Equating a Medicaid Per Capita Cap with Capitation Payments Is Highly Misleading

Congressional Republicans who support a per capita cap for Medicaid — including Senator Bill Cassidy, who’s co-sponsored a bill to replace the Affordable Care Act — have conflated such a cap with the widespread practice through which states reimburse health plans and some health care providers in their Medicaid programs through “capitated” payment arrangements. But that’s highly misleading.

States have considerable flexibility in how they reimburse managed care plans and health care providers under Medicaid. Many use capitation, under which they pay a Medicaid managed care plan a set amount per month for each plan enrollee for providing some or all of a beneficiary’s care. Capitation payments can make Medicaid managed care plans (as well as providers) more responsible for the total cost and quality of a beneficiary’s care because the plans bear the financial risk of managing within their capitation payments or suffering a loss when they don’t. That can help ensure better health outcomes and lower costs.

Under federal law, however, Medicaid capitation payment rates must be actuarially sound — that is, sufficient to ensure that beneficiaries receive all covered benefits. States thus usually agree in advance to pay the plan or provider more if health care costs are significantly more than expected, and they can also add payments for unforeseen circumstances, such as when an expensive new treatment is released. States also raise or lower capitation payments at the end of the year and adjust them in future years based on expected medical and long-term care costs to keep capitation rates adequate.

In sharp contrast, a per capita cap is designed to significantly reduce federal Medicaid funding to states, relative to current law. Typically, proposals to establish a per capita cap would set an annual cap on federal Medicaid spending per beneficiary that’s substantially below the amount that states are projected to receive under the existing financing structure, with the cuts growing over time. Moreover, if costs end up higher than anticipated and states exceed their federal funding cap — due to, for instance, the aging of the population, a disease outbreak, or the development of new, expensive drugs — states would get no additional federal Medicaid funding and would have to bear those higher costs alone.

Because states would receive significantly less federal Medicaid funding under a per capita cap than they’re projected to need, such a cap constitutes an explicit cost-shift to states. That would require states to either contribute much more of their own funding to their Medicaid programs or, more likely, deeply cut eligibility, benefits, and provider payment rates as well as scale back or eliminate innovative state programs that are improving care. Tens of millions of beneficiaries who rely on Medicaid today could lose access to needed care.

Capitation payments and a per capita cap may sound similar, but they’re fundamentally different. One helps states to efficiently reimburse health plans for delivering needed care to Medicaid beneficiaries. The other would radically restructure Medicaid and shift substantial costs to states, beneficiaries, and health care providers and plans, leaving millions more low- and moderate-income people uninsured or underinsured.