Funneling Coronavirus Relief to the States through Medicaid Will Aggravate Problems with the Program and Delay the Economic Recovery

May 6, 2020 stgblase

By Brian Blase


Governments, at the federal, state, and local levels, as well as the private sector have responded in an unprecedented fashion to slow the spread of the coronavirus with large scale shutdowns of businesses, schools, and social gatherings. As a result of these closures, economic activity has plummeted, more
than 30 million people have lost jobs, and the country is in a severe recession.
Congress has provided massive funding for shuttered businesses and unemployed workers. In total, Congress has enacted four pieces of legislation to support businesses and workers as well as to direct money to support hospitals and health care providers. These actions, combined with automatic spending increases that would have occurred even without congressional action, will add about $2.7 trillion to the national debt, according to the Congressional Budget Office (CBO).
Congress also has provided substantial assistance to states. The Families First Coronavirus Response Act increased the federal Medicaid matching rate by 6.2 percentage points. This provides greater assistance to wealthier states as they tend to have more profligate programs. It raised federal Medicaid payments by
12.4 percent in the wealthiest states, compared an 8.3 percent increase in federal payments in the poorest states.
Overall, this action is projected to increase federal spending by about $50 billion, according to CBO.
The CARES Act included a $150 billion coronavirus relief fund that states and localities can utilize to cover coronavirus-related costs. In addition, it provides a $45 billion Federal Emergency Management Agency (FEMA) relief fund that states and localities also can tap to cover costs associated with the federally-declared emergency under the Stafford Act. CARES also included another $80 billion for state and local agencies.
Moreover, much of the remainder of the $2.7 trillion is for programs that will help state finances eventually—both directly through increased federal funds but also indirectly by income support for families and by helping businesses try to stay afloat. The Federal Reserve also is taking unprecedented action to provide relief, including buying short-term municipal debt for the first time.

Despite the substantial aid already provided, many governors, members of Congress, as well as leading policy experts on the Left are calling on Congress to provide states with another enormous aid package. Congress should not rush into providing additional funds to states. First, Congress needs to understand the impact of the actions it already has taken, including those that may hinder the recovery or otherwise use taxpayer dollars unwisely. Second, it is imperative that Congress not present states with additional incentives to either spend irresponsibly or to shutter economic activity for longer than necessary. Third,
Congress should ensure any aid is fairly distributed across states. Fourth, any aid provided to states should be temporary and capped. Finally, Congress should look to couple aid to states with reforms that will both incentivize states to spend judiciously but also improve the integrity of key programs.
Congress should be especially wary of funneling state aid through Medicaid. An explosion of state spending over the past three decades has been fueled primarily by Medicaid spending, with nearly 30 percent of state budgets now devoted to Medicaid.
Key features of Medicaid, including aspects added by the Affordable Care Act (ACA), have led to enormous low-value spending as well as inappropriate and unlawful use of federal Medicaid funds.
It is vital that Congress condition any additional aid on reforms that improve the
Medicaid program and put it on a more sustainable trajectory, particularly given the nation’s rapidly deteriorating fiscal situation. Such reforms would include equalizing the federal government’s matching rates across Medicaid populations and improving the integrity of the program to ensure that spending benefits program enrollees and is not siphoned for other non-health related projects.
This paper reviews pertinent issues and then offers recommendations for Congress.

Full paper

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