Blog Series: Medicaid Block Grants and Per Capita Caps

This week, House Republicans are aiming to begin marking up the repeal of ACA. House leaders have announced a plan that would drastically alter states’ Medicaid programs by putting a cap on the federal contribution for Medicaid. This change could significantly reduce access to health care for tens of thousands of Montanans. Nationally, these changes could result in cutting federal Medicaid support by over $560 billion over the next decade.

There are two ways that the federal government can cap spending – Medicaid block grants and per capita caps. Both of these measures would limit the amount of money the federal government sends to states for Medicaid, while increasing cost for state governments.

These two options are structured differently, but have similar long-term results.

How does Medicaid spending work now? Currently, Montana receives a fixed share of its Medicaid costs from the federal government. On average, a state receives about 64 percent of this cost. (Under Medicaid expansion, which has helped over 70,000 Montanans get access to health coverage, the federal share is even higher, a minimum of 90%.) In the past, if a state spends more on Medicaid one year, say due to a bad flu season, the federal government would send more money, keeping the percentage the same.

Under a block grant, states would receive a fixed amount of federal funds for Medicaid. Anything above that amount, the state would be responsible for paying. Under a block grant, Congress eliminates the set federal matching rates, and instead, the states will receive a total fixed amount of funds to run their Medicaid programs.

Per Capita Cap

A per capita cap is similar, but instead of setting a dollar limit for the entire Medicaid program, it would cap the amount of spending per beneficiary. If a beneficiary’s health needs exceeds that capped amount, the state would be responsible for the entire amount of those costs. The per capita cap would likely be set using current per-beneficiary spending and grow only slightly over time using an inflationary adjustment (but highly unlikely to keep pace with rising health care costs).

So why are spending caps so dangerous?

On a federal level, block grants and per capita caps are designed to do the same thing: create savings for the federal government in the long run, primarily by passing the cost along to the states. They achieve this by setting a cap below what the federal government is projected to spend, and then increase that cost each year only slightly, at or less than the rate of inflation. As noted above, health care costs have grown faster than inflation. The cost of Montana’s Medicaid program would increase over time, but the federal contribution would not. After a few years, the federal government would be contributing a much smaller percentage than it is now, leaving Montana holding the bag.

We have historical evidence of how disastrous block granting can be for social safety net programs critical to low-income families. The most direct example of block granting is the federal Temporary Assistance for Needy Families (TANF) program, which Congress implemented in 1996 to replace the Aid to Families with Dependent Children (AFDC). Because federal support was capped, the TANF program in Montana now serves about 13 of every 100 families experiencing poverty in the state. Before TANF, AFDC served 63 of 100 Montana families living in poverty.

Why would health care costs increase?

Historically, health care costs have increased faster than inflation. Although the rate at which they have increased has slowed down, lawmakers cannot be sure if this slowdown is permanent or temporary, especially while they make other changes to the Affordable Care Act.

Montana also has a rapidly aging population, and the health care costs for older adults is significantly more expensive than it is for younger adults. By 2030, Montana is expected to be the fifth oldest state in the nation, and many older Montanans are served through the Medicaid program.

Last, with new diseases and new treatments, per-beneficiary costs could increase. For example, if researchers discover a new treatment for cancer, people’s lives could be saved but costs could increase. Similarly, if there is an outbreak of a new disease – such as Zika, or an epidemic similar to HIV/AIDS in the 1980s – per-person treatment costs could increase.

So what happens?

If the amount of money the federal government sends is capped, the state would have to either spend more of its own money, or reduce the amount of health care it provides. This could leave thousands of Montanans without access to affordable health care.

Tomorrow, we will talk about who has the most to lose from putting a cap on Medicaid spending.

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