Why the Medicaid Cap Can’t Be Fixed

Confusion reigns about the cap on federal Medicaid spending now hurtling toward the floor of the House. It’s hardly surprising that people don’t fully understand what the House bill would do to Medicaid. It is presented as “repeal and replace” of the ACA, but it goes far beyond ending the ACA Medicaid expansion for 11 million adults. It would cap federal payments for the entire Medicaid program, affecting 77 million Americans, including children and families, the elderly, and individuals with disabilities.

The legislative text of the cap has not been explained by either of the committees that approved it and has not been specifically scored by the Congressional Budget Office (CBO’s estimate of the cap is rolled up into its estimate of all Medicaid coverage savings). The text of the bill has only been available to the public since March 7, an incredibly short period of time to consider the impact of such a major change to Medicaid, a pillar of our nation’s health care system since 1965. Hopefully the CBO will provide a more thorough analysis of the Medicaid cap provision before it is presented to the entire House of Representatives on March 23 (that would be this coming Thursday).

Trying to figure out the complex proposal to cap federal Medicaid funding before the House votes on it is like running through a house of mirrors in the dark. The per capita-based formula for calculating the cap has its own language, along with lots of ratios and growth factors and sums of products and adjustments, all of which can be manipulated to create different results. There are thoughtful people who sincerely believe that, with some tinkering, the cap can be fixed to mitigate harm to children and families, people with disabilities and others who rely on Medicaid for needed health and long-term care services. They are wrong.

To see why, we need to step back from all the moving parts and focus on the basics. Since 1965, the federal government has matched state spending for the costs of providing covered medical and long-term care services to Medicaid-eligible individuals on an open-ended basis. If a state’s Medicaid costs go up for any reason – increasing enrollment, higher medical care costs and drug prices and public health – the state knows that the federal government will match its spending at its statutory matching rate (50 to 75 percent, depending on the state).

This open-ended federal commitment to states participating in Medicaid is the foundation for the many roles Medicaid plays in our nation’s health care system that we now take for granted. Medicaid is the largest health insurer for children; covers the cost of delivery for about half of America’s newborns each year; and is the top source of funding for those who need help paying for long-term care in a nursing home or in the community. It is also the foundation for the innovation that many states have undertaken in recent years to reform their delivery systems, drive the adoption of value-based purchasing, improve the quality of care, and improve health outcomes, especially among populations with health disparities.

Under the House bill, this foundation would be ripped up and the world we have taken for granted would be turned upside down. The bill would impose a cap — a hard limit — on federal payments to states for health and long-term care services starting in 2020 and continuing every year after that, in perpetuity. In states that exceed their cap in 2020 (and any year thereafter), the federal government would claw back the excess in the following year.

It is the fact of this cap – not the multiple moving pieces of the formula by which it is calculated in any given year – that is the point of this legislative exercise. It is a “game-changer” for sure, but it’s changing the game into something nobody should want to play (think “Hunger Games”).

Here’s why. Starting October 1, 2019, each state’s spending on Medicaid benefits for that fiscal year will be measured against a target amount for FY 2020. (A federal fiscal year begins on October 1 and ends the following September 30). The state will have a rough idea of what its cap will be by Jan. 1, 2020 (a full quarter into FY 2020) but it won’t actually know its final cap for FY 2020, or whether it has stayed under the cap, until after FY 2020 is over, in early 2021.

If it has exceeded its cap, the federal government will claw back the excess amount in 2021 in four installments, one quarter at a time. (At the same time, the state will be operating under a new and perhaps tighter cap, with the same risk of a claw back in 2022 if it breaches its cap in 2021.)

In short, if you are a state Medicaid policymaker, it is uncertain whether you will exceed the cap in 2020, but it is certain that if you do, you will lose federal matching funds in 2021. It is also certain that if you are in a position of political or program responsibility in 2021, you will have some ‘splainin’ to do if the state starts losing federal matching funds it would otherwise receive.

So what do you do to protect yourself against this scenario? You come up with a conservative projection of your 2020 cap before FY 2020 begins, and you pull out all the policy stops to stay under that projection, starting October 1, 2019. To do that, you have to go to your state legislature before its session in early 2019 and ask for all of the cost-saving authority federal law allows that you have not already implemented.

One likely scenario would be: To ensure predictability of expenses, states could force all Medicaid beneficiaries into private managed care plans and contract with those plans for the provision of all covered services. They could negotiate low capitation rates that may not be actuarially sound and give plans lots of contractual running room to limit their payments for services for high-cost enrollees. They could allow the plans to limit their provider networks to the lowest-cost providers and to impose rigorous prior authorization controls on expensive drugs and technologies. They could reduce the “optional” services and the scope of the mandatory services that plans must cover and increase the cost-sharing that the plans can impose.

Note that the types of cost-saving policies imposed to avoid exceeding the cap are the ones that provide immediate returns — not the innovative delivery system reforms, new provider payment systems, or other long-term strategies to bring down health care costs while improving care. The rug would be pulled out from under the promising long-term strategies now underway as states are forced to focus on more short-term ways to reduce costs. High-cost providers and high-cost individual beneficiaries will likely be the first to be targeted as the greatest threat to the state’s ability to stay under its cap.

From the federal budgeteer’s standpoint, the House bill is attractive because it would bound the federal financial exposure for the costs of health and long-term care for the elderly and disabled now and, more importantly, in the future, when these high-cost populations will grow due to demographic changes.

In addition, the cap can be dialed down (think “Hunger Games” control room). Once the cap is in place, all the federal government would have to do to reduce its Medicaid spending would be to lower the annual growth factor — e.g., CPI-M minus 0.5, CPI-M minus 1.0, etc. – and give states even more “flexibility” to make the cuts necessary to stay within their new, lower annual caps.

The cap shifts the responsibility – but not the necessary resources — for managing health care needs and escalating health care costs squarely onto the shoulders of state policymakers. They, in turn, may elect to transfer the responsibility over to managed care plans, counties, and beneficiaries and their families.

Why would federal policy-makers want to use the nation’s largest health insurer for children as a budget platform? For some, it is an ideological crusade against a federal role in funding health care for low-income Americans. “Medicaid, sending it back to the states, capping its growth rate: We’ve been dreaming of this since you and I were drinking out of a keg,” House Speaker Paul Ryan told the National Review’s Rich Lowry. “We are on the cusp of doing something that we’ve long believed in.”

For others, it is all about finding budget savings to offset federal spending on other priorities, such as tax cuts (the House bill approved by two committees contains $883 billion in tax cuts and $880 billion in cuts in federal Medicaid spending) and deficit reduction). For others, it is about managing the federal debt by demonstrating “budget discipline” that will make it possible for Congress to pass an extension of the debt ceiling and avoid a default. It goes without saying that, among the three large federal entitlement programs, Medicaid is the easiest political target, since nearly half of its beneficiaries are not old enough to vote. There will always be a market for Medicaid offsets.

So how would improving the formula for determining how the cap is calculated, or otherwise “fixing” the cap, avoid this dynamic? It wouldn’t. The House bill is not about the formula, or any of its moving parts, or even how much in federal “savings” it generates initially. It’s all about the cap.

The formula is transient. It can be tinkered with as the political circumstances dictate to smooth out some of the rough edges. But the cap, once in place, would be almost impossible to reverse. The fact of the cap will fundamentally change state Medicaid decision-making from investing in coverage and innovation for children and families and other populations to managing the federal cost shift to states. The only question will be how large a shift and who will take the biggest hit.

Andy Schneider is a Research Professor at the Georgetown University McCourt School of Public Policy.