Medicaid Per Capita Cap Would Disproportionately Harm Some States

WASHINGTON, June 15 -- The Center on Budget & Policy Priorities issued the following news release:

The American Health Care Act (AHCA), which the House passed on May 4, would cut federal Medicaid spending by $834 billion over ten years by converting the program to a per capita cap and effectively ending the Affordable Care Act's (ACA) Medicaid expansion.[1] Media reports suggest that Senate Republicans will retain the per capita cap without major changes in their version of the House bill.[2] While the per capita cap would shift substantial Medicaid costs and risks to all states, some states would likely face disproportionately large cuts. They include:

* States with relatively low historical spending per beneficiary. Each state's initial funding under the per capita cap would be based on its spending per beneficiary in 2016, so these states would receive less funding per beneficiary than other states. Moreover, each state's funding for subsequent years would be based on their initial-year funding, so the per capita cap would permanently cement this state variation in spending per beneficiary moving forward.

* States with relatively fast growth in per-beneficiary spending. The House bill adjusts the per capita cap amounts each year in all states by a national growth rate. This means that states with higher-than-average growth in per-beneficiary costs would face deeper cuts than other states.

* States with more restrictive Medicaid benefits or eligibility. Since states have wide flexibility to design their own Medicaid programs, benefits and eligibility vary significantly across the country. Under the per capita cap, states with more restrictive policies in these areas during the base year of 2016 would receive fewer funds than other states due to their lower spending. And they would have to finance any improvements to their programs entirely with their own funds, as no additional federal funds would be available.

* States with demographic and other factors that will likely raise Medicaid spending per beneficiary in the future. For example, each state's funding cap per senior beneficiary would effectively be based on the state's spending per senior beneficiary in 2016. But per-beneficiary costs among seniors will rise significantly over the long run as the share of elderly beneficiaries who are over age 85 -- a group with higher health costs than other seniors -- grows.

* States at greater risk of natural disasters. The per capita cap would not adjust to help states facing higher-than-anticipated per-beneficiary costs due to increased health care needs following a natural disaster like Hurricane Katrina, an epidemic like Zika, or a public health emergency like the lead poisoning in Flint, Michigan.

* States with low provider payments or especially efficient health care delivery and financing. States that have been more aggressive in implementing cost-containment strategies that lower per-beneficiary costs while preserving access to care, such as by expanding use of managed care or instituting innovative delivery system reforms, would receive lower per capita caps as a result.

Medicaid Cap Would Lead to Large and Growing Shortfalls for States

The AHCA would end Medicaid's federal-state financing partnership, in which the federal government pays a fixed percentage of state Medicaid costs -- on average, 64 percent today. Instead, beginning in 2020, federal funding would be capped at a set amount per beneficiary. The overall cap would equal federal Medicaid spending per beneficiary in 2016, rising each year by a slower rate than the Congressional Budget Office's (CBO) current projection for Medicaid spending per beneficiary. That would cut federal Medicaid spending for all states, with the cuts growing each year. (In place of the per capita cap, states could convert Medicaid to a block grant for children, adults other than seniors and people with disabilities, or both.)

Starting in 2020, the AHCA would establish different per-beneficiary caps for different groups: children, seniors, people with disabilities, adults eligible through the Medicaid expansion, and other adults. Each year, states would receive a fixed amount of overall federal funding based on each of these caps and enrollment in each beneficiary group.

To compensate for this large cost shift, states would have to raise taxes, cut other budget areas like education, or as is far likelier, cut Medicaid spending. But Medicaid is already highly efficient, with per-beneficiary costs that are lower than (and growing more slowly than) private insurance.[3] So all states would likely have to make cuts that seriously harm beneficiaries, like restricting eligibility, reducing services, cutting payments to providers, or a combination of all three approaches to rationing care. Moreover, under the House bill, these federal funding shortfalls would be even greater if health care costs grow more quickly than anticipated due to a public health emergency, development of a costly new prescription drug, or changing demographics, as states would be responsible for 100 percent of all costs above the cap.

Disproportionate Harm Reflects Historical Variation Across State Medicaid Programs

As a new Kaiser Family Foundation analysis finds, "states with certain characteristics are more at risk" under the Medicaid per capita cap.[4] By basing states' per capita cap amounts on their 2016 spending, the House bill would permanently lock in states' variation in spending, population demographics, and historical decisions.[5] The kinds of states that this approach would particularly disadvantage are outlined below. (See Table 1.)

States with Relatively Low Per-Beneficiary Spending

States vary widely in per-beneficiary Medicaid spending. Among Medicaid beneficiaries in 2014 who would be subject to the per capita cap, [6] total federal and state Medicaid spending per beneficiary was $6,393 (total spending among seniors and people with disabilities was much higher). But spending varied widely among states: from $4,003 to $10,721, the Kaiser Family Foundation found.[7] (See Table 2.)

Per-beneficiary spending tends to be lower in southern states and higher in northeastern states.[8] Substantial variation exists across states among different beneficiary groups as well. For example, average per-beneficiary spending among the states ranges from $8,623 to $44,752 for seniors, from $9,448 to $38,442 for individuals with disabilities, and from $1,520 to $5,137 for children.

Under the House bill, states with relatively low Medicaid spending per beneficiary would initially receive less overall federal funding per beneficiary (or for specific populations) than other states. Since a state's funding for subsequent years would be based on this initial-year funding, the per capita cap would permanently cement this state variation in spending per beneficiary moving forward.

States with Relatively High Growth in Per-Beneficiary Spending

Growth in per-beneficiary Medicaid costs, both overall and for specific beneficiary groups, also varies considerably by state. For example, over the 2000-2011 period, average annual growth in annual Medicaid spending ranged from minus 1.4 percent to 13.3 percent for seniors,[9] from 5.7 percent to 15.5 percent for individuals with disabilities, and from 0.4 percent to 11.6 percent for children.[10] (See Table 3.)

Because the House bill adjusts the per capita cap amounts each year in all states by a single national growth rate, states with higher-than-average growth in per-beneficiary costs would face deeper cuts than other states. In fact, under the House bill's per capita cap, states with relatively low per-beneficiary spending would not only be locked in at lower spending levels, but also would likely bear as much as 85 percent of the national federal spending cuts under the per capita cap, according to a Brookings Institution analysis.[11] That's because states with relatively low spending in a given year tend to experience faster cost growth in subsequent years, so states with the lowest spending during the base year (2016 under the House bill) could see higher per-beneficiary growth and therefore disproportionately larger cuts in subsequent years even though they are least able to reduce spending per beneficiary without harming beneficiaries.[12]

States with Limited Medicaid Benefits and Eligibility

Benefits. Medicaid gives states expansive flexibility to design their own programs -- whom they cover, what benefits they provide, and how they deliver health care services. The federal government sets minimum standards, including specifying certain categories of people that all states must cover and certain health coverage they must provide. But other benefits and eligibility categories are at the option of the state.

As a result, Medicaid benefits vary significantly by state. But states with relatively narrow Medicaid benefits during the base year would receive fewer funds than other states due to their lower costs. Such states would have to finance any subsequent improvements to their Medicaid programs entirely with their own funds, as no additional federal funds beyond the per capita amount would be available. Moreover, these states would likely have to make cuts to critical benefits earlier -- and to a deeper extent -- to compensate for the federal Medicaid funding cuts under the per capita cap.

Medicaid Home- and Community-Based Services Are Vulnerable to Cuts

Federal waivers and other state options for home- and community-based services (HCBS), which give seniors and people with disabilities care at home instead of in a nursing home, have given states new ways to address the long-term service and support needs of their residents, including seniors as well as both children and adults with serious disabilities. Progress has been dramatic: HCBS accounted for 53 percent of state Medicaid expenditures for long-term services and supports in 2014, up from 18 percent in 1995, and the number of people served with HCBS has risen dramatically, to nearly 3 million.a States now spend more for HCBS than for nursing home care.

A Medicaid per capita cap would make HCBS especially vulnerable to deep cuts. Unlike most Medicaid services, which states must cover, most HCBS are optional, so states can cut them when they face funding shortfalls. Most states already limit HCBS due to funding constraints, and HCBS are a likely target if states must make substantial cuts due to federal funding shortfalls because they spend more on optional HCBS than on any other optional benefit.

The House bill would therefore likely generate large increases in HCBS waiting lists. States would likely curtail these services, and some states could eliminate their HCBS programs altogether.

a Judith Solomon and Jessica Schubel, "Medicaid Cuts in House ACA Repeal Bill Would Limit Availability of Home- and Community-Based Services," Center on Budget and Policy Priorities, May 18, 2017, http://www.cbpp.org/research/health/medicaid-cuts-in-house-aca-repeal-bill-would-limit-availability-of-home-and.

Eligibility. States must cover certain "mandatory" eligibility groups, but many states offer more generous coverage for some individuals, such as pregnant women. As a result, Medicaid eligibility varies substantially from state to state. The annual financial strain of a per capita cap is likely to prevent any state from increasing eligibility beyond 2016 levels. Therefore, states with lower eligibility levels will be locked into these lower limits, whereas states with higher eligibility levels will continue receiving federal funding for a greater share of their low-income residents.

States Where Health Care Needs Will Grow Over Time

Aging of the senior population. The House bill's per capita cap does not address demographic changes that will increase states' per-beneficiary health care needs, poorer health status, and higher health spending over time. For example, the share of seniors who are 85 and older will rise substantially in future decades as the huge baby-boom population moves into "old-old" age.[13] But seniors aged 85 and older have much higher health care costs than young elderly people: they have more serious and chronic health problems and are likelier to require nursing home and other long-term services and supports. In 2011, average Medicaid costs were more than 2.5 times higher for beneficiaries 85 and older than for those aged 65 to 74.[14]

Under the House bill, each state's funding cap per senior beneficiary would effectively be based on the state's spending per senior beneficiary in 2016, when the share of elderly beneficiaries aged 85 and over was significantly smaller than it will be when the boomers reach old-old age. This is a serious flaw, which virtually guarantees that the formula will cause growing difficulties for states over time. For example, Alaska will see a 76 percent increase in the share of seniors who are 85 and older between 2025 and 2035.[15] As AARP explains, "shifting to capped financing in Medicaid, as proposed under the AHCA, could constrain the Medicaid program in its ability to adequately serve consumers, including millions of older adults and people with disabilities enrolled in the program today."[16]

Faster rise in disability. Approximately 10 million people with disabilities rely on Medicaid for medical and long-term care services.[17] But states expected to see a faster rise in the incidence of serious disabilities among Medicaid beneficiaries would face higher costs, and thus deeper Medicaid cuts, than other states under the House bill's per capita cap.

Moreover, per capita caps would make it difficult for states to provide all needed care if the proportion of individuals with serious disabilities rises due to a new epidemic or medical condition (or the growing prevalence of such a condition). For example, Medicaid played a central role in helping states disproportionately affected by the HIV/AIDS epidemic in the late 1980s and 1990s. But capping and cutting federal Medicaid spending would make it more difficult for states to prevent and treat similar public health emergencies in the future.[18]

States at Greater Risk of Natural Disasters

The House bill's per capita cap would not adjust to help states that face higher-than-anticipated per-beneficiary costs due to a natural disaster. Thus, the states most likely to face natural disasters -- including Florida, Rhode Island, Louisiana, California, Massachusetts, Kansas, Connecticut, Oklahoma, South Carolina, and Delaware[19] -- would be at risk of even larger Medicaid cost shifts.

Today, federal Medicaid funding rises automatically when state needs increase, allowing states to react quickly to natural disasters like Hurricane Katrina, as well as epidemics like Zika or public health emergencies like the lead poisoning in Flint, Michigan. In contrast, under a per capita cap, Michigan would have received no additional federal Medicaid funding to deal with the Flint lead poisoning crisis. It took Congress 32 months after the lead poisoning -- and 11 months after President Obama declared a state of emergency in Flint -- to send additional non-Medicaid aid to the city.

As noted, states would be responsible for 100 percent of Medicaid costs in excess of the per capita cap. States facing a natural disaster would be in no position to absorb those extra costs, as they likely would already be under significant financial strain given the need to rebuild and support families facing devastating losses.

States with Especially Efficient Health Care Delivery and Financing

The House bill would penalize states that have already instituted efficiencies to lower their per-beneficiary costs by giving them a lower per capita cap than less efficient states. Medicaid cuts under a per capita cap would disproportionately harm these states, which would likely have to cut Medicaid benefits and eligibility more than other states in order to balance their budgets. These efficiencies include:

Lower provider payments. A per capita cap would effectively lock in state cuts to Medicaid provider payment rates. Most states have made substantial cuts in the last decade to help close the budget shortfalls resulting from the recession and slow recovery, and many of these cuts have not been restored.[20] These reductions have lowered states' per-beneficiary costs and would be built into the base used to determine a state's initial per capita cap. This could pose particular problems in states that imposed especially severe restrictions on provider reimbursements -- restrictions that may not be sustainable indefinitely.[21] At the same time, the cap would also lock in the significant variation in states' provider payment rates, allowing states with higher rates to continue to pay providers more generously.

Other cost-containment strategies. States that have been more aggressive in implementing cost-containment strategies, and therefore have lower per-beneficiary costs, would receive lower per capita caps. For example, a state that has instituted efficiencies in prescription drug coverage or successfully experimented with delivery system reforms like medical homes would receive lower funding per beneficiary. It is questionable whether such a state could do much more to lower costs to stay within its per capita cap over time without impairing access to needed health care services.[22]

Managed care. Some 39 states (including the District of Columbia) have contracts with Medicaid managed care organizations,[23] and more than 60 percent of Medicaid beneficiaries are enrolled in a managed care plan.[24] (In total, 77 percent of beneficiaries are enrolled in some form of managed care, including primary care case management).[25] Some states with managed care contracts have achieved savings by improving access to primary care, providing care management, and reducing overuse of hospitals and other high-cost care.[26] These states would receive lower caps than states with lower managed care penetration, even if the non-managed care states later increase their managed care enrollment.

Innovations. Medicaid offers states significant flexibility to innovate and improve delivery of care.[27] Federal funding cuts of the House bill's magnitude would endanger this innovation. Medicaid caps' inadequate funding would make it much harder for states to make the upfront investments generally needed to develop systems that provide high-quality care at less cost. States that have not yet made these investments will likely be prevented from doing so in the future due to their lower per capita caps.

Moreover, the per capita cap significantly reduces states' return on investment in Medicaid, since each dollar of state spending would no longer be matched with federal funding.[28] This would create a further disincentive for states to invest in innovative ways to provide care to Medicaid beneficiaries.

Financing. Every state except Alaska uses taxes on health care providers such as hospitals and nursing facilities, as well as managed care plans, to help finance Medicaid.[29] States with lower provider taxes may be able to raise them to help them offset a portion of the per capita cap's cost shift to the state. But states that already rely on the maximum allowable provider taxes could not further utilize this financing tool and would likely have to make deeper cuts to benefits, eligibility, and provider rates to balance their state budgets.

See the details here (http://www.cbpp.org/research/health/medicaid-per-capita-cap-would-disproportionately-harm-some-states)

Footnotes:

[1] Center on Budget and Policy Priorities, "House Health Care Bill Ends Medicaid As We Know It," updated May 25, 2017, http://www.cbpp.org/research/health/house-health-care-bill-ends-medicaid-as-we-know-it.

[2] Associated Press, "Senate Republicans Claim Progress on Health Care Legislation," June 6, 2017, https://www.nytimes.com/aponline/2017/06/06/us/politics/ap-us-congress-health-overhaul.html.

[3] Edwin Park et al., "Frequently Asked Questions About Medicaid," Center on Budget and Policy Priorities, updated March 29, 2017, http://www.cbpp.org/research/health/frequently-asked-questions-about-medicaid.

[4] Robin Rudowitz et al., "Factors Affecting States' Ability to Respond to Federal Medicaid Cuts and Caps: Which States are Most at Risk?" Kaiser Family Foundation, June 9, 2017, http://www.kff.org/report-section/factors-affecting-states-ability-to-respond-to-federal-medicaid-cuts-and-caps-which-states-are-most-at-risk-issue-brief/.

[5]Ibid.

[6] Under the House bill, spending for Medicaid enrollees who are only eligible for partial benefits (such as emergency services) is not subject to the cap.

[7] Kaiser Family Foundation, "Data Note: Variation in Per Enrollee Medicaid Spending," June 9, 2017, http://www.kff.org/medicaid/fact-sheet/data-note-variation-in-per-enrollee-medicaid-spending/.

[8] Kaiser Family Foundation, "Data Note: Variation in Per Enrollee Medicaid Spending Across States," February 23, 2017.

[9] This calculation excludes prescription drug spending to account for the shift in prescription drug costs from Medicaid to Medicare for the dual eligibles starting in 2006 with the implementation of the Medicare drug benefit.

[10] Kaiser Family Foundation, "Average Growth in Annual Medicaid Spending from FY2000 to FY2011 for Full-Benefit Enrollees," January 28, 2015, http://www.kff.org/medicaid/state-indicator/average-growth-in-annual-medicaid-spending-from-fy2000-to-fy2011-for-full-benefit-enrollees/.

[11] The Brookings analysis estimated the impact of the cap in 2011 if it were in effect starting in 2004 based on state spending in 2000. Loren Adler, Matthew Fiedler, and Tim Gronniger, "Effects of the Medicaid Per Capita Cap Included in the House-Passed American Health Care Act," May 10, 2017, Brookings Institution, https://www.brookings.edu/research/effects-of-the-medicaid-per-capita-cap-included-in-the-house-passed-american-health-care-act/.

[12]Ibid.

[13] Matt Broaddus, "Population's Aging Would Deepen House Health Bill's Medicaid Cuts for States," Center on Budget and Policy Priorities, March 24, 2017, http://www.cbpp.org/blog/populations-aging-would-deepen-house-health-bills-medicaid-cuts-for-states.

[14] CBPP analysis of fiscal year 2011 Medicaid Statistical Information System data.

[15]Ibid.

[16] Brendan Flinn and Ari Houser, "Capped Financing for Medicaid Does Not Account for the Growing Aging Population," AARP Public Policy Institute, June 2017, http://www.aarp.org/ppi/info-2017/ahca-capped-financing-for-medicaid1.html.

[17] Center on Budget and Policy Priorities, "GOP Health Bill's Medicaid Cuts Threaten Care for People with Disabilities," June 2, 2017, http://www.cbpp.org/research/health/gop-health-bills-medicaid-cuts-threaten-care-for-people-with-disabilities.

[18]Op cit., Kaiser Family Foundation, June 9, 2017.

[19] "CoreLogic Identifies US States at Highest Risk of Property Damage Loss from Natural Hazards," September 10, 2014, http://www.corelogic.com/about-us/news/corelogic-identifies-us-states-at-highest-risk-of-property-damage-loss-from-natural-hazards.aspx.

[20] Vernon Smith et al., "Moving Ahead Amid Fiscal Challenges: A Look at Medicaid Spending, Coverage and Policy Trends," Kaiser Commission on Medicaid and the Uninsured, October 2011, https://kaiserfamilyfoundation.files.wordpress.com/2013/01/8248.pdf.

[21] Edwin Park and Matt Broaddus, "Medicaid Per Capita Cap Would Shift Costs to States and Place Low-Income Beneficiaries at Risk," Center on Budget and Policy Priorities, October 5, 2012, http://www.cbpp.org/research/medicaid-per-capita-cap-would-shift-costs-to-states-and-place-low-income-beneficiaries-at.

[22]Op cit., Park and Broaddus 2012.

[23] Kaiser Family Foundation, Medicaid MCO Enrollment, March 2017, http://www.kff.org/other/state-indicator/medicaid-enrollment-by-mco/.

[24] Centers for Medicare & Medicaid Services, Medicaid Managed Care Enrollment and Program Characteristics, 2014, Spring 2016, https://www.medicaid.gov/medicaid-chip-program-information/by-topics/data-and-systems/medicaid-managed-care/downloads/2014-medicaid-managed-care-enrollment-report.pdf.

[25] Kaiser Family Foundation, Total Medicaid Managed Care Enrollment, July 2014, http://www.kff.org/medicaid/state-indicator/total-medicaid-mc-enrollment/.

[26] Kaiser Commission on Medicaid and the Uninsured, "Medicaid Managed Care: Key Data, Trends, and Issues," February 2012, https://kaiserfamilyfoundation.files.wordpress.com/2012/02/8046-02.pdf.

[27] Judith Solomon, "Caps on Federal Medicaid Funding Would Give States Flexibility to Cut, Stymie Innovation," Center on Budget and Policy Priorities, January 18, 2017, http://www.cbpp.org/research/health/caps-on-federal-medicaid-funding-would-give-states-flexibility-to-cut-stymie.

[28]Op cit., Adler, Fiedler, and Gronniger, 2017.