Debt Digest | RFK Jr. Misunderstands Medicare and Medicaid
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
RFK Jr. misunderstands Medicare and Medicaid. Robert F. Kennedy Jr., Trump’s nominee for the Secretary of the Department of Health and Human Services (HHS), doesn’t seem to understand how Medicaid and Medicare work. For example, Kennedy incorrectly claimed that “Medicaid is fully paid for by the federal government,” when in reality, states fund a significant portion of the program. He also stated that Medicaid enrollees are dissatisfied with the program’s high deductibles and premiums, even though most Medicaid beneficiaries pay neither. As for Medicare, Kennedy suggested it operates on a fee-for-service model and is funded by employer taxes. However, Medicare Parts B and D rely primarily on general revenue and enrollee premiums, while Part C doesn’t use fee-for-service payments. As we’ve highlighted in our Medicare fact sheet, “The majority (65 percent) of Medicare spending is financed by borrowing, premiums, and other taxes.” A potential HHS secretary misunderstanding how Medicare works is problematic, given the program costs about $1 trillion and accounts for about 70 percent ($53.1 trillion) of the federal government’s unfunded obligations (see figure below). Beyond his lack of understanding of the nation’s main healthcare programs, as Cato’s Michael Cannon puts it: “RFK is even more of a paternalist than Anthony Fauci is.”
Closing the Medicaid provider tax loophole could save over $500 billion. Brian Blase, the President of Paragon Health Institute, highlights how states use provider taxes that are “basically fake expenditures” to claim federal reimbursements: “A state assesses a $1 million tax on a provider and then returns the $1 million to the provider through additional Medicaid spending. Common sense shows that this isn’t a real transaction. But the state provides a receipt of the $1 million Medicaid expenditure to the federal government. For the average state, the federal government pays the state $650,000 for this illusory expenditure, part of which goes to the provider. Through these schemes, states and providers reap windfalls at the expense of federal taxpayers.” The Congressional Budget Office estimates eliminating this practice would reduce federal deficits by $526 billion over a decade.” As Cato’s Marc Joffe and Krit Chanwong pointed out when addressing California’s new provider tax: “The problem stems from the perverse incentives that are caused by Medicaid’s open-ended matching structure. As such, the best solution is to eliminate these incentives by turning Medicaid into a block-grant program.” If President Trump is serious about ‘draining the swamp’ this loophole which fleeces federal taxpayers to pad states’ and health care providers’ bottom lines should be top of the agenda!
Recent funding freeze shows how not to cut spending. The Office of Management and Budget (OMB) memo from last Monday that called for temporary freezing of federal grants and loans caused so much confusion that it was rescinded within 48 hours. According to the Atlantic, the OMB memo wasn’t properly communicated with the White House: “[...] Trump’s deputy chief of staff for policy, Stephen Miller, had requested to see the memo before it went out, but OMB never sent it over [...].” Given the deteriorating US fiscal outlook, spending cuts are crucial to shrink deficits, boost economic growth, and avoid another episode of spending-driven inflation. However, implementation matters—spending cuts should be predictable and gradual, not abrupt and chaotic. The OMB’s memo likely did more harm than good by scaring GOP members with a potential fallout from actually cutting spending. As Politico’s Meredith Lee Hill and Mia McCarthy put it: “[T]he uproar from Trump’s federal spending freeze gave vulnerable [GOP] members a taste of the backlash that could result if they follow through on promised cuts to key programs.”
Raise Social Security eligibility thresholds and index them to life expectancy. John Arnold, co-chair of Arnold Ventures, writes on X: “Most developed countries have terrible demographics, putting enormous pressure on pension and healthcare spending. [...] The social safety net was based on a growing working age population. That's over. This is the fundamental economic problem of coming decades and it has no politically viable solution.” Social Security’s spending has primarily increased due to adverse demographic developments, with the worker-to-beneficiary shrinking from 16.5 in 1950 to 2.7 in 2023. One effective reform is raising eligibility ages and indexing them to increases in life expectancy. One in four OECD countries, including Denmark, Finland, and Sweden, have linked their pension eligibility thresholds to life expectancy, automatically adjusting their systems to address the pressures of an aging population. For more on Social Security reforms, see this fact sheet and pre-order our upcoming Cato book, Reimagining Social Security: Global Lessons for Retirement Policy Changes, which draws on the pension reform experiences of Canada, New Zealand, Germany, and Sweden to recommend structural reforms to the US Social Security program.
Rising debt is a threat to national security. Pierre Yared, professor of international business at Columbia University, highlights the link between the US dollar dominance—the “exorbitant privilege”—and its military power: “America’s ‘exorbitant privilege’ isn’t just an economic perk – it’s the bedrock of its global leadership. Yet, mounting debt and unchecked entitlement spending threaten this delicate balance. As the US faces an increasingly multipolar world, prioritising fiscal discipline and military strength isn’t just prudent – it’s imperative.” Beyond weakening the dollar’s status, unchecked debt could undermine US defense capabilities by diverting resources toward debt servicing costs. As I’ve noted in my testimony before the House Budget Committee: “In 2024, net interest payments exceeded federal spending on discretionary defense appropriations—an alarming milestone that underscores the trade-offs imposed by fiscal irresponsibility.”
