Capping Federal Medicaid Funding: Key Financing Issues for States

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

President-elect Donald Trump and Republican congressional leadership have called for a repeal of the Affordable Care Act (ACA) and a fundamental overhaul of the Medicaid program that would include imposing caps on federal funding to states. If adopted, capped funding would replace the central feature of Medicaid’s financing structure—the federal government’s legal obligation to share all allowable state Medicaid costs.

While capped funding proposals vary in important ways, they all aim to allow the federal government to achieve budget certainty and reduce federal Medicaid spending. As advanced in recent proposals, capped funding achieves budget certainty for the federal government by placing a preset limit on the amount of federal dollars available to states to finance coverage. The proposals reduce federal spending by setting the amounts states would receive over time sharply below the amount the program is expected to need. All proposals couple the financing changes with increased programmatic flexibility, for example, with respect to eligibility, benefits and cost sharing.

In a new issue brief for the Robert Wood Johnson Foundation State Health Reform Assistance Network, Manatt Health draws on a review of past proposals to explore financing issues that arise in the design of capped federal funding. The issue brief addresses 14 key questions:

1. How would capped funding change Medicaid financing?
2. What kinds of caps are under consideration?
3. Would capped funding apply to all Medicaid populations, including the elderly and people with disabilities or just to the ACA expansion group?
4. Could Congress exempt certain groups of beneficiaries or certain services from capped funding?
5. If federal Medicaid payments to states were capped, would states still have to cover all groups of individuals or all services they are now required to cover?
6. Would states that want to continue to cover their Medicaid enrollees—or new populations—be able to do so?
7. How would capped payments be set?
8. What funding would be counted in setting the caps? How do capped funding proposals treat states that have expanded Medicaid versus states that have not done so?
9. Would Congress fold into the capped funding other ACA funds, waiver funds, or supplemental payments in the capped allotments?
10. How do capped funding proposals accommodate advances in medical care or events beyond states’ control that can drive up state costs?
11. Would states still be required to spend state funds as a condition of receiving federal capped payments?
12. What can states learn from CHIP, which caps federal funding?
13. What other Medicaid financing-related rules might be affected?
14. Will new flexibility allow states to manage their programs within reduced, capped federal funding?

Click here to read the full issue brief, including the answers to the 14 critical questions.

What Approaches Are Being Advanced—and What Lies Ahead?

Two different types of capped Medicaid spending have been advanced over the years: block grants and per capita caps. They differ in important ways, but both reduce federal spending by divorcing the amount of federal financing provided to states from the actual cost of coverage and setting the caps below the level states are expected to need under current program projections.

Block grants impose a national cap on federal Medicaid funding and an aggregate cap for each state. The funding available to states would not vary based on healthcare costs or the number of people served. Under a per capita cap, federal funding is capped on a per-person basis, with the amount of the cap typically varying by enrollee group. Like block grants, per capita caps do not account for the cost of care, but funding would adjust based on the number of people served. However, per capita caps may also be subject to a national aggregate cap on federal Medicaid funding, which could limit the extent they accommodate changes in enrollment.

President-elect Trump and his nominee for Secretary of Health and Human Services, Congressman Tom Price, have supported block grants, while House Speaker Paul Ryan’s “Better Way” proposal would offer states the choice of a block grant or per capita cap. With differing concepts and viewpoints under discussion, it is important for states, healthcare providers and others to watch developments closely to prepare for the debate ahead. Manatt Health will continue to monitor emerging positions, approaches and issues and keep you informed. If you have any questions or would like more information, please contact Cindy Mann, Partner, at 202.585.6572 or cmann@manatt.com.