Three Ways to Reform Medicaid

The federal Medicaid program—designed to provide health insurance to struggling American households—is in serious trouble. The program costs taxpayers nearly $1 trillion per year, but there’s disappointingly little evidence that Medicaid has made low-income Americans healthier.

Summing up the evidence from more than ten years of Medicaid expansion under the Affordable Care Act (aka Obamacare), Mercatus Center scholars Liam Sigaud and Markus Bjoerkheim find, “no consistent evidence of lasting health improvements among those targeted by the reform” and even a possible decline in reported “very good” or “excellent” health in the years following expansion. While the One Big Beautiful Bill (OBBB) will improve the program’s function and lower costs, the legislation alone is not nearly enough to turn Medicaid around.

The Taxpayers Protection Alliance (TPA) has long advocated for changes to the program that would improve patient health and protect taxpayers against runaway costs. Below, TPA provides three suggestions for reforming Medicaid.

1. Increase Use of Private Systems to Administer Medicaid.

One major issue with Medicaid is that it operates according to bureaucratic procedures that only succeed in creating administrative headaches.

According to a 2023 analysis published in The Quarterly Journal of Economics, infamously-low program reimbursement rates are not the only reason why doctors tend to avoid Medicaid.

Examining doctors’ various issues in communicating with insurers to obtain reimbursement, the economists find, “physicians lose 18% of Medicaid revenue to billing problems, compared with 4.7% for Medicare and 2.4% for commercial insurers.” Bureaucratic “hurdles are quantitatively just as important as payment rates for explaining variation in physicians’ willingness to treat Medicaid patients.”

Fortunately, companies are beginning to offer services to state governments that could make Medicaid work similarly to commercial insurers, which have the fewest billing problems. For example, technology provider Unite Us unveiled a new service in 2024 that provides real-time beneficiary eligibility verification “to confirm the appropriate health plan to bill in order to be reimbursed for Health-Related Social Needs (HRSN) services.” As a result, providers need not face endless bureaucratic hurdles for “taking a chance” on a Medicaid patient. 

There is also real value in private sector partners utilizing data to ensure limited taxpayer dollars go as far as possible toward helping people and assisting beneficiaries in transitioning off Medicaid and other public benefits.

2. Harness Private Insurance to Cover Medicaid Patients.

The OBBB stipulates that, to receive Medicaid benefits, individuals must be working, engaged in community service (e.g., volunteering) or receiving education or work training at least 80 hours per month. Taxpayers will save about $30 billion per year from the enactment of Medicaid work requirements, and about $100 billion per year once other Medicaid provisions of the bill (e.g., more frequent eligibility checks, curtailing state-directed payments) are taken into account.

Even more ambitious reforms could add significant savings to these welcome reforms. One approach would be a means-tested, refundable tax credit of approximately $550 per month for individuals to go out and purchase the private healthcare plan of their choice. This would allow households to purchase mid-tier “silver” health insurance plans (which typically cost less than $550 monthly in low-income states such as Mississippi). Assuming a beneficiary population base of 75 million, this would save taxpayers $300 billion per year. Even if Congress used half of those annual savings to reimburse miscellaneous expenses (e.g., high co-pays, out-of-pocket medication costs), taxpayers would still save $150 billion annually on top of OBBB savings.   

Alternatively, policymakers could pursue some combination of lower tax credit subsidies (say, $400 per month) and direct reimbursements to hospitals providing free care. These alternative policies would not only be better for taxpayers but would also give low-income households a far better (private) insurance product.

3. Reform State-Level Certificate-of-Need (CON) Laws.

Healthcare is likely the most regulated industry in the U.S., with barriers to entry and standards of care dictated by the federal government and states contributing to roughly $5 trillion in total annual national health expenditures. New entrants in the provider space can treat patients and bolster competition, but existing industry participants use state laws to deter entry.

As the Reason Foundation noted in a 2021 analysis, “State-level [CON] laws require health care providers to receive government approval to construct new facilities, expand existing ones, or offer new medical services. To gain approval, health care providers are often required to demonstrate that there is an unmet need for additional capacity. However, existing providers–who have an interest in limiting competition–may block new entrants and competitors by arguing that there is no additional need.”

Fortunately, the Centers for Medicare and Medicaid Services is addressing how it can work with states to limit these laws and bolster healthcare competition in the process. That’s important because lower supply of healthcare facilities directly results in higher prices and reimbursements paid out in the Medicaid program. Nixing these needless rules can save taxpayers and consumers significant sums of money.

Conclusion

Medicaid is a significant driver of the $37 trillion national debt. A few commonsense reforms, and a shift toward market-based solutions, can go a long way toward restoring fiscal sanity to the program and providing beneficiaries with the care they deserve.