July 15, 1998

The House Budget Resolution Threatens
Health Care Programs for Low-Income Families
and Elderly and Disabled People

by Cindy Mann and Jocelyn Guyer


On June 5, 1998, by a vote of 216 to 204, the House adopted a budget resolution calling for $101 billion in federal spending cuts over the next five years and the same amount in tax cuts. The spending reductions consist of $45 billion in discretionary program reductions and $56 billion in mandatory program reductions. The resolution assumes that almost 25 percent of the reductions in mandatory spending — $13.5 billion — will be generated from cuts in health care programs.

It is likely that most if not all of these cuts would come from Medicaid and potentially the new Children's Health Insurance Program (CHIP) — programs that serve almost exclusively low-income families, children, the elderly, and the disabled. Coming on top of the reductions in federal Medicaid spending and the program changes that were enacted last year as part of the Balanced Budget Act, further cuts in Medicaid of this magnitude could not be achieved through program efficiencies. As a result, these cuts would almost certainly result in less access to health care for the families and individuals served by Medicaid and a deterioration in the quality of the services provided. Moreover, the specific proposals advanced by the House Budget Committee for how to reduce Medicaid spending call for major structural changes that would shift costs to states and likely lead to deeper federal Medicaid cuts over time.

The Republican leadership is now attempting to work out the stark differences between the House and Senate budget resolutions. In contrast to the House, the Senate Budget Resolution does not include any cuts in CHIP, and it proposes to cut Medicaid by a much smaller amount than the level assumed by the House. Specifically, the Senate Budget Resolution calls for cutting Medicaid spending by $1.9 billion between 1999 and 2003 through reductions in federal payments for Medicaid administrative costs. Moreover, this Medicaid proposal was reflected in the Senate Budget Resolution solely to help offset the cost of the Transportation Equity Act for the 21st Century (TEA-21), the new transportation law. Since passage of the Senate Budget Resolution, however, a version of TEA-21 has been signed into law that did not rely on cuts in Medicaid to finance any of the cost of the legislation. Thus, the Medicaid administrative cut included in the Senate Budget Resolution is no longer needed to fulfill the function that it was slated to serve.(1)

Problems with Cutting Medicaid and CHIP

The House Budget Resolution calls for a $13.5 billion cut in mandatory spending under "Function 550," the budget category that encompasses Medicaid, the new Children's Health Insurance Program (CHIP), the Federal Employees Health Benefit Program (FEHBP), and other small health care programs.(2) Medicaid is by far the largest program in Function 550, accounting for more than 90 percent of mandatory spending in this category. As such, it is likely to bear the burden of most or all of the $13.5 billion in cuts assumed in the House resolution.

As discussed in more detail below, House Budget Committee documents released in mid-May confirm that Medicaid is likely to be the main target of the Function 550 spending reductions. CHIP, which accounts for four percent of mandatory spending under Function 550, also could be subject to reductions. Although the House Budget documents released in May originally proposed $1.5 billion in FEHBP spending reductions, Chairman Kasich has pledged since then that FEHBP will not be cut. Thus, it is likely that virtually all of the $13.5 billion in Function 550 mandatory program cuts would come from Medicaid and possibly CHIP.

Moreover, the $13.5 billion in Medicaid and CHIP cuts could be a conservative estimate of the level of cuts in health care programs for low-income people that would emerge from a budget agreement based on the House Budget Resolution. In addition to establishing spending targets for various budget functions, such as Function 550, the House Budget Resolution includes "reconciliation instructions" that direct the various House committees to meet specified spending targets. The reconciliation instructions in the House Budget Resolution direct the House Commerce Committee, which has jurisdiction over Medicaid and CHIP, to cut mandatory spending under its jurisdiction by a total of $18.6 billion between fiscal year 1999 and 2003. House Budget Committee documents released in May indicate that $6.6 billion of the $18.6 billion is expected to come from selling three power marketing associations, but some have suggested it is likely to be politically infeasible to sell these PMAs. If the House Commerce Committee is required to produce $18.6 billion in mandatory savings but cannot achieve savings by selling the power marketing associations, it could go to Medicaid and CHIP for most or all of the $18.6 billion in savings.(3) (In addition, if the $1.5 billion in savings that was assumed to come from the Federal Employee Health Benefits Program — and which the House Budget resolution reconciles to the House Government Reform and Oversight Committee, the committee with jurisdiction over FEHBP — is shifted to the House Commerce Committee, the total reductions from Medicaid and CHIP could approach $20 billion.(4))

There are several reasons Medicaid and CHIP should not be cut:


The Health Care Cuts Assumed in the House Budget Resolution

The House Budget Resolution provides no specific information on how the Function 550 mandatory health program cuts would be accomplished. However, materials released in May by Representative Kasich, the Chairman of the House Budget Committee, indicate that Medicaid has been identified as the primary target of the proposed $13.5 billion in cuts.

The House Budget Committee documents included three specific proposals to reduce mandatory health care spending under Function 550:

In addition to these two reductions affecting federal contributions to state Medicaid programs, the House Budget Committee documents proposed generating $1.5 billion in mandatory savings under Function 550 by capping the size of the federal government's contribution toward the premiums of participants in the Federal Employees Health Benefits Plan. As noted, however, Rep. Kasich subsequently stated that the FEHBP will not be cut. This deepens the need for reductions in other Function 550 mandatory spending programs, suggesting that Medicaid, and possibly the new child health block grant, would be hit with the full $13.5 billion in cuts in Function 550 required by the House Budget Resolution.

The two principal reductions the House Budget documents assume, the reduction in federal support for state Medicaid administrative costs and the conversion of Medicaid acute care to a block grant, are discussed in more detail below.

What About Cuts in Disproportionate Share Hospital Payments?

Another potential target of the cuts called for under the House Budget Resolution are Disproportionate Share Hospital payments (DSH), an important source of funding for children's hospitals, public hospitals, and other providers of last resort in many states. DSH spending has been the target of cuts in the past and may again be identified as an "easy" way to achieve Medicaid savings.

Further savings in DSH, however, would be problematic. The Balanced Budget Act already reduced federal Medicaid spending on DSH by $15 billion between fiscal year 1999 and fiscal year 2003. These reductions accounted for more than 65 percent of the Medicaid savings included in the BBA for this five-year period. As a result, CBO now projects that federal DSH spending will decrease at an average annual rate of 2.6 percent between fiscal year 1999 and fiscal year 2003. Any further cuts in DSH are likely to fall most heavily on a number of states that have already been hit hard by the DSH cuts in the Balanced Budget Act, including Alabama, California, Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, and Texas.


Reductions in Medicaid Payments for Administrative Costs

The House Budget Committee documents released in May propose cutting federal reimbursement of Medicaid administrative expenditures. Currently, administrative costs consume less than five percent of all federal Medicaid spending. Reductions in federal administrative payments to states could lead to damaging consequences both for the integrity of the program and for the beneficiaries who rely on it for their health care. This is particularly true in light of changes enacted as part of the Balanced Budget Act of 1997 that create new challenges and opportunities for state Medicaid programs. If states are to implement these changes properly, they are likely to need to increase, not reduce, Medicaid administrative expenditures.

The House Budget Committee proposal to convert federal Medicaid administrative spending into a block grant is a particularly risky mechanism for cutting Medicaid administrative expenditures. Under a block grant structure, states would no longer be entitled to federal matching payments for all administrative costs. Instead, they would receive a fixed block grant allocation and would have to pay 100 percent of all costs above that level.

In many respects, federal changes enacted over the past few years have set the Medicaid program in new directions. The welfare law changes, the new child health block grant, and the flexibility accorded states under the BBA to set provider rates and implement managed care without seeking federal waivers require states to pay more, rather than less, attention to administrative tasks. Reductions in administrative payments, whether they result from a cap on federal payments or other mechanisms such as a reduction in the federal matching rate, could make it much more difficult to assure that eligible beneficiaries are enrolled in the program and to prevent a deterioration in the quality of health care the program provides.

The Acute Care Block Grant

The Medicaid program serves several groups of low-income beneficiaries: the elderly, people with disabilities, pregnant women, children and their parents, and, in some states, individuals with high medical expenses relative to their income. For each of these groups, coverage is provided for a range of services, including acute care services — 81 percent of acute care services consist of physician and hospital care and pharmacy services — and long-term care services, which cover both nursing home care and home health services. The Budget Committee documents suggest transforming the acute care portion of Medicaid into a block grant. In 1995, acute care spending accounted for 52 percent of total Medicaid spending and nearly 60 percent of non-DSH spending.

Although the amount of federal savings that would be achieved through the acute care block grant proposal is not as large as the reductions under the 1995-1996 block grant proposals, the changes in the financing structure could lead to greater reductions over time and to significant losses in services and coverage for vulnerable populations.



The House Budget Resolution proposes unnecessary and potentially quite harmful cuts in health care programs that serve low-income children and elderly and disabled individuals. These cuts would shift new fiscal responsibilities to the states and could reduce both the quantity and the quality of the health care coverage provided under the Medicaid and CHIP programs.

End Notes:

1. In its fiscal year 1999 budget, the Clinton Administration proposed reducing the matching rate for Medicaid administrative costs from 50 percent to 47 percent, a change that CBO has estimated would generate $1.9 billion in federal savings. However, this proposal was offered in the context of a budget package that also included several Medicaid initiatives to reduce the number of uninsured children. CBO has estimated that the net impact of the Clinton Administration's budget proposal would be to reduce federal Medicaid spending by $0.9 billion between fiscal year 1999 and fiscal year 2003.

2. Function 550 also encompasses discretionary spending on biomedical research, health education activities, and other health care programs, but the House Budget Resolution calls for cuts only in the mandatory spending programs included under Function 550.

3. In theory, the Commerce Committee could achieve some of these savings by reducing spending on Medicare Part B, over which the Committee also has jurisdiction. In practice, there is virtually no possibility the committee would cut Medicare. The budget resolution the House Budget Committee reported included $10 billion in Medicare cuts, but those cuts aroused significant opposition in the House Republican caucus, and Rep. Kasich and the Rules Committee reversed these cuts before the budget resolution came to the House floor to help secure sufficient votes for approval of the resolution.

4. Since the reconciliation instructions are directed to committees, it is not certain that the $1.5 billion in FEHBP cuts would be shifted to programs within the Commerce Committee's jurisdiction. However, because the $1.5 billion in FEHBP cuts are mandatory health spending cuts under Function 550, if the House Budget Resolution spending targets are maintained, it is likely that the cuts would stay within Function 550 and add to the cuts that the Commerce Committee would need to make.

5. CBO, Budgetary Implications of the Balanced Budget Act of 1997, August 12, 1997. While the estimated $10.1 billion in increased Medicaid expenditures are sometimes characterized as offsetting the Medicaid spending reductions, the increases enacted as part of the BBA generally do not benefit those institutions and beneficiaries most adversely affected by the cuts included in that legislation.

6. The House budget resolution does assume $2 billion in other food stamp reductions and reconciles those reductions to the House Agriculture Committee.

7. An enhanced federal matching rate is available for a selected number of administrative activities.

8. This proposal was first described in a May 12, 1998 document from the House Budget Committee majority where it was listed as generating $4.8 billion in federal savings. On May 19, 1998, a revised list of proposed cuts was leaked that indicated the Medicaid acute care block grant was now assumed to generate $7.4 billion in savings. The $7.4 billion figure is consistent with the aggregate cut of $13.5 billion in Function 550 required by the House Budget Resolution and hence is used here.

9. These calculations assume states would spend as much in acute care spending as would be matched by the federal government and are based on an overall federal Medicaid matching rate of 57 percent.

Related reports: