A Smarter Approach to Offering States Federal COVID-19 Relief Funds

It is understandable that Congress and the Trump administration want to support state efforts to combat the coronavirus and to help with the downturn that inevitably will come as business slows. But House Democrats advocate sending enormous sums to states — even those with without any connection to the outbreak — sans any requirement that they be spent on addressing the problem.

It’s common sense that funds should be targeted to where the outbreak is most severe, yet the bill the House aims to pass today uses an inequitable, untargeted, simplistic distribution formula that would send tens of billions of dollars disproportionately to states that are richer and have lower uninsured rates, not those hardest hit by the virus attack.

House Democrats have proposed increasing the federal medical-assistance percentage (FMAP) by eight percentage points to get funding for states. The FMAP is the percentage that Washington uses to reimburse states for their Medicaid expenditures. For most eligibility groups, the FMAP is generally based on a state’s per capita income, so the wealthiest states, such as Massachusetts, New York, and California, have a 50 percent FMAP while the poorest states, such as Mississippi and New Mexico, have an FMAP closer to 75 percent.

An across-the-board eight-point FMAP increase would raise the federal reimbursement rate by 16 percent in the richest states but only by 10.7 percent in the poorest states. Therefore, on a first-order level, the House proposal is much more generous to the richest states. For example, despite having a similar number of uninsured, Massachusetts would receive more than four times as much money as New Mexico.

But the actual distribution would be even more skewed in favor of states that have much larger, profligate Medicaid programs. Massachusetts would receive $350 million more than New Jersey despite New Jersey’s having 2 million more residents and 470,000 more uninsured, simply because Massachusetts has a much more expensive Medicaid program than New Jersey.

Nor is the FMAP increase targeted to the diverse impacts of the coronavirus crisis on states. The epicenter of the attack is Washington State. Washington, which has 2 million more people than Minnesota, would receive $100 million less even though, as of March 12, there are 366 reported coronavirus cases in Washington and fewer than five in Minnesota.

The table below uses fiscal-year 2017 Medicaid-expenditure data from the Kaiser Family Foundation inflated by 4 percent a year to project the extra funds that would be provided to each state in fiscal year 2020 if the House Democrats’ eight-point FMAP increase lasted the entire year. It also includes the number of uninsured Americans per state in 2018. As a way of making comparisons across states, the final column shows the extra funding per uninsured individual. Importantly, it does not account for the population covered by the Affordable Care Act’s Medicaid expansion. If that group were also subject to the eight-point FMAP increase, the disparities would be even more pronounced, since richer states were more likely to adopt the expansion and those states have fewer uninsured.

Some have argued, for understandable reasons, that aid should be targeted to ensure that uninsured individuals have access to tests and treatments. As such, sending states money based on the number of uninsured makes some sense. There are obviously other important considerations that policymakers might want to account for, such as areas where the epidemic is most severe, as well as the ability of a jurisdiction to marshal adequate resources.

As the table shows, the average spending per uninsured would be about $1,575. The variability in federal aid would be enormous, however.

For example, Massachusetts, New York, and the District of Columbia would collectively stand to receive $8.1 billion in funds, or about $6,700 per uninsured individual. That is more funding than Alabama, South Dakota, Idaho, Wyoming, Oklahoma, Utah, Florida, Texas, Georgia, and Nevada — the bottom-ten states in terms of dollars per uninsured — would receive combined. These ten states have roughly 9.4 million more uninsured people than Massachusetts, New York, and D.C.

In short, an across-the-board FMAP increase is not the smartest use of resources to respond to this public-health emergency. Congress should provide funds to help, but it should do so separate from existing state Medicaid expenditures, which would reward states with larger and higher-spending programs. Moreover, we should be sending more federal funds to poorer states and those with more uninsured — precisely the opposite of what House Democrats are proposing.

If Congress is smart in its approach to this crisis, it will instead consider establishing a dedicated program to help states with the costs of addressing the coronavirus outbreak, focusing on the health-care needs of the states that have been hardest hit, and allowing such states the flexibility to target their use of the funds to those places where the need is greatest.

The House bill, despite its other shortcomings, contains provisions that would accomplish this. It would use federal funds, for example, to allow uninsured people to get free tests for the coronavirus, so that no uninsured person went untested for financial reasons. Congress could also approve federal funding to replace the lost income of those who need to self-quarantine but lack flexible work arrangements. These approaches are targeted to the problem, would improve public health, and would not merely spray federal money to states without regard to the impact of the virus on their communities.