What a default could mean for Medicaid and other federal benefits

by Joseph Choi - 05/18/23 6:04 AM ET

With the White House and House leadership less than two weeks away from a default deadline on the country’s debt, anxiety is rising over the potential impact on federal programs such as Medicaid and the beneficiaries who depend on it.

Among the sticking points is Speaker Kevin McCarthy’s (R-Calif.) push for work requirements to be added to federal assistance programs such as Medicaid and the Supplemental Nutrition Assistance Program.

McCarthy told reporters before a meeting with President Biden on Tuesday that adding work requirements was a “red line” for him, while House Minority Leader Hakeem Jeffries (D-N.Y.) has called the proposal a “nonstarter.”

Health care policy experts say a default would be a disaster for the federal programs, though some think the government could stave off the impact on beneficiaries for some time beyond the June 1 “X date” for raising the debt ceiling.

More debt ceiling coverage from The Hill:

If a default does occur, the federal government will likely prioritize paying bond holders in order to avoid a technical default. It remains unclear where Medicare, Medicaid and Social Security would fall on the list of priorities — policy experts aren’t even sure the Treasury Department has the capacity to prioritize payments in a specific order.

“Social Security and Medicare are major sources of federal expenditure, and in most scenarios, they will be impacted,” said Katherine Hempstead, senior policy advisor at the Robert Wood Johnson Foundation. “Medicare is the financial backbone of our healthcare system, so the consequences to hospitals and health care providers will be profound.”

The U.S. has never in history defaulted on its debt, and there is no precedent for payments to federal health programs being delayed.

“Even approaching default could damage the economy, as we saw in 2011,” a Centers for Medicare & Medicaid Services (CMS) spokesperson told The Hill.

The debt ceiling standoff in 2011 resulted in the U.S. reaching the debt ceiling, stock prices plummeting and the country’s credit rating being downgraded for the first time in history. There are fears this fight could be even worse.

“While the precise impact on CMS’s programs depends on many uncertain factors, it is clear that if the federal government is prevented from making good on its promises, there would be significant consequences for Medicaid, Medicare, and the Affordable Care Act Marketplaces,” CMS added.

In traditional Medicare, CMS reimburses providers directly for services. In the absence of available funding, providers would have to prepare for reimbursements to stop coming in, but there may be some cushion before that happens.

The sluggish rate at which Medicare bills are paid could help providers in the wake of a default, according to Joseph Antos, senior fellow at the American Enterprise Institute.

“For at least a month, maybe two months, hospitals and doctors offices and other providers would continue to get payments from the Medicare program, but for services that they provided potentially months ago,” Antos said.

And a 1996 amendment to the Social Security Act could provide temporary relief if the default were to persist for some months. The law states that federal trust funds cannot be cashed out for any purpose except for the “payment of benefits,” such as Social Security and Medicare. The most recent report from the Social Security Administration stated the trust has $2.83 trillion in reserves.

“Theoretically, the Treasury Department could release very substantial sums of money, which would then have to be used to pay federal bills,” Antos said. “That includes Medicare payments to medical providers. It also includes Social Security but it also includes payments to defense contracts and the janitor at the [Department of Health and Human Services] building. Basically all of those would be paid, kind of in the order as they come in.”

In Antos’s estimate, if a default did come to pass, it would only be a matter of weeks before lawmakers were cowed into reaching a deal, and he believes federal health programs can survive for a few weeks.

Still, others feel that the urgency of the situation isn’t quite hitting home for those on Capitol Hill.

“The situation this year seems more serious in that, you know, one side of the discussion — namely the House Republicans — seem to be less worried about the prospect of default than they should be,” said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities and a former staffer at the Congressional Budget Office.

“McCarthy has said that he doesn’t want the government to default, that he recognizes the serious adverse impacts that would have, but it’s not clear that all of the Republican caucus feels the same way.”

McCarthy has said that House Republicans already passed their debt limit package, and it’s up to the Biden administration to respond. He emerged from Tuesday’s talks saying that the “structure” of the talks had improved.

But he added, “I’m not more optimistic. You’re only 15 days away, and you’re trying to raise the debt ceiling.”