Issue Tracker: Medicaid Funding

Federal per capita funding of Medicaid deals a wild card to the states

Republicans say it brings efficiency and flexibility. Others see dire consequences for beneficiaries and state budgets.

Updated April 6, 2017

How the federal government funds Medicaid would have changed dramatically under House Republicans’ American Health Care Act (AHCA).

Since its inception, the federal government has financed a certain percentage of Medicaid expenditures. The percentage has varied with a state’s per capita income relative to the national average and other factors. The current federal share ranges from 50% to 75%. It has increased in recent years both because of provisions in the 2009 fiscal stimulus bill and, of course, ACA Medicaid expansion.

Medicaid spending by funding source

Billions $

Source: Milliman

The AHCA legislation that House Republicans unveiled on March 6 would have ditched the percentage funding and replaced it with a set amount per Medicaid beneficiary. The bill called for using each state’s spending in 2016 as the base year to arrive at the per Medicaid beneficiary amount.

Who are the Medicaid beneficiaries?

Per capita spending by enrollment group

Source: Kaiser Family Foundation

In its report on the AHCA, the Congressional Budget Office projected that by 2026, 14 million fewer Americans would have been covered under the AHCA, as it was proposed, than under the ACA if the law was left on the books. The CBO also predicted big savings for the federal government from changing the way Medicaid is funded. Starting this year through 2026, the savings would have added up $880 billion, by the CBO’s figuring.

Projected loss of insurance coverage under the AHCA

Change in number of people covered, in millions

Source: Congressional Budget Office

Moving to per capita funding of Medicaid was discussed at some length in the A Better Way plan that House Speaker Paul Ryan released last summer, so it wasn’t a big surprise to see it in the AHCA. Ryan argued in A Better Way that per capita funding will reduce federal spending, a priority for budget hawks, and help modernize Medicaid by improving the incentives for states to better manage the program. Ryan also said that it makes sense to put federal Medicaid funding on what is, effectively, a per-member, per-month basis when about two thirds of Medicaid beneficiaries get their benefits through a managed care plan.

But Republicans have also talked about changing federal Medicaid funding so states would get the money in lump sums as block grants. Sen. Ted Cruz of Texas attacked per capita funding in the initial version of the AHCA as having too many federal strings attached. So, to win conservatives over, Ryan and his allies later amended the legislation to allow states to choose either block grant or per capita funding. Even with that change and others, Ryan couldn't get enough votes for bill, and it was pulled back on March 24 before a vote was taken.

Earlier this year, before the AHCA was out, Avalere Health published a report that compared the block grant approach with the per capita one.

Avalere’s projections were based on a boatload of assumptions, so the specifics aren’t as important as the general point that block grants would reduce federal spending more than per capita funding.

Projected annual reduction in federal Medicaid spending under a block grant vs. per capita cap

Billions $

Source: Avalere

In Avalere’s pre-AHCA calculations, block grants would mean a decrease in federal Medicaid dollars for every state except North Dakota, whereas per-capita funding would increase funding for about half of the states. Why the difference? Block grants, because they are lump sums, would squeeze state Medicaid programs from two sides: enrollment and per-beneficiary health care costs.

Under a per-capita scheme, federal funding will, to some extent, keep pace with Medicaid spending in states with growing numbers of Medicaid beneficiaries.

“Per capita caps involve a little less risk for the states, but they still shift a great deal of financial risk from the federal budget to state budgets,” David Grande, MD, an assistant professor at the University of Pennsylvania School of Medicine and a senior fellow at the Penn’s Leonard Davis Institute of Health Economics, noted in an email to Managed Care.

While Republicans talk about efficiency and flexibility, Grande and others see the per capita funding as putting a new, onerous limit on federal support of Medicaid that will have many negative consequences: reduced payments to an already dwindling supply of providers, barebones benefits, incentives for states to avoid enrolling higher cost individuals. “States would end up much better off [financially] if the sickest did not enroll,” noted Grande.

New treatments, if they are expensive, will hit state budgets hard under per capita Medicaid funding, according to Grande, who pointed to the hepatitis C drugs like Sovaldi as an example. “And we shouldn’t forget,” he wrote, “that unlike the federal government, states have to balance their budgets, even during a recession when revenues fall and safety-net demands increase.”

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