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eforms to Medicaid proposed in the Republican-led American Health Care Act have provoked a certain degree of hysteria. Politicians, interest groups, and lobbyists have launched epithets at them ranging from “unsustainable” and “damaging” and have warned that the reforms are the “real death panels” and that “people will die.” A recent report from the Brookings Institution turned up the heat by suggesting that “implementing a Medicaid per-capita cap during the 2000s would have reduced federal Medicaid funding to more than half of states.”
The federal government currently allocates Medicaid money to states according to how much they are themselves able to spend on the program. The AHCA’s proposed caps would limit the amount by which each state is able to automatically claim increases in funding per Medicaid enrollee from federal taxpayers in any particular year.
Taken in context, these proposed caps are extraordinarily modest. Far from threatening “to end Medicaid as we know it,” the per-capita caps would do little to alter the program’s existing commitments, and serve mainly to increase the scrutiny applied to expansions of benefits that states may make in the future.
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The Medicaid program was designed to help states meet health care needs they aren’t able to finance by themselves. The poorest states have the largest low-income populations and the greatest unmet medical needs, but they also have the shallowest pool of taxable resources. For every dollar that states spend on Medicaid services, the federal government provides $1 to $3, depending on the size of the state’s low-income population. In theory, this provides the most resources to the poorest states with the least ability to fund medical services out of their own tax revenues.
In practice, though, wealthier states are able to put up more money to be matched by the federal government, which means that states needing the least help receive the greatest share of federal funds.
Consider the cases of Alabama and Connecticut, representative of high- and low-spending Medicaid programs. In Alabama, 17 percent of the state’s population lived under the poverty level in 2015, compared with 9 percent in Connecticut. Yet in February of this year, 18 percent of Alabama residents were enrolled in Medicaid, compared with 21 percent in Connecticut. Alabama’s Medicaid program received much less federal support ($786) per capita than Connecticut ($1,253), a disparity little altered by the Affordable Care Act’s expansion of Medicaid for able-bodied adults.
Per-capita caps are a modest proposal that would begin to address this inequity. They would not reduce the funds available to any state. Instead, they would merely limit the yearly increase in federal subsidies which each state could automatically claim per individual enrolled. From 1999 to 2015, Medicaid per-capita spending increased at an average of 2 percent per year; the metric proposed by the AHCA as a cap increased at a rate of 3.7 percent per year.
The reality of such caps are hardly recognizable in former Democratic Congressman Henry Waxman’s recent characterization of “cuts growing larger each year” that would “deny care to the most vulnerable among us.” More accurate is Waxman’s 1996 assessment of per-capita caps as a sensible response “to the pleas of those who want more cost discipline in Medicaid without terminating the guarantee of basic health and long-term care.”
Medicaid caps can — and likely would be — revised every year in the federal budget by future sessions of Congress. They are unlikely to be enforced to prevent Alabama from bringing its Medicaid spending in line with the national average, nor would they prevent Congress from acting against sudden public health challenges in states. Their main practical effect is likely to be constraining attempts by the wealthiest states to further expand their benefit packages beyond national norms.
The recent experience of states scrambling to pay for Sovaldi, a highly effective yet expensive drug used to treat hepatitis C, serves as a demonstration of the inadequacy and inequity of Medicaid’s current matching-fund setup. The proportion of Medicaid beneficiaries with hepatitis C receiving prescriptions for Sovaldi in the first quarter of 2014 ranged from 0.8 percent in West Virginia to 39 percent in Hawaii. Beneficiaries in poorer states would likely fare better if Congress were to appropriate funds directly for hepatitis C care rather than relying on the misguided assumption that Medicaid’s matching-fund setup takes good care of them.
In 2015, Connecticut’s Medicaid program spent $2,077 per inhabitant, compared to $1,037 in Alabama. Yet this disparity in spending is not explained by Connecticut being a Medicaid expansion state nor by differences in the regional cost of living. Connecticut spends little more per person on hospital services, $520, than Alabama does, $410. The difference between the two is largely a matter of the breadth of eligibility for long-term care, on which Connecticut spent $935 per capita and Alabama $307.
The AHCA does not go as far as it could in closing disparities between the states. The bill could be improved by having per-capita Medicaid caps grow slower in states that spend above the national average of Medicaid spending, and should also be amended to prevent states from claiming greater payments merely by increasing enrollment.
The proposed per-capita caps on Medicaid spending won’t give us an equitable distribution of Medicaid spending overnight. But they’re a necessary first step in that direction.
Chris Pope is a senior fellow at the Manhattan Institute.