A surreal maze illustrates the complexities of Medicaid funding paths.

The Affordable Care Act's Hidden Flaw: Are States Gaming the System?

Soraya Malik in Politics & Policy September 2025 • 4 min read.

"New research uncovers how states may be inflating Medicaid expansion costs, impacting healthcare budgets nationwide."

The Affordable Care Act (ACA), enacted in 2010, brought about significant changes to the healthcare landscape in the United States, most notably through the expansion of Medicaid. Medicaid, the single largest source of health insurance in the U.S., covers approximately 85 million Americans, with an annual cost of around $750 billion, funded by both the federal government and individual states. The ACA allowed states to expand Medicaid eligibility to non-elderly adults with incomes up to 138% of the federal poverty level, with the federal government initially covering 100% of the costs for these newly eligible enrollees, later decreasing to 90% in perpetuity.

A recent study sheds light on a potentially problematic aspect of this expansion: a fiscal incentive that may have led states to reclassify existing Medicaid enrollees into the 'newly eligible' category. Under the ACA, the federal government pays a substantially larger share of medical costs for newly eligible enrollees compared to those previously eligible. This creates an opportunity for states to save money—potentially up to 100% of per-enrollee costs—by strategically reclassifying enrollees.

The research suggests that Medicaid expansion has led to a decline in the number of beneficiaries enrolled in the original Medicaid population, implying widespread reclassification. In 2019 alone, this phenomenon affected an estimated 4.4 million Medicaid enrollees, costing the federal government $8.3 billion. These reclassifications may have inflated the federal cost of Medicaid expansion by 18.2%. This article examines this hidden subsidy, its implications, and the potential responses to ensure the integrity of Medicaid funding.

What is Medicaid Reclassification and Why Does It Matter?

A surreal maze illustrates the complexities of Medicaid funding paths.

Medicaid reclassification, in this context, refers to states shifting existing Medicaid enrollees—those who would have been eligible for Medicaid before the ACA—into the 'newly eligible' expansion group. Since the federal government provides a higher matching rate for this expansion group, states can effectively offload a greater portion of their Medicaid costs to the federal government. This creates a strong fiscal incentive for states to engage in reclassification, whether deliberately or through administrative loopholes.

The implications of this practice are far-reaching. While reclassification itself may not directly affect the coverage or benefits received by Medicaid enrollees, it has significant fiscal consequences for both states and the federal government. By inflating the number of enrollees in the expansion group, states can draw down more federal funds, potentially at the expense of other programs or taxpayers nationwide.

Increased Federal Spending: Reclassification inflates the federal share of Medicaid expansion costs.
Distorted Program Evaluations: It obscures the true impact and cost-effectiveness of Medicaid expansion.
Potential for Abuse: It creates opportunities for states to manipulate enrollment numbers for financial gain.

The study highlights that, in many cases, Medicaid enrollees are likely unaware of how they are classified, as the process primarily involves administrative and reimbursement requests. However, the researchers emphasize that these reclassifications had substantial fiscal implications. Their results suggest that the U.S. Treasury bore a significantly higher cost for Medicaid expansion than would have been the case without these reclassifications. From 2014 to 2019, an estimated $52.9 billion in additional federal funding was distributed to states due to reclassification, including $8.3 billion in 2019 alone.

The Road Ahead: Ensuring Accountability and Transparency in Medicaid Funding

The findings of this study underscore the need for greater scrutiny and oversight of Medicaid enrollment practices. As policymakers grapple with rising healthcare costs and debates over the future of the ACA, understanding the incentives that drive state behavior is crucial. More stringent federal monitoring of enrollment practices, along with alternative financing methods, could help mitigate the risk of improper reclassifications and ensure that Medicaid dollars are used effectively and efficiently. By addressing these hidden subsidies, policymakers can promote a more sustainable and equitable healthcare system for all Americans.

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Everything You Need To Know

What is the Affordable Care Act (ACA) and how did it impact Medicaid?

The Affordable Care Act (ACA), enacted in 2010, significantly altered the healthcare landscape in the United States. A key change was the expansion of Medicaid, the largest source of health insurance in the U.S. The ACA allowed states to extend Medicaid eligibility to non-elderly adults with incomes up to 138% of the federal poverty level. Initially, the federal government covered 100% of the costs for these newly eligible individuals, decreasing to 90% in perpetuity. This expansion aimed to increase healthcare coverage, but it also introduced fiscal incentives that led to unintended consequences, such as Medicaid reclassification.

What does Medicaid reclassification mean in the context of the ACA, and why is it a concern?

Medicaid reclassification refers to the practice of states shifting existing Medicaid enrollees into the 'newly eligible' expansion group created by the Affordable Care Act. Because the federal government provides a higher matching rate for the expansion group, states can offload a larger portion of their Medicaid costs to the federal government. This creates a fiscal incentive for reclassification. This is concerning because it inflates the federal share of Medicaid spending, distorts program evaluations, and creates opportunities for states to manipulate enrollment numbers for financial gain. It doesn't directly impact the care received, but it has fiscal implications, potentially affecting taxpayers and other programs.

How does Medicaid reclassification affect federal spending, and what are the financial implications?

Medicaid reclassification inflates federal spending on Medicaid expansion. The study found that reclassifications led to substantial additional federal funding for states. From 2014 to 2019, an estimated $52.9 billion in extra federal funds were distributed due to reclassification, with $8.3 billion in 2019 alone. This means the U.S. Treasury bore a significantly higher cost. These reclassifications can inflate the federal cost of Medicaid expansion, potentially diverting resources from other programs and increasing the burden on taxpayers nationwide.

Who is aware of the Medicaid reclassification process and what are the key issues identified?

Typically, Medicaid enrollees are likely unaware of the reclassification process, which is primarily handled through administrative and reimbursement requests. However, the researchers highlight that these reclassifications have significant fiscal consequences. The key issues are increased federal spending, distorted program evaluations, and potential for abuse. The practice allows states to draw down more federal funds, which is particularly problematic given the long-term financial sustainability of Medicaid. These issues create an environment where states can manipulate enrollment numbers, potentially at the expense of federal resources intended to expand healthcare access.

What steps are being suggested to address the issue of Medicaid reclassification, and what is the road ahead?

The findings underscore the need for greater scrutiny and oversight of Medicaid enrollment practices. The suggestion is for more stringent federal monitoring of enrollment practices and exploring alternative financing methods to mitigate improper reclassifications. Addressing these hidden subsidies could promote a more sustainable and equitable healthcare system. Policymakers must understand the incentives driving state behavior. The focus should be on ensuring that Medicaid dollars are used effectively and efficiently. The road ahead involves greater transparency and accountability in Medicaid funding to ensure the integrity of the system and the responsible use of federal funds.