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Supreme Court axes tariffs

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Why Medicaid has drifted from its mission — and how to fix It

As the Trump administration intensifies oversight of Medicaid spending to curb fraud, waste and abuse, policymakers should look beyond enrollment and address a deeper structural shift — Medicaid’s “mission creep” into housing.

Medicaid was created in 1965 as a federal-state partnership to ensure that the poor had access to essential health care: doctor visits, hospital stays and prescription drugs. Since then, its scale has exploded, with spending hitting $914 billion in fiscal 2024, consuming nearly 9 percent of the federal budget and 30 percent of state budgets.

Rising health care expenditures are one culprit. But the program increasingly diverts billions from its original mission into housing initiatives. The spending, incentivized by federal matching funds, flows through an opaque system under the dubious proposition that health care bureaucrats can fix housing problems that plague low-income Americans, and thereby improve their health outlook.

Any dollar spent by a state in Medicaid generates more than a dollar in federal matching funds — with no cap on those federal dollars. In theory, the Center for Medicare and Medicaid Services caps non-health care spending, including housing, at 3 percent of Medicaid’s budget, which would put it at about $30 billion. But the actual spending could be much higher. It is impossible to know for sure because states typically bundle both health care and non-health care services into contracts with Medicaid Managed Care Organizations that do not report transparently by service category and impose no caps on non-clinical spending.

Section 1115 waivers allow the Department of Health and Human Services to grant a state flexibility to address local priorities as long as the waiver is “budget neutral,” meaning that federal spending with the waiver will be no higher than the “projected” federal spending without it. But a recent Government Accountability Office report states that “CMS has rendered the assessment of budget neutrality a hollow exercise.”

The Biden administration allowed states to use outdated historical spending projections and hypothetical spending on housing and other social supports — money the state did not actually spend, but could have spent — in the base year, inflating projections. This let states increase waiver spending by tens of billions of dollars, in additional federal spending. As of August 2025, 31 states have waivers to fund housing-related supports from rental aid to medical respite.

Advocates argue that investments in housing pay for themselves by reducing health costs. Their evidence is ambiguous at best. For example, the official evaluation of California’s Whole Person Care program — which implemented housing and other social supports for high-need populations — claimed annual health care savings of $383 per enrollee. But closer inspection reveals that costs for enrollees declined by only 15 percent over five years, compared to a 32 percent cost reduction among control-group beneficiaries. Importantly, these analyses do not account for administrative or pilot implementation costs.

A review by the National Academies notes that rigorously conducted randomized controlled trials have failed to demonstrate significant savings or improved outcomes. Similarly, a RAND evaluation of managed care-sponsored permanent supportive housing found no evidence of long-term Medicaid savings.

The Department of Health and Human Services is already restricting the use of waivers, but Medicaid’s “mission drift” needs broader reforms to reduce perverse incentives for states to inflate non-medical spending.

First, transparency should be increased by requiring the reporting of expenditures by category — hospital, physician, drug costs, housing, nutrition, and caregiving. That could put teeth back in the 3 percent Medicaid limit on non-health care spending.

Second, Medicaid financing should be shifted from uncapped federal matching toward per-capita allotments, adjusted for health care costs and population. Estimated federal savings would be at least $53 billion annually. The savings could be used to address the root cause of the housing crisis — lack of supply — by creating incentives outside Medicaid for states and cities to reduce regulatory barriers and by providing targeted subsidies for constructing affordable housing. Alternatively, the savings could be captured for deficit reduction.

Medicaid remains vital, serving millions of Americans who rely on its safety net. But as spending balloons and the program wanders from its health care mission, policymakers must choose: maintain discipline and transparency, or allow Medicaid’s inefficiencies to crowd out other priorities. The solution lies in smarter, targeted spending — anchored in Medicaid’s original vision, evidence-based, and transparent for all.

Virat Agrawal, Ph.D., is a scholar, and Neeraj Sood, Ph.D., is a senior scholar at the USC Schaeffer Institute for Public Policy and Government Service.

Copyright 2026 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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