Q&A: Robert Kaestner Discusses the How and Why of Potential Medicaid Cuts

Robert Kaestner is a Research Professor at the University of Chicago Harris School of Public Policy.  His areas of research interest are the economic and social determinants of health, health demography, and health, labor and social policy evaluation. He has been the principal investigator on several studies that have explored Medicare and Medicaid policy. 

As the federal government considers its funding priorities in the era of Trump and DOGE, Kaestner provides context for the economic questions and considerations surrounding Medicaid that underlie the current US political debate. 

What is Medicaid? 

Medicaid is a health insurance program intended to provide low-cost, comprehensive healthcare to low-income families. The program is jointly financed by states and the federal government. Under federal guidelines, states operate and design the Medicaid program in their state. Medicaid provides virtually free inpatient, outpatient and prescription drug services to enrollees.  Most Medicaid beneficiaries are enrolled in a managed care plan where the state pays a private company a fixed amount each month per enrollee, although the share of people in managed care plans varies by state and reason for Medicaid eligibility.

How has the Medicaid program expanded, and by how much?

Medicaid enrollment and expenditures have risen markedly between 2000 and 2023. Total enrollment tripled from 35 million people to 98 million; total spending quadrupled from $206 billion to $894 billion; and spending per enrollee increased by 50% from $5,972 to $9,109. The Federal government pays for approximately two-thirds of total Medicaid costs and that share has increased modestly over time from about 58% in 2000. (The rest of the costs are generally incurred by the states.) It is against this backdrop that political interest has focused on reducing the costs of Medicaid at the Federal level.

What factors have contributed to this growth?

Part of the current focus on reducing Medicaid costs stems from the growth in enrollment of those who were traditionally not eligible for Medicaid—for example, single adults. This "new" adult group represents 25 million people and 27% of all Medicaid enrollees. 

Much of the increase in the enrollment of this "new" adult group occurred after the passage of the Affordable Care Act in 2014 and in the aftermath of the COVID pandemic.

From 2013 to 2016, Medicaid enrollment increased by 20% and Medicaid spending increased by 25%. From 2020 to 2023, Medicaid enrollment increased by 25% and Medicaid spending increased by 30%.  These two periods, which were during Democratic presidential administrations (and most notably during the Biden administration), account for approximately 50% of the total growth in spending and enrollment in Medicaid from 2000 to 2023.

Is Medicaid cost-effective? 

Medicaid provides health insurance relatively cheaply with current costs of $3,000 per child, $4,500 per traditional adult, $6,400 per "new" adult (discussed above), and approximately $15,000 per person for the elderly or people with disabilities. These figures are lower than those for comparable privately held insurance. For example, employer-sponsored health insurance costs about $9,000 for a single person and $25,000 for a family. The lower costs of Medicaid are mainly the result of lower payments to healthcare providers. Estimates suggest that Medicaid pays approximately 30% less than Medicare and an even lower percentage than private health insurance.

What are the current administration’s plans for reducing Medicaid costs?

While the Trump administration's exact plans to reduce Medicaid costs are, as of yet, unclear, the recently passed Continuing Resolution bill assumes that Medicaid spending will be reduced by $880 billion over the next 10 years, or $88 billion per year. This represents a 14% cut–a large cut, to be sure, but not a draconian one.

What options are there for reducing Medicaid costs? 

The primary way to reduce Medicaid spending is to reduce enrollment, as costs per enrollee are already relatively low. Various ways to reduce enrollment have been proposed. One is to institute a work requirement, which would induce a small number of people on Medicaid to disenroll. This option would result in only small savings because it would apply mainly to single adults most of whom are already working or are unable to work. It would only make a small dent in the desired 14% cut. 

A second way to reduce enrollment is to tighten renewal and eligibility requirements. Some portion of those enrolled in Medicaid become ineligible after they are enrolled—because of an increased earned income, for example. Increasing the frequency or intensity of renewal requirements would cause some on Medicaid to disenroll. But this approach will also likely contribute only modestly to the desired reduction target of $88 billion.

The most straightforward way to reduce enrollment and/or cut Federal Medicaid spending is to reduce payments to states. A proposal by some Republicans calls for capping Federal payments to states for Medicaid. This approach is similar to the caps placed on the Aid to Families with Dependent Children (AFDC) program that were implemented as part of welfare reform in the 1990s. Capping Federal payments to states for Medicaid, which, because of rising healthcare costs, would meaningfully reduce Federal payments over time.

If there were caps, how would states respond?

A state would likely respond to such a change by cutting their Medicaid rolls, which is what happened in the case of welfare reform, or by cutting spending on other priorities--likely education, because it is the next largest state expenditure. Or a state could raise taxes to meet the increased burden, which would be unlikely to be politically attractive. Raising taxes is not something Republicans would tend to support, especially because the Medicaid cuts are intended to make room in the Federal budget for tax cuts.  

Are there other options for getting overall Medicaid spending in line?

One additional option for shrinking Medicaid spending is to reduce fraud. However, the extent of fraud in the program is not well measured. A widely cited estimate is that there were $50 billion in improper payments annually, but improper payments are not necessarily fraud. Nevertheless, reducing fraud and improper payments--those that were not valid for providing actual services--by even $25 billion would go a long way to contributing to the 14% proposed reduction. One state policy often viewed as inappropriate and that has long been on policymaker’s radar are provider taxes that state use to generate more federal payments. States tax providers (e.g., hospitals) and then raise payments to same providers holding them almost harmless. The state payments, however, triggers increased federal payments. The state gains additional federal funds for little change, for example, no change in Medicaid enrollment.