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Medicaid as Health Insurer: Balancing State and Federal Responsibilities


Born as an afterthought to Medicare five decades ago, Medicaid has evolved from an adjunct to state welfare programs to the nation’s largest health insurer. The occasion of Medicaid’s 50th birthday is a fitting time to consider that evolution, not to reminisce, but to help chart the path forward. Medicaid is a complex program with a complex history, and understanding its role in the U.S. health system is essential to ensuring that it is performing at optimal levels for its beneficiaries, as well as for states, taxpayers, and the myriad health care providers, health plans, and others touched by the program. In a four-part series supported by The Commonwealth Fund, Cindy Mann and Deborah Bachrach of Manatt Health Solutions examine Medicaid’s evolution and consider its role in the new coverage paradigm established by the Affordable Care Act (ACA).

First post: Medicaid as Health Insurer: Evolution and Implications

Second post: Medicaid as Health Insurer: New Eligibility and Enrollment Rules and Practices for a Revamped Program

As we consider what it means for Medicaid to have evolved from a welfare-based program to a large health insurer, it’s important to take into account the balance of responsibilities between states and the federal government. Federalism—shared authority between states and the federal government—has always been a defining characteristic of Medicaid.

The Affordable Care Act (ACA) imposed greater uniformity in certain aspects of Medicaid—chiefly around eligibility and enrollment—to make the continuum of subsidized public and private coverage work. Those changes, which flow from new federal minimum requirements, have been reviewed in our earlier blogs. At the same time, the evidence shows that federalism remains firmly in place. Far from diminishing the importance of states, Medicaid’s key position in the health care system both enables and requires state-driven efforts to devise value-based, integrated models for delivering and paying for quality care in Medicaid and beyond.

For the past five years, the Centers for Medicare and Medicaid Services (CMS) has been supporting states’ efforts to test new approaches to the delivery of care. There are extensive and diverse changes under way: States are leading the way, leveraging their purchasing power in Medicaid and requiring their contracted providers and health plans to become more accountable for the costs and quality of care.

For example, states are experimenting with health homes to coordinate care for chronically ill beneficiaries and developing new integrated care models for all beneficiaries, supported by new provider payment models. Aiming to align with other payers, including Medicare and commercial insurers, states are working with health plans and providers to: drive better value through provider incentives and the use of quality metrics; reduce unnecessary hospital admissions and emergency department use; improve coordination between physical and mental health services; and in some states, bring long-term services and supports into managed care. In short, states’ interest in improving care and lowering costs, coupled with a rapidly changing health care system, has triggered far-reaching innovations.

States have implemented many such payment and delivery initiatives without special authority, but some have sought to transform their delivery systems under initiatives established by CMS’ new Innovation Center or with funding and authority granted through a Section 1115 demonstration waiver. Section 1115 of the Social Security Act allows the Secretary of the Department of Health and Human Services to allow and fund policies that are not otherwise permitted by federal law if she determines they “promote the objectives of the [Medicaid] program.” The Medicaid programs in Oregon, New York, and Texas are examples of these delivery system reform waivers.

In addition, several states have secured 1115 waivers to test alternative expansion models. As has been true with demonstrations in the past, each of the five alternate expansion demonstrations approved and in effect (in Arkansas, Iowa, Michigan, New Hampshire, and Indiana) has broken new ground. Two will test access to coverage and care when Medicaid enrollees receive services through qualified health plans doing business in the health insurance marketplace; four will test the impact of new premiums; one imposes higher copayments aimed at deterring inappropriate use of emergency department services; several seek to encourage healthy behaviors; and three set up different versions of health savings accounts.

While these demonstrations move state policy in new and sometimes controversial directions, they all test new ways to provide health insurance and potentially improve care. The Department of Health and Human Services has signaled that some proposed policies, such as conditioning coverage on the payment of premiums by those with very low incomes, caps on the number of people enrolled, and work requirements that base eligibility for coverage on job search or other work-related activities, will not be approved because they don’t fit with Medicaid’s objectives. The law requires that demonstration waivers “promote the objectives” of the Medicaid program. Enrollment caps, costs that exceed people’s ability to pay, and work requirements are incompatible with a health insurance model and impede Medicaid’s coverage goals.

The flexibility debate—and to some degree the tension between federal and state roles inherent to federalism—will continue. It’s a valuable debate, helping to draw lines as to which level of government drives which decisions and figure out what “shared responsibility” really means. But the ACA’s changes to Medicaid, which cemented its place in the coverage continuum, underscores the importance of considering state experimentation in the context of the program’s core objectives: providing coverage, access to care, and payment for services for a low-income population; aligning with other health insurers to promote quality, person-centered care; and driving value for the dollars spent.

Publication Details



C. Mann and D. Bachrach, "Medicaid as Health Insurer: Balancing State and Federal Responsibilities," The Commonwealth Fund Blog, July 2015.