Much of the Fiscal Relief Provided to States for COVID-19 Could be Canceled Out if Trump Administration’s Medicaid “MFAR” Rule Is Finalized

Congress included substantial fiscal relief for states in both the Families First Coronavirus Response Act (P.L. 116-127) and the CARES Act (P.L. 116-136).  Families First temporarily increased the federal Medicaid matching rate (FMAP) by 6.2 percentage points for all states and territories starting January 1, 2020 through the end of the public health emergency.  That is estimated to provide an additional $36 billion in federal Medicaid funding for states assuming the emergency goes through the end of December.  It would also have the effect of providing roughly $860 million in additional federal Children’s Health Insurance Program (CHIP) funding for states.  In addition, the CARES Act established a $150 billion Coronavirus Relief Fund for state, local, tribal and territorial governments, of which about $110 billion is estimated to go to states in 2020.  The CARES Act provides some other funding to states as well.

This fiscal relief is critical because states will face very large budget deficits as demand for public services rapidly increase and state revenues precipitously decline.  Because nearly all states are required to balance their budgets, the fiscal relief would avert or limit budget cuts that states would otherwise have to make and which would deepen and lengthen the economic downturn caused by COVID-19.  Moreover, the FMAP increase will specifically help states address higher Medicaid costs resulting from sharply higher enrollment as more people become eligible for Medicaid when they lose their jobs or see their hours or wages reduced due to the economic impact of the COVID-19 outbreak.  It would also aid states facing higher-than-expected health costs in Medicaid due to the costs of treatment and related services for COVID-19 patients covered by Medicaid.  Moreover, it would allow for greater financial support to a health care safety net that disproportionately serves Medicaid beneficiaries (and the uninsured) and is already under severe stress.

Yet, the Trump Administration has still not withdrawn its proposed “Medicaid Fiscal Accountability” rule (known as MFAR), which would adversely affect how states finance their share of the cost of Medicaid programs and how states provide supplemental payments to hospitals, nursing homes, physicians and other health care providers.   As I have previously explained, it is imperative that the Trump Administration immediately withdraw its proposed rule.  Alternatively, Congress should bar the rule from being finalized.

As our CCF public comments and my Health Affairs blog post point out, by prohibiting or limiting existing state Medicaid financing arrangements such as provider taxes and intergovernmental transfers, the rule would reduce the state funding for Medicaid available to draw down federal Medicaid matching funds (including the enhanced funds provided through the Families First matching rate increase) to sustain states’ existing Medicaid programs, let alone address higher costs resulting from greater enrollment and COVID-19 treatment.  By reducing supplemental payments and leading to overall provider reimbursement rate cuts, it would financially destabilize hospitals and other health care providers facing unprecedented demands for care.  It would also enlarge the overall budget deficits states would otherwise face and make Medicaid less able to serve its critical countercyclical function in an economic downturn.  It would thus lead to Medicaid cuts harming beneficiaries and reducing access to needed care just when the program is needed most by low-income individuals and families.  In other words, finalizing the rule would seriously blunt a significant share of the positive health and economic benefits the temporary Medicaid matching rate increase and the Coronavirus Relief Fund provides.

To give a sense of the magnitude of the fiscal impact of MFAR being finalized, on behalf of the American Hospital Association, Manatt Health estimated that MFAR, when fully implemented, could reduce federal Medicaid spending by $24 billion to $31 billion annually, with a cut to total federal and state Medicaid spending between $37 billion to $49 billion each year.  These estimates, however, have a substantial degree of uncertainty due to data limitations and the vagueness of the rule itself, which, for example, gives undue discretion to the Centers for Medicare and Medicaid Services to determine whether certain arrangements remain permissible.  Nevertheless, it is important to note that many of the MFAR provisions take effect immediately upon the rule being finalized and while others take effect after two to three years, it is likely that states would take steps well before then to eliminate or limit existing financing and supplemental payment arrangements out of fear and confusion and because of the advance time needed to plan their budgets and make required legislative changes.  This means that a large portion of this $24 billion to $31 billion in estimated annual federal Medicaid spending cuts could occur in the remainder of calendar year 2020.  While the estimates of the additional federal Medicaid funding ($36 billion) and CHIP funding ($860 million) provided under the Families First FMAP increase are likely significantly understated because they do not account for the costs of higher Medicaid and CHIP enrollment due to the economic downturn and greater Medicaid and CHIP spending per beneficiary due to the costs of COVID-19 screening and treatment, under any scenario, a sizable share of the additional federal Medicaid and CHIP funds provided by the Families First FMAP increase could be canceled out by the MFAR rule being finalized.

In addition, the MFAR rule would also immediately prohibit or limit states’ ability to add new or expand existing state financing arrangements such as provider taxes and intergovernmental transfers.  Many states increased their reliance on such financing arrangements in the aftermath of the Great Recession to support their Medicaid programs — which experienced an enrollment increase of nearly 6 million between December 2007 and December 2009 — and to address the overall, severe budget shortfalls they faced.  As a result, the MFAR rule would take away financing tools states have used in the past and, if they are unable to identify other sources to finance their share of the cost of Medicaid, as is likely, they will be forced to make Medicaid cuts that they may not otherwise have to institute if they could instead turn to new Medicaid financing sources.  That, in turn, would reduce Medicaid’s ability to provide essential health coverage during the COVID-19 crisis and worsen the economic downturn resulting from COVID-19.         

It is virtually certain that the state fiscal relief provided by the Families First and CARES COVID-19 response legislation will be insufficient.  As the Center on Budget and Policy Priorities has warned: “[s]tate budget shortfalls reached about $227 billion in the worst year of the last recession (adjusted only for inflation, and not including city and county shortfalls) and will likely be even larger in this recession. That’s both because unemployment is rising much more rapidly in this recession, causing steeper drops in income and sales tax revenues, and because states and localities face substantial direct costs related to the virus.”

But if MFAR is finalized, it would offset much of the benefits of the FMAP increase and make the combined state fiscal relief that has already been provided even more inadequate.  It is thus critical that the Trump Administration should immediately withdraw the MFAR rule or Congress should block the rule from being finalized.  Moreover, Congress should provide substantially more state fiscal relief to better avert the looming budget shortfalls that states will face and the inevitable budget cuts they will have no choice but to make.  That could be furnished through further increases in the FMAP, with the FMAP increases tied to increases in state unemployment rates as proposed in a House bill (Take Responsibility for Workers and Families Act, H.R. 6379).  Both the elimination of the MFAR rule and an additional FMAP increase have been strongly endorsed by the bipartisan National Governors Association.

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