The Impact of Per Capita Caps on Federal and State Medicaid Spending

The Impact of Per Capita Caps on Federal and State Medicaid SpendingU.S. Health Reform — Monitoring and ImpactBy John Holahan, Matthew Buettgens, Clare Pan, and Linda J. Blumberg March 2017Support for this research was provided by the Robert Wood Johnson Foundation. The views expressed here do not necessarily reflect the views of the Foundation. U.S. Health Reform — Monitoring and Impact2INTRODUCTIONOn March 6, 2017, House Republican leaders introduced the American Health Care Act (AHCA) as a replacement for the Affordable Care Act (ACA).1 If passed, the law would repeal many components of the ACA, substitute a number of alternative policies, and make substantial revisions to Medicaid financing. The bill would allow states to continue covering the population made eligible for Medicaid under the ACA’s expansion, but it would phase out the higher federal contribution (i.e., the 90 percent federal matching rate) that the ACA provided to finance the cost of care for the new Medicaid population. Also, it would impose a per capita cap on the rest of the Medicaid program. A per capita cap sets limits on federal Medicaid contributions per enrollee and defines an annual growth rate for those limits in order to gradually reduce federal Medicaid spending over time. Such a policy fundamentally alters the nature of federal financing of Medicaid, shifting from an open-ended entitlement, where the federal government commits to paying for a set percentage of the expenses a state may incur under the program, to a limited federal allotment that would not respond to increased spending beyond a preset target per enrollee. In this paper, we analyze the effect of two per capita cap approaches: that in the AHCA and that in Speaker of the House Paul Ryan’s “Better Way” health care plan, released in June 2016.2 We estimate the effect of each of these per capita caps on federal and state spending from 2019 to 2028. Our approach is similar to that used in a previous analysis of the 2012 House Republican budget plan.3 The Better Way proposal would increase federal spending per Medicaid enrollee each year by general inflation (using the consumer price index, or CPI), but the AHCA legislation would increase federal spending per enrollee by the medical care component of CPI, which has a higher historical growth rate than general CPI. However, the AHCA would phase out the expansion matching rate by 2020, earlier than the Better Way plan would. We account for differences in the two proposals’ growth rates and phaseout schedules in our analysis. We analyze both proposals to show the sensitivity of our results to the effect of small differences in these parameters.Our main findings are as follows:• We estimate that between 2019 and 2028, the Better Way proposal would reduce federal Medicaid spending by $841 billion, or 18.1 percent. The AHCA would reduce federal spending by $457 billion, or 9.8 percent. This main estimate is considerably lower than the March 13, 2017, Congressional Budget Office (CBO) estimate,4 which assumed that many states would cut enrollment; our estimates do not assume enrollment cuts, but they are discussed below. This is not because we do not think there will be coverage losses; it would be difficult for all or most states to increase taxes or cut benefits or reduce already low reimbursement rates sufficient to offset losses of federal funds. We do not model enrollment changes in this exercise because it is too difficult to make judgments about decisions individual states would make. For instance, cutting enrollment reduces federal payments in addition to reducing states’ own spending. However, we do provide a sensitivity to our main results, assuming some retraction of the ACA eligibility expansion. • About 29 percent of the Better Way plan’s reduction in federal spending would be attributable to phasing out With support from the Robert Wood Johnson Foundation (RWJF), the Urban Institute is undertaking a comprehensive monitoring and tracking project to examine the implementation and effects of health reform. The project began in May 2011 and will take place over several years. The Urban Institute will document changes to the implementation of national health reform to help states, researchers and policymakers learn from the process as it unfolds. Reports that have been prepared as part of this ongoing project can be found at www.rwjf.org and www.healthpolicycenter.org. U.S. Health Reform — Monitoring and Impact3the ACA’s higher Medicaid expansion rate. This phaseout would account for 57 percent of the AHCA’s reduction in federal spending. Thus, federal spending cuts under the AHCA would fall very heavily on states that expanded Medicaid under the ACA.• If states increase their Medicaid spending to cover lost federal revenue, state Medicaid spending would increase by 29.7 percent under the Better Way plan and by 16.1 percent under the AHCA. Increases would be largest in low-income expansion states such as Kentucky,