“Show me the incentive and I’ll show you the outcome.” This insightful quote from the late investor Charlie Munger is relevant to much of what happens in the economy, but for the purposes of this blog series, it also provides a valuable lens for discussing the topic of Medicaid financing.

As I’ve discussed in earlier parts of this series, the Medicaid program is financed as a partnership between states and the federal government. For traditional Medicaid recipients (parents, children, elderly, disabled, etc.), states pay approximately one third of all medical costs and the federal government picks up the remaining two thirds. But for Medicaid expansion enrollees (healthy adults), the federal government increases its share to 90%. And for both populations, this financing arrangement is open ended. This means that no matter what the total cost of care may be, if the recipient is eligible for Medicaid and is receiving a covered service, the federal government will pay the established share.

Now, let’s consider what these financing arrangements might incentivize, and how they could relate to the troubling outcomes described earlier in this series.

Several years ago, in my Medicaid primer, I dove into great detail explaining some of the problems with Medicaid’s open-ended funding structure. The federal government’s willingness to pay the majority of all Medicaid costs with no limits distorts the program’s true costs for states, which are ultimately responsible for administering the program. This arrangement not only fails to incentivize states to search for total cost savings but also effectively incentivizes them to shift costs to the federal government .

Perhaps the best example of this dubious incentive is Medicaid provider taxes (explained here). These “taxes” are a federally approved way for some healthcare providers to exploit Medicaid’s financing arrangement to generate additional federal reimbursement for themselves at “minimal” cost to state taxpayers. If it sounds too good to be true, that’s because it is. Lawmakers in states like Missouri have repeatedly been willing participants in this scheme, and our state has since become overly reliant on these provider taxes. What this means is that states have used these taxes to raise provider rates far beyond what state taxpayers could afford if the federal government ever decides to stop allowing the gimmick, which is a very real risk.

Another financing gimmick for states is the permanent total disability (PTD) shifting that I described in part three of this series. By agreeing to pay more for expansion enrollees (90% vs. 66%), along with the open-ended funding arrangement, the federal government has effectively incentivized states to enroll people into the expansion population that might have otherwise been eligible to enroll traditionally. For example, if Missouri’s Medicaid agency could enroll just 25,000 people with disabilities as expansion enrollees instead of traditional ones, according to my calculations (available upon request) state taxpayers could save upwards of $150 million per year. But as I’ve emphasized, the federal government has explicitly stated this behavior is not permitted. There’s no way to know for sure if Missouri is doing this until Missouri’s Medicaid program is audited, but I think there’s good reason to believe it’s happening. New York was caught engaging in this behavior not long ago.

Given all of this, it should be no surprise that Missouri’s Medicaid program is a bloated, inefficient mess. There’s optimism that in the coming months the federal government will begin pursuing Medicaid reforms that target its side of the financial partnership. In part five of this series, I’ll dive into some of the likely proposals.