Federal Medicaid Proposal Could Help State Budgets

Representative Todd Rokita (R-IA) has proposed a new bill, the State Health Flexibility Act that could vastly improve incentives in state Medicaid administration. The bill would convert Medicaid and the Children’s Health Insurance Program (CHIP) into a block grant program under which states would have the freedom to shape the program as they see fit. Additionally, up to 30% of the block grant could be transferred into the state general fund if state lawmakers could administer the program for less than the grant amount.

Currently, Medicaid operates a little bit differently in each state, but most states receive matching funds from the federal government at levels between 50% and 74% of what they spend out of the state budget. This set up encourages states to overspend on this program because the federal government pays them to increase spending.

This program would bring all states in line with reforms already implemented in Rhode Island and Washington. In a recent podcast, Scott Beaulier discusses some of the benefits that these states have acheived through reform, both in their budgets and in their healthcare outcomes.

The State Health Flexibility Act would save money for taxpayers at the state and federal levels by capping federal spending at its current nominal amount. Both inflation and GDP growth would serve to reduce real Medicaid spending at the federal level. By removing the incentive for states to increase Medicaid spending to receive federal dollars, the bill would also reduce spending at the state level. Furthermore, states would enjoy freedom to determine Medicaid and CHIP spending for themselves, better tailoring the program to meet their citizens’ specific needs.

Despite reducing Medicaid spending, this reform bill would provide better incentives for improved outcomes by shifting state focus from matching funds to better healthcare. In Rhode Island and Washington, Beaulier found that states used cost saving measures such as not allowing Medicaid patients to use emergency rooms for non-emergency care and encouraging preventative care, improving healthcare while saving money.

Current Medicaid spending patterns are unsustainable. The State Health Flexibility Act provides an opportunity to save taxpayers money, put state budgets on a saner trajectory, and improve health outcomes for benefit recipients.