Capping Federal Medicaid Payments to States: Four Questions to Consider

Late last week, the House of Representatives, with one vote to spare, passed a bill to “repeal and replace” the Affordable Care Act (ACA).  Among many other things, the bill would radically restructure the nation’s largest health insurer for children—Medicaid—by capping federal matching payments to states starting in three years and continuing each year after that in perpetuity. For over 50 years, the federal government has matched state Medicaid spending on health and long-term care services for children and other vulnerable populations.  Under the House bill, those days would be history, and the federal government would have a new budgeting tool to dial down for “savings” by shifting costs to the states.

It’s hard to overstate how damaging this change will be to children’s coverage, to their health, and ultimately to their life chances.  (I’ve tried, but words have failed me).  And even though the 34 million children in Medicaid represent over 40 percent of all 77 million Americans enrolled in Medicaid, their voices were not heard during the House process—a process notable for its lack of transparency (no hearings, less than 24 hours between release of the final version and a vote, and no estimate of the final version by the independent Congressional Budget Office).

To its credit, the Senate Republican leadership has made it clear that the Senate will not pass the House bill but will instead write it own version of “repeal and replace”.  This presents an opportunity for children’s interests to be considered. Stipulating that children do not vote, it is nonetheless reasonable to expect Senators to be concerned with all of the populations in their states and, because they stand for office only every 6 years, to take the long view about what is best for their states.

The House bill’s cap on federal Medicaid payments has received very little attention, and the effect of the cap on children has received even less. Here are 4 questions to start the conversation about the cap. They are questions that anyone interested in the future of Medicaid and the future of the states—federal policymakers, state decision-makers, community leaders, ordinary citizens—should consider.

  1. Exactly How Would the Cap Work? This may seem like an odd question, but the House never explained how the cap would work—how the federal government would administer it, how states would respond, and what the combination of federal and state actions would mean for health care providers and program beneficiaries.  In a program that this year along will cover 77 million Americans and send $390 billion to the states, these operational details matter.  A lot.  This is too big a change, involving too many lives and too many dollars, to leave to the technicians.  Federal policymakers need to understand exactly how the cap would work, how their state would implement it, and how the federal government could dial it down to extract more “savings” at their state’s expense.  They also need to consider the implications for their state not just in the next few years, but over the next decade and beyond.
  1. Why Should the Federal Government Shift the Costs of Health and Long-Term Care Services to States? Once they are done explaining how it works, proponents of the cap should explain the underlying philosophy.  For over 50 years, the federal government, through Medicaid, has shared in the costs that states incur in providing health and long-term care services to their low-income citizens, including the elderly, the disabled, and children and families. As state costs go up, whether due to inflation in the price of health care or to increased use of services from a public health crisis like the opioid epidemic or from a hurricane or other natural disaster, federal matching funds increase as well.  Under the House bill, states would be on their own for all costs above the cap each year in perpetuity, whether those costs are within their control or not. This is called a cost shift.  Done in the face of the demographic changes that will dramatically increase the number of elderly Americans needing costly long-term care services that Medicare does not cover, this is called a historic, game-changing cost shift.  Why?  Are the states in a better position to absorb this cost shift now than they were in 1965?
  1. What Happens to States Under the Cap? Federal Medicaid payments are the single largest source of Federal funds to states, dwarfing federal payments for education, highways, or other activities. On average, federal Medicaid payments accounted for nearly 58 percent of all federal funds flowing to states in FY 2015. That same year, on average total federal and state spending on Medicaid accounted for 28 percent of total state spending (including both federal and state funds).  The short of it is that what the federal government does to Medicaid has major implications for state budgets and potentially state creditworthiness. These issues were not given a hearing during House consideration of the bill. What the House process did produce was a bill that sets a cap on federal Medicaid spending in FY 2020 and every year thereafter in perpetuity. The cap is based on each state’s spending for certain populations in 2016, multiplied by an annual growth factor.  Each state is forever locked into its 2016 spending amount, regardless of whether the amount is high and low.  And each state’s 2016 spending is subject to the same annual growth factor—one size fits all.  Finally, the growth factor, initially set at the medical care component of the consumer price index (CPI-M, or 3.7 percent) can be dialed down by future Congresses in order to hit federal budget targets. Why should federal policymakers turn the Medicaid program from a federal-state partnership into a federal budgeting instrument that can lower federal payments without regard to a state’s budget or health needs?
  1. What Happens to Children Under the Cap? The House bill’s cap on federal funding applies to the costs of health and long-term care services that Medicaid covers for all its beneficiaries—children and families, the elderly, and individuals with disabilities.  States that want to keep their own spending under the cap will have choices—all of them bad for beneficiaries and providers—as to how to do so.   They can drop “optional” eligibility groups, drop coverage of “optional” services, and/or reduce payments to providers and managed care plans.  While most children covered by Medicaid fall into mandatory eligibility groups and are entitled to comprehensive services under the Early and Periodic Screening, Diagnostic, and Treatment  (EPSDT) benefit, some children, especially children with disabilities, are covered under “optional” eligibility categories and receive home and community-based services through waivers.  States can restrict enrollment into those waivers or discontinue them altogether.

Federal policymakers need to ask their state counterparts to explain exactly how they will keep their spending under the cap each year.  Is there any fat in the program, and if so, is it sufficient to avoid cuts to eligibility, benefits, or provider payments?  Will the state target its spending cuts on children and families, on adults with disabilities, on the elderly, or on all of the above?  Will the state wait until 2020 to start lowering spending, or will it begin in 2019?  One particularly nasty option that the House bill gives states is to impose an even tighter federal cap upon themselves and convert part of their Medicaid program into a block grant.  This option, which gives states virtually unlimited discretion to limit enrollment and cut benefits (including EPDST), applies only to children and families—not to the elderly or disabled.  Federal policymakers need to ask whether their state would take up the block grant option, whether it would limit enrollment of high-cost children with disabilities, and whether it would reduce or eliminate the EPSDT benefit.