Lack of Federal Action Puts Puerto Rico and Other Territories in Peril of Dire Medicaid Fiscal Cliff, Yet Again

With Puerto Rico reeling from the widespread damage caused by Hurricane Fiona, it is critical that Puerto Rico receives all the emergency relief and longer-term assistance it needs to recover from yet another devastating natural disaster.  But it is also important to remember that the Medicaid programs in Puerto Rico and the other territories — American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands — again face a looming fiscal cliff on December 16, 2022.  If Congress does not act to avert this Medicaid fiscal cliff in the “lame duck” session after the midterm elections, Puerto Rico and the territories would have no choice but to impose severe, damaging cuts to their Medicaid programs.

Unlike for the states, federal Medicaid funding for Puerto Rico and the other territories is capped, with the regular block grant amounts set at highly inadequate levels.  In addition, the regular Medicaid matching rate (known as the FMAP) for the territories is set at 55 percent, even though the FMAPs for the territories would equal 83 percent if they were calculated in the same way the matching rate for states is determined, due to the territories’ lower per-capita income.

This has forced the territories to operate Medicaid programs that are far less generous than those in the states, with the territories not meeting various federal eligibility, benefit and other requirements that apply to the states.  For example, Puerto Rico’s Medicaid income eligibility levels are well below the federally required minimum eligibility levels in the states.  That is because Puerto Rico, like Guam and the U.S. Virgin Islands, uses its own poverty level in determining Medicaid and CHIP eligibility, which is considerably lower than the federal poverty level.  Puerto Rico also does not cover benefits like nursing home care and non-emergency medical transportation that are otherwise required of states.  While it covers prescription drugs, Puerto Rico has a closed formulary, which states cannot impose due to the requirements of the Medicaid Drug Rebate Program.  That permitted Puerto Rico to not cover any drugs curing Hepatitis C until 2020, even though those drugs first came to the market in 2014.

However, over the last decade, Congress has provided additional federal Medicaid funding and FMAP increases to both avoid draconian cuts and to allow the territories to institute modest eligibility, benefit and provider rate improvements.  For example, in 2020, Puerto Rico raised its own poverty level to expand eligibility, albeit on a temporary basis, which extended Medicaid coverage to an additional 150,000-200,000 people.  (However, that expansion setting the Puerto Rico Poverty Level equal to 85 percent of the federal poverty level expired at the end of September 2021.  But the adverse impact on coverage has likely been largely mitigated by the continuous coverage requirement that applies through the duration of the COVID-19 public health emergency.  Without this poverty level expansion, Medicaid income eligibility set at 138 percent of the Puerto Rico Poverty Level translated to only 59.6 percent of the federal poverty level for individuals and 44.8 percent for a family of four in 2020.)  Puerto Rico has also temporarily increased Medicaid reimbursement rates for physicians and some other providers and, as discussed above, covered its first drug curing Hepatitis C in March 2020.

In 2021, Guam significantly raised its Guam Medicaid Poverty Level.  The U.S. Virgin Islands recently implemented a new personal care attendant program, added a hospice benefit, expanded assistance providing help with Medicare premiums for some dual eligibles (discussed further below) and extended postpartum coverage to 12 months.  But the federal funding and matching rate increases supporting these Medicaid improvements have always been temporary.

Moreover, Puerto Rico’s current FMAP equals 76% and the FMAPs for American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands equal 83%.  But after December 16, 2022, the FMAPs for all the territories will revert to the regular 55%.  This means that the federal government will pick up much less of the cost of the territories’ Medicaid programs and the territories will have to make up the difference with their own funds if they want to maintain their existing programs.

Based on past spending projections, I estimate that Puerto Rico would likely have to spend roughly $500 million more of its own funding in fiscal year 2023, which would constitute a roughly 65 percent increase.  It is hard to see how Puerto Rico could possibly do that in fiscal year 2023 and beyond, considering Puerto Rico’s ongoing fiscal and debt crisis, the need to get approval from the Financial Oversight and Management Board for Puerto Rico, and the short- and long-term budgetary and economic impact of Hurricane Fiona.  Guam has also indicated that it would need to increase its own financial contribution to its Medicaid costs by an additional $20 million in fiscal year 2023 if the FMAP decrease takes effect as scheduled.  That is roughly a 120 percent increase in Guam’s current share of its Medicaid costs.  Yet the smaller territories have always had considerable difficulties in generating their current spending levels and in many years, they have been unable to draw down all available federal matching funds despite the availability of temporary FMAP and federal funding increases.

Moreover, insufficient federal block grant funding for Puerto Rico is also a looming issue.  Last year, the Centers for Medicare and Medicaid Services (CMS) announced that under one of the previous federal funding extensions enacted by Congress, the base block grant amounts for each of the territories in fiscal year 2022 and future years would be significantly higher than was previously expected.  (For Puerto Rico, block grant amounts for fiscal year 2022 and beyond are based on the increased fiscal year 2020 level, adjusted annually for the medical care component of the Consumer Price Index.  For the other territories, block grant amounts are based on the increased fiscal year 2021 level, adjusted for medical care inflation.)  Nevertheless, even if the 76% FMAP for Puerto Rico is extended, under these higher block grant levels, it is likely that Puerto Rico would still have insufficient federal funding to sustain its existing program for the rest of fiscal year 2023, with potential federal funding shortfalls of as much as $600 million.

To make matters worse, as the Center on Budget and Policy Priorities warns, some House Republican leaders may want to block the CMS interpretation and have the block grant amounts revert to their past, highly inadequate levels for this fiscal year and for all future years.  To give a sense of the magnitude of the federal funding shortfalls the territories would subsequently face under such low block grant amounts, in fiscal year 2019, these base block grants would have by themselves financed only 11.1 percent of total Medicaid spending in the Northern Mariana Islands, 12.1 percent in the U.S. Virgin Islands, 13.9 percent in Puerto Rico, 15.5 percent in Guam, and 22.2 percent in American Samoa, as this blog post explains.

As a result, the double fiscal cliff facing the territories on December 16th — sharply reduced FMAPs and insufficient federal Medicaid funding for Puerto Rico — would likely threaten not only the viability of recent programmatic improvements in the territories but also lead to severe cuts to the rest of Puerto Rico’s and the other territories’ Medicaid programs.  For example, Puerto Rico would likely have to consider dropping its recent Medicare provider rate increases and drop its plans to restore its income eligibility expansion (which as noted above, would cover 150,000-200,000 people if and when the continuous coverage requirement expires after the end of the public health emergency).  It would also likely have to make additional Medicaid cuts to eligibility, benefits and provider rates, which would further undermine a long-stressed Puerto Rican health system, which relies heavily on Medicaid for its financing.  According to data from the Census Bureau’s Puerto Rico Community Survey, in 2021, nearly 47 percent of all residents of Puerto Rico were covered by Medicaid alone or in combination with other health insurance and nearly 62 percent of all Puerto Rican children had Medicaid coverage.  (If the FMAP falls to 55% and the CMS interpretation is reversed, Medicaid enrollment in Puerto Rico may have to be cut by an additional 450,000 additional beneficiaries, based on 2019 estimates conducted by MACPAC prior to enactment of the most recent funding increases for the territories.)

In the face of an earlier fiscal cliff, the Kaiser Family Foundation reports that the Medicaid directors of the territories all indicated that the territories would be unable to address federal funding shortfalls by increasing their local fund contributions.  The U.S. Virgin Islands noted they would have to cut income eligibility across all eligibility groups, cut dental services and cut provider rates.  The Northern Mariana Islands indicated that they would have to cut payments to their safety net hospitals.

It is thus essential that Congress averts the looming Medicaid fiscal cliff for Puerto Rico and the other territories by extending the increased FMAPs and providing sufficient federal funding that not only sustains their existing Medicaid programs but allows for continued improvements.  For example, if sufficient federal funding was available, Puerto Rico has expressed interest over the last few years in extending premium assistance to more dual eligibles — low-income Medicare beneficiaries also eligible for Medicaid.  In the states, dual eligibles who are not eligible for full Medicaid benefits can get help with their Medicare premiums and/or cost-sharing through the Medicare Savings Programs (MSPs).  But due to their block grant financing, the territories are exempt from the state requirement to provide MSPs to dual eligibles with incomes too high to qualify for full Medicaid benefits.  Puerto Rico, however, has long had plans to provide MSP-like benefits to more of its dually eligible beneficiaries.  It has also considered offering some limited long-term services and supports (LTSS) benefits which are not currently provided to Medicaid beneficiaries in Puerto Rico.  And as discussed above, Puerto Rico has plans to restore or enhance its recently expired income eligibility expansion (via an increase in its own poverty level) as well.

One sound approach would be to address the Medicaid fiscal cliff for the territories permanently.  The original House-passed “Build Back Better” budget reconciliation bill passed in November 2021, for example, would have provided a permanent, significant increase in the territories’ block grant amounts, starting in fiscal year 2022.  The FMAP for the territories would also have been permanently increased to 83 percent.  (Unlike for the other territories, for which the 83 percent FMAP would have taken effect in 2022, Puerto Rico’s matching rate would have remained at 76 percent for one year and then risen to 83 percent in 2023.)  Based on past spending projections from the territories, the Build Back Better provision would have likely ensured that Puerto Rico and the other territories had sufficient federal financial support to sustain their existing Medicaid programs and make further significant improvements to expand coverage and access over the long run.  At the very least, the fiscal cliff should be addressed with higher FMAPs and sufficient federal funding on an extensive multi-year basis.  That would avoid the frequent fiscal cliffs the territories have been recently experiencing, provide some fiscal stability for the territories, and encourage them to institute further improvements to their Medicaid programs.  A temporary FMAP of 100 percent for Puerto Rico to help it respond to Hurricane Fiona, with sufficient federal funding to support that FMAP level, could also be considered.

It is important to remember, however, that even with a permanent or lengthy increase in the block grant amounts and of the FMAPs, the territories will still not be able to come into full compliance with federal eligibility, benefit and other requirements.  That would require replacement of their block grant structure with permanent state-like financial treatment under which the federal government picks up a fixed percentage of the territories’ Medicaid costs.  In exchange, the territories could be required to improve and expand their programs over time and eventually meet minimum federal requirements that apply to the states, although when and how they come into compliance would likely have to be territory-specific due, among other factors, to considerable differences in their current programmatic gaps and their capacity to close them.  More comprehensive Medicaid programs in the territories, in turn, would significantly increase health coverage and access to needed care for residents of the territories.   It would also make the territories’ Medicaid programs (and their health systems) stronger and more resilient, and thus better able to respond when future natural disasters occur and public health emergencies arise.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.