Can States Survive The Per Capita Medicaid Caps in the AHCA?

by Vernon K. Smith for Health Affairs Blog Published 5/17/2017
Published on May 17, 2017

“Any attempt to restructure federal financing for Medicaid and replace flexibility with strict spending limits—whether in the form of block grants, per capita limits on spending, restrictions on what counts as state expenditures or a combination of all three—would divorce funding considerations from the real-life needs that have informed federal and state Medicaid policy for half a century,” according to a new analysis from the Commonwealth Fund by Sara Rosenbaum and colleagues from George Washington University.

The American Health Care Act (AHCA), H.R. 1628, as adopted by the House of Representatives on May 4, would significantly change Medicaid financing, by changing both how Medicaid is financed and the amount of future federal support of the program. The changes are historic in scope, with seismic implications for states and the budget-driven decisions states will have to make for their Medicaid programs.

According to the most recent Congressional Budget Office (CBO) scoring of the AHCA, the Medicaid provisions would reduce federal support to states for Medicaid by $839 billion over the 10 year period from 2017 to 2026. These savings would be achieved by ending the financing formula by which the federal government has supported Medicaid since its beginning in 1965, consisting of federal matching rates that range from 50 percent to 73 percent, with higher rates going to states with lower average personal income.

The new federal financing formula would institute state options for a per capita cap or block grant, with formulas intentionally set to ensure federal savings. The per capita cap would be adjusted annually by the Medical Consumer Price Index (CPI) for all eligibility groups, plus an additional 1 percent only for the aged and disabled eligibility groups for 2020 and subsequent years. The per capita cap is to be a limit on federal funds, so a state is at full financial risk for any spending above that cap, but a state does not keep any portion of savings if it keeps spending under the per capita limit. The per capita cap allows federal Medicaid support to states to change as Medicaid enrollment changes, such as the large increases that have occurred during times of economic downturn. A block grant option is available to states only for the eligibility groups that are not disabled or aged, and a block grant would be adjusted annually by the regular CPI only. The ACA Medicaid expansion is effectively ended as the preferred matching rate is replaced by the per capita cap or block grant beginning in 2020.


Quantifying the Federal Funding Cuts

The proposed per capita caps are designed to dramatically reduce federal payments that support state Medicaid programs, with $20 billion less federal support to states in 2018, and the annual reduction in federal Medicaid support to states reaching $149 billion in 2026 (Figure 1).

According to the CBO 2017 Medicaid baseline, in the absence of the AHCA, federal payments to states for Medicaid benefits in 2026 would have been $576 billion. In other words, the $149 billion reduction in 2026 represents a 26 percent reduction in federal funds that states would have used to support their Medicaid programs (Figure 2).


The impact of these cuts in federal support for Medicaid will vary from state to state. Some states could be advantaged, though certainly almost all will suffer financially. The 31 states that implemented the Medicaid expansion will experience the steepest cliff in cuts to federal funds as the preferential matching rate for newly eligible adults ends in 2020. How individual states will be affected will depend on many factors, including how previous cost containment actions impact base year expenditures, actual cost growth for specific eligibility categories, cost trends for specific services disproportionately needed by Medicaid populations, and opportunities for new Medicaid reforms or cost cuts in the future.

From a state perspective, the challenge of responding to the proposed reductions in the federal Medicaid funds may be daunting. Indeed, from a state perspective, Medicaid is a very lean program, especially since the extreme fiscal pressures of the two major economic downturns since 2000 forced states to take every action possible to control growth in Medicaid spending. Taking advantage of flexibilities within current Medicaid law, these actions included redesign of delivery and payment systems, coordination of care for high cost populations, special initiatives to address use of emergency rooms, greater use of managed care, as well as restrictions on provider payments, eligibility, and benefits.

For states, a threshold question is, how much would the state have to add to its current budget in state funds to make up for the loss in federal funding? What would be the necessary percentage increase in state support to maintain the current program? The relative increase and actual dollar amounts will vary across states, but on average, the necessary increases in state funds would be over 20 percent by 2020, and over one-third and increasing every year after 2022 (Figure 3).


Impact on State Budgets

From a state budget perspective, the increase in state general fund dollars necessary to maintain the current Medicaid program would be massive. Even the additional 8 percent in state funds needed immediately in 2018, on top of growth already in state budgets for 2018, would require states to move quickly, likely by restricting provider payment rates or benefits. Cutting provider payment rates is usually the first option states use to achieve short term Medicaid savings, even though Medicaid rates are already low relative to other payers and further cuts could impact provider participation and access. Once provider rates and benefits are restricted, states would have to create further savings from delivery system initiatives, perhaps taking advantage of new federal flexibility in Medicaid design, as few options for further savings would remain.

Within three or four years, states would need to increase state support by a third or more above already anticipated program growth. Given that combined state and federal spending on Medicaid makes it the largest program in state budgets, and one-sixth of state budgets in terms of state general fund spending, future annual increases of these proportions would be impossible to accomplish without new state revenues or program restrictions. Inevitably, states would be forced to consider significant tax increases, or major cuts to Medicaid or other state programs on a scale never seen in previous periods of economic stress and state budget shortfalls.

States receive scant credit for the success they have achieved in ensuring Medicaid is a lean program. Primarily due to the requirement that states must balance their budgets annually, states have long been compelled to constrain spending growth for Medicaid as best they could within the fiscal resources of the state. Looking at the 13 pre-ACA years since 2000, Medicaid per enrollee spending increased by just 2.8 percent, compared to 4.8 percent for Medicare, and 6.2 percent for private health insurance, based on CMS data on per enrollee spending by insurer. (Medicaid and Medicare growth rates were adjusted to account for the 2006 implementation of Medicare Part D. Calculation not shown [Figure 4].)


Given that Medicaid is already lean, as a result of a perennial state focus on Medicaid cost controls, it is impossible to imagine how states could respond to the challenge of massive reductions in federal Medicaid support to states proposed in the AHCA without harming current beneficiaries. The proposed shift in fiscal responsibility from the federal government to the states is so large, no amount of new flexibility could allow a response that wouldn’t include large state tax increases or severe reductions in coverage that would affect the medical services needed by the children, pregnant women, persons with disabilities, the elderly, and other adults now served by Medicaid.