Medicaid Per Capita Cap Would Shift Costs to States and Harm Beneficiaries

House Energy and Commerce Committee Chairman Fred Upton, a prominent proponent of a Medicaid “per capita cap” (a per-beneficiary limit on federal Medicaid funding), has appointed a Medicaid Task Force of Republican members to examine ways to “strengthen and sustain” the program, which would likely include such a cap.  As we’ve explained (see here and here), however, a per capita cap would shift large costs to states and almost certainly lead over time to substantial cuts affecting low-income beneficiaries and health care providers.   

It also would likely discourage states from taking up health reform’s Medicaid expansion and could cause some states to abandon the expansion.

The federal government now pays a fixed share of states’ Medicaid costs; it varies by state but averages 57 percent.  Under a per capita cap, the federal government would instead pay its share of a state’s Medicaid costs only up to a fixed amount per beneficiary.  The state would be responsible for all costs above that cap.

To achieve its purpose of producing significant federal savings, the cap for each state would have to be set significantly below projected costs.  Cap proposals usually achieve this by adjusting the cap annually by a rate well below the expected growth in per-beneficiary costs.  Some proposals, for example, would raise the cap each year only by overall inflation; historically, health costs outpace inflation, so this approach would produce federal funding reductions relative to current law that would grow over time.

The cuts for states could be much larger than originally estimated, for several reasons:

• Faster health care cost growth.  Costs throughout the health care system have been growing at historically low rates in recent years.  Setting per capita cap amounts would essentially require an assumption of how much of this slowdown is permanent (due in part to health reform) and how much is temporary.  If policymakers assume incorrectly, actual per-beneficiary Medicaid costs could turn out much higher than the cap assumed, and the cap could force deeper cuts than had been anticipated.
• Population aging.  As the population ages, a larger share of Medicaid beneficiaries will be seniors and people with disabilities, whose average health care spending is about five times higher than among children and other adults.  Some per capita cap proposals claim to address this issue by setting separate caps for seniors and other beneficiary groups.  But as the baby boomers age, a growing share of seniors will move from “young-old age” to “old-old age.” People in their 80s or 90s are likelier than younger seniors to have serious and chronic health problems and require nursing home and other long-term care.  Unless a per capita cap were designed to address this issue, as well — which no per capita cap proposal we’re aware of would do — the cap would cut state Medicaid programs by deeper and deeper amounts as more boomers move into “old-old age.”
• Unexpected costs.  A per capita cap would provide no further federal funding if medical costs per beneficiary rose faster than anticipated due to a new disease, epidemic, or costly medical breakthrough, such as a new blockbuster drug.  When the HIV/AIDS epidemic struck, in contrast, the federal government and states shared the unexpected costs.

While all states would face cuts in federal funding under such a scenario, some states could be hit disproportionately hard, including states whose Medicaid costs per beneficiary grew relatively quickly.

To compensate for the funding cuts under a per capita cap, states would have to contribute significantly more of their own funds or, as is far likelier, cut eligibility, benefits, and/or payments to health care providers and plans.  That’s because cutting per-beneficiary expenditures substantially without limiting access to needed care would be extremely difficult: Medicaid costs per beneficiary already are well below those of both private insurance and Medicare, and states already take advantage of existing flexibility to institute an array of measures to limit Medicaid costs. 

A per capita cap also would force states to bear more of the costs of health reform’s Medicaid expansion, since most states would receive less federal funding for each newly eligible beneficiary than the Affordable Care Act provides.  Under current law, the federal government picks up at least 90 percent of expansion costs on a permanent basis, but a per capita cap would effectively shrink that percentage.  That would likely discourage more states from taking up the expansion and might lead some expansion states to drop it.