June 23, 2016

House Republicans Propose Real, Though Incomplete, Medicaid Reform

Brian Blase

Former Senior Research Fellow
Summary

Sensible Medicaid reform must accomplish two aims: reduce the unsustainable trajectory of federal and state Medicaid spending, and produce better outcomes for people most in need of public assistance. The House task force proposal would take steps to accomplish both aims. While much more work needs to be done, this is generally a good start.

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Medicaid, the joint federal-state program that finances health care and long-term care expenses for disabled and low income individuals, needs fundamental reform. Medicaid provides far too many enrollees with relatively little value, produces relatively poor outcomes, and crowds out private sector coverage.

Many of the program’s problems emanate from the open-ended federal reimbursement of state Medicaid expenditures. Last year, the federal government paid 63% of state Medicaid bills. The current financing structure discourages both states and the federal government from caring much about the value the program delivers and allows interest groups to argue that states should increase Medicaid for the economic stimulus it generates, ignoring that Medicaid spending must be financed by higher federal taxes.

The open-ended federal reimbursement is causing Medicaid to crowd out state priorities such as education, infrastructure, and adequate funding of public sector pensions. The figure below shows how Medicaid has risen as a percentage of state spending over time and how other categories of state spending have declined.

Percentage of Key Categories of State Expenditures, Including Federal Funds

The open-ended federal Medicaid reimbursement has also produced an explosion of federal spending. Between 1990 and 2015, federal Medicaid spending increased from $77 billion (in 2015 dollars) to $350 billion, and program enrollment more than tripled during this period.

For a myriad of reasons, it’s hard to significantly change government programs, even ones that provide a small benefit relative to their cost. Yesterday, the House Republicans’ health care task force released a blueprint for health care reform, which includes Medicaid reform. Fortunately, the Medicaid portion of the blueprint recognizes that the federal government should no longer provide an open-ended reimbursement of state Medicaid spending—the single most important policy change needed for the program.

The task force proposal allows states the choice of a block grant or a per capita allotment and changes federal rules to allow states greater freedom to reform their programs. While more meat needs to be put on the bones of the proposal, the Medicaid component of the health care blueprint shows signs that serious legislation could emerge that would be a vast improvement from the status quo.

The House Republicans’ Medicaid Financing Proposal

The Medicaid proposal contained in the task force plan has two central elements: 1) replacing the open-ended federal financing structure with, at states’ option, a per capita allotment or a block grant, and 2) increasing the ability of states to reform their programs and transition people off Medicaid by reducing federal rules and streamlining bureaucracy.

Starting in 2019, the task force plan allows states to receive federal Medicaid funding through block grants, or through per capita allotments, which were proposed in 1995 by then-president Bill Clinton. If states elect the per capita allotment option they will receive an allotment for each enrollee in the four major enrollment groups—seniors, the blind and disabled, children, and non-disabled, working-age adults—with varying allotment amounts for each group.

The proposal indicates that the per capita amounts would be based on the 2016 federal share of expenditures for each category of enrollees, adjusted for inflation. The proposal also indicates that the inflation rate would be less than under current law, but that rate is not specified.

Under the block grant option—the longstanding Republican Medicaid reform position—“funding would be determined using a base year in a manner that would assume states transition individuals currently enrolled in Obamacare’s Medicaid expansion into other sources of coverage.” The proposal further indicates that “states would receive maximum flexibility for the management of eligibility and benefits for non-disabled, non-elderly adults and children” if they select a block grant.

Any Medicaid reform proposal must also specify what will be done with the population made eligible for Medicaid by the ACA. Under the proposal, states that have not yet expanded Medicaid would be prohibited from doing so. This effectively means that the plan would eliminate the enhanced match—the federal government reimburses the ACA expansion population of generally non-disabled, working-age adults at a rate of 100% from 2014 to 2016 and never below 90% thereafter—for states that have not yet expanded. People in those states who would have been covered under the terms of the ACA Medicaid expansion would instead qualify for a tax credit—a core component of the House Republicans’ task force plan—to assist in the purchase of a private insurance plan.

The task force plan also allows states that have expanded Medicaid to reduce income eligibility thresholds below the 138 percent of federal poverty level threshold in the ACA or to phase out the expansion by freezing enrollment. People who are no longer eligible for Medicaid in those states, would be eligible for a tax credit to purchase a private plan. The task force also proposes to slowly phase down the enhanced reimbursement rate for the ACA expansion population until it reaches the normal state reimbursement rate in the hopes of “transitioning many of the able-bodied adults from Medicaid into commercial coverage.”

In addition to changing Medicaid’s financing structure, the task force blueprint outlines several ideas for how Republicans would significantly loosen the federal rules governing state programs. I will discuss this aspect of the proposal in a subsequent piece, but, if adopted, these policies would reduce federal rules and bureaucracy and allow states much greater discretion over eligibility requirements as well as plan design, particularly for non-disabled adults.

Evaluating the Medicaid Financing Proposal

The three key questions to ask of any Medicaid financing proposal that ends the open-ended federal reimbursement are: 1) what is the level of federal commitment? 2) how are the funds divided among the states? and 3) how are state incentives affected? These questions touch on deep divisions and profoundly affect both states and interest groups. The first question is crucial given that the large and growing federal budget deficits are primarily driven by unsustainable federal commitments through Social Security, Medicare, Medicaid, and the ACA, but I will focus on the last two questions.

For all enrollees except the ACA expansion population, states’ federal Medicaid reimbursement rate is inversely related to states’ per capita income. The idea was to provide greater federal support for poorer states. However, the reality is more complicated as some states, exemplified by New York, have developed sophisticated financing gimmicks to leverage federal funds without actual state contributions. Unfortunately, federal funding is increasingly a function of the creativity of state financing gimmicks.

In addition to different state approaches to financing gimmicks, some states spend a lot more on Medicaid per enrollee than other states. For example, New York spends more than three times as much per disabled Medicaid enrollee as Alabama. Although Alabama is a much poorer state, it receives $10,000 less than New York in federal funding per disabled Medicaid enrollee. Grandfathering in existing spending levels, which the task force plan appears to do, should be reconsidered since doing so seems to unjustly award states with high existing spending like New York and punish states with lower existing spending like Alabama.

Moving forward, it is also important to understand the different effects on state incentives produced by block grants and per capita caps. One concern, with per capita allotments is the incentive created for states when they receive additional funding for each program enrollee. This will undoubtedly cause some states, aided by interest groups in those states, to seek to enroll as many people, particularly relatively healthy people, into their programs as possible.

The ability of states to do this for the blind and disabled population is not concerning since those enrollees generally have already gone through a screening process to gain eligibility for a disability program—Supplemental Security Income. Moreover, the phase down in the elevated match for the expansion population does diminish the incentive for states to enroll non-disabled, working-age adults into Medicaid. Moving forward, the task force may consider how to blend per capita caps with block grants to best achieve Medicaid financing reform.

With respect to the ACA Medicaid expansion, the task force approach moves in the right direction. Given the evidence that Medicaid is such a poor program for non-disabled adults in particular, allowing states to move as many non-disabled adults off of Medicaid is sensible. Thus, the decision of the task force to ratchet down the elevated match rate for the expansion population is important. While reducing the elevated rate eliminates the bias against the traditional Medicaid enrollment groups, it will also provide states with an incentive to transition non-disabled, working-age adults off of Medicaid. Of course, it is important to consider the costs of this approach, meaning the task force needs to specify the size of the tax credit.

Conclusion

Sensible Medicaid reform must accomplish two aims: reduce the unsustainable trajectory of federal and state Medicaid spending, and produce better outcomes for people most in need of public assistance. The House task force proposal would take steps to accomplish both aims. While much more work needs to be done, this is generally a good start.