Republicans want to save $880 billion over 10 years in the Medicaid program. Politicians often turn to using various tricks and gimmicks to create the illusion of budgetary savings. But Medicaid is so large and has expanded so far past its original target population that Republicans can find those savings without relying on accounting gimmicks or price controls.
All they need is to implement three long-held Republican ideas.
The first is to block-grant the federal portion the state, something Republicans have long proposed.
Medicaid is a federal-state program. The federal government provides every state with “matching funds” based on the Federal Medical Assistance Percentage. The idea is to base the block grant on the Federal Medical Assistance Percentage rate. Allowing the block grants to grow 1 percent faster than the rate of inflation would save roughly $550 billion over a decade, according to the Committee for a Responsible Federal Budget.
In 2024, Medicaid spent about $914 billion, of which the federal government’s share was $588 billion (64 percent). However, the Congressional Budget Office says there was $31.1 billion in “improper payments” (that is, fraud and errors) in 2024. The federal government shouldn’t be funding those problems, so subtract that and you have $557 billion for block grants.
But there’s more. The Affordable Care Act increased the Federal Medical Assistance Percentage to 90 percent for states that expanded their Medicaid population to include some who aren’t eligible for traditional Medicaid. The CBO says returning to the standard Federal Medical Assistance Percentage could save $561 billion over 10 years, depending on how it is implemented, or roughly $56 billion a year. That change would drop the block grant total to $500 billion a year. These last two fixes alone would achieve the $880 billion savings they are hoping for over 10 years.
Block grants would eliminate the economic incentives for states to game the system. For example, nearly every state uses a “provider tax” loophole to inflate spending to increase the federal reimbursement. They couldn’t do that under a block grant.
Any changes to the annual block grant should be tied to the rate of inflation and changes in a state’s Medicaid-eligible population. The Department of Health and Human Services should be allowed to audit each state regularly to ensure that those who are no longer eligible to receive Medicaid — because they moved out of state, got insurance through a spouse or employer, or passed away — are off the rolls.
The second idea is to provide maximum state flexibility. Once the federal government sets the block grant and identifies a basic eligible population, states should be given the flexibility to expand the program any way they want — recognizing they will pay any additional cost.
If a state wants to retain the eligibility requirements under the Affordable Care Act, impose a work requirement, or expand the program to undocumented individuals, it could, but the state would bear the expense.
The third idea is to expand Medicare Part D to Medicaid. The way Medicaid pays for prescription drugs is a convoluted disaster. There are price controls on drugs, plus government-imposed drug-company rebates to the states, and supplemental rebates to put a drug on a state’s preferred drug list.
Rather than turn to market reforms to fix the problem, Republicans are considering — and Trump is pushing — importing prescription drug price controls from other countries, referred to as Most Favored Nation pricing. And this from a president who’s trying to stop imports. Trump says Americans should be glad to pay a little more for American-made products. Why doesn’t that include pharmaceuticals?
The better solution for Medicaid drugs is to expand one of the most successful Republican-created programs in decades: the Medicare Part D prescription drug benefit.
Medicare Part D uses market competition between drug companies and health insurers to provide seniors with prescription drugs at the lowest possible cost. And it is one of the few programs where costs to the government grew at a much slower rate than predicted. So why not let Medicaid patients have the same opportunity?
Most Medicaid beneficiaries are in a managed care plan. But so are most Medicare beneficiaries. Allowing the insurers that provide Part D plans to expand to the Medicaid population, with states covering any premiums, would give Medicaid participants real choice.
Taking these three steps would save the Medicaid program more than the $880 billion over 10 years. In addition, they would transform a program that is mired in regulations, price controls and accounting gimmicks and turn it into a relatively simple plan — at least from the federal government’s involvement. And if states wanted to do more, they would have the flexibility to do so. It’s a Medicaid fix without the tricks.
Merrill Matthews is a public policy and political analyst and the co-author of “On the Edge: America Faces the Entitlements Cliff.”
