The myth of free money in Medicaid Expansion. Encouraging fraud is coming home to roost.

We are passing the cost of profligacy to our grandchildren.

A friend in Texas asked me to provide him with some sense of the scope of fraud in public sector health insurance, and, as importantly, what drives it.  As the country is now facing deficits and increased interest costs for US Government debt, and health care costs crowd out other state needs, we must take a hard look at the ‘free money’ enticements that contributed to the current fiscal straits.

Medicaid expansion was sold to the State Legislatures who had to approve it as ‘free money’ from Washington.  In the first few years of expansion, the “Federal Government” paid for 100% of new Medicaid beneficiaries; the number is still 90%.  California, Illinois, and New York were most aggressive in adding beneficiaries, and in California’s case 600,000 ineligible people were enrolled in Medicaid.  And then there is the recent bribe (that's the only way to describe it) that we all paid North Carolina to expand its Medicaid program. The Federal Government sprinkled $1 Billion to health facilities in the state to get the Legislature to approve it after 14 years. Again, there will be no additional oversight for the cost of 600,000 new North Carolina beneficiaries. North Carolina gets 2/3 of its Medicaid budget from the Rest of Us with no incentive to spend wisely, just the opposite (see the next paragraph). I'm not picking on the Tarheel State; this is just the latest in recent events.

At the same time, significant disincentives to reduce fraud became more acute.  The “Federal Government” was paying for 100% of new beneficiaries, and the “Federal Government” proportion of Medicaid paid for reached as high as 75% for some states, from the intended 50%.  Medicaid agencies and state legislators, never ones to pass up ‘free money’ as it was advertised looked at this and said, “You mean for every dollar we spend; we can get three dollars from Federal taxpayers?”  Ignoring inappropriate payments was good business, as each dollar spent, legitimately or not, would be $1.08 the following year, with 75% paid from Federal taxes and borrowing. You can calculate how this compounds over the years since the PPACA was passed. A fraudulent dollar paid in Year 1, at a 10% growth rate, becomes $2.30 in year 10 as the amount spent is the basis for subsequent years' appropriations. Over the 10-year period $1 of inappropriate payments generates about $15 dollars in additional appropriations.

And to qualify for the Federal tax dollar, States passed around the hat and collected a ‘provider tax’ as the ante at the table to get 3x from Uncle Sam.  The providers were guaranteed that they would get the money back in spades once received from the US Treasury.  Oversight and reduction of fraud would only serve to limit the “Federal government” dollars that could be requested.  And, if a State received 75% of its Medicaid funds from the “Federal Government” it would be required to pay back 75% of any recoveries back to Uncle Sam. Quite a disincentive, evidenced by the fact that Medicaid fraud recoveries as a percentage of total Medicaid spending are down 74% since the implementation of the PPACA.

The singular difference between a state and the Federal Government is that the Federal government can engage in deficit spending. That puts the bill for this spending squarely in our grandchildren's laps.

So where is this myth?  And why am I referring to national government funding in quotation marks  [“Federal Government".}.  To a state, the “Free Money” (there I go again) made it seem as if a Legislature was getting an advantage on its neighboring states by expanding Medicaid, and not increasing oversight.  What they didn’t tell their constituents is that every other state was doing the same thing.  At the end of the day the “Free Money” from the “Federal Government,” that big amorphous pot of gold on the Potomac, was merely a shift of costs from State taxes paid to Federal taxes paid by Everybody Else.  “Federal Government” money isn’t “free,” it comes out of your 1040 filed every April.  Ergo, the quotation marks for “Federal Government.” It's not some abstraction, rather a different pocket in your trousers. And since nearly every state was doing it, federal taxpayer costs of Medicaid were rising quickly.  This is a likely contributor to the fiscal probity theatrics now going on in Congress. Call it what it is.

So what is the myth?  For my friend in Texas, I did a calculation of Texas’ taxpayer Federal burden for Medicaid and what has happened to it.  In In 2007, Texans’ Federal tax burden for Medicaid was $15.5 Billion.  For 2021 it was $40 Billion.  That’s the “Free Money” coming from the “Federal Government” paid for by significant increases in Federal tax burden. Since Texas has no income tax, residents must come up with another $23 Billion to pay the Medicaid bill.  Similar numbers exist for the other 49 States.

It is time to stop the charade of “free money” and time to change the incentive structure so that States benefit, not suffer from, reductions in inappropriate payments.  Encouraging spending and discouraging oversight has wreaked substantial damage already.  Instead of cutting, or threatening to cut services, change this outdated and dangerous methodology.  It only serves to benefit those on the receiving end of the dollar, and not those who pay it.