Donald Trump Wants to Radically Change Medicaid. Here's What the Program Actually Does.

Most Americans give little thought to Medicaid, which is typically viewed as an entitlement program for the poor. But it's about to get a lot more attention. President Donald Trump is seeking to radically overhaul the $530 billion program by changing its funding—a move that could end up sharply reducing coverage and jeopardizing the financial security of many middle-class families.

Contrary to popular belief, Medicaid is not just a benefit for low-income Americans. It's actually the nation’s largest health care program, covering 74 million enrollees, or about one in four Americans. Some 60% of Medicaid's spending is for the elderly and the disabled, many of whom come from middle-class households.

Medicaid costs are funded jointly by the federal government and the states, with the feds paying about 57% of program's overall expenses. It's an open-ended commitment, meaning the federal government pays a certain percentage of each state's costs (the amounts vary) with no fixed dollar limit. If costs rise—a new drug charges a high price, say, or a virus breaks out—states get more money.

Trump's plan would change all that by converting the federal funding to so-called block grants. With this approach, each state would get a set amount of money, which would be distributed as local governments see fit. In theory, this would give states more flexibility. Problem is, block-grant funding typically doesn’t keep up with rising costs. As a recent study by the left-leaning Center on Budget and Policy Priorities found, a similar House Republican budget plan for 2017 would slash federal Medicaid funding by 33% by the year 2026.

The CBPP estimate did not include the impact of a repeal of the Affordable Care Act, another Republican goal. The ACA, also known as Obamacare, gave additional funding to states that expanded Medicaid eligibility. If that policy is reversed, some 11 million enrollees who signed up through the expansion would lose coverage.

The block-grant approach (as well as a similar per capita cap plan) is backed by many Republicans lawmakers, including Rep. Tom Price, Trump’s nominee for Health and Human Services Secretary, who would oversee Medicaid and Medicare. In a recent Senate hearing, Price acknowledged that switching to block grants would mean ending guaranteed coverage under Medicaid. Cash-strapped states would end up limiting eligibility or requiring beneficiaries to pay more. The cost-sharing Medicaid model is being used now in Indiana, home state of Trump's nominee to run Medicare, where low-income beneficiaries must make monthly payments for coverage.

It’s far from clear whether these Medicaid changes will be enacted. Many state governors, both Democrats and Republicans, who are concerned about a potential rise in uninsured residents are pushing back. But the Medicaid expansion is a key provision in Obamacare, which means the GOP repeal effort puts the program on the table.

Even if you aren't a Medicaid beneficiary, a shift to block-grant funding could have a major impact on your finances, so it's important to understand what these changes would mean. Here are six key ways Medicaid supports middle-class Americans:

1. Some 40% of Medicaid spending goes to the disabled.

Although they make up only 15% of enrollees, disabled beneficiaries account for 42% of Medicaid spending, the largest share, according to the Kaiser Family Foundation. This group includes people with developmental delays and severe physical disabilities, as well as the mentally ill. Without this help, the disabled would have to rely on family and friends to pay the steep costs for their care, which may last a lifetime. Given the limited financial planning options for special needs family members, Medicaid helps the middle class avoid depleting their assets.

2. Medicaid funds most long-term care for the elderly.

Care for the elderly ranks as Medicaid's second largest expense, tied with care for children (see below). The elderly make up just 9% of enrollees but 21% of Medicaid spending. Much of those costs go to long-term care, which Medicare generally does not cover.

Those expenses can add up quickly. Nursing home costs average some $80,000 a year—an expense that can erode the finances of many middle-class and even upper-middle class families. Some 70% of nursing home residents eventually end up on Medicaid after depleting their own resources, although increasingly the program is paying for care at home and in community settings at a lower cost.

“Medicaid's long-term-care funding will be increasingly important as millions of baby boomers age,“ says Judy Solomon, vice president for health care policy at the CBPP. Many of these boomer retirees may end up with high-cost illnesses such as Alzheimer’s. Those illnesses are expected to push up Medicaid costs by 50% by 2026.

3. Half of all Medicaid enrollees are children.

Medicaid covers children’s health care for low-income families. And through its Children’s Health Insurance Program (CHIP), uninsured children up to age 19 in families with incomes too high to qualify for Medicaid can get free or low-cost care. Overall, Medicaid covers 40% of all children, and 75% of poor children in a typical state, according to Kaiser. Eligibility for CHIP varies widely among states, but in some programs, families earning 300% of the federal poverty level can qualify. In 2017 that means an income of $60,750 for a family of four.

4. Nearly half of all births are covered by Medicaid.

In a typical state, the program covers 75% of births of poor children and 49% of births overall. The program also provides essential coverage to pregnant women.

5. Medicaid coverage helps hold down health care costs for everyone else.

Medicaid absorbs the costs for expensive coverage—including care of the disabled and those with dementia—that would otherwise be shifted to the private insurance market and Medicare. That's kept private insurance prices about 7% lower, according to a recent study by researchers at the Department of Health and Human Services. The program is also highly cost-effective at delivering those services: Between 2007 and 2013, Medicaid spending per enrollee rose just 3.1% vs. 4.6% for private insurance.

6. Medicaid changes may be followed by cuts to Medicare and Social Security.

There's no way to know if Trump’s Medicaid plans will gain traction in Congress. But if funding limits are enacted, it may smooth the way for overhauls of Medicare and Social Security, which both face serious financial shortfalls.

Granted, Trump has previously said he would leave Social Security and Medicare untouched. But some of his cabinet nominees, as well as many GOP lawmakers, would like these programs to be privatized (essentially shifting costs to seniors) or cut back. If that happens, the nation’s retirement safety net is likely to unravel.