For the first time since 1929, the GOP controls the White House, the Senate, the House, and most governorships and state houses. Never before, in most of our lifetimes, have Republicans been in a better position to coordinate and advance legislation at both the state and federal level. So it came as a surprise to many when disagreements between moderate and conservative factions within the party resulted in the Republican replacement to the Affordable Care Act (ACA), the American Health Care Act (AHCA), being pulled from the House floor only moments before a vote could be taken.

As Speaker of the House Paul Ryan explained after pulling the bill, “doing big things is hard” and “moving from an opposition party to a governing party comes with growing pains.”

Although it is unclear when or if a new bill will make its way through both the House and Senate, whenever Republicans do reconcile on a revised AHCA, it is sure to include a key feature that appeared in the original AHCA and received little opposition from either conservative or moderate Republicans: caps on federal contributions to Medicaid.
But just what are Medicaid funding caps, what do they mean for the states, and how will they affect Medicaid coverage for the millions of Americans receiving coverage under our current laws?

WHAT IS MEDICAID? WHO PAYS FOR IT?

Medicaid provides health care coverage to millions of Americans, including eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities. The program is funded jointly by the states and the federal government, and administered by the states, according to federal requirements.

As of December 2016, approximately 69 million Americans were covered by Medicaid, with children comprising nearly 49 percent of all enrollees. Last year, Medicaid cost taxpayers $582.9 billion, of which, the federal government paid $364.3 billion (62.4 percent), and states paid $218.6 billion (37.5 percent).

Under our current Medicaid laws, eligible individuals have an entitlement to coverage and states are guaranteed federal matching dollars with no pre-set limit. This means that for each dollar a state spends on Medicaid, the federal government will spend a dollar to match, without a limit; and individuals covered by Medicaid are able to receive treatment regardless of preexisting conditions. This system protects Medicaid services implemented by the states in the event of an unforeseen increase in Medicaid enrollment or costs and ensures those individuals covered by Medicaid receive the treatments they need.
Although unlimited federal match and the entitlement to coverage have dramatically increased Medicaid enrollment, coverage, and benefits over the last seven years, not everyone agrees with the current system.

Proponents of Medicaid reform contend that unlimited federal match and the entitlement to coverage cause poor state planning, unchecked spending, and wasted federal dollars. Federal contributions, they argue, should be capped. This would allow the federal government to fix the annual cost of Medicaid and limit federal Medicaid spending over time while incentivizing efficiency by removing the financial safety net for the states. But there’s a tradeoff. While capping federal contributions to Medicaid would make federal spending more predictable and achieve federal budget savings, it would also shift the costs of Medicaid to the states and likely eliminate many services as well as the entitlement to coverage.

WHAT ARE MEDICAID CAPS?

Caps to federal Medicaid contributions may be accomplished by a variety of means; however, all caps to federal Medicaid contributions are based on the same process. A fixed amount of money is granted by the federal government to the states to address a broad range of issues. The states are then free to create and implement programs to address those issues using the federal funds as they see fit (within broad federal guidelines). The contributions are considered “capped” because rather than increasing based on Medicaid expenses, the federal funds are fixed and do not exceed a set limit in a given year. Caps are typically implemented in one of two ways: block grants or per capita/per enrollee caps.
Under a block grant system, each state would receive a predetermined, fixed amount of money each year for its entire Medicaid program irrespective of enrollment; that base figure would then be increased by a specific amount each year, typically tied to inflation of the medical care component of the consumer price index. The base amount of the grants is not necessarily tied to enrollment, costs, or program needs, and instead may be determined using spending data from previous years or an arbitrary combination of factors. Once a base amount has been determined and the funds are allocated to the states, it is then up to the states to create programs and decide how block granted funds are spent (within broad federal guidelines).

Under a per capita cap, rather than provide a set block of funds for the entire Medicaid program irrespective of enrollment, federal funding for each state is determined based on an amount provided per enrollee. The federal government begins by determining a base amount to be paid to the states for each individual enrollee. The base amount per enrollee is then multiplied by the total number of enrollees in a given state to arrive at a total grant amount for the state for a given year. Like block grants, the base amount for annual per-enrollee spending is established using spending figures from previous years or a combination of factors that affect population health and the cost of care. Unlike block grants, per capita grants grow along with enrollment and allow for the creation of separate classes of enrollees, such as children, the elderly, and the disabled. Once a base amount has been determined and the funds allocated to the states, it is then up to the states to decide how per capita funds are spent.

For example, under the original text of the AHCA, beginning in 2020, the federal government would have established a limit on the amount of funding it provides the states for Medicaid using a per-enrollee cap. The cap for each state would have been determined by calculating the average per-enrollee cost of medical services for most enrollees who received full Medicaid benefits in the state in 2016. The Secretary of Health and Human Services would have then increased the average per-enrollee cost for each state by the growth in the medical care component of the consumer price index.

With both block grants and per capita caps, federal savings are achieved by limiting the rate at which grant funds grow so that federal Medicaid spending is kept at levels less than under current Medicaid laws. Over time, as per-enrollee Medicaid expenses grow at a faster rate than the amount of federal funds available, states will be forced to increasingly rely on their own tax dollars to support Medicaid programs. If a gap develops between the amount a state needs to meet its Medicaid expenses and the amount provided by the block grant or per capita allotment, the federal government will not contribute additional funds and it will be up to the states to choose between making up the difference, increasing eligibility requirements or reducing services.

HOW DO CAPS AFFECT THE STATES?

Currently, the federal government provides unlimited matching funds to the states for Medicaid. In return, the states are required to cover certain people and services. Removing the unlimited federal match and implementing caps will have a significant impact on the states’ budgets as well as the services they provide. While states will be allowed greater leeway in how they spend their funds, the cost of flexibility may be a reduction in services, an increase in eligibility requirements, and/or repeal of the entitlement to coverage.
One of the most immediate impacts of federal funding caps for Medicaid would be the reduction and redistribution of federal funds away from lower income states. There is significant variation in federal Medicaid spending across the United States due to each states’ decision to accept or refuse the Medicaid expansions offered under the ACA as well as the states’ unique health care needs, policies, and economies. The poorer, sicker states typically receive more federal funds per capita than their healthier, wealthier counterparts, and are at greater risk of sudden economic downturn or spikes in enrollment. For example, the federal government pays approximately 75 percent of Mississippi’s annual Medicaid expenses, but pays only 50.1 percent of the annual Medicaid expenses for Virginia and 56.1 percent for Massachusetts. Implementing caps would reduce the federal funds flowing to the poorer states while simultaneously increasing the states’ Medicaid expenses (if they maintain services at their current level).

Many state government officials are displeased with the proposal to cap Medicaid funding while maintaining the entitlement to coverage; to appease these officials, legislatures have proposed allowing states the right to eliminate the entitlement to coverage or implement waiting lists and increase eligibility requirements. Although many states insist they would not cut services, at a time when state budget committees are already under pressure to cut spending, the poorer states will inevitably be forced to cut services, implement waiting lists, or increase eligibility requirements to compensate for the reduction in federal spending. Conversely, the redistribution will reward wealthier, healthier states who would see less of their federal taxes used to support Medicaid programs in low income states. The effect of these redistributions is that as states are left to reduce or expand Medicaid services based on their unique financial capabilities, regional health disparities will begin to arise throughout the country.

INCREASED FLEXIBILITY?

A key argument in favor of capping federal contributions to Medicaid is that caps will increase efficiency and reduce waste by allowing the states greater flexibility in how they create and implement Medicaid programs using federal funds. However, our current Medicaid laws are already quite flexible and it is difficult to see how greater efficiency will be achieved without significantly reducing coverage, increasing eligibility requirements, or eliminating entitlements.

Under our current laws, states design and implement Medicaid programs in accordance with federal guidelines and may elect to participate in a number of optional programs.
Federal guidelines implement minimum standards for eligibility, benefits, premiums, cost sharing, and provider payments and delivery systems. States are required to cover low income children, families, seniors, and individuals with disabilities who meet the federal poverty requirements. States then have the option to expand coverage to children, pregnant women, and adults at or above 138 percent of the federal poverty line (FPL), as well as seniors and disabled people over the age of 75, working people with disabilities, the medically needy, and people experiencing need of long-term care up to 300 percent SSI.
All states have elected to cover children at or above 138 percent FPL; and 32 states have elected to expand coverage to adults at or above 138 percent FPL. For both minimum and optional benefits, states determine the amount, duration, and scope of covered benefits, subject to the requirement that coverage be sufficient to achieve the program’s purpose.
States also have significant leeway to charge premiums and implement cost sharing for certain Medicaid enrollees, structure the delivery systems used to provide services, and determine provider payments. Should states feel the need to implement a program or payment method beyond the guidelines or state options, federal law provides Section 1115 waiver authority, which allows the Secretary of HHS to waive certain requirements in Medicaid matching funds for purposes not otherwise allowed under federal rules. If the states are still unsatisfied with all of the options described above, they are allowed to use Medicaid funds as premium assistance to purchase private insurance rather than providing direct coverage.

Given the already broad latitude enjoyed by the states when creating and implementing Medicaid programs, and the existence of federally supported state options to expand coverage, any additional state flexibility would be achieved by allowing the states to reduce benefits, increase eligibility requirements, increase premiums and cost sharing, or impose additional program requirements for participants. These proposals would reduce the number of people covered by Medicaid, reduce the services provided to covered enrollees, or require additional out of pocket payments for enrollees.

Due to political nature of the Medicaid program, it is unlikely that any legislature will attempt to implement these proposals in any meaningful way with regard to the elderly, disabled, or child populations. Since these groups represent the largest portion of Medicaid costs, reduction of benefits or increased eligibility requirements for other groups, such as low income adults, will have little effect on the overall efficiency of the Medicaid program.

WHAT’S NEXT?

So what does all of this mean for you? As we look ahead for Congress to craft the revised AHCA, it is important to keep in mind that any future iteration of the AHCA will very likely include caps on federal contributions to Medicaid. Implementing caps will eliminate unlimited federal match and replace it with a fixed sum to be paid to the states annually.
Due to limited state budgets, without funding from other sources to account for the difference, removal of unlimited federal match will result in a reduction in Medicaid services, increased eligibility requirements, and/or the elimination of the entitlement to coverage.

Due to the broad flexibility the states currently enjoy, it is doubtful that caps on federal contributions to Medicaid would increase flexibility or efficiency sufficiently to justify the overall negative impacts that caps would have on the states and the populations they serve.

Therefore, any proposal that includes block grants or per capita caps must include some additional measures to compensate for the negative impacts those funding systems would cause.

It is important to keep in mind that the issues raised above are influenced by a number of factors: what categories of program spending and eligibility are included in spending limits, which year’s spending is used as the base and what growth factor is used to increase the caps over time, how much flexibility is granted to the states to make changes to their programs, and how to treat the optional expansion of coverage under the ACA. These are all very important considerations that will affect how federal caps operate.

Much of whether you consider caps to federal contributions to Medicaid to be good or bad is predicated on what your goals are. If your goal is to reduce federal spending, caps will accomplish this, albeit at the cost of reducing services and coverage. If your goal is to maximize services and coverage, caps will do the exact opposite, and will actually reduce coverage and benefits. As always, the devil is in the details; until we know more about how the revised AHCA will structure and implement the factors discussed here, any proposal that touts caps to federal Medicaid contributions as the golden ticket to fixing Medicaid funding should be taken with a grain of salt.

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Cameron Onks
Cameron Onks is an attorney at the F. Marie Hall Institute for Rural and Community Health at the Texas Tech University Health Sciences Center.