What is the Republicans’ repeal and replace plan? Part 2 of 4: Medicaid block grants

This post is the second in a four-part series in which I explain major proposals in the American Health Care Act (excellent summary here), the Republican plan to repeal and replace the Affordable Care Act (ACA). In this post, I will analyze the proposal to cap per-enrollee Medicaid spending.

The proposal is not only a change in ACA policy, it is a fundamental change in how Medicaid has been financed since its passage in 1965. A state-run program for the poor, ill, and disabled, Medicaid must meet or exceed certain standards of eligibility and benefits to receive federal funding. All states exceed these standards for at least some categories of beneficiaries. The federal government contributes 50-83% of every dollar of Medicaid spending; this percentage contribution is called the Federal Medical Assistance Percentage (FMAP), and is based on average per capita income in the state. The financing system was designed this way so that states could expand benefits, eligibility, and payments to providers, without straining their budgets.

Under the American Health Care Act, the federal government proposes to cap the FMAP beginning in 2020. Contributions would increase per Medicaid enrollee, but not with total spending. The capped amount is based on states’ spending per enrollee in 2016, and would increase each year with medical prices, but not, unlike with FMAP matching funds, with:

  1. expanded benefits;
  2. increased payments to providers;
  3. a higher volume of services per enrollee;
  4. prices that rise faster than the medical inflation index

Let’s consider these scenarios in more detail, under the hypothetical implementation of the American Health Care Act. First, suppose that a state wanted to add dental benefits or an opioid treatment program. The federal government would not share in the cost of this benefit expansion; rather, the state would have to bear the entire cost. Second, Medicaid notoriously pays fees below the cost of most services (below even Medicare fees). As a result, Medicaid beneficiaries may have difficulty accessing providers, who limit the proportion of Medicaid patients that they see, if they see any at all. States wishing to rectify this issue could increase payments to providers, but again, the federal government would not share in the cost of this payment increase. Third, some states might experience more rapid health care use increases among their Medicaid enrollees than in other states. For example, some states have more rapidly aging populations, or populations that are becoming more ill because of changing mixes of occupations or demographics. Older, sicker individuals are apt to use more medical care, but federal payment does not increase per enrollee. Fourth, federal payment to states increases with the medical portion of the Current Population Index (CPI), which estimates prices for a “market basket” of goods. The basket is based on national consumer prices for goods and services. This index is a problematic target for federal payment increases because national prices may not reflect the mix of goods and services used by Medicaid enrollees, whose service use may be more intensive and thus more inflationary; and because Medicaid beneficiaries do not pay out-of-pocket for the same types of care as privately insured patients, so the medical CPI could overestimate inflation for some services and underestimate it for others (for example, adult dental and vision services, which most states do not cover). When the CPI underestimates Medicaid price inflation, the federal per-enrollee contribution to states will be too low.

The New York Times analyzed which states might fare better and worse under a Medicaid block grant program. All else equal, states that spent more per enrollee last year would do better, since the block grant is based on 2016 spending levels. States such as New York, Massachusetts, and Alaska, therefore, would receive higher federal contributions than Florida, Georgia, or Nevada. Nevada could also face higher expenditures per enrollee without the support of the federal government, as its population of poor, elderly individuals is growing, as in neighboring Utah and Arizona. In Pennsylvania, Iowa, and North and South Dakota, the poor, elderly population is declining.

Finally, under the ACA, states that expanded Medicaid up to 138% of the federal poverty level received an enhanced FMAP for newly eligible enrollees – 100% in 2014, phasing down to 90% by 2020. The American Health Care Act proposes to continue to match contributions at this rate until 2020. In 2020, however, enrollment under Medicaid expansion would freeze, and the expansion population would become subject to the spending cap, leaving expansion states to find ways to limit spending on enrollees for whom they previously had very little financial responsibility.

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