Block Grants Would Slash Federal Medicaid Budget, Constrain Growth

Moving Medicaid to a block-grant program could cut federal spending by $150 billion over five years, while switching to a per capita cap model would trim costs by $110 billion, according to an analysis from Avalere Health. But states, particularly those that expanded Medicaid through the Affordable Care Act (ACA), could see shrinking federal dollars under either scenario, which could prompt them to cut enrollment, limit benefits, or reduce payment rates to providers and insurance carriers.

Republican lawmakers have long advocated per capita Medicaid financing or block grants. Both Tom Price, M.D. — who was confirmed Feb. 10 as HHS secretary — and House Speaker Paul Ryan (R-Wis.) have highlighted block grants as the centerpiece of a reformed Medicaid program.

Block grants start with a fixed base-year spending amount, and it’s the state’s job to manage the program within that amount. In a per capita cap model, a fixed amount is paid to the state for each enrollee. Per capita caps are flexible and likely would be more palatable to states than block grants. A per capita cap model, for example, would make it easier for states to respond to economic fluctuations, such as a recession, and cover more people. But states that spend more per beneficiary than other states will fare worse under per capita caps. Block grants, by contrast, constrain both spending growth and enrollment growth and would lead to more severe cuts than per capita caps. States that experience large increases in enrollment will struggle in a block grant scenario, according to Avalere.

While 31 states expanded their Medicaid program, 19 did not. In 2016, expansion states received close to $60 billion in federal funding to cover the cost of services for expansion adults. Caroline Pearson, senior vice president at Avalere, says it’s too soon to know how lawmakers would determine funding for non-expansion states. The federal government could boost overall Medicaid funding and give non-expansion states the money they would have received had they expanded the program. But that very improbable solution would dramatically boost federal spending.

What’s more likely is a redistribution of federal Medicaid dollars. While that would mean more federal money for non-expansion states, expansion states could face budget gaps, Pearson says.

A report released by Milliman Feb. 9 notes that funding growth for block grants likely wouldn’t be tied directly to the complex factors that drive spending growth in the program. The gross domestic product (GDP) has been discussed as a potential growth rate, but that might not reflect trends in aggregate future medical costs, according to the report. Although the per capita cap system is designed to allow for adjustments in funding as enrollment grows, it is not yet known whether the growth methodology would account for changes in factors such as the mix of members enrolled in Medicaid, the Milliman paper notes.

About 75% of Medicaid beneficiaries are already enrolled in managed care. But capping the program could shift the remaining 25% into private plans, which offer states better budget predictability. “There’s an immediate opportunity [for carriers], but there definitely will be downward pressure on capitation rates over time or reduction in overall program enrollment. It really depends on the state,” Pearson says. Managed care companies in states such as California and New York, which have relied on managed care for years, could see more downside risk in terms of lower enrollment and lower payment.

Adapted from the 2/13/17 issue of AIS’s Health Plan Week.