The Medicaid Spending Caps Are More Complex Than They Seem

by Max Bloom

Much has been said about the per capita spending caps on Medicaid in the Senate health-care bill. But little attention has been paid to the fact that the spending caps are not uniform. Most importantly, there are special rules for the disabled and the elderly, who together account for about one-quarter of Medicaid enrollment.

To get technical, the per capita caps work by penalizing states whose “adjusted total medical assistance expenditures” exceed their “target total medical assistance expenditures.” In other words, states that spend more on Medicaid than they’re supposed to lose some of their federal matching funds the following year.

The calculation for how much states are supposed to spend depends on the composition of the eligible population. For most of the Medicaid population — the non-disabled and the non-elderly — the spending targets are set to increase annually until 2025 by the medical-care component of the Consumer Price Index, which tracks health-care inflation. After 2025, they will increase by the CPI-U, which tracks overall inflation for urban consumers. Based on recent levels of inflation, this would allow spending to increase by about 2–4 percent per year until 2025, and around 1–2 percent afterward, although these numbers could change dramatically depending on inflation.

For the elderly and the disabled, the Senate bill allows the spending targets to increase annually by health-care inflation plus one percentage point until 2025, and, afterward, at the same rate of urban inflation as for the non-elderly and the non-disabled. This makes sense politically, since it’s harder to publicly cut back on care for the elderly and the disabled than it is to cut, say, care for the middle-aged, but it will also mean higher expenditures over the next eight years. A program that becomes more expensive at a rate of 4 percent every year will cost about 10 percent more in a decade than a program that sees 3 percent annual cost growth. But given how unpopular the Medicaid cuts are already, this is probably necessary.

The other nuances of the spending caps are managed through the “adjusted total expenditures” instead of the “target expenditures” — so certain expenditures don’t count against the spending targets imposed by the Senate bill. These include payments to “disproportionate share hospitals” — hospitals that receive a large number of low-income patients — as well as payments to beneficiaries of the Indian Health Service and a few other categories.

Most notably, expenditures on children who are made eligible for Medicaid on the basis of being blind and disabled are excluded. This too is politically necessary since cuts to health care for disabled children play terribly among virtually all constituencies. But it doesn’t make very much sense: If per capita caps make sense for children and make sense for the disabled, then why don’t they make sense for disabled children? And there are compromise solutions available: The Senate, for instance, could allow spending on disabled children to increase at health-care inflation plus two percentage points, for instance. But instead, for more or less understandable reasons, the Senate will preserve the open-ended system of matching funds for disabled children, which will mean that federal funds for this purpose will be primarily directed to the wealthier states that need them least, with little incentive to cut costs.

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