Rising Medicaid costs continue to squeeze state budgets and contribute to the federal deficit and national debt. According to actuarial estimates from the U.S. Department of Health and Human Services, total Medicaid expenditures could reach $1 trillion per year by 2026. In order to fight these escalating costs, states are trying to reform their Medicaid programs by enacting work requirements, increasing program audits, and decreasing administrative costs. Now it’s time for Congress to do its part.

Although current state-initiated reforms will help curb Medicaid costs, Congress must change Medicaid’s funding mechanism so that states have the power and financial incentive to improve their Medicaid programs.

Under current federal law, each state’s Medicaid program is funded by a combination of state and federal dollars. There is no pre-set amount the federal government gives to states. Rather, the federal government reimburses a percentage of the state’s program expenditures using the Federal Medical Assistance Percentage (FMAP) formula. States with a lower per capita income relative to the national average receive a higher matching rate for their Medicaid expenditures and vice versa.

These federal dollars come with very expensive strings attached. There are more than 1,800 federal regulations regarding eligibility, cost sharing, financing, and data collection (to name a few) that states must follow.

Not only must states adhere to thousands of regulations, but they must also turn over a portion of any savings from state-initiated, cost-saving measures. States don’t get to keep all of their “saved dollars” in their state. With this structure, states don’t have a strong incentive to experiment with new policies that could improve their Medicaid programs. Moreover, if states decide to go ahead with major program changes, such as work requirements, states must go through a lengthy waiver process with the federal government with no guarantees of approval. Mississippi has been waiting nearly a year to get its Medicaid work requirements waiver approved by the Centers for Medicare and Medicaid Services (CMS). This year, CMS denied other state’s requests for control over Medicaid drug pricing and lifetime Medicaid limits for beneficiaries in their programs.

In order for states to achieve new cost-saving measures, Congress must replace the current matching fund system and instead allot a fixed amount–a block grant–to each state’s Medicaid program. Each state would receive a lump sum based on previous state spending levels and enrollment, and the amount would be indexed annually to account for inflation and other factors. Block grants would allow state legislatures and the federal government to better forecast their budgets and could result in substantial savings. Adopting block grants could save the federal government $128 billion by 2026, according to a Cato Institute report based on Congressional Budget Office projections.

In general, states would have much more discretion to administer the funds. States could create additional policies to help beneficiaries ultimately leave Medicaid and transition into the private insurance market. States could transition their Medicaid programs to allocate funds to beneficiaries to purchase private health insurance or enroll them in Direct Primary Care Services (DPCS).

In the past, states like Michigan have tried to implement new ways of providing more affordable care to Medicaid beneficiaries by utilizing Health Savings Accounts (HSAs) towards DPCS. This would provide all primary health care services to patients for a low monthly subscription fee instead of using insurance or co-pays. Since they cut out the insurance middleman, DPCS are able to offer substantially lower prices for their services than traditional primary care doctors. Unfortunately, Michigan was hindered by the federal government’s waiver process and current regulatory tax restrictions on HSAs used for DPCS fees.

This is just one example in which Congress must remove regulatory shackles so that states have the option to implement substantial reform for their programs. Through a block grant system, states may circumvent burdensome regulations and dramatically change how they serve their Medicaid populations. This change will give states positive incentives to find the most cost-effective ways to run their programs in order to free up more dollars for other core government services.

Having Congress simply throw more matching dollars at states will only exacerbate the federal deficit and leave state budgets in a permanent bind for years to come. Congress must implement block grants and remove the regulatory red tape attached to federal dollars so that states may provide higher quality care for their Medicaid patients.