Those who reject the narrative that the budget reconciliation bill Congress enacted earlier this year “cuts” Medicaid have many places to look. After reports confirming federal spending on dead individuals and individuals in multiple forms of “free” health coverage simultaneously, federal auditors just revealed yet another example of Washington waste.
A recent Government Accountability Office (GAO) study quantified how the Biden administration allowed states to increase spending on Medicaid waivers. These policies, which the Trump administration should overturn, not only have the potential to cost taxpayers billions, but they have also expanded the welfare state yet again to cover far more than health care procedures.
Definition of Budget Neutrality
The GAO study examined spending for Medicaid waivers, authorized by Section 1115 of the Social Security Act. Spending via these waivers, designed to promote state flexibility and innovation within the program, comprised about one-third of all federal spending on Medicaid, or $194 billion in 2023.
The Centers for Medicare and Medicaid Services (CMS) has long held that, for states to receive federal approval for their waiver applications, their Medicaid waivers must not increase costs to the federal government — that is, they must be budget neutral. But, as with the old axiom about beauty, budget neutrality lies in the eye of the beholder.
While the first Trump administration in 2018 issued guidance defining budget neutrality in ways that would protect taxpayers, the Biden administration undid that guidance in several key respects. The GAO report quantified the potential effects of those changes on federal spending — and, in one case, very clearly recommended that CMS undo one Biden-era policy.
Biden Increased Spending Benchmarks
The Trump administration’s guidance required states to calculate base year spending through actual spending data, rather than trending forward historical data. In other words, if a state had managed to lower its Medicaid spending in recent years, it couldn’t cherry-pick some time in the past and trend that year’s spending forward, to start its waiver with a higher base level of spending.
GAO said this change, when applied to waivers submitted by Tennessee and New York, lowered those waivers’ total spending limits by a total of $232.6 billion, with the federal share of that reduction amounting to $122.5 billion. (Time will tell whether the two states actually hit or exceed the spending limits for their respective waivers, so the total savings could be lower.)
But the revised guidance issued by the Biden administration said it would establish base years by using a blend of actual and historical spending — a change that weakened the fiscal discipline imposed by the Trump guidance. With respect to waivers submitted by three other states — Arizona, Massachusetts, and Washington state — GAO said this change increased the limit on Medicaid spending by $28.4 billion, with $16.6 billion of that potential cost hitting the federal government.
And whereas the Trump administration guidance said the growth rate for future years’ waiver spending (most waivers run in five-year increments) would be linked to the state’s actual spending growth during the last waiver period or the growth rate included in the president’s budget, whichever is lower, the Biden administration linked all states’ spending growth assumptions to the growth rate in the president’s budget. For the Arizona, Massachusetts, and Washington state waivers, GAO said this change raised the limit on Medicaid spending by $8.5 billion, with $4.3 billion of that potential cost hitting the federal government.
Social Spending in Medicaid
Finally, the Biden administration allowed states to assume that they incurred hypothetical costs associated with certain “health-related social needs” — things like housing or other similar costs. CMS justified the change by claiming the “expenditures could improve the quality and effectiveness of downstream services” and “might improve beneficiary health, reducing the future downstream costs of medical care.”
But Medicaid does not ordinarily cover those services. As GAO noted, it seems more than a little dishonest to “includ[e] these costs in the spending limit, rather than requiring states to offset the costs with savings elsewhere in the demonstration.” For instance, if a state can prove that providing a homeless person with a rent voucher will prevent so many emergency room visits that it will reduce Medicaid spending, then it can fund the vouchers via that lower health spending. But a state can’t assume Medicaid would have provided housing vouchers outside of the waiver because a state doesn’t have that authority.
The social needs spending increased the spending limits for five states’ waivers by nearly $7.5 billion (of which $3.8 billion would come via federal dollars). GAO took a dim view of this change, recommending that CMS should “stop treating costs for populations or services that could not have otherwise been covered under existing Medicaid authorities as hypothetical when setting demonstration spending limits.”
Expanding Welfare State
The Biden administration’s actions demonstrate Democrats’ desire to turn Medicaid into a vehicle for an all-encompassing government. The last four years saw myriad housing, transportation, food assistance, and other programs shoehorned into Medicare and Medicaid, all in the name of expanding the welfare state and promoting “equity.”
Thankfully, Congress acted to rein in spending on Medicaid waivers earlier this year. After suggestions from me and GAO, lawmakers finally codified the requirement for all Medicaid waivers to be budget neutral, helping to prevent future administrations from using Medicaid as a vehicle for overspending.
The GAO study illustrates the billions of dollars at risk via this free-spending strategy. And it emphasizes the wisdom of Congress taking action via the “big, beautiful bill” to restore some fiscal sanity to a program plagued by waste and abuse.
