Avalere Health issued a new study conducted for the Children’s Hospital Association, estimating how much a per capita cap or block grant could significantly cut federal Medicaid spending on children nationally and on a state-by-state basis, relative to current law.  The study models the impact of four illustrative per capita caps and block grants.  It finds that federal Medicaid spending on children would fall by as much as $143 billion to $163 billion over the next ten years.  That would constitute reductions of 22 percent to 24 percent, relative to current law.

Today, the federal government picks up a fixed percentage of states’ Medicaid costs.  In contrast, under a per capita cap, states would receive a fixed amount of federal funding on a per-beneficiary basis, irrespective of states’ actual costs.  Under a block grant, states would receive a fixed amount of federal overall funding.  If a state’s actual Medicaid spending exceeds the capped amount of federal funding, states would be responsible for 100 percent of Medicaid costs above the cap.  In either case, under typical per capita cap or block grant proposals, these fixed amounts would be adjusted each year at a rate considerably slower than projected growth in overall or per-beneficiary costs in order to produce substantial federal savings.

For example, back in 2017, during the Congressional debate over repeal of the Affordable Care Act, the Congressional Budget Office (CBO) expected that Medicaid per-beneficiary spending would increase annually, on average, by 4.4 percent, over the next decade.  (CBO expected spending per beneficiary to rise by differing amounts among Medicaid beneficiaries: Medicaid per-beneficiary spending for children and adults was estimated to increase by 4.9 percent and for seniors and people by disabilities by 3.3 percent.)  As a result, increasing states’ per capita cap amounts each year by only general inflation or medical inflation — which in 2017, CBO projected to be 2.4 percent and 3.7 percent respectively — would thus result in significant Medicaid spending cuts, relative to current law, with the reductions growing ever larger over time.

The Avalere study is modeled on the Cassidy-Graham plan from September 2017, under which states are given a choice of either a per capita cap or block grant.  (The Cassidy-Graham plan would have separately converted the Affordable Care Act’s Medicaid expansion and marketplace subsidies to a highly inadequate block grant.  The Avalere study does not estimate the impact of that element of the Cassidy-Graham plan.  It only examines the effect of the per capita cap or block grant on the rest of the Medicaid program outside of the expansion.)  Avalere assumes the Medicaid per capita cap or block grant is taken up in all states starting in 2020.  For the per capita cap and the block grant, Avalere assumes two different rates for the annual increase in the federal funding amounts: its projections for general inflation (CPI-U) and medical inflation (CPI-M).  It then projects the impact on federal Medicaid spending on children, relative to current law, over ten years (2020-2029).  (These estimates exclude the effects on federal Medicaid spending for children who are eligible for Medicaid on the basis of disability, which if accounted for, would result in even higher estimates.)  It finds the following:

• A per capita cap adjusted by CPI-U would cut federal Medicaid spending on children by about $143 billion over ten years, a cut of 22 percent.
• A per capita cap adjusted by CPI-M would cut federal Medicaid spending on children by about $89 billion over ten years, a cut of 14 percent.
• A block grant adjusted by CPI-U would cut federal Medicaid spending on children by about $163 billion over ten years, a cut of 24 percent.
• A block grant adjusted by CPI-M would cut federal Medicaid spending on children by about $110 billion over ten years, a cut of 16 percent.

Avalere also estimates the cuts to federal Medicaid spending on children under each of these four scenarios on a state-by-state basis.  Moreover, as Avalere acknowledges, the actual federal Medicaid funding cuts states would face could be even greater, if states face higher-than-expected costs due to a new costly breakthrough drug or treatment or higher enrollment due to a recession or an economic downturn.

In response to the magnitude of the federal funding cuts under a per capita cap or block grant that Avalere estimates, states would either have to raise taxes considerably or slash other parts of their budgets such as education, or as is more likely, deeply cut their Medicaid programs in the areas of eligibility, benefits and provider payment rates.  Tens of millions of low-income children and children with special health care needs who now rely on Medicaid, as well as millions of their parents, seniors, people with disabilities and other adults, would thus be at grave risk of losing their health coverage entirely or seeing their access to needed care sharply reduced.

The Avalere study clearly demonstrates the dangers to children of a Medicaid per capita cap or block grant.  It also should provide serious pause to states now considering waivers which would cap their federal Medicaid funding and thus shift significant costs and risks from the federal government back to their states.