The complicated politics of a federal “coverage gap” workaround

The Biden administration and Democrats in Congress are pursuing a two-track legislative agenda for the second half of 2021, although political considerations and a crowded calendar may force a merger.

The first bill is supposed to consummate an agreement among a bipartisan group of ten senators for more infrastructure spending. The president has endorsed their framework.

The second bill will focus on the domestic priorities of the Democratic majority and is not expected to attract Republican support. Senate Democrats on the Budget Committee recently agreed to a ceiling of $3.5 trillion for the ten-year cost of their emerging plan. As the second bill gains momentum and visibility, it may become difficult to sustain GOP support for a separate vehicle focused strictly on traditional infrastructure.



There are many competing claims on what is expected to be a large, but not unlimited, pool of funds for both bills. One health care proposal that is likely to attract substantial support from Democrats is a federal workaround for the uninsured population who fall into the “coverage gap” in non-expansion states. While there is a broad agreement in the majority party that a federal remedy is now called for (because the remaining non-expansion states are unlikely to change their positions), building a consensus for a specific plan that appeals to expansion and non-expansion states alike might be challenging.

The coverage gap refers to the break in subsidized insurance that exists when Medicaid eligibility ends before ACA premium subsidization begins. The ACA provided enhanced federal matching funds when eligibility for Medicaid is increased to all persons with incomes below 138 percent of the federal poverty line (FPL). This expansion brought many adults without children into the program for the first time and reduced the size of the nation’s uninsured population.

While most states quickly agreed to the ACA’s terms for expanding Medicaid, which first went into effect in 2014, some states did not. As of mid-2021, thirteen states have yet to adopt the expansion (in 2020, Missouri voters directly endorsed a Medicaid expansion but the state government has yet to implement it; the issue is now in litigation and under review by the state Supreme Court).

Individuals caught in the gap have limited options. Their incomes are too low to pay for private insurance premiums themselves, and yet they are not eligible for subsidized coverage offered through the ACA’s exchanges (premium credits for exchange coverage begin at 100 percent of the FPL in non-expansion states). Of the nearly 30 million people who remain uninsured in the U.S., 2.2 million are in the coverage gap.

The Biden administration and Democratic leaders in Congress included a provision in the American Rescue Plan, enacted in March, that attempts to entice the non-expansion state to drop their opposition. The law authorizes a two-year, five percentage-point increase in the federal matching rate for all of a state’s Medicaid costs if a non-expansion state agrees to the ACA’s expansion terms. The effect of this provision would be to shift the financial burden of five percent of total state Medicaid spending onto federal taxpayers. There is not much evidence yet that it is having its intended effect.

If elected leaders in the holdout states remain resolute, congressional Democrats have a couple of options for bypassing them through new federal legislation:

  • A National Public Option. President Biden and many congressional Democrats would like to create a new, federally-run insurance plan, and make it available to certain segments of the population. It would be offered to everyone getting coverage through the ACA exchanges, and also could be made available to persons in the coverage gap in the non-expansion states.

While this solution would be attractive to many Democrats, the hospital and insurance industries are not on board with it. Their opposition would complicate getting it passed in an evenly-divided Congress.

Moreover, if a public option were made available to persons with incomes below the poverty line in non-expansion states, some expansion states might want similar treatment for their citizens, which would raise the overall cost and might undermine more expansive Medicaid coverage for lower-income households.

  • A Federally-Financed Medicaid Option. Instead of a large public option, Congress could create a more targeted solution through a federally-run Medicaid plan. The new option would be made available just to persons below 100 percent of the FPL in the non-expansion states, with the federal government paying 100 percent of the cost and directly contracting with Medicaid managed care plans to provide the coverage.

Bypassing states with a federally-run Medicaid offering would not generate as much opposition in the hospital and insurance industries as a true public option, but it would be controversial nonetheless because of concerns in the expansion states that the federal government would be rewarding the holdouts with 100 percent federal funding. Democrats might address this objection by providing separate financial relief to the states that agreed to the expansion before the new law is passed.


Officials in the Biden administration and Democrats in Congress see 2021 as a historic opportunity to enact a substantial portion of their agenda, and closing the coverage gap is near the top of their list of priorities. Increasing the federal cost of whatever solution is pursued may be the surest route to overcoming the inevitable political obstacles to its enactment.

James C. Capretta is a columnist for State of Reform and is a senior fellow at the American Enterprise Institute.