Is Trump’s Medicaid reform plan a hidden tax?

The Centers for Medicare and Medicaid Services (CMS) recently announced that it is undertaking the daunting task of reforming America’s health care entitlement for the poor. Its plan — the Medicaid Fiscal Accountability Regulation (MFAR) — would “promote transparency by establishing new reporting requirements for states to provide CMS with certain information on supplemental payments to Medicaid providers.”

The Trump administration has it right: Medicaid, the nation’s third-largest entitlement program, certainly is in need of reform. The program has become a veritable nightmare of waste, incompetence and poor health care. With an improper payment rate of 8.4 percent and $161 billion worth of misappropriated funds, Medicaid ranks as one of the most poorly handled programs in America.

Without a doubt, the administration should be commended for its determination to reform Medicaid. However, while restructuring this politically sensitive program is necessary, the approach selected to do so is everything. Unfortunately, with MFAR, the administration’s process will violate states’ rights and inadvertently create unnecessary budget pressure that likely will lead to state tax increases.

To understand how MFAR would change Medicaid for the worse, it is first essential to grasp how the system operates. Currently, Medicaid is funded through a combination of local, state and federal funds. The federal government provides a match to each state of 50 to 75 percent of what each state spends itself on the program.

That match effectively operates like paying the states to spend more money on the program. Similar matches throughout the welfare state from the feds to the states are why America now spends more than $1 trillion a year on welfare.

The match also creates perverse incentives for the states to manipulate their Medicaid budgets to receive more funding from Washington — stimulating unnecessary pressure on the U.S. Treasury as a result. 

While the match is problematic, fixing it shouldn’t involve Washington giving orders to the states on how they can run and fund their own Medicaid programs, which is exactly what MFAR would do. 

The states fund their non-federal share of Medicaid through many sources, including state taxes, intergovernmental transfers and third-party contributions. In theory, MFAR would allow Washington to crack down on the funding mechanisms it feels the states are using for no reason other than to receive the match and unfairly raid the federal Treasury. However, by attempting to address the symptoms of the larger problem — each isolated case of states gaming the law — rather than the root of all of them (the federal match itself), MFAR would punish many honest funding practices and prevent the states from adequately funding Medicare. 

In just one of many examples, CMS seemingly perceives internal government transfers (IGTs) as one of the ways many states often artificially increase their Medicaid budgets to milk the federal Treasury. MFAR thus would eliminate most of them from the program. In some cases, CMS’s logic may be true; however, CMS scrutinizing or banning most IGTs outright ignores that some states utilize them for noble goals, such as funding graduate medical education for university teaching hospitals. States would do that even without the federal match or Washington’s involvement in Medicaid, and yet CMS would prevent them from doing so in many cases.

Imposing restrictions on the methods states use to fund their Medicaid programs will result in more taxes — likely a lot more. States would be compelled to transfer funds from other local programs into Medicaid while raising taxes elsewhere. To compensate for the states’ sudden budgetary shortfalls, Americans will just end up paying more for line-items such as roads, public schools and other state programs. The resulting tax increases for gas and property would be regressive as well, hitting hard-working Americans right in the pocket.

Reforming Medicaid shouldn’t come at the cost of higher taxes. Rather than slapping the states with 200 pages of federal government-mandated, top-down regulations on how they can fund Medicaid, the Trump administration should pursue the alternative of Medicaid block grants.

Such blocks grants reverse the perverse incentives of the federal match. The federal government gives each state a fixed, finite block grant to help fund the program along with blanket authority to reform the program even more. That leaves the states with powerful incentives to minimize, rather than maximize, state financing for the program.

In 1996, block grants reforms were adopted for the old Aid to Families with Dependent Children (AFDC) program. States used their new powers to reform the program to prioritize getting welfare dependents into jobs. Over 50 percent of those originally on the program left dependency to go to work. That increased their incomes on welfare alone by 25 percent or more. The poor benefitted, as did taxpayers.

President Trump should propose block grants for Medicaid, instead of MFAR. That would be so “typically Trump,” benefiting the poor with more — and better — health care under state control of the program, and taxpayers.  

Peter Ferrara is the Dunn Liberty Fellow in Economics at King’s College and a senior fellow at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as associate deputy U.S. attorney general under President George H.W. Bush.