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.
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