Medicaid Funding Caps Would Lead to Program Cuts, Impede Innovation

Plans by President-elect Trump, House Speaker Paul Ryan, and Health and Human Services Secretary-nominee Tom Price to radically change Medicaid’s structure by converting it to a block grant or “per capita cap” and cut its federal funding over time would likely mean benefit and eligibility cuts and less state innovation, as I explain in a new paper.

Under Medicaid’s current structure, the federal government pays a fixed share of each state’s Medicaid costs in providing covered services to all eligible beneficiaries who apply. States have lots of flexibility on how they deliver health care, and every state designs its Medicaid program to fit its needs and environment. The significant innovation that’s happening in most states today is due to Medicaid’s flexibility and financing structure.

Block grants and per capita caps are fundamentally different. They provide fixed amounts of federal funds to states that, under every Medicaid and per capita cap proposal of recent years, are set below the amounts that states are projected to need to provide health care to beneficiaries (and would receive under current law). Block grants and per capita caps save federal money by shifting costs to the states, with the cost shift growing larger each year. States are then left to make the hard decisions on how to address their increasingly inadequate federal funding.

The 2017 budget plan that the Republican-run House Budget Committee adopted last spring would have given states the choice of a block grant or per capita cap and thereby reduced federal Medicaid spending by $1 trillion over ten years — a 25 percent cut — on top of repealing the ACA’s Medicaid expansion. Cuts of that size would endanger state innovation because states would have to quickly decide how to live within fixed, inadequate amounts of federal funds, making it much harder for them to continue making the upfront investments that generally are needed to develop systems that can provide high quality care at lower costs.

In the short term, states might try to avoid cutting eligibility or benefits and fill the funding shortfall by imposing premiums, higher cost-sharing, cuts in provider payments, or changes that make it harder for prospective beneficiaries to enroll. Politically, states can more easily make these kinds of changes because unlike a direct cut in eligibility, the impact isn’t transparent. Yet these kinds of changes fall hardest on the poorest, most vulnerable beneficiaries who are less well-equipped to pay premiums and cost-sharing or navigate complex eligibility requirements.

As state funding shortfalls grow over time, most states eventually would have to explicitly cut eligibility and benefits and/or cut provider payments more. After examining an earlier Medicaid block grant proposal from Speaker Ryan that’s similar to the proposal in last year’s House Republican budget plan, the Urban Institute estimated that between 14 and 21 million people would lose their coverage, on top of those who would lose coverage due to repealing the ACA’s Medicaid expansion.

Supporters of a block grant or per capita cap contend that it would give states new flexibility to innovate and lower their costs. But states already have great flexibility to innovate, and a block grant or per capita cap would impede innovation while generating benefit and eligibility cuts that would hurt tens of millions of beneficiaries.

Click here to read the full paper.