Preserving Medicaid by Strengthening Employer-Based Coverage
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Recent analyses of budget reconciliation legislation before Congress have prompted attacks from the Left about the number of individuals the Congressional Budget Office (CBO) believes may lose access to insurance under the bill. But many of those individuals belong to groups who many would argue have little right to taxpayer-funded benefits, from undocumented immigrants in the country illegally to people receiving subsidized coverage despite being ineligible.[1]
Rather than obsessing over the number of individuals in government-run health care, lawmakers should instead attempt to increase the number of Americans with private health insurance, helping people transition off the government rolls and into coverage frequently funded by employers. Achieving this worthy policy goal requires solutions to reduce the phenomenon of crowd-out—government programs like Medicaid crowding out private insurance coverage.
The House Energy and Commerce Committee’s budget reconciliation recommendations achieved a positive first step in this direction, by placing a moratorium on implementation of a Biden Administration rule regarding Medicaid eligibility.[2] That rule prohibited policies that Medicaid programs use to limit crowd-out—for instance, checking eligibility more frequently than once per year, or imposing waiting periods on certain forms of coverage—limiting state flexibility within Medicaid, while raising costs as ineligible individuals remain on government health rolls.[3]
But lawmakers can and should go further, implementing premium assistance within Medicaid on a broad basis as another important way to combat crowd-out. This policy change would require individuals with an offer of employer-sponsored coverage to utilize that coverage instead of going on “free” Medicaid.
Under premium assistance, Medicaid dollars provide supplemental “wrap-around” benefits and assistance with cost-sharing (e.g., deductibles, co-payments, etc.) that an enrollee’s employer-based plan does not cover—the government program serving as the secondary, rather than primary, form of health coverage. For instance, rather than spending $8,000 providing full Medicaid coverage to an eligible individual—roughly the average per-beneficiary cost for expansion enrollees in 2025, according to the Congressional Budget Office—Medicaid might instead pay $6,000 to pay for the enrollee’s share of their employer-sponsored plan premium, and/or fill in the cost of their deductible.[4]
This policy change would lead to many positive outcomes. First, premium assistance would restore private insurance coverage for millions of Americans—coverage which in many cases will provide better access to care than government-run Medicaid. It would complement attempts to enact work requirements in Medicaid, promoting a culture of self-sufficiency and a move away from welfare and towards the dignity of work.
By utilizing employer coverage of able-bodied adults whenever possible, it would also ensure that federal funds remain focused on the populations for whom Medicaid was originally designed—individuals with disabilities, pregnant women, and other vulnerable groups. And at a time when our nation holds over $36 trillion in debt, premium assistance could save federal taxpayers tens of billions of dollars. The numerous benefits of premium assistance demonstrate the common-sense nature of this proposal, one that lawmakers across the political spectrum can embrace.
Crowd-Out—In Theory and Practice
For years, economists and analysts have recognized that expanding government programs can lead individuals to drop their private health coverage. A seminal work co-authored by MIT professor Jonathan Gruber found that as many as 60% of the individuals covered by certain coverage expansions represented crowd-out.[5] This figure means that, in three out of five cases, government subsidies for enrollees’ health coverage merely replaced dollars paying for private insurance premiums—a highly inefficient use of scarce taxpayer resources.
Obamacare’s expansion of Medicaid to able-bodied adults with incomes of under 138 percent of the federal poverty level created incentives for individuals newly eligible for expansion to drop their private insurance.[6] Census Bureau data from 2008, prior to the law’s passage, indicate that a plurality (44%) of individuals in households with incomes between one and two times poverty had private health insurance, with smaller percentages on Medicaid (27%) or uninsured (28%).[7] Other, more recent data from states that had yet to expand Medicaid also indicate that a large percentage of individuals potentially eligible for expansion already had private coverage, either through an employer or via their own purchase.[8]
Data from states that have expanded Medicaid confirm what economic theory and surveys suggest: That the enticement of “free” government coverage has prompted many individuals to drop their private health plans. For instance, information compiled by the Louisiana Department of Health shows that, after that state’s Medicaid expansion took effect in June 2016, between 3,000 and 5,000 individuals every month dropped private coverage to enroll in Medicaid.[9]
Given the number of individuals enrolling in Medicaid at the time, Louisiana’s own data suggested a crowd-out rate of approximately 30-40%.[10] This estimated crowd-out rate is in some ways conservative, as it excluded the impact of individuals “who enrolled in Medicaid first, then dropped private coverage.”[11]
Mis-Aligned Incentives
Unfortunately, while expansion states like Louisiana have high levels of crowd-out, states themselves have little financial incentive to constrain this ineffective and inefficient use of government resources. Under Obamacare, the federal government funds at least 90% of the cost of each expansion enrollee.[12] Many states have utilized provider taxes—a money laundering mechanism that even Joe Biden called a “scam”—to pay for their 10% share of costs, such that states like Colorado and New Hampshire have avoided paying for expansion costs out of their general fund.[13]
With states having little if any financial exposure to the costs of Medicaid expansion, program integrity has remained a low priority. A recent investigation that revealed billions of Medicaid dollars being spent to cover individuals in multiple states simultaneously confirmed states’ lack of interest in safeguarding taxpayer dollars.[14] Likewise, Medicaid enrollees themselves have financial incentives to switch from employer-provided insurance coverage and its attendant cost-sharing—a worker’s share of premiums, plus potential deductibles, co-payments, etc.—to “free” Medicaid coverage, for which they face little if any financial exposure.
The Louisiana experience confirms that state’s minimal efforts to combat crowd-out. Rather than proposing policy solutions to mitigate the migration of thousands of individuals from private coverage to Medicaid, the state’s Department of Health actually stopped compiling the data that revealed the problem to begin with.[15] Officials did create a program to subsidize enrollees’ private coverage using Medicaid dollars, but spent a paltry $11,730 promoting this option from 2017 to 2019.[16] Unsurprisingly, total enrollment in Louisiana’s premium assistance program never exceeded 1,000 individuals during that time frame—a small fraction of the number dropping private coverage every month.[17]
Actions Congress Should Take
Given more than a decade of Medicaid expansion crowding out private coverage, and the general inattentiveness to the issue by states participating in expansion, lawmakers in Washington can and should address this problem. The reconciliation bill provides Congress an opportunity to expand premium assistance to reduce crowd-out, and restore the primacy of private coverage.
Lawmakers last seriously debated issues surrounding premium assistance in 2007 and 2008. During that period, President George W. Bush twice vetoed legislation expanding children’s health insurance on the grounds that “under this bill, government coverage would displace private health insurance for many children,” with “one out of every three children moving on to government coverage…moving from private coverage.”[18]
After Barack Obama came into office and signed virtually the same legislation that Bush had twice vetoed, premium assistance became a dormant policy issue.[19] However, with a few key legislative changes, a more robust premium assistance program within Medicaid would allow individuals to transfer from the government rolls back into employer-provided health coverage, with Medicaid funds providing supplemental benefits when needed.
Mandatory for States: With respect to premium assistance, current law permits—but does not require—state Medicaid programs “to identify those cases in which enrollment of an individual otherwise entitled to medical assistance under this subchapter [i.e., Medicaid] in a group health plan [i.e., employer coverage] is cost-effective.”[20] Democrats initially included language in Obamacare requiring states to participate in premium assistance programs.[21] However, a manager’s amendment added to the bill before it became law nullified this provision, keeping participation in premium assistance by states voluntary.[22]
The sizable growth in the Medicaid expansion population, the large numbers of Medicaid enrollees who have an offer of employer coverage—but are dropping said coverage to go on to government insurance—and states’ lack of interest in limiting enrollment all suggest that lawmakers should make premium assistance programs mandatory for states. With the federal government $36 trillion in debt, policy-makers should utilize every possible policy lever to keep individuals in private coverage, rather than continuing to expand government insurance. If the high federal match rate for Medicaid expansion makes states uninterested in keeping beneficiaries enrolled in private health coverage, then Congress should act for them, by requiring states to create premium assistance programs.
Mandatory for Applicants: Likewise, the premium assistance program enacted by the Democratic Congress in 2009, and slightly modified by Obamacare in 2010, specifies that “no subsidy [i.e., premium assistance] shall be provided to an individual…unless the individual voluntarily elects to receive such a subsidy. A state may not require such an election as a condition of receipt of medical assistance [i.e., Medicaid].”[23]
While conservatives generally support the concept of choice in health care, conservatives also support making public assistance a last resort, not the first option. The significant public funding of Medicaid means that the federal government has every interest in directing beneficiaries to the most efficient option for taxpayers—particularly if that option comes via a private program as opposed to a government-funded one. Requiring individuals to remain in employer-sponsored coverage, if they have a coverage offer available and it is cost-effective for taxpayers, comports with this important principle.
Employer Participation: Lawmakers should also remove language permitting employers to opt-out of participation in premium assistance programs.[24] This change would not require employers to provide coverage to their workers, but instead simply state that businesses choosing to offer coverage to their workers must do so on an equal basis, regardless of whether a particular employee qualifies for Medicaid or not.
Health Savings Accounts: Current law exempts all high-deductible health plans from the current definition of “qualified employer-sponsored coverage,” making insurance plans associated with Health Savings Accounts (HSAs) ineligible for premium assistance.[25] This restriction contradicts the principles of premium assistance, which provides “wrap-around” coverage, funded by Medicaid dollars, to fill in the gaps of any deductibles or other cost-sharing that exceed limits set out in the Medicaid statute.
Because premium assistance by definition provides supplemental coverage to prevent beneficiaries from facing high deductibles, some would argue that this blanket prohibition on HSA-eligible coverage stemmed from little more than animus against HSAs by the Democratic lawmakers who drafted this section of law. Lawmakers can and should repeal this provision as part of their reforms.
Cost-Effectiveness: Current law requires that premium assistance be cost-effective compared to either “the amount of expenditures…including administrative expenditures, that the state would have made to provide comparable coverage of” the individual or family, or to “the aggregate amount of expenditures that the state would have made…including administrative expenditures, for providing coverage under such plan for all such children or families.”[26]
The administrative costs associated with premium assistance—of calculating cost-effectiveness for each applicant based on that applicant’s employer plan, and determining ways to “wrap-around” benefits to enrollees—have likely dissuaded states from more widely adopting premium assistance programs. On the one hand, including administrative expenses in the cost-effectiveness test gives states an easy avenue to preserve the status quo, by inflating estimates of administrative costs and complexity to claim that premium assistance would not be cost-effective. On the other hand, excluding administrative expenses from the cost-effectiveness calculation, potentially leaving states to absorb those expenses themselves, might impose an unfunded mandate. Conservatives should weigh costs and benefits, in conjunction with budgetary estimates and the views of actuarial experts, in determining whether and how to alter the current cost-effectiveness test.
Making the first four changes outlined above, and considering the latter issue, would likely result in millions of Medicaid enrollees with offers of employer-sponsored coverage having that coverage evaluated for participation in premium assistance.
Sizable Impact
Preliminary estimates suggest that reforms creating a broader premium assistance program for the Medicaid expansion population could yield significant budgetary savings. Last June, the Congressional Budget Office (CBO) estimated that Medicaid enrollment among the Obamacare expansion population would average 14-15 million individuals per month each year from 2025 through 2034. It also estimated that per-beneficiary costs for this population would increase from $7,970 in 2025 to $12,560 in 2034.[27]
Assuming that one-third of expansion enrollees have an offer of employer-sponsored coverage yields a potential population eligible for premium assistance of 4.7 million to 5 million individuals. If premium assistance could lower costs to the taxpayer by 10%—that is, reduce average per-beneficiary costs for this population from $7,970 to $7,173 in 2025, and from $12,560 down to $11,304 in 2034—taxpayers would save billions. Savings per year would rise from $3.7 billion in 2025 to nearly $6.3 billion in 2034, and would total $47.9 billion over the ten-year period.
These preliminary estimates do not account for any interactions between other provisions of the budget reconciliation bill, such as the impact of work requirements or beneficiary cost-sharing provisions on enrollment or per-beneficiary costs. However, these figures are in many ways conservative, as they also do not account for CBO’s significant increase in estimated Medicaid costs in recent months. In January 2025, CBO raised its ten-year estimates for Medicaid spending by $817 billion, or 12 percent.[28] The budget office cited an increase in overall Medicaid enrollment, as well as increases in per-beneficiary costs, as driving the higher projected spending.[29]
Because CBO has yet to release the granular data—i.e., estimated enrollment and per-beneficiary spending for the Obamacare expansion population—underlying its revised projections for overall Medicaid spending, this paper must rely on the older baseline figures from June 2024. However, the sharp rise in CBO’s projections for Medicaid spending since then means that this paper’s $47.9 billion estimated impact of premium assistance likely understates this policy’s potential savings.
A Better Option
Expanding premium assistance represents a true “win-win” scenario. Beneficiaries would receive access to employer-sponsored coverage—coverage which, because it generally reimburses physicians and other medical providers at much higher levels than most Medicaid plans, provides better access to care.[30] They would receive supplemental coverage funded by Medicaid, to alleviate cost-sharing expenses that might prove daunting for those of modest means. As their incomes grow, they could maintain their employer coverage, with the Medicaid-funded supplemental benefits phasing out as the workers become more financially self-sufficient.
Just as important, taxpayers would achieve significant budgetary savings from an expansion of premium assistance. Lawmakers could use these funds to expand the fiscal savings created by the reconciliation package up to this point. Alternatively, Congress could utilize the savings to expand health care freedom provisions—an increase in HSA contribution limits above and beyond that laid out in Section 110213 of the House-passed reconciliation package, and/or a provision allowing individuals to purchase health insurance coverage with HSA dollars, to make coverage more portable.
In either event, expanding premium assistance would promote the expansion of quality private health insurance options, and more efficient use of scarce taxpayer resources. Members of Congress along the ideological spectrum should support it.
[1] “The Mediscare Campaign, CBO Version,” Wall Street Journal June 6, 2025, https://www.wsj.com/opinion/the-mediscare-campaign-cbo-version-d5bb2447.
[2] Section 44101 of Subtitle D of the House Energy and Commerce Committee recommendations regarding budget reconciliation for Fiscal Year 2025.
[3] Centers for Medicare and Medicaid Services, “Medicaid Program: Streamlining the Medicaid, Children’s Health Insurance Program, and Basic Health Program Application, Eligibility Determination, Enrollment, and Renewal Processes,” Federal Register April 2, 2024, https://www.govinfo.gov/content/pkg/FR-2024-04-02/pdf/2024-06566.pdf, pp. 22780-22878.
[4] Congressional Budget Office, baseline projections for Medicaid, June 2024, https://www.cbo.gov/system/files/2024-06/51301-2024-06-medicaid.pdf.
[5] Jonathan Gruber and Kosali Simon, “Crowd-Out Ten Years Later: Have Recent Public Insurance Expansions Crowded Out Private Health Insurance?” National Bureau of Economic Research Working Paper No. 12858, January 2007, https://www.nber.org/system/files/working_papers/w12858/w12858.pdf.
[6] As of this writing, 40 states and the District of Columbia have decided to participate in the expansion to able-bodied adults.
[7] Diane Rowland, “Health Reform Primer: Who Are the Uninsured?” Kaiser Family Foundation, Presentation at Alliance for Health Reform Briefing, March 2, 2009, https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fwww.allhealthpolicy.org%2Fwp-content%2Fuploads%2F2017%2F01%2FRowlandPresentation-1403.ppt&wdOrigin=BROWSELINK, p. 6.
[8] Nicholas Horton and Jonathan Ingram, “The Obamacare Cost Shift: How Medicaid Expansion Is Crowding Out Private Insurance,” Foundation for Government Accountability, April 11, 2019, https://thefga.org/wp-content/uploads/2019/04/MedEx-Crowd-Out-Paper-DRAFT7.pdf.
[9] Chris Jacobs, “Medicaid Expansion Has Louisianans Dropping Their Private Plans,” Wall Street Journal June 7, 2019, https://www.wsj.com/articles/medicaid-expansion-has-louisianans-dropping-their-private-plans-11559944048. Original data provided by the Louisiana Department of Health pursuant to a public records request, and available from the author upon request.
[10] Chris Jacobs, “What You Need to Know about Medicaid Crowd-Out,” Pelican Institute, May 20, 2019, https://www.juniperresearchgroup.com/post/1784/what-you-need-to-know-about-medicaid-crowd-out.
[11] Jacobs, “Medicaid Expansion Has Louisianans.”
[12] Section 1201(1)(B) of the Health Care and Education Reconciliation Act, P.L. 111-152, codified at 42 U.S.C. 1396d(y)(1)(E).
[13] Quoted in Brian Blase, “Biden Was Right: Medicaid Provider Taxes a ‘Scam’ That Should Be Scrapped,” Forbes February 16, 2016, https://www.forbes.com/sites/theapothecary/2016/02/16/biden-was-right-medicaid-provider-taxes-a-scam-that-should-be-scrapped/?sh=7873604a1c6c; Families USA, “Options to Generate the State Share of Medicaid Expansion Costs,” January 2019, https://familiesusa.org/wp-content/uploads/2019/09/MCD_States-Share-10-Percent_Fact-Sheet.pdf, p. 5.
[14] Christopher Weaver, Anna Wilde Mathews, and Tom McGinty, “Taxpayers Spent Billions Covering the Same Medicaid Patients Twice,” Wall Street Journal March 26, 2025, https://www.wsj.com/health/healthcare/medicaid-double-payments-insurers-states-1c091b41.
[15] Jacobs, “Medicaid Expansion Has Louisianans.”
[16] Chris Jacobs, “Long After the Pandemic, Medicaid’s Crisis Persists,” Wall Street Journal April 2, 2025, https://www.wsj.com/opinion/long-after-the-pandemic-medicaids-crisis-persists-healthcare-policy-148e136b. Original data provided by the Louisiana Department of Health pursuant to a public records request, and available from the author upon request.
[17] Ibid.
[18] Veto message of President George W. Bush regarding Children’s Health Insurance Program Reauthorization Act of 2007, October 3, 2007, https://websites.umich.edu/~graceyor/govdocs/pdf/schip.pdf.
[19] Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA), P.L. 111-3.
[20] 42 U.S.C. 1396e(a)(1).
[21] Section 2003(a)(1)(A) of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, converted the “may elect to” to “shall” in 42 U.S.C. 1396e-1(a).
[22] Section 10203(b)(2) of PPACA deemed Section 2003(a)(1)(A) “null, void, and of no effect.”
[23] Section 301(b) of CHIPRA, as modified by Section 2003 of PPACA, and codified at 42 U.S.C. 1396e-1(d)(2).
[24] 42 U.S.C. 1396e-1(d)(1).
[25] 42 U.S.C. 1396e-1(b)(2)(B).
[26] 42 U.S.C. 1397ee(c)(3)(A).
[27] CBO, June 2024 Medicaid baseline.
[28] Congressional Budget Office, “The Budget and Economic Outlook: 2025 to 2035,” January 17, 2025, https://www.cbo.gov/system/files/2025-01/60870-Outlook-2025.pdf, pp. 16-17.
[29] Chris Jacobs, “Congress Can Rein in Medicaid Spending,” Wall Street Journal January 22, 2025, https://www.wsj.com/opinion/congress-can-rein-in-medicaid-spending-cbo-medicaid-e8233d8d.
[30] Cindy Mann and Adam Striar, “How Differences in Medicaid, Medicare, and Commercial Health Insurance Payment Rates Impact Access, Health Equity, and Cost,” Commonwealth Fund, August 17, 2022, https://www.commonwealthfund.org/blog/2022/how-differences-medicaid-medicare-and-commercial-health-insurance-payment-rates-impact; Medicaid and CHIP Payment and Access Commission, “Physician Acceptance of New Medicaid Patients: Findings from the National Electronic Health Records Survey,” June 2021, https://www.macpac.gov/wp-content/uploads/2021/06/Physician-Acceptance-of-New-Medicaid-Patients-Findings-from-the-National-Electronic-Health-Records-Survey.pdf.