In January, news outlets published a summary of House Budget Committee proposals. One policy proposed converting Medicaid spending from its current percentage of a state’s Medicaid costs into a per capita cap.
With control of Congress and the Presidency, a Medicaid funding modification long proposed by Republicans could become a reality. Here’s a look at the future of Medicaid funding, including potential funding options and the impact modifying Medicaid’s funding mechanism may have on the program:
What is a Medicaid spending cap?
A Medicaid block grant or spending cap is a way to limit the amount of federal funding that states receive for their Medicaid programs. Instead of the federal government paying a fixed percentage of a state’s Medicaid costs, as it does now, it provides a limited amount of funding, and states would be responsible for the costs above that limit.
There are two main types of spending caps:
- Overall caps set a maximum amount of funding that the federal government would provide to a state. This amount generally does not fluctuate in response to rising or falling enrollment or if service costs change. Congress could set a growth rate to account for population expansion or allow for automatic increases during economic downturns. An overall cap is also known as a block grant.
- Per-enrollee caps set a limit on federal payments for each Medicaid enrollee, on average. Total federal funding would be limited to the product of the number of enrollees and the capped per-enrollee spending amount. Per-enrollee caps would allow for additional funding if enrollment rose. Funding would decline if enrollment fell.
Key design choices that would affect the amount of federal savings under a block grant or spending cap include:
- Whether to set overall or per-enrollee caps;
- The Medicaid spending and eligibility categories in the spending limits;
- Which year’s spending to select as a base year;
- The growth factor used to limit the increase in Medicaid spending over time;
- Whether spending for the optional expansion of coverage under the ACA would also be subject to the caps.
How do recent Republican proposals adjust Medicaid spending?
Recent Republican proposals suggest several ways that Medicaid caps could be implemented, including per capita caps and block grants while also proposing other changes to Medicaid financing that would reduce federal spending. These proposals aim to limit federal spending on Medicaid, shifting more financial responsibility to the states.
Per Capita Cap
Under a per capita cap, the federal government would pay states a fixed amount of funding per enrollee. This amount would increase each year at a rate below the projected growth in per capita healthcare spending, leading to elevated cuts over time.
Some proposals suggest setting separate caps for eligibility groups such as the elderly, people with disabilities, children, and adults eligible through the ACA Medicaid expansion.
A per capita cap could also have a single cap for all Medicaid enrollees, regardless of eligibility group. However, this could incentivize states to limit spending for populations with higher healthcare costs. Per capita caps may grow by the rate of general inflation, as measured by the consumer price index (CPI-U) or the medical consumer price index (CPI-M).
Some proposals would allow slightly higher growth in the caps for enrollees with disabilities and those aged 65 or older using the CPI-M plus one percentage point (CPI-M + 1).
Block Grants
Under a block grant, states would receive a fixed amount of federal Medicaid funding, regardless of actual costs. This amount would not adjust for changes in enrollment. The Republican Study Committee (RSC) budget plan proposes to convert Medicaid to five block grants for children, seniors, people with disabilities, pregnant women, and all other beneficiaries, and these block grants would be annually adjusted only for population growth in the state for each of the five groups. There would be zero annual adjustment for annual healthcare cost growth.
Like per capita caps, block grants would eliminate many federal requirements for state Medicaid programs regarding eligibility and benefits, including minimum income eligibility levels for children.
Why are block grants or spending caps being proposed?
Congress would transition to Medicaid block grants and spending caps to cut federal Medicaid spending, with the cuts increasing over time. The caps expand at a rate below the growth in per capita healthcare spending. Even small annual cuts can produce ever-growing annual reductions in later years.
These proposals would shift costs and financial risks to states. If the combined federal and state costs of Medicaid exceeded the cap, then states would be responsible for providing additional funds. As a result, states would decide whether to commit more of their revenues to Medicaid or reduce Medicaid spending by cutting payments to healthcare providers and healthcare plans, eliminating optional services, restricting enrollment, or attempting to deliver services more efficiently.
What are some potential impacts of Medicaid block grants or spending caps?
Because states would face reductions in federal funding, they would likely cut eligibility and benefits. States may react by covering fewer people, cutting benefits, or lowering provider payment rates. Some states might discontinue coverage for enrollees made eligible by the Affordable Care Act (ACA). All states that would have adopted such coverage in the future might choose not to do so. Many people who lost Medicaid coverage would likely become uninsured.
A per-enrollee cap would cause states to receive less federal funding if they restrict eligibility since funding would be tied directly to enrollment. Under overall caps, changes in enrollment would not affect federal funding.
States may also decide to charge Medicaid beneficiaries a small monthly premium. Though some states have chosen this solution in the past, the Biden administration found monthly premiums to be a barrier to enrollment. That stance may change with the Trump administration.
What impact would caps have on federal government spending?
Overall Spending Caps
Using the Consumer Price Index for all urban consumers (CPI-U) as a growth factor, overall spending caps would reduce the deficit by $836 billion between 2024 and 2032. Gross savings to Medicaid would be $921 billion over the same period.
Using the CPI-U plus 1 percentage point as a growth factor, overall caps would reduce the deficit by $501 billion between 2024 and 2032. Gross savings to Medicaid would be $576 billion over the same period.
Savings in 2032 would be about 17 percent of projected federal Medicaid spending using the CPI-U growth factor and 11 percent using the CPI-U plus 1 growth factor.
The net savings from capping overall spending would depend on the growth factor. The lower CPI-U growth factor would increase savings by an additional $334 billion compared to the CPI-U plus 1 growth factor.
Per-Enrollee Spending Caps
Using the CPI-U growth factor, per-enrollee caps would reduce the deficit by $871 billion between 2024 and 2032. Gross savings to Medicaid would be $934 billion over the same period. Using the CPI-U plus 1 growth factor, per-enrollee caps would reduce the deficit by $539 billion between 2024 and 2032. Gross savings to Medicaid would be $593 billion over the same period.
The savings would represent about 20 percent and 13 percent, respectively, of projected federal Medicaid spending in 2032. The lower CPI-U growth factor, compared with the CPI-U plus 1 growth factor, would increase savings by an additional $331 billion.
Per-enrollee caps are estimated to save the federal government more than overall caps. This is because, under per-enrollee caps, a reduction in enrollment would cause states to receive less federal funding. Conversely, the federal government would save more because funding would be tied directly to enrollment.
By contrast, under the overall caps, the reduction in enrollment would not change the amount of federal funding available to states because that funding would not be affected by changes in enrollment.
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