Medicaid Spending per Beneficiary Would Shrink by Half Under House Budget’s Per Capita Cap Option

We’ve explained that the House Budget Committee-approved budget plan would convert Medicaid into a block grant, cutting federal spending by about $1 trillion over the next decade relative to current law (in addition to repealing health reform’s Medicaid expansion).  The committee has since clarified in report language that the $1 trillion in savings could come through a block grant or a Medicaid per capita cap.  Either way, the impact would be essentially the same:  tens of millions of Americans now on Medicaid would see sharply reduced access to needed health and long-term care or lose Medicaid entirely and become uninsured.

Under a per capita cap, rather than paying a fixed share of a state’s Medicaid costs (as it does today), the federal government would pay only up to a fixed amount per beneficiary.  The state would have to cover all costs above that cap.  The cap would be set at levels well below projected federal Medicaid spending per beneficiary in order to produce large savings. 

The committee report describes an illustrative option under which states could choose between a block grant and a per capita cap.  Presumably, the per capita cap amounts for states taking that option would be set to generate the same savings as a block grant. 

How big would the cuts in federal Medicaid spending per beneficiary have to be for a per capita cap to produce $1 trillion in savings over ten years?  Assuming the cap takes effect in 2018, all states elect the per capita cap option, and Medicaid enrollment (outside of the Medicaid expansion repeal) continues at the levels now projected, we estimate that:

• Federal Medicaid spending per beneficiary would be about 50 percent lower than under current law by the budget’s tenth year (2026).

• Each year, states would receive less federal Medicaid funding per beneficiary — in nominal terms — than the year before.  That’s because annual Medicaid spending growth per beneficiary would have to be about 7.5 percentage points slower than under current law to produce the needed savings, and per-beneficiary costs are expected to grow by just over 4 percent annually over the next decade.

To compensate for such draconian cuts, states would have to drastically boost their own spending or, as is far likelier, deeply cut eligibility, benefits, and payments to health care providers and plans.  Cutting per-beneficiary spending substantially without limiting access to needed care would be extremely difficult: Medicaid costs per beneficiary already are well below those of private insurance, and states have used their existing flexibility to institute various measures to limit per-beneficiary Medicaid costs.