COVID-19 has brought healthcare heroes to the fore. News stories abound of the doctors, nurses and other frontline medical personnel who have risked personal safety, often in chaotic circumstances, to serve others.

Less immediately visible is the harsh reality that the virus has placed the healthcare system itself under financial siege.

Many of the healthcare institutions on the front lines of the COVID-19 crisis are part of this country’s healthcare safety net -- providers who treat the sickest patients and conduct medical research which provides access to the newest therapies and clinical trials. They also serve a disproportionate share of our most vulnerable populations, alongside the nation’s children’s hospitals, rural hospitals, long-term care facilities, community health care centers and free clinics.

Major funding for the national healthcare safety net comes from Medicare and a variety of Medicaid programs, along with other state and local government initiatives. Medicaid covers both health care and long-term care for eligible low-income individuals. But unlike Medicare – the federal health insurance program for those 65 and older – the Medicaid program is jointly funded by the federal government and the states.

This funding model was always a compromise and never ideal. In our current crisis, it may prove at best inadequate, and at worst disastrous.

Our practical solution and rationale, outlined below, proposes to mirror the Medicare funding model by transferring all Medicaid funding responsibility to the federal government. This bold action, which is in keeping with much of the government’s virus response, better positions the U.S. healthcare safety net to perform its critical task in this crisis and its aftermath.

If it is to care for us, we must first care for it.

According to The Kaiser Family Foundation (KFF) Medicaid spending data, for fiscal year 2018, $593 billion was spent for Medicaid services in the United States – a huge number. Almost two-thirds of that was paid for by the federal government. Individual states paid the rest. The federal contribution comes to the states as matching funds based on a complex formula called the Federal Medical Assistance Percentage (FMAP). The FMAP is intended to provide a larger percentage match to those states with the lowest per capital incomes.

It’s been an uneasy relationship at best.

Over the years as increasing Medicaid expenditures have stressed annual budgets, states have turned to utilizing intergovernmental transfers from local governments and other state-owned medical facilities, as well as state-wide community hospital provider tax programs, to help maximize their state Medicaid expenditures for the FMAP federal matching funds. These innovative methodologies, however, have recently been targeted as “impermissible donations” by the Centers for Medicare & Medicaid Services (CMS). 1

Unlike the federal government, states and localities cannot run ongoing annual budget deficits. So, even with the enhanced FMAP provided under the Affordable Care Act (ACA), 14 states have so far declined to expand Medicaid eligibility. Their decisions have been largely driven by a fear of additional Medicaid funding responsibilities that they may not be able to sustain in the future.

Years of state funding limitations for Medicaid have resulted in low Medicaid provider rates and the exclusion from eligibility of many adults among the working poor. The Medicaid financing system has been cobbled together with a myriad of funding mechanisms since its inception. In effect, there are now 50 state Medicaid programs being managed concurrently, all with unique funding mechanisms and varying levels of healthcare access for the poor.

The ACA currently provides subsidized insurance coverage options for individuals not eligible for Medicaid. Yet the reality is that most of the working poor struggle to meet even these subsidized commercial premiums, not to mention their related high deductibles and co-insurance requirements.

The more immediate problem, however, is the looming crisis for state and local governments – revenue shortfalls that will inevitably impact their ability to sustain even current Medicaid funding levels. The COVID-19 pandemic has to a large extent paralyzed the U.S. economy, which in just two months has resulted in 30 million (and counting) newly unemployed. Unsurprisingly, Medicaid enrollment and spending growth have peaked in past economic downturns (2002 & 2009).2

In addition to the significant costs incurred in treating COVID-19 patients, the U.S. healthcare system is also under substantial financial stress due to the significant reductions of elective procedures, non-COVID-19 outpatient visits and commercially insured patients. The CARES Act and its amendments have provided $175 billion in direct grants to hospitals to help offset near term financial losses caused by COVID-19. Yet there has been little relief to state and local governments for their projected revenue losses and resulting projected budget deficits.

This scenario will require a broader response than the Affordable Care Act health insurance exchanges can offer. Millions of newly uninsured patients will exert more financial pressure on a U.S. healthcare safety net already under extreme financial duress. There will likely be renewed arguments that a “Medicare for All” single payer government healthcare system would be a potential solution to this “new normal” scenario.

Let us offer a more practical solution:

For SFYs 2020 & 2021, retroactive to July 1, 2019 and extending at least through June 30, 2021, the Federal Medical Assistance Percentage (FMAP) which determines the share of the cost of Medicaid covered services that the federal government will pay in each state, should be reset at 100% for all Medicaid programs and services.

This would accomplish the following: 1) Solidifying current Medicaid funding levels in a COVID-19 “new normal” environment. 2) Accommodating Medicaid coverage eligibility for the potentially millions of newly uninsured. 3) Providing immediate relief from the economic pressure of the lower tax revenues that state and local governments will inevitably be facing for at least the next 12-24 months.

There is precedent for temporary modifications to the FMAP formula in previous recessions, including the Great Recession of 2007-2009. In a recent policy brief regarding how the Medicaid program could respond to the COVID-19 crisis, KFF discussed the legislative option of enhanced federal funding.3 KFF provided a variety of legislative and regulatory options for responding to this crisis. In our view, however, the magnitude of the financial fallout of the COVID-19 crisis mandates the dramatic interim federal funding intervention proposed above.

We believe that this course of action, when compared to other economic stimulus options, would generate support from both states and the federal government.

Here’s why:

1) This solution does not materially increase overall government spending compared to other options; it simply transfers the states’ current Medicaid funding ($216 billion in SFY 2018) to the federal government for a two-year period. Compared to the CARES Act’s now $2.5 trillion price tag, this proposed relief package to the U.S. healthcare safety net and state and local governments is a bargain.

2) Each state’s reduced Medicaid funding responsibility would immediately provide a significant cushion for projected tax revenue shortfalls in the near term and would also be available to fund other state and local government priorities such as K-12 education, higher education and transportation.

3) All healthcare providers would be spared from the likelihood of further provider Medicaid payment delays and/or rate reductions to help solve a state’s near-term fiscal deficits.

4) The federal government would be able to utilize an existing payment mechanism to provide immediate stimulus to states rather than having to administer new bailout mechanisms like the CARES Act’s Small Business Administration loan program. States could also utilize existing Medicaid administrative infrastructure to continue to manage their programs, but with full federal funding reimbursement (currently 50% reimbursed).

During the interim timeframe of this FMAP change, Congress and CMS could also explore the potential for making this a permanent change. We believe that doing so would prove to be a win-win-win for all parties and make clear the optimal roles of federal, state and local governments in the future financing of healthcare.

These win-win-win additional benefits include:

1) States would be freed from having to fund and manage individual Medicaid insurance plans for low income residents, while being able to better manage within their annual budgets. They would instead have the options of reducing state taxes, redistributing Medicaid funds to other state agencies and focusing state and local health care efforts on public health programs and monitoring.

2) The federal government would have complete control over the Medicaid program, where dual eligible individuals for both Medicare & Medicaid already account for approximately 40% of all Medicaid spending. Converting Medicaid to a completely federal program would allow uniform Medicaid eligibility requirements, minimum services offered, payment rates and managed care options for all 50 states, where capitated payments to health plans already account for 49% of Medicaid spending.4

3) The existing Medicare program infrastructure could potentially be utilized to also administer Medicaid, which could over the long term significantly reduce the administrative complexity for the healthcare provider community by eliminating the duplication of 50 individual state Medicaid plans. We already have Medicare Advantage, so why not Medicaid Advantage?

The COVID-19 crisis has necessitated an immediate reckoning for the U.S. health care system. We believe our practical solution for the healthcare safety net is both doable and will provide the best results for the largest number of healthcare stakeholders.

1.Centers for Medicare & Medicaid Services, Fact Sheet: 2019 Medicaid Fiscal Accountability Regulation (MFAR), November 12, 2019

2. The Kaiser Family Foundation, Medicaid Financing: The Basics, Figure 4, March 21, 2019

3.The Kaiser Family Foundation, Issue Brief: How Can Medicaid Enhance State Capacity to Respond to COVID-19? March 17, 2020

4.The Kaiser Family Foundation, Medicaid Financing: The Basics, Figures 2 and 3, March 21, 2019

Updated on 5/26/20