Senate Change to Medicaid Per Capita Cap Could Deepen Federal Funding Cuts

Senate Republicans reportedly will retain the House health bill’s damaging Medicaid per capita cap in their bill, but some of them are considering a change that would “reset” or rebase the annual cap amounts for states every two or three years, a Vox article yesterday suggests. Depending on its design, the proposal could put states at serious risk of getting even less federal Medicaid funding over time than under the House bill, thereby making its Medicaid cuts even deeper.

The House bill would convert Medicaid to a per capita cap. Instead of the federal government continuing to pay a fixed share of state Medicaid costs, federal funding starting in 2020 would be capped at a set amount per beneficiary. In general, the cap would equal the 2016 level of federal Medicaid spending per beneficiary and would rise each year by a slower rate than the Congressional Budget Office’s current projection for Medicaid per-beneficiary spending. That would cut federal Medicaid spending, with the cuts growing each year. To compensate, states would have to raise taxes, cut other parts of their budget like education, or, as is far likelier, impose increasingly severe cuts to Medicaid eligibility, benefits, and provider payments.

More specifically, as we’ve explained, the House bill’s per capita cap uses a formula to determine separate per-beneficiary funding caps for seniors, people with disabilities, children, other adults, and adult expansion enrollees. Each year, states would receive an overall amount of federal Medicaid funding that’s the sum of each population’s per capita cap multiplied by actual Medicaid enrollment in each such population group.

As Vox explains, the “reset” proposal under consideration could mean that if a state’s actual per-beneficiary spending for a population group falls below the per capita cap amount that would otherwise apply to that population, the cap amount for that group would be recalculated based on what was actually spent. That, in turn, would give the state less overall Medicaid funding than under the House bill’s per capita cap.

Consider:

• States that achieved efficiencies without harming beneficiaries — such as through delivery system reforms — that lowered their per-beneficiary spending for one or more population groups would effectively be punished for doing so. Their per capita cap amounts would be rebased and cut further.
• States would lose their financial flexibility from facing an overall funding cap and adjusting their spending across all population groups. If, say, a state’s per capita cap for one group (e.g., seniors) provided more overall federal funding and partially offset inadequate federal funding for another group (e.g., children), the per capita cap amount for seniors that would otherwise apply would be cut to equal actual spending per beneficiary on seniors. Rebasing in this way, however, would leave the state with even less total federal Medicaid funding moving forward than under the House bill.
• This approach risks further reducing federal Medicaid funding for states each year, forcing them to cut their Medicaid programs ever more deeply over time (above and beyond what the House bill would already require). Some states would likely try to keep their spending just below the per capita cap amounts, to avoid breaching the overall funding cap.

Suppose a state takes steps to cut spending and keep it 2 percent below the cap level for children. Under the reported rebasing approach, within a few years, the state’s per capita cap amount for children would be reduced by another 2 percent, relative to what the cap would otherwise have been under the House bill formula. If the state again cuts its spending further to stay below the cap, the per capita amount will later be reduced by 4 percent, compared to the House bill’s already highly inadequate cap levels, and so on. The state will be caught in a cycle of increasingly severe cuts.

This approach to rebasing could thus make the Medicaid per capita cap even more damaging over time.