The Medicaid Cap: “Carving Out” Medically Complex Kids Won’t Protect Them

The Senate Leadership is reportedly including a cap on federal Medicaid payments to states in its version of legislation to “repeal and replace” the ACA.  That cap will apparently look a lot like the cap that narrowly passed the House in early May, but with some tweaks to accommodate concerns of individual Senators.

One tweak under consideration has to do with “carving out” medically complex children from the cap. Because no bill text is available, it’s not possible to know for sure how the bill would define medically complex children or how they would be “carved out.”

That said, two points are clear. First, like all of the other 37 million children enrolled in Medicaid, medically complex children need to be protected from the loss of federal funds for needed care. Second, the only way to protect them is not to cap federal Medicaid payments to states for any population—children and families, seniors, persons with disabilities, or pregnant women. Here’s why carving out medically fragile children will not protect them.

Let’s start with the basics of a cap.

The way federal-state matching works in Medicaid is that the state must spend its own funds before the federal government pays its share of the state’s cost. If the state spending is for a covered service furnished to an eligible individual by a qualified provider, the federal government will match the spending at the state’s statutory matching rate on an open-ended basis. The cap on federal Medicaid spending in the House bill would limit the total amount the federal government would pay to a state each year beginning in 2020 and thereafter, in perpetuity, even if the state’s cost is otherwise eligible for federal matching.

As we’ve said before, the fundamental problem with the cap is that it limits federal payments to states but it doesn’t limit the drivers of state Medicaid spending, such things as rapid increases in the price of prescription drugs or increased need for services due to, say, the opioid epidemic.

All costs above the amount of the cap are entirely paid for by the state. In short, the cap is a cost shift from the federal government to the states. States can respond either by paying those additional costs with their own funds or by reducing their Medicaid spending below the level of the cap through cutting payments to providers, eliminating coverage of optional services and optional eligibility groups, and/or restricting the use of services.

Because the cuts in federal Medicaid funds in the House bill are so large, states will find it extremely difficult, if not impossible, to make up the shortfalls with their own funds. The Urban Institute recently estimated that to make up the shortfall without reducing enrollment, states would have to increase their own spending by $370 billion, or 13 percent over the next 10 years. (Reportedly the reductions in the Senate Leadership bill may be even larger).

In the states that decide not to make up the shortfall with their own dollars or those that are unable to do so—which will likely be most states—the focus will be on keeping Medicaid spending below the cap by limiting state spending. Cuts in provider payments, elimination of “optional” services, and restrictions on enrollment of “optional” eligibility groups will likely be among the ways that states try to “manage to the cap.”

If the cap is “dialed down” over time to achieve additional federal budget savings, the challenge for states to keep their spending under the cap will be exacerbated, and the search for additional Medicaid savings will intensify.

In these circumstances, whether medically complex kids are “carved out” from the cap will be largely irrelevant. The operational focus will be on ensuring that payments to providers and utilization of services by all populations are constrained as much as necessary to keep total program spending under the cap—not on exempting these kids from payment or service cutbacks.

Even as the states look for ways to reduce their spending to stay under the cap, the shortfall in federal funding relative to need will increase, especially if the federal government “dials down” the cap.

As the shortfall increases, demand will grow for state funds to replace the federal funds lost to the state budget. The Medicaid program will have to compete with other state programs for limited state funds, and within Medicaid, “carved out” medically complex children will have to compete with other needy populations for state Medicaid funds.

If the state is unable to free up the resources to spend on services for the “carved out” children, the federal government will not make matching payments. In short, a “carve out” for medically complex children does not protect them from the limits on state funds. And without that protection, a “carve out” from the federal cap is meaningless.

As the Center on Budget and Policy Priorities has explained, no population can be protected by a “carve out” – not medically complex kids, not all kids, not parents, not people with disabilities, not seniors.

A “carve out” for medically complex children will make the Medicaid cap appear less “mean.” But it won’t actually protect them or the providers who serve them.

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