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Reflections on Recent Medicaid Reform Efforts

By Abe Sutton

In the context of limited regulatory resources, Trump’s Centers for Medicare & Medicaid Services (CMS) prioritized allowing states to impose work requirements over Medicaid fiscal reform.

Now that the Trump Administration’s term in office has ended, it is worth exploring, with the benefit of hindsight, the value of this decision. Setting aside moral arguments used to criticize Medicaid work requirements, administering the requirements proved to be challenging, as did justifying them in court. Additionally, amid indications Medicaid work requirements will not be politically sustainable, it is worth considering whether Medicaid fiscal reform would have led to more significant taxpayer savings.

In this post, I provide an overview of Medicaid work requirements and explore some of the reforms included in the Medicaid fiscal reform proposal CMS ultimately chose not to implement.

Medicaid work requirements

Work requirements in theory

Section 1115 of the Social Security Act empowers the U.S. Department of Health and Human Services (HHS) to approve state demonstrations that promote the objectives of the Medicaid program. Pursuant with this authority, in 2018 CMS started allowing states to restrict Medicaid eligibility for able-bodied adults without dependents to those who work a minimum of 80 hours a month, or are engaged in job searches or community service.

Legal challenges to work requirements

Arkansas is the only state that reached the implementation stage on its work requirement waiver, and even then it was set aside in court less than a year later. Other states also have run into legal challenges implementing their waivers. Courts have rejected CMS’ broad reading of the objectives of the Medicaid program, arguing textually that the objective of the Medicaid program is to cover health costs by providing subsidized health coverage rather than improve health outcomes or other goals. As CMS did not engage with the objective of increasing health insurance coverage, the waivers have been set aside as arbitrary and capricious.

Work requirements in Arkansas

Based on the limited experience in Arkansas, the work requirements imposed under its waiver did not increase employment. Instead, their administrative burden appears to have led to people losing coverage without gaining jobs. Many stakeholders appear not to have understood fully the work requirements, and found the online reporting system difficult to navigate. As such, the requirements did not lead to improved health outcomes and did not meet the broader Medicaid objectives CMS sought to promote.

Medicaid Fiscal Reform

The Medicaid Fiscal Accountability Regulation (MFAR) sought to improve program integrity in the Medicaid program and ensure payment mechanisms would not be gamed to increase federal expenditures. To further this goal, MFAR proposed a number of technical changes to the Medicaid program. Some of these changes aimed to address the distorted incentive caused by the federal Medicaid matching structure.

Medicaid Federal Match

Under the federal Medicaid matching structure, state Medicaid funds are matched with federal funds at a specific rate for each state. This rate ranges as high as ~78% of every dollar spent on the Medicaid program in Mississippi. High match rates distort states’ incentives, desensitizing them to high prices for health services, as only a small share of each dollar comes from state coffers. Particularly as funds flow to providers in a state, higher Medicaid spending may represent a roundabout way to grow a state’s economy. States can then take advantage of this phenomenon by charging Medicaid provider taxes or intergovernmental transfers, effectively laundering federal Medicaid match funding.

MFAR Proposed Changes

MFAR proposed to address this distorted incentive by strengthening the upper payment limit restriction on what Medicaid can pay providers. Among other changes, it proposed limiting provider supplemental payments to 50% of the base payment rate (75% for rural areas) rather than the current average commercial rate limit.

MFAR also sought to address this distorted incentive by adding teeth to the requirements that healthcare taxes must be broad-based and uniformly imposed to avoid reducing federal match funding. The rule would have required waivers of this requirement be renewed every 3 years. The rule also would have introduced a net effect standard to test if a state is holding providers harmless from a provider tax. Additionally, it would have restricted which entities can make intergovernmental transfers and restricted provider donations, among an array of technical changes.

MFAR’s impact

While MFAR’s precise impact is hard to predict, its directional shift is clear. MFAR likely would have reduced improper payments in Medicaid and incentivized states to reduce Medicaid spending due to their increased financial exposure. By canceling MFAR, CMS deferred intervening in these issues.

Conclusion

In the future, it should be possible to design work requirements that clear the legal hurdles the current effort ran into, particularly as the Supreme Court has yet to rule on waivers. However, effective work requirements will need to build in additional elements to help Medicaid recipients gain work and ensure the waivers do not impose bureaucratic hurdles that harm those who are engaged in work, job searches, or community service. Without that tailoring, a better bet for Medicaid reform may be reviving some of the proposals included in MFAR.

While serving at the White House the author was involved in discussions around MFAR and Medicaid work requirements.

Abe Sutton

Abe Sutton

Abe Sutton is a J.D. Candidate at Harvard Law School in the Class of 2022. From 2017 until 2019, Sutton focused on health policy with the federal government, serving at the National Economic Council, Domestic Policy Council and Department of Health and Human Services. In these roles, he coordinated health policy across the federal government, with a focus on the shift to paying-for-value within Medicare, increasing choice and competition in health care markets, and updating the federal government’s approach to kidney care. Prior to that, Sutton was a consultant with McKinsey & Company where he worked with clients in the health sector. He holds undergraduate degrees in political science, management, and health care management and policy from the Wharton School and the College at the University of Pennsylvania. He has been named to Forbes 30 Under 30 for Law and Policy.

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