Politics & Policy

Per Capita Caps Can Solve the Medicaid-Expansion Dilemma

(Photo: Robert Kneschke/Dreamstime)
But they shouldn’t reward states for enrolling as many people in the program as possible.

Attempts to repeal and replace the Affordable Care Act have repeatedly run aground on the issue of cutting funding for the law’s Medicaid expansion. Senator McCain (R., Ariz.), for example, felt aggrieved that his state stood to lose billions in federal payments, despite its Medicaid program costing less than the national average.

The expansion of Medicaid is expected to account for $70 billion of the $119 billion cost of the ACA in 2017. As this spending is concentrated in 31 states (i.e., those that chose to expand the program) and directly tied to the provision of specific services (i.e., medical care for able-bodied adults earning up to 138 percent of the poverty level), its proposed rollback has caused a fierce backlash from lobbyists for medical providers and is responsible for the much of the current impasse on Capitol Hill.

The Senate GOP’s Medicaid reforms included two key provisions. First, the bill would have reduced the 90 percent federal subsidy for states to provide Medicaid services to able-bodied adults to align with the 50 to 75 percent subsidy for services provided to the elderly, disabled, and pregnant women. And second, by imposing a “per capita cap” on federal Medicaid spending, it would have limited the amount by which each state could increase the federal subsidies per Medicaid enrollee they receive every year.

Per capita caps are designed to enable a more deliberate distribution of federal Medicaid funds between states. They could provide the basis for GOP agreement on replacing the ACA — if they’re structured a bit differently than they were in the Senate bill. Set up correctly, they could be well-suited to preventing the over-expansion of Medicaid enrollment, which is primarily responsible for driving up program costs, without concentrating cuts on expansion states that overall have little fat in their systems.

Non-expansion states were right to reserve Medicaid’s uniquely generous benefits for those who are unable to work. They are also right to complain that the status quo leaves them unfairly disadvantaged, and forced to operate with less money per enrollee. But, from a broader perspective, the fundamental inequity in Medicaid (and source of the threat of runaway costs to the program) is the disparity in subsidies provided by the federal government between high-spending and low-spending states, not that between expansion and non-expansion states as such. Vermont’s federal Medicaid subsidy per resident under the poverty line is more than double that received by McCain’s Arizona — even though both are expansion states. This is a consequence of the federal government reimbursing states a fixed percentage of what they spend, no matter how much that is.

The rapid growth in the cost of the Medicaid program over recent years has been driven by increased enrollment, more than rising costs per enrollee. Medicaid spending grew from $206 billion in 2000 to $545 billion in 2015. Over that period, enrollment increased by 99.6 percent, whereas per enrollee spending expanded by only 34.7 percent. With these trends expected to continue, and recent expansions of enrollment as a share of the population adding relatively healthier and cheaper beneficiaries, the per enrollee caps on payments to states proposed by the Senate GOP are unlikely to do much to constrain the program’s soaring cost.

This suggests a path to compromise that is consistent with a concern for the solvency and focus of the Medicaid program, and that does not treat expansion or non-expansion states unfairly: Republicans should allow both expansion and non-expansion states to continue claiming federal matching funds according to the rates established by ACA up to the GOP’s proposed per capita caps. This could include 90 percent reimbursement for expansion enrollees — though only up to the cap, above which reimbursement would of course be zero percent.

But these caps should be indexed to the size of the low-income population of each state, rather than the number of individuals that each state chooses to enroll. This would allow states to give more generous benefits to fewer enrollees without losing funding, rather than encouraging them to enroll as many people as possible to soak up federal funds.

The GOP may be able to improve the value of its proposed reform along with its prospects for passage.

In addition, the caps should adjust over time to eliminate existing Medicaid-funding gaps between the states. Although the Senate bill includes a provision to adjust the caps by 0.5 to 2 percent in relation to states’ levels of per enrollee spending, these adjustments do not compound to narrow gaps over time, and may actually hit some low-spending states (whose Medicaid enrollment is focused on the very ill) hardest.

For states whose annual federal Medicaid subsidy per resident under the poverty line exceeds the national average, the level of that payment above the national average should be reduced by 5 percent per year. The cap for states receiving subsidies below the average should increase by an equivalent amount, so that the inequity between states could be eliminated over 20 years.

Such a reform would allow expansion and non-expansion states to both be treated fairly, while more effectively addressing the broader challenge of over-inflated Medicaid caseloads. It would impose less of a sudden and unfairly distributed hit to state budgets, would protect expansion states whose overall Medicaid costs have been well-controlled, and would do more to sustainably curtail the growth of Medicaid spending by ensuring that cuts come from the most over-extended programs.

The scramble for votes in Congress often reduces the quality of policy. But by using per capita caps to address the expansion of Medicaid enrollment, the GOP may be able to improve the value of its proposed reform along with its prospects for passage.


Medicaid Needs Fundamental Reform 

The Centrist History of Medicaid Spending Caps

Entitlement Fraud: The Great American Rip-Off

— Chris Pope is a senior fellow in health policy at the Manhattan Institute.

Chris Pope is a senior fellow at the Manhattan Institute.

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