program. Instead of buying private health insurance plans, they would pay for Medicaid benefits. According to United States of Care, 18 states have explored this option as of 2020, but only Colorado has signed the option into law. If Colorado’s new program turns out to help the state budget or improve public health, it could encourage more states to adopt similar plans.
  • Medicare for All. One of the broadest health reform proposals is Medicare for All. This plan would replace the existing Medicare and Medicaid programs as well as private health insurance with a new single-payer plan. Essentially, the federal government would provide health care for all Americans. If this program passed, funding Medicaid would no longer be an issue. However, that’s unlikely to happen soon. Although KFF polls show a narrow majority of Americans support Medicare for All, it doesn’t have broad support in Congress.

Final Word

Like the U.S. health care system as a whole, Medicaid poses a complicated problem with no easy fixes. Keeping the program afloat for the future will most likely require a mix of approaches to control costs and raise revenues. It could involve tax hikes, changes in benefits, and new approaches to how the programs provide care. Republicans and Democrats in Congress and statehouses across the country will undoubtedly continue to fight over which solutions to adopt.

Yet despite its problems, Medicaid continues to enjoy strong support from ordinary Americans.
According to a 2018 KFF poll, 74% of Americans have a favorable view of Medicaid, including 65% of Republicans. Roughly half of Americans say the program works well for most of the low-income people it covers. Those numbers should be enough to convince politicians the Medicaid program is worth saving, no matter how much work it takes.

Amy Livingston
Amy Livingston is a freelance writer who can actually answer yes to the question, "And from that you make a living?" She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.

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