The Challenge of Sustaining Medicaid: A Tragedy in Three Acts

By Matt Salo
Medicaid is the largest, most important program that nobody has ever heard of. While it has gotten increased attention lately as the third entitlement—after Social Security and Medicare—that should be reformed  in order to ensure federal fiscal solvency, its critical role as the nation’s health care safety net is still overlooked and underappreciated.
In 2011, Medicaid directors are facing three new challenges. They will continue to face the perpetual challenge of administering the largest health care program in the country and providing cutting-edge care to the nation’s most medically fragile populations on a shoestring budget.
The first and most immediate is how to survive the next two fiscal years. The second is how to prepare for implementation of the Affordable Care Act. The third and longer-term challenge is how to sustain the program in the future.


States are facing a cumulative budget deficit of $175 billion over the next two fiscal years—2012 and 2013. Balanced budget requirements, the expiration of the enhanced federal Medicaid match and the maintenance of effort on eligibility will make resolving this situation extremely difficult. While Medicaid will not bear the brunt of solving the entire budget crisis, most states will be forced to make significant reductions in spending just to survive. With eligibility reductions off limits, reimbursement rates already too low in many areas and the moral/ethical hazard of eliminating optional services like home and community-based care, viable options are few.


State revenues are expected to return to pre-recession levels by 2013 or 2014. This coincides with the timeline for implementing the largest expansion of Medicaid in the program’s history. While the political fate of the Affordable Care Act—or at least pieces of it—will be decided in the courts and in Congress, states are moving forward with implementation as best they can. Their challenge will be to enact transformational changes across the program without enough time, money or staff. States will be facing the challenge of creating insurance exchanges that envision seamless interaction between multiple state programs and federal agencies; total overhaul of eligibility, information and claims systems; and ensuring access for 16 million new beneficiaries, all while they are simultaneously slashing Medicaid spending to balance the budget.

The Future

Finally, regardless of what transpires in the short term, states will be concerned about the long term. Although state revenues will rebound, they are unlikely to ever be at the relatively robust 6.5 percent growth that they averaged over the past 30 years. This new baseline—or “new normal” —will likely be around 4.5 percent for the foreseeable future. This calls into serious question the ability of states to sustain a Medicaid program that will always be growing faster than the revenues to sustain it.
While state tax systems must be modernized, we must also rethink how Medicaid is structured. This restructuring must totally rethink Medicaid’s current role as the only significant public source of long-term care funding in this country, and the unacceptable fact that fully 40 percent of Medicaid spending is on individuals who are also Medicare eligible.