Behind closed doors, Senate Republicans are struggling to agree on how to restructure Medicaid as part of their quest to repeal and replace Obamacare.
One of the biggest points of contention for the sequestered senators is whether and how to convert open-ended federal funding for all Medicaid beneficiaries into a system of capped payments to the states that would cut the growth of those contributions.
That change would affect all of the nearly 70 million Americans—including children, pregnant women, and elderly and disabled people—who now receive benefits through the $552 billion program, for which the federal government picks up about 57% of the cost.
Designing a capped Medicaid contribution model that’s fair to different states and maintains adequate coverage is daunting because state spending growth varies based on policy choices, population health, the competitiveness of provider markets and program efficiency, experts say.
A fixed cap could penalize lower-spending states that were operating too lean and needed to grow faster, or reward higher-spending states where cost-saving reforms were needed.
Senate Republicans, in their private meetings to draft a bill to repeal and replace the Affordable Care Act, are working off the House GOP’s American Health Care Act, which, starting in 2020, would convert total federal Medicaid payments into per-capita contributions for five different categories of beneficiaries. No GOP senators so far have voiced explicit opposition to that idea.
Those payments would be based on each state’s spending for the 2016 fiscal year. They would grow annually by the medical Consumer Price Index, which the Congressional Budget Office projects will lag behind actual Medicaid per-capita cost growth by 0.7 percentage points—3.7% versus 4.4%. For the elderly and disabled, the per-capita payments would rise by a higher rate, medical CPI plus 1 percentage point.
Alternatively, states could choose to receive payments as flat block grants, which would grow by the regular Consumer Price Index—more slowly than under the medical CPI—but would offer states greater flexibility in designing their programs.
Senate conservatives are pushing to peg per-capita growth at the CPI, which the CBO projects will be 2.4%.
The Republicans’ proposed per-capita payment model “would freeze differences in place and project them indefinitely into the future,” said Matt Fiedler, a Medicaid expert at the Brookings Institution who has studied the potential state impact of the caps. “It’s an essentially problematic structure.”
Per-capita Medicaid spending among the states varies widely. In 2011, the last year for which full cost data were available by state, per-capita Medicaid spending in Alaska, Montana, New York and Pennsylvania totaled from $7,500 to more than $10,500. In contrast, spending in Florida, Illinois and Oklahoma was $4,000 to $5,300, according to the Kaiser Family Foundation.
Rather than using historical costs, Republicans could craft the system to even out the states, by setting lower caps for higher-spending states and higher caps for lower-spending ones. But that would cause severe short-term disruption.
“If you don’t base (the caps) on where states are starting off, there’s an immediate shock, where states with costs over the caps have to come up with tremendous amounts of money,” Fiedler said.
Choosing a starting point for the cap calculation is perilous. Basing the cap on a particular benchmark year could permanently lock in lower federal payments to states that faced a tight budget year and had to sharply restrain Medicaid spending.
Lawmakers also face challenges in reconciling the needs of Medicaid expansion and non-expansion states. If expansion efforts aren’t factored into the formula, the 31 expansion states would suffer stiff cuts. But legislators from non-expansion states say they shouldn’t be penalized. They are pushing for an upward adjustment in the formula for their states to bring them to parity with the higher-spending expansion states.
Regardless of how Senate Republicans design the caps, “no states would really come out winners because the overall goal is to reduce federal spending,” said Robin Rudowitz, a Medicaid researcher at the Kaiser Family Foundation.
The CBO projected in March that the House bill’s Medicaid changes, including the capped payment system and the phase-out of enhanced federal expansion funding, would slash federal Medicaid spending by $839 billion over 10 years, with a 26% cut by 2026. Providers, insurers, patient advocacy groups and policy experts warn this would force states to whack eligibility, benefits and provider payments.
“Federal Medicaid funding caps simply shift the cost burden onto local and state governments, providers, and individual beneficiaries,” Sister Carol Keehan, CEO of the Catholic Health Association, said in March.
To maintain their current Medicaid programs in the face of those federal cuts, states would have to boost spending from their own coffers by 8% in 2018, rising to 37% by 2026, according to an estimate by Health Management Associates.
Ohio, for instance, would need to contribute an additional $6.4 billion to $8.5 billion in state dollars between 2019 and 2025 to maintain the program at its current level, according to the Center for Community Solutions in Cleveland.
Given the difficult fiscal situations facing many states, it’s more likely they would hack provider payment rates and shrink eligibility and benefits, said Vernon Smith, a Medicaid expert at Health Management Associates and former Michigan Medicaid director who participated in a 1996 effort to transform Medicaid into a capped system. “The thing I took away from that discussion 21 years ago is how hard it is to craft a formula that fairly accounts for the actual legitimate costs that a state incurs in serving its Medicaid population,” Smith said.
Pennsylvania state Rep. Gene DiGirolamo, a Republican who chairs the House Human Services Committee, fears the capped payment model would force his state to make big reductions in its traditional Medicaid program, which covers about 1 million children and 1 million seniors and disabled people.
“Someone has to explain to me how it’s a good thing when we’re taking care of our most vulnerable people, and we’ll have to scale down the benefit package or cut the number of people we’re covering,” he said. “This will be nothing short of a disaster.”
Joe Antos, a conservative health policy analyst at the American Enterprise Institute, acknowledged that establishing a viable Medicaid capped-payment model is challenging. But he said the legislation can set out a general framework that later can be refined through HHS administrative rules.
Beyond the technical difficulties, however, there’s another big reason that state officials, patient advocates and Medicaid experts are leery about the capped-payment model. Once the framework is in place, Congress has a handy lever for braking spending, compared with the current system where spending is out of policymakers’ control, determined by actual healthcare costs and the state of the economy.
Deborah Bachrach, a partner at Manatt Health and former Medicaid director of New York, said lawmakers could readily dial back the growth rate for per-capita payments from medical CPI to CPI, putting added pressure on states, patients and providers.
Indeed, using a few keystrokes, House Republicans already did that. In the final version of their bill, they lowered the growth rate for most beneficiaries to medical CPI, from medical CPI plus 1 in an earlier leaked version.
“Once we shift to a national trend rate, it’s relatively easy for Congress in a bad budget year to hit the budget target by ratcheting down the rate,” Bachrach said.