To Battle COVID-19’s Twin Economic and Health Crises, Medicaid Needs Flexible Funding Structures for Stabilization

Abstract

Medicaid, which provides health insurance to low-income Americans, is a joint federal-state partnership that manifests as 50 unique state programs. States have policy flexibility to design programs within federal parameters. However, Medicaid also requires funding flexibility to encourage states to maintain services during times of crisis when more people need Medicaid. Currently, Medicaid’s funding formula, the Federal Medical Assistance Percentage (FMAP), adjusts federal spending by state levels of economic development but fails to adjust for nationwide recessions. During economic contractions, the federal government should use its ability to run budget deficits to reimburse states at higher rates in exchange for maintaining services. In turn, during economic expansions, states should shoulder relatively more costs of Medicaid. Although the current FMAP boost provided under the Families First Coronavirus Response Act has reduced strain on state Medicaid programs, it does not account for the severity of state-specific downturns and is limited to the current emergency. Instead of ad hoc, across-the-board FMAP boosts to respond to each crisis, Congress should pass legislation making automatic adjustments based on changes in state unemployment rates.