Capping Medicaid Funding could Significantly Reduce Federal Spending

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New analysis from Avalere shows Medicaid block grants and per capita caps could result in state budget gaps

Recent research from Avalere finds that capped Medicaid payments, either in the form of block grants or per person (per capita) caps, could help to slash federal spending on the program. According Avalere’s assessment, block grants would result in $150 billion fewer dollars in Medicaid spending over a five-year period, while per capita capping could save the government almost $110 billion over five years.

The new Congress has already embraced these strategies, placing Medicaid reforms and a move to block grants or per capita caps into several of the proposals created to replace the Affordable Care Act (ACA). At this time, the federal government pays a portion of the states’ total spending on Medicaid. Under Medicaid block grants, states would receive a fixed amount of dollars from the government for their Medicaid programs, while under per capita funding, each beneficiary is allotted a certain fixed amount of monies for coverage.

“Medicaid block grants and per capita caps serve as vehicles to control federal spending on the program and put more of the decision-making on things like covered services and program eligibility in the hands of the states,” said Dan Mendelson, president at Avalere. “The details of block grant and per capita caps are critically important in determining the distribution of funding across states, plans, and providers.

The ways in which lawmakers could structure a potential Medicaid funding cap, based on growth rates, allowances for historical spending, and mechanisms for quality improvement will have outsized impacts on the states. For example, a state that spends more dollars per enrollee could fare poorly under per capita caps. Meanwhile, a state that experiences a large increase in enrollment numbers will struggle under block granting.

How would capped Medicaid spending impact individual states?

In order to show how the different impacts of these two approaches affect states, Avalere analyzed how state Medicaid funding from the federal government would change under the two different options from 2001-2008. Under the Medicaid block grant approach, only North Dakota would have seen increased funding at a modest uptick of 11% in federal funding. All other states and D.C. would see a reduction in federal dollars ranging from a 4% dip in Wisconsin to a 62% drop in Arizona. With the per capita cap model, twenty-four states would see an increase in federal funding. The other 26 states and D.C. would see reductions in federal monies of up to 30%.

“The Medicaid block grant model is more limiting to states because it constrains both spending growth and enrollment growth,” said Caroline Pearson, senior vice president at Avalere. “The per capita cap model allows for greater flexibility and better absorbs marketplace fluctuations like financial downturn; however, it can still result in an overall loss of federal funding for state Medicaid programs. States may respond to block grants or per capita caps by cutting enrollment, limiting benefits, or reducing payment rates to providers and plans.”

Under the provisions of the ACA, Medicaid funding from the federal government is currently open ended. The federal government contributes a set amount of each state’s actual Medicaid spending. Under either the per capita cap or the block grant model, states may see benefits from the enhanced flexibility inherent in the structure of these programs. But, should either of those concepts be implemented, the impacts on the states will be determined by their individual current federal match rate, their Medicaid expansion and eligibility requirements, the overall scope of the benefits, the role of managed care, and the use of provider taxes.

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