In 2011, Medicaid looked awfully ripe. That year, deficit negotiators were scrambling for entitlement savings, and the president proposed more than $100 billion in cuts to the federal-state health insurance program over a decade, mostly by reducing the rate at which Washington matched state spending. State governments would have needed to make up the difference, but it’s not like they could have deserted Medicaid: The 2010 Affordable Care Act virtually compelled them to expand their insurance pool to 17 million more poor people by closing the spigot altogether if they refused. If the federal government needed to chop entitlements so badly, well, the states were going to have to pay for it.
Then the Supreme Court changed everything. In June, it decided that the federal government couldn’t strong-arm states into expanding their Medicaid programs. They don’t have to join if they don’t want to. Now, the Health and Human Services Department must woo governors to expand their programs with the promise of federal matching funds. If those funds dry up, states may be disinclined to help the president deliver on his promise to broaden insurance coverage. That makes Medicaid, one of the country’s three largest entitlements, a much less appealing target for cuts in any deficit-reducing “grand bargain.”
If nothing changes, the states get a pretty sweet deal for expanding their Medicaid programs. Beginning in 2014, the federal government will pay for people who are not currently eligible but who earn below 133 percent of the federal poverty limit—which is about $15,000 for a single person. The federal reimbursement rate slowly drops to 90 percent, but the cost to most states will still be dwarfed by federal dollars, particularly in the first 10 years. A study published by the Kaiser Family Foundation this week found that, on average, states will come out ahead by expanding, because small state-spending increases will be offset by savings in programs that currently serve the uninsured.
But if the federal formula changes, states may be less likely to expand Medicaid. In 2011, the president pitched a “blended rate” in which the federal match contracts a little. He also proposed to eliminate provider taxes that states impose to supplement federal dollars. Both changes would require states to pony up more cash for their existing Medicaid beneficiaries and for those who come in with the expansion. Now that the Court has improved the states’ negotiating position, the president is backing away from the “blended rate,” according to Matt Salo, the executive director of the National Association of Medicaid Directors. Salo says that administration officials have told him they no longer support the proposal. “Any kind of federal deficit-driven Medicaid reform is probably going to make a number of people upset and could have a chilling effect on the administration’s primary goal right now, which is to get states to do the expansion,” he says.
Currently, a majority of states are undecided about Medicaid expansion; officials in both red and blue states say that budget issues will affect their decisions. Because Medicaid spending represents such a large slice of state budgets—23 percent, on average—even small increases can have a big overall effect. “The major negotiations are going on between the states and the president, and not with the Congress,” says Douglas Holtz-Eakin, the president of the conservative American Action Forum and a former Congressional Budget Office director.
Policy experts close to the president say they’ve seen the political calculus change dramatically since the Supreme Court ruling. Dr. Donald Berwick, the former administrator of the Centers for Medicare and Medicaid Services, said in a November press briefing that any cuts to federal support of state Medicaid programs would be a “bad move” if the administration wants them to expand. “The states are watching to see if they can count on the federal share of Medicaid,” he said. Neera Tanden, the president of the liberal Center for American Progress and a former top policy adviser to the president, agrees that Medicaid cuts would be “ill-advised” if the president wants states to sign on.
Tanden was among a handful of liberal-group leaders who recently met with the president to discuss his outlook on the budget negotiations. Robert Greenstein, the president of the Center on Budget and Policy Priorities, who was also in the room, says he was struck by how much the president talked about his commitment to the Medicaid program.
Of course, Medicaid was never going to be a huge component of a budget deal. Given the goal—a $4 trillion deficit reduction—$100 billion is peanuts. But the president’s Medicaid dilemma could pose symbolic problems if he wants to satisfy Republicans that he can accept meaningful changes to costly programs. Democratic senators, including Majority Leader Harry Reid, have already said they won’t allow Social Security cuts. Without Social Security or Medicaid on the table, the president’s gambit for “entitlement reform” may mean a very dark outlook for Medicare.
This article appeared in print as "No Deal."
Nancy Cook contributed
This article appears in the Dec. 1, 2012, edition of National Journal.