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4 Reasons Why Lawmakers Should Reject Medicaid Per Capita Caps
Congressional Republicans may seek to drastically cut Medicaid by imposing per capita caps, which would place a hard cap on per-person federal Medicaid spending. At a time when people across America are already struggling with high health care costs, per capita caps would cause millions to lose coverage for vital health services.
A per capita cap would cut federal Medicaid funding and shift costs to states — disrupting the federal-state financing partnership that has been in place since Medicaid’s start. If federal funding drops sharply, states would be forced to scale back Medicaid by cutting people from the program, slashing benefits for remaining enrollees, reducing payments to hospitals and physicians — or a combination of all three.
This would harm Medicaid enrollees across the program. For instance, benefits that are not federally required would be likely targets for early cuts, including prescription drugs, dental care for adults, and services that help many seniors and people with disabilities live in their communities. While the federal government currently maintains minimum standards for eligibility, benefits, and cost-sharing obligations for Medicaid enrollees, per capita cap proposals are often paired with provisions that would weaken or remove these standards, paving the way for deeper cuts.
Policymakers should reject per capita caps. Here are four reasons why:
1. Per capita caps are designed to impose severe cuts that grow even deeper over time, straining a program that already controls costs.
Under Medicaid’s current financing structure, the federal government covers a fixed share of states’ Medicaid costs. Per capita caps cut federal funding by capping how much the federal government pays for each enrollee. Initial caps would be based on each state’s historical spending and then would grow each year at a rate well below the growth in per-person health spending. As a result, cuts in federal funding would be designed to deepen over time (see chart). And by drastically disrupting Medicaid’s financing structure, per capita caps would enact a formula that future Congresses could easily modify to cut Medicaid even more severely.
Cutting Medicaid would strain a program that already controls costs. Evidence consistently shows that health costs are significantly lower for Medicaid enrollees than for enrollees in private plans with similar patterns of health care use, primarily due to Medicaid’s lower provider payments and administrative costs. And long-term growth in per-enrollee spending is projected to be similar for Medicaid, Medicare, and private coverage.
2. Per capita caps limit spending to a rate well below — and not appropriate for — growth in health care spending per enrollee.
Some proposals limit per capita caps to the growth rate of general inflation, as measured by the consumer price index (CPI-U), while others use medical inflation, as measured by the medical consumer price index (CPI-M). Neither is appropriate to use in setting formulas for growth in per-enrollee health care spending.
The CPI-M typically grows faster than the CPI-U because health care prices grow faster than prices across the overall economy. Still, the growth of the CPI-M is not meant to match health care spending per enrollee and usually falls well short, under both private and public coverage. This is because the CPI-M measures changes in out-of-pocket prices paid for medical services, rather than total spending on health care for each person. Spending typically grows faster than prices because it is also driven by health care use, which tends to increase over time due to factors such as technological advancements in care.
3. Per capita caps put the burden fully on states to deal with any unexpected costs.
Under Medicaid’s current structure, if a breakthrough procedure or drug for patients with cancer or Alzheimer’s disease unexpectedly increases medical care costs, states and the federal government share in the increase. Under a per capita cap, however, states would bear the full burden of unexpected spending increases (see chart).
As noted above, changes in medical technology, health care use, and medical practice patterns can drive up per-person medical costs. Medical costs also fluctuate due to changing demographics and health conditions among the population. For instance, states that have growing shares of older adults, who tend to have greater health care needs, may face increased per-person costs in the coming years. States also experience regular year-to-year variations in health care costs.
These factors are difficult for states to predict, yet they would become their full financial responsibility under a per capita cap. And unlike the federal government, which can run budget deficits when unexpected funding shortfalls arise, states must balance their budgets annually. That would force them to cut Medicaid and/or other essential state spending on programs that communities rely on.
4. Per capita caps would reduce federal funding to all states, with the size of cuts depending, in part, on existing features in each state’s Medicaid program.
The effects of a per capita cap would depend on existing features in each state’s Medicaid program. By establishing initial caps based on current or historical per-person costs, a per capita cap would lock in spending differences across states. States with lower initial per-enrollee spending would continue to receive less federal funding than states with higher initial spending. And because states with lower costs tend to experience faster cost growth than states with higher costs, states with lower initial costs would likely surpass the federal cap by more, facing larger cuts as a result.
A per capita cap may also disproportionately harm states with more restrictive eligibility and benefits policies and lower provider payments, as well as those using cost containment strategies such as managed care and delivery system reforms. For instance, Alabama, Florida, Georgia, Mississippi, and Texas already have lower income eligibility limits for parents than other states. These states would have less room to lower costs to stay within the per capita cap, forcing them to more quickly resort to making more harmful and deeper cuts. As a result, residents in these states would be most at risk of losing coverage and benefits and facing less access to care.