A New Proposal To Change The Counter-Cyclical Effect In Medicaid Funding

Michael O’Grady and Jennifer Baxendell Young have offered a new proposal to reverse the ‘counter-cyclical’ effect in Medicaid funding — in which states are overridden with higher Medicaid costs during periods of economic recession, often forcing the federal government to increase its contribution (known as FMAP) to the program. O’Grady and Young would automatically trigger a higher federal contribution during economic downturns and allow the states to repay the loan over a five year period:

The proposal we are considering is to adjust downward a state’s share during an economic downturn. The adjustment would allow states facing economic hardship to make a lower contribution during the downturn, i.e., the FMAP would increase and the federal government would pay more. However, unlike current practice, the additional federal funds would be paid back using a lower FMAP (therefore a higher state share) once the state’s economy rebounded. The design would achieve the dual policy goals of providing federal help to states during a downturn, and not adding to the federal debt.

To achieve this, a number of steps would be taken:

First, there would need to be a trigger mechanism (not controlled by the states) that would indicate economic vulnerability. Some possibilities might be the state’s unemployment rate rising above 10 percent or an annual reduction in state gross domestic product (GDP) of more than 5 percent


Second, there would need to be a sliding scale emergency FMAP adjustment where the federal government picks up a higher percentage based on how bad the state’s economy is. For example, a 1 percent increase in the federal share for every 1 percent of the state’s unemployment rate beyond 10 percent.

Third, the adjustment should not occur until the next fiscal year. This lag is designed to serve two purposes. First, this mechanism is not intended to address short-term dips in a state’s economy. That is for the state to manage. Second, accessing federal relief should not be an option of first resort. Instead, states should exercise the program management tools they possess (not that those are easy or desirable) before asking federal taxpayers for help.

Fourth, the difference between the regular FMAP and the emergency FMAP would be treated as a loan with a five-year payback window.

Fifth, as the state’s economy recovers, the five-year payback window would start. This could be designed to have the payback start within five years of the initial triggering event. The result is a maximum payback period of 10 years.

Sixth, the payback mechanism would be a higher percentage share from the state until the additional federal money is repaid, plus an amount equal to the market rate for federal borrowing during the time period of the emergency FMAP.

In other words, the proposal would make changes to FMAP so that it moves more flexibly with the economy. All the politicking around increasing the FMAP contribution (everything we saw during the fight to pass the $26.1 billion package) would just move to the back end, when states actually have the capacity to repay the additional FMAP dollars. But significantly, states will be able to deal with the surge of new applicants without lowering eligibility, reducing funding, or dealing with all the political implications of accepting additional dollars from Washington.