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Puerto Rico’s Capped Federal Medicaid Funding Causing Shortfalls

This week’s Senate Finance Committee hearing on Puerto Rico’s financial and economic challenges brought overdue attention to the island’s inadequate Medicaid funding.  Unlike the 50 states and the District of Columbia, Puerto Rico is limited to a low, fixed amount of federal Medicaid funding each year irrespective of its actual Medicaid costs. 

The federal government generally pays a specified share of states’ total Medicaid costs (known as the federal Medicaid matching rate or FMAP).  This share varies by state based on per-capita income and averages 57 percent. 

Puerto Rico’s FMAP was 50 percent until 2011, when health reform permanently raised it to 55 percent.  But for Puerto Rico (and the other territories), that rate applies only up to a capped dollar amount of federal Medicaid funding each year; Puerto Rico must cover all costs above the cap.  Under this cap, Puerto Rico’s effective matching rate — how much of its total Medicaid costs the federal government actually pays — has generally been between 15 and 20 percent.  If Puerto Rico’s FMAP were based on per-capita income (as it is for states) and there were no funding cap, the federal government would likely pick up 83 percent of its total Medicaid costs.

These federal funding shortfalls have contributed to Puerto Rico’s troubled fiscal situation and to the stress on Puerto Rico’s health care system.  Hospitals, physicians, and other health care providers heavily rely on Medicaid for reimbursement because a large share of their patients are Medicaid-eligible.  Due to the low incomes of Puerto Rico’s residents and less access to private insurance, about 40 percent of the population was enrolled in Medicaid in 2014. 

Along with permanently raising Puerto Rico’s FMAP, health reform provided a one-time Medicaid boost of about $5.5 billion.  But Puerto Rico spent about $2.3 billion of it as of 2014 and is expected to exhaust the rest well before 2019, the last year for which it’s available. 

To ensure that Puerto Rico has sufficient federal funding to sustain Medicaid over the long run, policymakers could consider eliminating or significantly raising its funding cap.  Alternatively, they could substantially increase health reform’s supplemental Medicaid funding and extend its availability or make it permanent.  Such policies would help shore up Puerto Rico’s finances, better ensure that its residents on Medicaid have access to needed care, and strengthen its struggling health care system.