The perverse incentives of federal funding

Medicaid spending across the country continues to grow at an unsustainable rate. We know this all too well in Kentucky.

The Federal Medical Assistance Percentage (FMAP) rate creates perverse incentives for states to grow their Medicaid programs unnaturally and beyond state capacity in order to receive more federal funds. The matching rate's design intends to provide a greater percentage of funds to the most impoverished states.

However, new research by Pamela Villarreal and Michael Barba at the National Center for Policy Analysis shows that the federal government's funding has led to significant disparities.

Despite the fact that poor states like Kentucky receive a higher matching percentage from the federal government, more populous states with larger programs actually end up receiving more funds. Because there is no limit to federal Medicaid funding, states can continue to grow their Medicaid programs without facing any penalty.

A 2008 comparison of states' poverty rates and their percentages of federal funding shows the discrepancies in spending. Villarreall and Barba write, "On one end of the spectrum, high-spending New York state receives 87 percent more federal funding than it would based on its poverty population."

ObamaCare only worsens the problem with its massive expansion in 2014 of Medicaid eligibility standards to 133 percent of the Federal Poverty Limit (FPL). The federal government will fund 100 percent of this expansion at the outset, but the matching rate will decline in the years to follow. States will continue to feel the burden of strapped Medicaid budgets, but with no real incentives to stop spending.

The solution? The authors suggest increased state flexibility and capped federal funding.

Kentucky desperately needs increased flexibility and spending restraint if our Medicaid program will ever get on a path towards fiscal solvency.