Medicaid Edition: Establishing a Medicaid Per Capita Cap: Implications for California

By Jocelyn A. Guyer, Managing Director | April Grady, Director | Adam D. Striar, Consultant

Both the House-passed American Health Care Act (AHCA) and the Senate’s draft Better Care Reconciliation Act (BCRA) of 2017 propose major changes to Medicaid’s financing structure. These include caps on federal funding for nearly all Medicaid beneficiaries and services. Currently the federal government covers a share of all Medicaid expenditures, but a per capita cap would eliminate this guarantee. Instead, states would be allocated a set amount per beneficiary. These amounts would be added together to establish an overall limit on expenditures that the federal government will match.

To understand the implications of a per capita cap for California and the 13.5 million beneficiaries served by Medi-Cal (California’s Medicaid program), Manatt Health prepared an analysis for the California Health Care Foundation (CHCF) that:

• Describes the cap proposals under consideration in Congress;
• Provides estimates of the fiscal impact on California of the per capita cap included in the Senate’s June 22 BCRA draft, and illustrates the impact of changes in the trend factor;
• Describes the operational issues and challenges created by a per capita cap; and
• Reviews the choices available to California if a per capita cap is established.

Key takeaways from the analysis are summarized below. To download a free presentation of the complete findings, click here.

Key Takeaways

Manatt Health’s analysis yielded five important takeaways for California and can serve as an important lesson for other states facing the effects of a per capita cap:

• A per capita cap would put significant pressure on Medi-Cal and the state budget by eliminating the federal government’s commitment to share all Medicaid costs with the state. California can expect to lose $37.6 billion in federal funds between fiscal years (FY) 2020 and 2027 under the per capita cap proposed in the June 22 version of the Senate’s draft BCRA.
• The actual impact of a per capita cap will depend on the trend rates for the cap. If the caps turn out to be even slightly lower than expected, cuts will compound quickly. For example, if the medical consumer price index (CPI) is just half a percentage point below projections, and actual Medicaid spending does not similarly drop, cuts during FY 2020–2027 increase by 39% to $52.4 billion. If medical CPI turns out to be significantly higher (or spending pressures are markedly lower) than expected for a given year, California may receive some short-term relief. The state cannot, however, use the “good” year to ease the impact of cuts in future years.
• A cap locks California into its relatively low Medi-Cal spending levels and puts the state at risk for unexpected healthcare costs.
• A cap would pose major operational issues for California, including the need to make Medi-Cal budget decisions in advance of knowing the amount of federal funds available to the state.
• California will face difficult choices if a cap is imposed. It will need to do some or all of the following—raise taxes, cut other programs and/or significantly reduce Medi-Cal expenditures.

Conclusion

California has much to lose under a per capita cap. The state is facing an estimated federal cut of $37.6 billion through FY 2027. The actual reduction in federal funding, however, could be higher or lower, depending on whether the trend rate for the cap differs from projections.

Unlike under the current financing structure, with per capita caps in place, California alone would bear the risk of unexpected health crises, increased drug prices and breakthrough treatments. As a relatively low-spending state, it has less room than many other states to cope with federal cuts, making it more likely that a cap would threaten important, California-specific efforts to improve Medi-Cal.

How should California respond if the cap becomes a reality? There are no easy options. It would need to increase its own Medi-Cal spending substantially, cut reimbursement rates, drop optional benefits, attempt to eliminate eligibility for particularly high-cost beneficiaries, increase price sharing—or implement a combination of these actions.