Capped Federal Medicaid Funding: Implications for Texas

By Deborah Bachrach, Partner | Cindy Mann, Partner | Anne Karl, Partner

Editor’s Note: Since its inception, Medicaid has been financed jointly by the federal and state governments. There are no caps on the federal government’s core financial obligations; federal funding is guaranteed as a share (known as a match) of all state expenditures that follow federal rules. Republican congressional leadership and President Trump are seeking to replace the current matching system with a fixed allocation of federal dollars paid through block grants or per capita caps.

In a new white paper prepared for the Texas Alliance for Health Care, summarized below, Manatt Health draws on recent proposals to examine the factors that go into calculating the amount of federal dollars that would be allocated to each state in a capped funding model and considers how they might play out for the State of Texas. Because capped funding proposals generally provide states with greater flexibility than the current Medicaid funding model, the paper also reviews the type of flexibilities that might be available to Texas under such proposals.

Click here to download the full paper free.

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Medicaid Financing Models

Under the current system, the federal government matches state spending on Medicaid so long as the state follows federal Medicaid rules. Texas’s federal matching rate for 2017 is 56%—meaning that the federal government generally pays 56% of all allowable Medicaid expenditures.

By contrast, under capped funding, the amount of federal dollars is set in advance and does not increase when the state’s healthcare costs increase beyond the preset amount. The base funding amount is trended annually generally using a national trend rate set below the rate of medical inflation. At least to date, all such proposals both cap and reduce the amount of federal dollars available to states.

Two types of capped models have been advanced:

• Block grants impose an aggregate cap on federal funding for each state. If costs are above the federal caps—due to enrollment or rising healthcare costs—states would bear all of those costs.
• Per capita caps limit federal funds on a per enrollee basis. Unlike a block grant, federal payments would rise with enrollment (that is, the state is paid per enrollee up to the cap), but like a block grant, federal payments would not vary based on healthcare costs. Notably, a per capita cap could also include a state or national spending cap, placing states at risk for increasing enrollment and rising healthcare costs in much the same way as a block grant.

Key Features of Capped Funding Models and Considerations for Texas

To evaluate the potential impact of capped funding, Texas will want to review key elements that affect the amount of federal Medicaid dollars it will receive—the base funding, trend rate, and treatment of supplemental payments and waivers—and consider how Texas fares relative to current law and other states. In some cases, the implications for Texas depend on whether capped funding is structured as a block grant or a per capita cap. The financial impact of capped funding also will be affected by the flexibility provided.

Base Funding. The proposals typically set initial state allotments based on each state’s historic federal payments. Block grants are generally based on a state’s total federal Medicaid payments during a base year, while per capita caps would be based on historic spending during a base year for specific populations, such as children, adults, the elderly or people with disabilities. In doing so, capped funding models essentially lock in prior state decisions with respect to eligibility levels, covered benefits and payment rates.

Texas will likely have additional programmatic flexibility to change some or all of its earlier programmatic decisions, but the state’s previous decisions, which are reflected in its base payments, will largely determine the funding available to make any future changes.

• Eligibility. In a block grant context, relatively low eligibility levels will translate into relatively low base payments; they are less informative in the context of a per capita cap. Texas has one of the lowest eligibility levels for parents in the country and like other nonexpansion states it does not cover childless adults at any income level. The eligibility issue that has garnered the most attention in connection with proposals to cap federal Medicaid funding relates to whether a state has elected to expand Medicaid under the Affordable Care Act. The 31 states plus the District of Columbia that expanded Medicaid received an additional $72.6 billion in federal funding in 2016—funding that did not flow to the 19 nonexpansion states, including Texas. (Texas would have received about $10 billion in 2016 had it expanded Medicaid.) A critical question for Texas is whether in setting the caps Congress will address the disparities between expansion and nonexpansion states.
• Benefits and payment rates. State decisions on covered benefits and plan and provider rates likewise drive Medicaid expenditures and therefore the historical base on which the capped funding is calculated. While eligibility levels affect base funding decisions with respect to block grants, benefit and rate decisions affect the base amount with respect to both block grants and per capita caps because they drive total state spending, as well as per enrollee spending.

A comparison of Medicaid spending per enrollee provides further insight into how Texas would fare under both types of capped funding models as compared to other states and whether it would have a relatively robust base payment available to underwrite future costs.

The most recent data available for all states is 2011; in that year, Texas spent more per enrollee than most states on children, but considerably less on elderly and disabled beneficiaries. With the elderly population expected to grow in every state, this will disadvantage Texas under most capped funding proposals. Ironically, Texas may also be disadvantaged by having made greater strides than many other states on lowering its spending on long-term services and supports by improving access to home and community-based services.

Trend Rate. As important as the base payment is in determining the amount of federal dollars that a state will receive, the trend rate is likewise important—particularly over time. The trend rates in recent proposals are tied to a national, not a state-specific, indicator—usually the Consumer Price Index (CPI) or Gross Domestic Product (GDP) plus one. These trend rates are projected to grow more slowly than overall healthcare costs or Medicaid spending. States might be able to lower program costs, but to the extent these trend rates do not keep up with actual costs, states will bear these added costs.

Supplemental Payments and Waivers. Virtually every state relies on some form of supplemental payment or waiver funding, but it is not clear from most of the proposals whether these funds would be built into the base payment or continue to be available to states as a separate stream of funding. These issues are of particular importance to Texas which receives a greater percentage of total Medicaid dollars through supplemental payments and waiver funds than any other state in the nation.

State Share. While the federal government, on average, covers 62% of the cost of Medicaid nationally and 56% in Texas, state spending in the program is significant. Texas will want to look closely at a number of features relating to state share:

• State spending requirement. Many of the proposals are unclear as to whether states would have to spend their own funds as a condition of receiving capped federal funds. If a state-matching requirement remains and the federal funds that states can draw down are reduced, Texas’s state-spending requirement will also be reduced given that Texas law limits state spending for Medicaid to those expenditures that will qualify for federal matching payments. This would mean that total reductions in program spending would be much higher than the federal spending reductions unless Texas law was changed.
• Matching rate. Assuming state spending is required, the capped funding proposals generally do not address the federal match rates that would be applied, nor whether higher matching rates currently available for certain populations and services would continue. Texas currently receives enhanced matching funds for its IT and eligibility systems and certain program integrity initiatives. Texas also was the 5th state in the nation to take advantage of the Community First Choice federal option, which provides enhanced federal matching payments (a six percentage point increase) for the home and community-based services provided through the program.
• Changes in how states can raise their nonfederal share. State spending (and therefore total program spending) could also be affected if the rules relating to how states can raise their nonfederal share are changed. Texas currently relies heavily on both intergovernmental transfers (IGTs) and provider taxes to fund the nonfederal share of Medicaid costs.

Flexibility

Capped funding is typically coupled with additional state flexibility. While states generally welcome more flexibility, when that flexibility is linked to a reduction of and a cap on federal Medicaid funding, states will want to consider the flexibility they are looking for and the extent to which it will help them manage program costs with less federal funding. In addition, states will want to consider whether that flexibility is available today through waivers or administrative changes, as well as the downstream implications of new flexibility on local governments, providers, health plans and consumers.

The three big drivers of spending in Medicaid are eligibility, benefits and provider payment rates. With the exception of children and pregnant women, Texas’s eligibility rules are set at the federal minimums today; it is unclear if Texas would have the flexibility to set lower eligibility levels or, if it did, whether it would choose to take up that flexibility. Texas might gain additional flexibility to condition coverage on work or job training requirements or payment of a monthly premium, but the majority of program enrollees are children and the majority of program spending is for low-income elderly and people with disabilities. Given the population Texas Medicaid covers today, Texas will want to consider whether it would impose such requirements, how much savings it would achieve and whether it could secure the authority to do so through a waiver today.

Similar questions arise with respect to the benefits Texas might choose to drop or constrain if it had the flexibility to do so. Notably, certain mental health services, as well as substance abuse and pharmacy, are optional benefits today, and Texas has determined to cover them. Finally, while Texas has considerable flexibility to set plan and provider payment rates today, it might be able to reduce rates even further and with fewer federal constraints in a capped funding model. Again, Texas will want to consider the impact on access to care, as well as the sustainability of its providers, particularly rural providers.

Conclusion

By design, capped funding proposals shift the risks of any Medicaid costs above the federal caps to states. The design of the capped funding proposal and each individual state’s circumstances historically and over time, as well as unanticipated and uncontrollable events, will determine the extent of that risk. Texas comes to the capped funding discussion with a number of fiscal challenges—most notably its historically low investment in Medicaid relative to other states, relatively low spending per enrollee for the elderly, growing population and high reliance on supplemental and waiver funding. New flexibility could help Texas structure its program in less costly ways, but given its spending levels and the fact that most of the spending is driven by the needs of high-cost, high-needs disabled and elderly enrollees, it is unclear how much Texas can save through any new flexibility. Texas will want to consider carefully all these factors as it evaluates the potential impact of capped funding on its budget, its residents and its healthcare providers.