Blog
Monday, March 24, 2025
Cutting Medicaid is Possible
In February, Republicans announced their intention to cut $2 trillion in spending over the next 10 years. $880 billion of that is to come from the Committee on Energy and Commerce (See Title II), which oversees Medicare, Medicaid, national energy policy, environmental protection, and several others.
Just doing basic searches on Medicaid cuts, trying to find information, all of the top stories include a warning about how many people are going to be hurt by this, but interestingly, there are no mentions of how much Medicaid has grown in the past ten years, even beyond its ACA expansion, how fast it's projected to grow, or how much waste could be cut. Every story just assumes, without including details, that every penny of Medicaid goes to children, poor adults, or disabled adults, but given the recent expansions, this seems unlikely.
The Recent Run-Up in Medicaid
Since 2000, federal Medicaid spending has been trending upward. In 2000, after 8 years of a Democratic president, federal Medicaid spending was just 1.1% of GDP, and it has nearly doubled since then. Some of that surely is the increasing cost of medical care, but it's also driven by enrollment growth due to expanded eligibility and state incentives to get matching federal funding.
Federal Medicaid Spending as a % of GDP
Source: Author Calculation based on NHE (Actual Federal Medicaid Expenditures), FRED (Actual GDP), CBO (Projected Medicaid and GDP)
In the last twenty-five years, the largest, single-year increase in federal Medicaid spending occurred in 2020, the year of Covid. This, in and of itself, is unsurprising, but what's harder to understand is why it has barely fallen back to its pre-Covid rate, even four years later, while the economy has boomed.
In the last twenty-five years, the largest, single-year increase in federal Medicaid spending occurred in 2020, the year of Covid. This, in and of itself, is unsurprising, but what's harder to understand is why it has barely fallen back to its pre-Covid rate, even four years later, while the economy has boomed.
Waste, Fraud, and Abuse
CMS periodically estimates the total "improper payments" in Medicare and Medicaid. The most recent estimate for Medicaid is that 5.1% of total Medicaid payments are "improper." While that sounds like fraud, in fact, the majority of these improper payments are simply insufficiently documented legitimate payments. They also estimated how much of the improper payments were actually illegitimate and found that 20% of them are truly improper and should not have been paid out.
Applying this rate of illegitimate payments to the CBO's ten-year forecast produces an estimate of $91.2 billion over ten years that can be saved without harming Medicaid recipients.
Applying this rate of illegitimate payments to the CBO's ten-year forecast produces an estimate of $91.2 billion over ten years that can be saved without harming Medicaid recipients.
Locking in Normal Growth
One approach Republicans might consider would be to lock in overall Medicaid growth to match its 2016-2019 rate. This was a time of a stable economy, after the major ACA expansion and before further expansions under Covid-era policies and the Biden administration. It represents a steady-state era for Medicaid.
During this time, Medicaid grew at 3.1% per year. This would represent smaller growth than the CBO estimated (between 4 and 5% per year).
Federal Medicaid Spending Growth by Year 2000-2024
Source: Author Calculation based on NHE (Actual Federal Medicaid Expenditures), CBO (Projected Medicaid)
Holding growth in Medicaid to the 2016-2019 average over the next ten years would save $778 billion. Considering that 2016-2019 was a time without major cuts to Medicaid benefits or eligibility, it would seem possible to lock in that growth rate without harming any beneficiaries.
Federal Medicaid Spending if Growth Held to 2016-2019 Rate
Source: Author Calculation based on NHE (Federal Medicaid Expenditures), CBO (Projected Medicaid)
Locking in Enrollment Levels
Another path Republicans might take is setting an enrollment target for Medicaid, which is supposed to assist the poorest Americans, yet enrolls close to 1 in 4. According to poverty statistics, before accounting for transfers 11.1% of Americans are impoverished. Medicaid, however, covered 27.4% of the US population in 2023.1
From 2000 to 2023, enrollment in Medicaid has grown from 12% of the population to 27% of the population, more than doubling, even though the federal poverty rate has barely moved, going from 11.3 to 12.5%. Some of that, obviously, was intentional, as the ACA expanded Medicaid, but in 2019, before the pandemic hit, and after state expansions had taken place, Medicaid penetration was only 23.0%. Since Covid, it has risen several percentage points, even without expanding Medicaid in large states like Texas and Florida.
% of Total US Population enrolled in Medicaid by Year
Source: Author Calculation based on NHE (Total Medicaid Enrollment), CBO (Projected Medicaid Enrollment). Note: The 2025 CBO projection for Medicaid spending is substantially higher than the 2024 CBO projection, but they have not yet released the breakdown. The dotted line represents a higher level of enrollment which could explain the higher CBO estimates.
Setting a maximum Medicaid enrollment of 23.0%, the highest level it reached before Covid and after the ACA expansion, would save $1.4 trillion over the next ten years.
Capping Medicaid enrollment at its pre-Covid peak would save $1.4 trillion over the next ten years.
Federal Medicaid Spending if Enrollment Held at Pre-Covid Maximum
Source: Author Calculation based on NHE (Total Medicaid Enrollment), CBO (Projected Medicaid Enrollment)
Conclusion
Rolling the Medicaid program back to the pre-Covid norm, when there were no significant criticisms of its inadequacy, would save more than Republicans are pushing for.
Medicaid has expanded in scope and scale over the past twenty-five years and has grown to a point where some pruning can be accomplished without the devastating results that many warn will occur. Simply rolling the program back to its scale from prior to the pandemic would provide more money than Congress is looking for and would return Medicaid to funding and enrollment levels that, at the time, drew little to no criticism.
Notes
For a counterargument, Kaiser Family Foundation claims it's impossible.
For some supportive analysis and a more detailed proposal for Medicaid, Manhattan Institute
Stray Thoughts
One of the explanations CBO gave for increased expected Medicaid spending from 2026-2035 was new spending on GLP-1s, which reduce obesity. Theoretically, though, the reduction in obesity should also lead to improved health and reduced spending. I'm curious if that is included in their estimates.
Footnotes
1This number has fallen in 2024 as the Medicaid expansions from the Covid-era are being unwound. The rate today is between 25 and 26%.
Tuesday, May 30, 2023
Too Much Money Chasing More Than Enough Goods Through a Too Small Pipe
There is a great debate on-going about what caused the surge in inflation in 2021. Jason Furman calls it the Original Sin vs. Unfortunate Events debate. The Republican view (which also includes notable Democrats such as Blanchard and Summers) is that the monetary stimulus of 2021 dumped a bunch of money on consumers who spent that on everything and everything available, and it raised the prices because increased demand and constant supply lead to higher prices. This is the "Original Sin" view.
Was inflation A Series of Unfortunate Events or Original Sin?
— Jason Furman (@jasonfurman) May 24, 2023
My discussion of the Bernanke-@ojblanchard1 paper at Hutchins @BrookingsEcon.
Short version: their model/results are agnostic. My view is *core* inflation is mostly original sin.
A ?https://t.co/5SyW6VlIyj pic.twitter.com/AUw7AfCHxu
This is an interesting way to frame the controversy, but I quibble with the characterizations of the microchip shortage and the clogged ports. It's easy to see how a microchip shortage could fall into the Original Sin category, since it could have been caused by an increase in demand for chips, either via increased demand for computers or non-computer products that require chips (like automobiles)
Less obvious is the clogged ports. In 2021, there were many stories about backups at ports (Fox Business, Barron's).
Many believe that the global supply chain disruption in 2021 is an externally-caused "unfortunate event," though the specific cause is unstated. Perhaps it was a shortage of workers transporting goods--either the ship operators, port operators, or truck drivers that distributed the goods across the country. I have not seen any analysis of that
There's a strong case that can be made, however, that the clogged ports were caused by increased demand for goods, which would mean that this issue belongs more in the Original Sin category, and was caused by the stimulus. For instance, imports increased 12.6% in 2021, exactly what you would expect to see if prices were caused by an increase in demand and not a decrease in supply.
How This Fits into the Monetary Formula
Macroeconomists use the formula MV = PY to help explain monetary phenomena. This formula is what drove many to predict that prices would increase because of the stimulus. In this formula M is the supply of money (number of dollars traversing the world economy), V is the velocity of money (the propensity of consumers to spend that money instead of saving it), P is the overall price level and Y represents the full suite of goods that are being bought and sold.
The basic foundation behind the "stimulus increases prices" argument is that the money supply (M) goes up when government dumps a bunch of money on the economy, and the the total number of goods being bought and sold stays the same because, in a short amount of time, new factories aren't being built quickly enough to offset the additional money being circulated. So if M goes up, and Y and V stay the same, then P (prices) have to go up to match.
However, one interesting thing about the post-pandemic economy was that Y probably could go up. Factories had reduced output during the pandemic, people perhaps were saving their money due to concern about where the economy might go. In January of 2021, the unemployment rate was 6.1% so there was ample space for expanded production of goods and services.
What few considered before 2021, was that in an era of global trade, the 'goods' component of Y is not constrained just by factory capacity and labor capacity in the home country, but also by the logistics. The number of goods available to consumers, historically was limited by the production capacity and transporting those goods was not an issue, particularly when the goods were manufactured locally or regionally and a robust interstate highway system and rail system offered many opportunities to distribute goods across a country.
My own view of what happened in 2021 is that M went up because of the stimulus, V went up because the pandemic was ending, Y went up somewhat as the labor utilization increased and factories ramped back up, but that it wasn't enough to offset the increases in M and V due to the limits of shipping capacity and also production capacity, so prices rose.
However, because so many of the goods Americans demanded came from overseas, the distribution network for those goods became the limiting factor. There are only so many trans-oceanic shipping vessels and containers, and even if consumers want to purchase more goods, and the international factories can produce them, if there aren't enough avenues of transportation, then the Y will still be limited and prices will increase.