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Block Grant No Solution for Rising Medicaid Costs

In the intensifying debate over cutting federal spending, troubling proposals to block-grant Medicaid or otherwise cap its funding are getting new attention.  For example, Rep. Fred Upton (R-MI), the new Chairman of the House Energy and Commerce Committee, has already discussed block-granting Medicaid with some governors.

Currently, the federal government picks up a fixed percentage — between 50 percent and 75 percent — of each state’s Medicaid costs.  It therefore shares in any increased costs or savings when state Medicaid spending rises or declines.

Under a block grant, the federal government would provide each state only with a fixed dollar amount of Medicaid funding, with states responsible for everything above that amount.  That would pose significant risks, as I detail in a new report:

  • Risks for states. To produce budgetary savings, a block grant would have to give states less federal funding than they would receive under the current system.  Also, federal funding under a block grant would no longer rise automatically in response to recessions, epidemics, or medical breakthroughs that improve health or save lives but at increased cost.  For these reasons, the block grant would shift an ever-larger share of Medicaid costs to states over time.
  • Risks for beneficiaries. Block-grant or cap proposals typically give states much more flexibility over their Medicaid programs.  So as states’ block grants fell further and further behind what they needed, states would likely make up for the shortfall by using this greater flexibility to sharply restrict enrollment, eligibility, and benefits.  Many people who would currently qualify for Medicaid could end up uninsured; many Medicaid beneficiaries, such as people with serious disabilities, could lose critical services.  States could also impose premiums and other costs on beneficiaries that many would find unaffordable.
  • Risks to health care providers. In some states, low reimbursement rates have impeded Medicaid beneficiaries’ access to physicians, particularly specialists.  States looking for Medicaid savings have tended to focus first on provider reimbursement rates, and are likely to cut provider rates further in the face of inadequate block grant funding.  This would likely cause more providers to withdraw from Medicaid, threatening beneficiaries’ access to care.

Block-grant proponents argue that Medicaid’s financing structure has helped cause costs to rise out of control.  Over the past 30 years, however, Medicaid costs per beneficiary have tracked costs in the health-care system as a whole, both public and private.  Moreover, average per-beneficiary costs are much lower under Medicaid than under private insurance (after adjusting for Medicaid beneficiaries’ poorer average health), despite Medicaid’s more comprehensive benefits and significantly lower cost-sharing charges.

Block-grant proponents also contend that Medicaid’s financing structure remains highly vulnerable to “gaming,” under which states use creative financing mechanisms to maximize federal funding.

However, the federal government has significantly curbed gaming by states over the past two decades and could take additional targeted steps without fundamentally altering Medicaid.

That said, slowing Medicaid cost growth over the long run is essential to reducing federal deficits and debt.  Since Medicaid costs are growing for the same reasons that costs in private insurance are, slowing Medicaid costs over the long run requires controlling costs throughout the U.S. health care system — and the health reform law takes some significant initial steps to achieve just that. Addressing Medicaid in isolation from the rest of the health-care system, as a block-grant system would do, is no answer.