OPINION:
As President Trump and Republicans in Congress target inefficient spending, Medicaid has come under scrutiny. The program is plagued by waste, fraud and abuse. A recent report reveals that Medicaid has issued nearly $1.1 trillion in improper payments over the past decade, about twice as much as previous, incomplete estimates suggested.
Opponents of reforming the program insist that any measure to tame federal Medicaid spending would destabilize state budgets, forcing deep cuts to eligibility or benefits.
That’s just not true.
On the contrary, a little-noticed but crucial fact is that many states devote fewer resources to Medicaid than they did a decade ago, even as the program’s total costs have surged. States have become adept at shifting the costs of Medicaid to the federal government, crowding out other spending priorities and resulting in larger deficits, mounting debt, and higher interest rates and inflation.
Since its inception 60 years ago, Medicaid has been funded jointly by the federal government and the states. Historically, Washington covered about 60% of program costs and the states covered the other 40%. However, over the past decade, the fraction of Medicaid spending paid for by federal taxpayers has steadily increased. Today, Washington pays nearly 75% of Medicaid’s costs when accounting for states’ true contributions. This cost shift is more than $100 billion annually from states to Washington.
So, while governors and state legislators often claim that their states are straining to cover their share of Medicaid costs, the numbers tell a different story.
As a share of gross domestic product, states are spending less on Medicaid today than they did a decade ago. In 2013, the average state spent 1.10% of its GDP on Medicaid. Today, it’s 0.98%. In other words, less than one in every hundred dollars of economic production is being directed toward the state’s share of Medicaid costs.
Similarly, a decade ago, Medicaid accounted for about 18.8% of the average state’s general fund. Today, it’s 18.4%. These numbers show that Medicaid spending growth has not meaningfully crowded out other state priorities such as education and public safety. If anything, states’ fiscal burden from Medicaid has declined slightly.
Some states have become exceptionally skilled at evading their responsibilities to fund Medicaid. Illinois, for example, spent 15% of its general fund on Medicaid in 2014. In 2024, it spent only 7%. Over the same period, Oklahoma shrank its general fund contributions to Medicaid from nearly 23% to 8%. In both cases, Medicaid enrollment grew rapidly even as state contributions plummeted.
Two major forces are driving these trends. The first is the Affordable Care Act’s expansion of Medicaid to cover able-bodied, working-age adults. The federal government covers at least 90% of the health care benefits for this group, which is significantly larger and more expensive to insure than initially projected. By providing much higher reimbursement for expansion enrollees, the federal government has created perverse incentives for states to improperly classify beneficiaries into this group. This phenomenon is costing the federal government tens of billions of dollars annually. More broadly, states are far more likely to tolerate improper enrollment and conduct lax eligibility reviews if federal taxpayers pay for ineligible enrollees.
The second factor is the growth in financing schemes that states use to artificially inflate their Medicaid spending. A central component of many of these schemes is provider taxes. These taxes are not actual taxes as they are supported by the industry that notionally pays them.
Provider taxes allow states to collect money from providers, return the money to those same providers through higher Medicaid payments, and receive reimbursement from Washington for most of these “costs.” These taxes have spread like wildfire. In 2024, 47 states had a special tax on hospitals, up from just 12 states 20 years earlier. Reining in these abuses, which amount to legalized money laundering, shouldn’t be a partisan issue. In 2011, Vice President Joseph R. Biden called provider taxes “scams.”
As the state share of Medicaid expenses shrinks, state policymakers face weaker incentives to use Medicaid funds efficiently. This lack of state accountability has fueled Medicaid’s mismanagement and is a key driver of the program’s unsustainable spending growth. Returning to states’ historical percentages of Medicaid contributions isn’t a radical idea; it’s a long-overdue reform that will improve the program for those who need it and the taxpayers financing it.
• Liam Sigaud is an adjunct scholar at the Paragon Health Institute. His research focuses on state health policy, including Medicaid.
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