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Research & Commentary: States Should Innovate, Not Expand Medicaid

November 4, 2014

According to the Centers for Medicare and Medicaid Services, the agency responsible for administering Medicaid, federal and state government spending for the program will total around $6.

stethoscope and insurance docs

According to the Centers for Medicare and Medicaid Services, the agency responsible for administering Medicaid, federal and state government spending for the program will total around $6.56 trillion between 2013 and 2022, with the federal government paying approximately 60 percent of the costs.

Since the implementation of the Affordable Care Act (ACA), spending on Medicaid has exploded. Peter Ferrara of The Heartland Institute warns total future costs to state governments are estimated to exceed the funds provided by the federal government, with this shortfall reaching as much as 66 percent of state expenditures. States will find the situation unsustainable.

Under the current system, states receive funding based on the previous year’s spending; this gives states the incentive to continually spend more, because they’ll receive more federal funding the next year. One proposed reform would shift federal Medicaid funding away from the current uncapped matching formula to a block-grant system.

Under a block-grant system, states would receive a set, finite grant from the federal government to spend on their Medicaid programs. Although the programs would have to abide by several guidelines, the states would be allowed to customize their programs to fit their needs and goals. If a state decided to expand its Medicaid program to a larger population, it would be able to do so; but if the costs of the program exceed the grant, the state would pay the difference.

The block-grant model being considered is based on the successful 1996 welfare reform that replaced the old matching funding formula to the block-granted Temporary Assistance to Needy Families (TANF) program. The TANF reforms were wildly successful – Ron Haskins of the Brookings Institution reports the welfare rolls were reduced by two-thirds nationwide by 2006 and the total income for low-income families formerly on welfare increased by about 25 percent over the same time period. In addition, total federal and state spending on TANF fell 31 percent, poverty declined sharply, and the cost to taxpayers dropped by 50 percent.

TANF vividly demonstrates the benefits of block granting, and it is not the only such example. Rhode Island has been experimenting with a Medicaid block grant since January 2009, under a waiver from the U.S. Department of Health and Human Services, and replacement of the traditional federal matching grant by a capped grant. The new grant placed a $12.075 billion limit on all federal Medicaid matching funds to the state through 2013 in exchange for giving the state more flexibility in administering its Medicaid program and providing an incentive to keep its costs down.

The program brought impressive reductions in spending; by 2010, the state’s Medicaid spending was an impressive $1.34 billion below the budget-neutral target of $2.4 billion. The system requires able-bodied people with incomes above 150 percent of the poverty level to contribute toward their health coverage and even helps pay all or part of the cost of employer-sponsored health insurance for Medicaid-eligible families who have access to these plans. Rhode Island also reduced waiting times for long-term care services and provided additional home care and physical therapy services.

The federal government should give states the flexibility to experiment with their Medicaid programs to find new and better ways to provide care for the needy. Before increasing Medicaid programs any further, state legislators should modernize it by petitioning for a block grant funding model.

The following articles examine block grant reforms for Medicaid and welfare funding from multiple perspectives. 

Ten Principles of Health Care Policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and providing reform suggestions to remedy current health care policy problems.

The Welfare Reform Model for Medicaid
Writing in The Wall Street Journal, Heartland Senior Fellow Peter Ferrara and Phil Kerpen describe the effectiveness of the 1996 welfare reforms and how block-granting funds to the states proved an effective way to manage costs. Ferrara and Kerpen recommend expanding this plan to other welfare programs, including Medicaid: “We believe that this model can be extended to all federal means-tested welfare programs – at least another 184 besides TANF – effectively sending welfare back to the states. According to The Heritage Foundation, those programs are collectively estimated to cost over $10 trillion in government spending between 2009 and 2018. Reform portends huge potential gains for taxpayers and the poor.”

Liberating the Poor from the Medicaid Ghetto
Heartland Institute Senior Fellow Peter Ferrara argues Medicaid desperately needs reform. Ferrara urges modernization of Medicaid by block-granting the federal government’s share of funding to the states.

Liberating the Poor from Poverty
Peter Ferrara explains how the United States lost the so-called War on Poverty and how new reforms, including block grants, could improve the country’s welfare system. “The federal government sponsors close to 200 additional means-tested welfare programs, including Medicaid, Food Stamps (formally, the Supplemental Nutrition Assistance Program, or SNAP), 27 low-income housing programs, and 30 employment and training programs, among others. All of these programs can and should be block-granted back to the states,” Ferrara writes.

How Medicaid Block Grants Would Work
Mary Agnes Carey and Marilyn Werber Serafini of Kaiser Health News examine how Medicaid block grants could work in practice, how they came about, and the political landscape affecting their potential implementation.

Should We Replace Medicaid with Block Grants to States?
John Goodman of the National Center for Policy Analysis explains why the Medicaid block grant proposal might work well for states facing increased Medicaid costs, and he provides several case studies on the issue.

Improving Medicaid With Block Grants & Consumer-Directed Health Care
Linda Gorman, director of the Independence Institute’s Health Policy Center, describes the benefits of replacing federal matching funds with Medicaid block grants. “If Medicaid were turned into a block grant program in which the federal government gave each state a set amount of money, it could improve patient care, restrain the growth in costs, reduce complexity and improve outcomes. Furthermore, block grants could be used to implement consumer-directed reforms that allow Medicaid enrollees to control some of the spending on their care and give them incentives to avoid unnecessary care,” Gorman wrote.

Medicaid’s Financing Merry-Go-Round Exemplifies Need for Block Grants
Independent Institute Senior Fellow John R. Graham explains the many problems with Medicaid financing that have led many experts to call for block grants. “Just think of the perverse incentives this gives state politicians and bureaucrats. Every policy that lifts people out of poverty, and away from dependence on Medicaid, causes the state to lose federal funds. That is why so many people want to change the federal financing of Medicaid into a block-grant program,” Graham wrote.

Long-Term Analysis of a Budget Proposal by Chairman Ryan
The Congressional Budget Office analyzes the 2011 budget prepared by House Budget Committee Chairman Paul Ryan (R-WI), including a proposal for Medicaid block grants.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at or 312/377-4000.

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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.