New Efforts to Cut Medicaid and Repeal ACA Emerging in Congress

There are non-alternative reports that the White House and the Republican Congressional leadership are planning for a vote next week on legislation to “repeal and replace” the Affordable Care Act (ACA).  Details as to what that legislation actually says are not yet available, but it’s likely that it will contain a cap on federal Medicaid spending along the lines of what was in the “repeal and replace” legislation pulled by the House Republican leadership without a vote on March 24.

In that bill, ironically titled American Health Care Act, the Medicaid cap was one of the two main sources of the $839 billion cut in federal Medicaid spending used to offset most of the $999 billion in lost federal revenues resulting from the repeal of the taxes used to pay for the ACA coverage expansions.  In some quarters, repealing the ACA taxes remains a high priority, and Medicaid is still the “go to” source for budget offsets.

Despite the lack of hearings and the frantic time frames during the last go-around—it was almost as though the authors did not want anyone to know what the legislation actually did—we learned a few things about the cap proposal.  It is worth keeping these lessons in mind if a “new and improved” version of “repeal and replace” surfaces in the next few days.

First, the cap has nothing to do with “repeal and replace.”  The ACA provides health insurance coverage to over 20 million Americans through a combination of premium and cost-sharing subsidies in the Marketplaces and expansion of Medicaid to non-disabled, non-elderly adults.  The cap would limit federal spending on both health and long-term care services for 77 million Americans, including 34 million children.

Second, don’t be distracted by the “per capita” part of the “per capita cap.”  That is a wonky policy complexity that has successfully misled many who have tried to understand what the cap is.  Here’s the key point:  the cap is a single number that represents the total amount that the federal government will spend on Medicaid in a state for each year starting in 2020, regardless of the need for services or the costs of care.  That single dollar amount is based on average per capita spending for four different groups—children, elderly, disabled, and other adults—in a base year (2016) multiplied by actual enrollment in each group.  (In Medicaid expansion states, another category—expansion adults—is added). There is no specific amount that states must spend on each group—just an overall limit on the amount the federal government will spend on health care and long-term care services for all of the groups in each year.

Third, the cap can be used by this and future Congresses to dial for dollars.  The dial they will turn is the annual growth factor used for calculating the single cap number that will apply to each state each year.  To get to that single cap amount, the average per capita amount for each group in the base year 2016 is increased each year by an annual growth factor.  The higher the annual growth factor, the lower the federal “savings” resulting from the cap.  (“Savings” is in quotes because the cap doesn’t actually reduce the need for medical or long-term care services, or reduce the cost of those services, or reform the delivery of care to make it more efficient; it just shifts the costs of covering services for 77 million Americans from the federal government to the states and counties).

In its original form, the House bill used as the annual growth factor the medical care component of the consumer price index (CPI-M), which the Congressional Budget Office (CBO) projects CPI-M to be 3.7 percent annually.  (CBO expects federal Medicaid spending to grow at 4.4 percent annually under current law).  As the bill headed for the House floor, it was revised to change the annual growth factor.  The annual growth factor for the elderly and disabled groups was increased to CPI-M plus one percentage point, while the annual growth factor for children, expansion adults, and non-expansion adults remained unchanged at CPI-M.   According to CBO, this change in the growth factor would have the effect of raising the single amount of the cap on federal spending for each state in 2020 and each year after, thereby reducing federal Medicaid “savings” by at least $41 billion over the 2017-2026 period.

In this case, the annual growth factor was increased for two favored groups and left unchanged for three others.  It could just as easily have been left unchanged for the favored groups and reduced to, say, CPI-M minus one for one or more of the unfavored groups (just for “able-bodied” adults, just for kids).  Of course, picking which groups to favor with a plus one or to disfavor with a minus one is entirely optical, since the calculation all sums up to one single number at the end.  But optics matter when Congress is looking for justification for whatever specific Medicaid budget target it wants to achieve at any point in time.

If federal policymakers need “savings” in order to pay for tax cuts or pass a debt ceiling extension or improve Medicare payments to providers, they can simply reduce one or more of the annual growth factors as needed, shifting more Medicaid costs to states.  A percentage point here, a percentage point there, pretty soon you’re talking real money.  And real states.  And real people.

Which brings us to the last lesson: the cap is a cost shift that will leave states with only bad choices.  Here’s how CBO put it:  “With less federal reimbursement for Medicaid, states would need to decide whether to commit more of their own resources to finance the program at current-law levels or whether to reduce spending by cutting payments to health care providers and health plans, eliminating optional services, restricting eligibility for enrollment, or (to the extent feasible) arriving at more efficient methods for delivering services.”

Delivery system reform is hard, takes time, and does not guarantee results.  In contrast, cutting payments to providers and plans, dropping optional services, and restricting enrollment will generate immediate, concrete financial results.  Faced with an annual federal Medicaid spending cap that Congress can dial down as needed to achieve federal budget targets, which pathway are state policymakers likely to follow?  And what are the implications for the nation’s largest health insurer for children?

Isn’t this at least worth a hearing?

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