Capped Federal Matching Funds: Washington State's Bipartisan Medicaid Reform

It’s a short law with big potential: SB 5596, signed by governor Christine Gregoire at the end of May, is only three pages long. Nevertheless it puts Washington State on a path to Medicaid solvency and sets an example for California and the nation.

Remarkably, the law, sponsored by conservative Republican senator, Linda Evans Parlette, passed with unanimous support in the state Senate and Assembly. Needless to say, the state’s Democratic legislators and liberal governor took some political risks in endorsing it. But we have to be careful in describing what SB 5596 achieves.

In a June 4 column in the Wall Street Journal, Nansen Malin of Americans for Prosperity described the reform as a Medicaid “block grant. ” A few days later, governor Gregoire wrote a letter denouncing this description. According to Gregoire, SB 5596 does not even mention “block grants” but seeks instead “greater flexibility from the federal government by focusing on effecting purchasing and treatment,” through a waiver from Medicaid’s default regulation and funding.

The term “block grant” appears anathema to Democrats. This may be simple guilt by association. Block grants have been proposed by Republicans for years, most recently by U.S. Senators Tom Coburn (R–OK) and Richard Burr (R–NC). A more accurate term for the Washington reform would be “capped federal matching funds.” It is a significant step in the right direction.

State spending on Medicaid is out of control because Medicaid’s traditional funding formula incentivizes the political class to overspend. For every dollar a state politician spends on Medicaid, the federal government pitches in at least one dollar – or even more, as a result of the misnamed “stimulus” of 2009 – via the Federal Medical Assistance Percentage (FMAP).

The federal government actually rewards states for making more residents dependent on Medicaid. Being a wealthy state, Washington should receive an FMAP of 50 percent. However, the federal so-called “stimulus” of 2009 increased FMAP to 58.23 percent for this year. That is, for every dollar Washington spends on the state’s Medicaid program, the federal government also spends $1.17.

A block grant would eliminate this formula entirely, and simply grant federal Medicaid money to the states based on the number of eligible beneficiaries every year. Capped matching funds are a middle ground. The federal government still transfers money based on state spending, but the total amount is capped over a multi–year period.

This approach is probably somewhat less effective than block grants. However, it has one overwhelming advantage: It now exists in two states, and enjoys massive bipartisan support, as demonstrated by the vote tally in Olympia.

The other state benefitting from this arrangement is Rhode Island, which received a waiver on the last day of the Bush administration that capped its total (state and federal) Medicaid spending at $12.075 billion through 2013. At the current rate, it looks like the actual spending will be about $9.3 billion – with no evidence of reduced access to care.

Washington’s simple three–page bill authorizes the state to apply to the federal government for a waiver by October 1. Unlike the legislation, the waiver will be dozens, perhaps hundreds of pages long, and may describe too much bureaucracy and regulation. Nevertheless, it is likely to be approved by Secretary Sebelius, who would be unlikely to dismiss such an overwhelmingly popular bill signed by a liberal Democratic ally. And it will save Washington taxpayers billions of dollars in the years to come.

In the long run, advocates of individual choice and fiscal responsibility in health care should certainly continue to advocate universal block grants for Medicaid. However, it would be irresponsible to ignore the beneficial alternative of capped federal matching funds – a reform with wind in its sails. If Democrats and Republicans in Congress agreed to break the longstanding logjam on Medicaid reform by negotiating a national cap for federal matching funds, many states – both red and blue – would cheer and benefit.

(This article is also available in PRI's Capital Ideas series: here, and as a column in the San Francisco Examiner, here.)