Episode 11: The Federal Medicaid Inmate Exclusion Rule is Wasting Your Tax Dollars

The Medicaid Inmate Exclusion Rule is often described as a way to save taxpayer money. In practice, it does the opposite. It shifts federal and state healthcare costs onto local governments, forces jails to purchase care at inflated prices, and ultimately redistributes public money upward to pharmacies and pharmaceutical companies.

To understand why, it helps to start with what Medicaid is and how it works.

Medicaid is a government health insurance program created to help low-income individuals access medical and mental health care. As of September 2025, approximately 77 million people in the United States were enrolled in Medicaid. For the purposes of this discussion, Medicaid does two important things.

First, it subsidizes the cost of care. Medical and mental health services are expensive, and these subsidies make treatment far more affordable for patients. Second, and more important here, Medicaid negotiates and sets rates for medical services and prescription medications. Those negotiated rates are substantially lower than what providers/manufacturers charge on the open market.

Some examples make this easier to see.

Consider a basic medical service, such as an X-ray for a suspected rib fracture. With Medicaid, a patient might pay around three dollars out of pocket, while Medicaid pays approximately twenty dollars to the provider. The total cost of the X-ray is roughly twenty-three dollars. Without insurance, the same X-ray could cost around two hundred dollars, nearly ten times as much, because the patient is charged the full retail rate rather than the negotiated Medicaid rate.

The same pattern applies to mental health medications. A thirty-day prescription for an ADHD medication might cost a Medicaid patient two dollars out of pocket, with Medicaid paying an additional five dollars, for a total of seven dollars. Without insurance, that same prescription could cost around forty dollars out of pocket.

In both cases, the total amount paid for care is dramatically lower when Medicaid is involved.

This brings us to the Medicaid Inmate Exclusion Rule.

The rule states that when a person who is enrolled in Medicaid is incarcerated in a jail or prison, their Medicaid benefits are suspended for the duration of their incarceration. Even though the individual was insured at the time of arrest, jail medical staff are prohibited from billing Medicaid for any services or medications provided. For billing purposes, the incarcerated person is treated as if they have no health insurance at all.

This rule has existed since Medicaid was created in 1965. The original rationale was that if a local government chose to arrest someone, that government should be responsible for providing medical care during incarceration.

That logic breaks down quickly under scrutiny. Local governments do not decide which behaviors are criminalized. They are responsible for enforcing laws passed by state legislatures and Congress. This creates a mismatch between who makes the laws and who bears the financial burden of enforcing them. States and the federal government define crimes, while counties and cities absorb the costs of incarceration and constitutionally required medical care. This is an unfunded mandate in practice, even if it is not labeled as such.

When this issue is raised, a common reaction is to frame it as a moral argument. Some people respond by suggesting that allowing Medicaid billing in jails means giving criminals free healthcare, or shifting costs unfairly from counties to state governments. Neither claim holds up.

First, many people in jail are not criminals. Most jail inmates are pre-adjudicated, meaning the court has not yet determined guilt or innocence. People can spend weeks or months in jail awaiting trial, and jails are constitutionally required to provide medical and mental health care during that time. Denying access to negotiated insurance rates before any finding of guilt raises serious fairness concerns.

Second, there is no such thing as free healthcare. Medicaid is funded by taxpayer dollars. Jail healthcare is also funded by taxpayer dollars. The question is not whether taxpayers pay, but how much they pay and who benefits from the system.

Because Medicaid negotiates lower prices, care provided through Medicaid is significantly cheaper than care purchased without insurance. The Inmate Exclusion Rule forces jails to buy medications at full retail prices, often five to ten times higher than Medicaid rates.

As a result, the rule does not reduce healthcare spending. It shifts costs onto local governments while dramatically increasing the price they must pay for the same care.

The beneficiaries of this arrangement are not taxpayers. Treatment providers benefit to some extent, but the largest winners are pharmaceutical companies and large pharmacy contractors. Because jails are barred from using Medicaid’s negotiated rates, they must pay monopoly retail prices for medications.

This becomes especially costly for certain populations. HIV medications and long-acting antipsychotics routinely cost jails thousands of dollars per month per patient. A single inmate prescribed a brand-name antipsychotic can add six thousand dollars to a jail’s monthly pharmacy bill. A brand-name HIV medication can add another five thousand dollars. Some inmates require multiple medications, and it is not uncommon for a single individual’s prescriptions to exceed ten thousand dollars per month.

If that same individual were in the community with Medicaid, their out-of-pocket cost might be ten dollars, and Medicaid itself might pay around one hundred dollars total. Exact figures are impossible to provide because privacy laws limit access to detailed Medicaid reimbursement data for specific medications.

The practical effect of the Inmate Exclusion Rule is that cities and counties pay far more for care than state or federal governments would pay for identical treatment in the community. The rule extracts money from local taxpayers and transfers it upward to drug manufacturers and large healthcare corporations. At the same time, these inflated costs strain county budgets, making it harder to raise employee wages, maintain facilities, or fund other essential public services.

The most straightforward solution would be to allow incarcerated individuals to retain Medicaid coverage during incarceration. That approach would immediately reduce costs and align jail healthcare spending with community healthcare spending. However, state budgets are already under pressure from numerous federal mandates, and many states would struggle to absorb these additional costs.

A more practical middle-ground solution is possible.

One option is to allow jails and prisons to bill Medicaid for services and medications, while requiring them to reimburse Medicaid for the full cost of those claims, plus a fixed surcharge, such as ten percent. This approach preserves local responsibility for paying for care while allowing jails to access Medicaid’s negotiated rates. It would dramatically reduce county healthcare expenditures while creating a modest new revenue stream for state Medicaid programs without raising taxes.

This model would not incentivize overbilling, since counties would still be responsible for the costs. Medicaid utilization review and existing oversight mechanisms could remain in place to prevent abuse.

The Medicaid Inmate Exclusion Rule does not save money. It wastes local tax dollars, inflates healthcare costs, and channels public funds to private corporations for no clear public benefit. Understanding how this system works is the first step toward fixing it.

For policymakers interested in addressing this issue, practical solutions exist. I am happy to discuss them further with anyone interested in reforming this policy.