My new paper for the Commonwealth Fund analyzes how Puerto Rico’s Medicaid block grant financing contributed to Puerto Rico’s overall fiscal and debt crisis and resulted in a Medicaid program that is far less generous than what is provided in the states. Puerto Rico’s experience thus offers critical lessons to federal and state policymakers about the dangers that Medicaid block grants — as well as other proposals that cap federal funding such as per capita caps — pose to states; these financing arrangements would likely shift significant costs to states and lead to damaging cuts affecting beneficiaries and health care providers.

Key findings from the paper include:

• Puerto Rico’s Medicaid block grant financing led to large federal funding shortfalls. Puerto Rico’s only permanent federal Medicaid funding is through an annual block grant. On its own, the block grant financed, on average, only 15 percent of Puerto Rico’s total Medicaid spending between 2012 and 2019, which is well below Puerto Rico’s already artificially low, official federal matching rate of 55 percent. If Puerto Rico were treated like a state, its matching rate would equal 83 percent. As a result, Puerto Rico had to contribute much more of its own funding to sustain its Medicaid program over the decades, which was a key factor in its long-term fiscal problems and debt crisis.
• The Medicaid program in Puerto Rico is far less generous than Medicaid programs in the states. Medicaid is the backbone of health coverage in Puerto Rico: nearly half of all Puerto Ricans rely on Medicaid (including Medicaid coverage financed through the Children’s Health Insurance Program — CHIP), with more than 60 percent of children covered by Medicaid and CHIP. Yet because of inadequate federal financing, Puerto Rico’s permanent Medicaid eligibility levels are considerably lower than under the federal standards that apply to the states. The Medicaid program in Puerto Rico also does not cover mandatory benefits like nursing home care and home health care as well as optional benefits such as home-and community-based long-term services and supports (LTSS). It also significantly restricts some benefits like prescription drugs by using a restrictive formulary, unlike in the states. The program also sets very low provider reimbursement rates, which have likely contributed to outmigration of health professionals and a highly stressed health care infrastructure overall.
• Recent infusions of federal Medicaid funding allowed Puerto Rico to sustain its existing program and make modest, temporary improvements to its Medicaid program. Over the last decade, Congress has provided multiple, temporary federal Medicaid funding increases to Puerto Rico (and to the other territories). These increases have not only sustained Puerto Rico’s existing program and averted large Medicaid cuts but have also allowed Puerto Rico to make a few modest programmatic improvements. These include increased provider reimbursement rates, more generous prescription drug coverage and as of December 2020, expanded eligibility. However, because the funding increases have been temporary, these programmatic improvements are also largely temporary. For example, the provider rate increases and eligibility expansions are scheduled to expire when the latest short-term funding increase for Puerto Rico and the other territories expires after September 30, 2021.

Two critical lessons emerge from Puerto Rico’s experience operating under a Medicaid block grant:

• Medicaid block grants and per capita caps would likely result in large federal funding cuts that would increase for states over time. These funding cuts, in turn, could lead to significant cuts to eligibility, benefits, and provider rates that would result in state Medicaid programs experiencing many of the serious challenges Puerto Rico faces, especially if states are given flexibility to cut eligibility and benefits in ways not permitted today. Block grants and per capita caps would also sharply limit the ability of state Medicaid programs to respond to future recessions, epidemics, and natural disasters.
• Providing sufficient federal Medicaid funding to Puerto Rico on a permanent basis could lead to significant long-term improvements to its Medicaid program and dramatically improve access to needed care. Sufficient funding also would provide considerable relief for Puerto Rico’s overall budget and help it emerge from its fiscal and debt crisis, which has been further exacerbated by the health and economic impact of the COVID-19 pandemic. For example, Congress could permanently eliminate Puerto Rico’s block grant and instead pay a fixed percentage of Puerto Rico’s Medicaid costs without limit (as it does for the states), with the matching rate equaling the federal maximum of 83 percent based on Puerto Rico’s low per capita income relative to the nation. In exchange, Puerto Rico could be required to improve and expand its program in areas such as eligibility and benefits, in order to come into fuller compliance with the minimum federal requirements that apply to the states. This same approach could be applied to the other territories.