Today, we released a new issue brief focusing on how radically restructuring federal financing of the Medicaid program by converting it to a block grant or a per capita cap would impose large, negative pressures on state budgets.  That, in turn, could lead to significant reductions in state funding of K-12 education, which would result in harmful cuts to total per-pupil spending, as this issue brief illustrates.

Key points from the issue brief include:

• States are facing large and growing budget deficits due to the COVID-19 health and economic crisis. School districts are bracing for substantial cuts to state funding of K-12 education.  Those funding cuts would be even more dire if the Medicaid program had been previously converted into a block grant or per capita cap as part of the failed effort by the Trump Administration and Congressional Republicans to repeal and replace the Affordable Care Act in 2017.
• Critics of Medicaid have often claimed that Medicaid spending “crowds out” state K-12 funding, an argument intended to generate support for cutting spending on the program at both the federal and state levels and to generate opposition for states expanding Medicaid. But in reality, preserving the current federal Medicaid financing structure is essential for sufficient state funding of K-12 education.
• Medicaid block grants and per capita caps shift significant costs and risks to states, with the cuts to federal Medicaid funding growing larger over time. That would impose sizable budget pressures on states, especially because Medicaid is the largest source of federal funding for states. To compensate, states would need to make increasingly draconian cuts to Medicaid eligibility, benefits and provider reimbursement rates, placing tens of millions of low-income beneficiaries, including children and families, at high risk of losing access to needed care or becoming uninsured.  To limit this harmful impact on Medicaid, states would need to instead raise taxes or cut other parts of their budgets.  But if states cut other spending, state funding of K-12 education would be at considerable risk as it constitutes the largest share of state spending in their budgets.
• Estimates of the potential cuts in state K-12 education funding that could be instituted to offset federal Medicaid funding reductions can illustrate the harmful impact of Medicaid block grants and per capita caps. This brief examines the state-by-state impact on total per-pupil spending (from all funding sources) if the “Graham-Cassidy” Medicaid block grant and per capita cap proposed in 2017 was fully in effect in 2018 and if states compensated for some or all of the estimated $28.1 billion in federal Medicaid funding cuts by instead cutting their funding of K-12 education.
• If states had offset 100 percent of the federal Medicaid funding cuts they would have faced in 2018 by cutting K-12 education, total spending per pupil would have been cut by $578 or 4.6 percent on average.
• If states had offset 50 percent of the federal Medicaid funding cuts by cutting K-12 education, total spending per pupil would have been cut by $289 or 2.3 percent on average.
• If states had proportionally offset federal Medicaid funding cuts by cutting K-12 education as a share of state spending in state budgets, total spending per pupil would have been cut by $145 or 1.2 percent on average.
• These cuts would be in addition to the direct, negative impact of federal Medicaid funding cuts on K-12 schools as Medicaid directly funds health and related services furnished by schools, including services provided to a child under an individualized education plan.

While these cuts are hypothetical, the Trump Administration continues to support Medicaid block grants and per capita caps and deep cuts to federal Medicaid funding as part of its annual budgets.  In addition, the Administration has encouraged states to apply for waivers that impose block grants and per capita caps, with two states with pending waivers that would cap their programs. As a result, the likely adverse impact of Medicaid block grants or per capita caps on K-12 education should be considered as part of the debate over the future of Medicaid and its financing at both the federal and state levels.