Revised April 22, 2003

by Cindy Mann, Melanie Nathanson, and Edwin Park[1]

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The Bush Administration’s fiscal year 2004 budget proposal appears to provide a modest amount of funding to help states meet Medicaid costs during this time of state fiscal crisis.  This offer, however, comes with a major catch.  States that opt for this fiscal relief would receive lower federal Medicaid payments than they otherwise would get, starting in fiscal year 2011.  In addition, states would have to accept a significant risk that the capped federal payments they would receive even in the years before 2011 would not keep pace with increases in costs they incur and thus would fall short of what they would have received under current law. 

Under the proposal, states would receive an annual allotment from the federal government to fund two programs — one for acute care (e.g., physician, pharmacy and hospital services) and one for long-term care (e.g., nursing home and community-based long-term-care services).[2]  States could use up to 15 percent of their allotment for program administration and direct payments to safety net providers.

A state’s allotments would be based on the amount of federal Medicaid funds (including Disproportionate Share Hospital payments) and certain SCHIP funds the state had received in fiscal year 2002.  The amount of the capped payments that would be provided to states would be adjusted upward each year, with the annual adjustments based on a pre-determined formula that would be established in legislation or through negotiated state adjustment rates, rather than on changes in the actual number of people served and the actual cost of services.  If program costs exceeded the capped amount, a state opting for the block grant would not receive additional federal funding.

This approach holds risk for states.

For such reasons, New Mexico governor Bill Richardson recently observed, “Capping the federal portion of Medicaid spending leaves states with all the risk.”[3]

Once in the block-grant structure, a state would be required to juggle a plethora of needs and demands within a fixed pot of funds.  Capped funding essentially creates a “zero sum” game for states.

In short, while the proposal would increase state flexibility in some areas, it would eliminate what is perhaps the most important element of flexibility for states that is built into Medicaid — the flexible, open-ended federal funding arrangement that lies at the heart of the program and under which states can count on the federal government to bear its share of any unanticipated costs that occur and any eligible expenditures that states determine they need to incur on behalf of their residents.  States would no longer be assured of additional federal Medicaid funds in the case of an outbreak of a potentially lethal disease, such as Severe Acute Respiratory Syndrome, or if a new treatment for AIDS or cancer became available or a plant closed and hundreds of families and retirees in a state suddenly qualified for public coverage.  The current flexible financing mechanism would be replaced by an inflexible, capped federal funding allocation.  That could put states in something of a fiscal straitjacket.

As noted, the block-grant approach would be optional for states.  States that declined this offer, however, would be denied any federal fiscal relief during this time of severe budget crisis. 

These and other issues related to the block-grant proposal and its financial implications are discussed in more depth below.

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End Notes:

[1] Cindy Mann is a Research Professor at the Georgetown University Institute for Health Care Research and Policy. She is the former Director of the Family and Children’s Health Program Group at the Health Care Financing Administration (now the Centers for Medicaid and Medicare Services). Melanie Nathanson and Edwin Park are Senior Health Policy Analysts at the Center on Budget and Policy Priorities.

[2] Initially, the Administration proposed two distinct allotments but this part of the proposal has reportedly been dropped.

[3] Testimony of Governor Bill Richardson before the House Committee on Energy and Commerce, March 12, 2003.