Manatt on Medicaid

New State-by-State Toolkit Highlights Challenges in Capping Medicaid Funding

By Jocelyn Guyer, Managing Director | Deborah Bachrach, Partner

With key leaders in Congress proposing major changes to Medicaid financing through the adoption of a block grant or per capita caps, Manatt has prepared a new toolkit for the Robert Wood Johnson Foundation’s State Health Reform Assistance Network to help states and others assess the potential implications of proposals to cap federal Medicaid funding. The toolkit provides state-by-state data on Medicaid enrollment and expenditure trends—factors that are central to establishing the amount each state would be allocated under various capped funding proposals—as well as a detailed memo describing how each data point might be used by an individual state. The primary purpose of the toolkit is to assist individual states in evaluating how they might fare, but, as discussed in this article, the state-by-state data also illustrate some of the key challenges that Congress would face in capping and allocating federal Medicaid funds.

1. Congress has limited data on which to base high-stakes capped funding formulas.

One of the most striking features of the toolkit is that some of the data are several years out of date. In a number of instances, the toolkit presents federal fiscal year (FY) 2011 data prepared by the Kaiser Family Foundation because this is the most recent year for which per enrollee spending levels and historical growth rates are publicly available by eligibility group using consistent data and methods across states. Congress likely would face the same issues in identifying recent, reliable data available for all 50 states if and when it seeks to cap federal Medicaid funding.1 An extraordinary amount has changed in Medicaid in recent years due to implementation of the Affordable Care Act (ACA), changes in the larger healthcare landscape, and state-driven initiatives to reform the way Medicaid operates, making it particularly problematic to rely on outdated data. While individual states could produce more recent data, Congress may not want to use self-reported data from states to set their “base” spending levels.

2. States vary dramatically in their base spending levels due to Medicaid expansion decisions.

The data book highlights that any proposal to convert Medicaid to a block grant or per capita cap will need to address the striking differences in Medicaid spending between expansion and non-expansion states. The 31 states and D.C. that elected to expand Medicaid to low-income adults received $72.6 billion in federal Medicaid funds in calendar year 2015 for their expansions and covered more than 14 million people (Tables 2 and 3).2 In these states, more than 30 percent of federal dollars spent on Medicaid is now attributable to the expansion (see Table 3 for state-specific figures). For Congress, this poses a major dilemma. If expansion states are allowed to “bake” these expansion dollars into their base funding levels (e.g., if they receive a base allotment under a block grant that includes expenditures on newly eligible adults), it will be viewed as unfair by non-expansion states. On the other hand, if Congress repeals the expansion and uses Medicaid restructuring to even out spending between expansion and non-expansion states, expansion states will face a major loss of federal funds with considerable implications for their state budgets.

3. The wide disparities in Medicaid expenditures across states extend well beyond expansion decisions.

The data book illustrates that there are dramatic differences in Medicaid expenditures by state and eligibility group that predate passage of the ACA. For example, as shown in Table 8, in FY 2011, average spending per child enrollee ranged from $1,656 to $5,214 across states.3 This same pattern holds true for other eligibility groups, with some states dedicating two or even three times as much per person as states with low per enrollee spending.4 Given these spending patterns, a capped funding proposal is inherently complex and difficult. States with low per enrollee spending are at risk of being locked into those low spending levels under either a block grant or per capita cap, making it more difficult to cope with federal cuts or to finance breakthrough drugs, innovative new treatment options for genetic conditions, or demand for new benefits (e.g., better substance use disorder benefits in response to the opioid epidemic). States with high per enrollee spending may have more “wiggle room” to address such challenges, but also could find that Congress expects them to move toward the median in per enrollee spending over time, regardless of whether the median accurately reflects the cost of financing care for the state’s beneficiaries.

4. Gross Domestic Product (GDP) growth and Consumer Product Index (CPI)—metrics often cited as possible trend rates for Medicaid spending—routinely have fallen below actual growth rates in recent years.

Historically, the rate of growth in Medicaid spending—both in the aggregate and on a per capita basis—has consistently been higher than some of the metrics proposed as trend rates in capped funding proposals. From FY 2000 to 2011, average annual growth in spending per full-benefit enrollee was 5.3 percent for children across all states, 5.6 percent for adults, 4.5 percent for people with disabilities, and 3.7 percent for seniors. In comparison, average annual growth in per capita GDP and CPI—metrics most often looked to as a source for a potential trend for a per capita cap—was 2.9 percent and 2.5 percent, respectively. With regard to aggregate Medicaid spending (as under a block grant), which includes the effects of both per enrollee amounts and total enrollment, average annual growth was 6.9 percent nationally—ranging from about 4 percent in the lowest states to 9 percent or more in the highest.

As important as the base rate is in determining the amount of federal dollars that a state would receive under block grant or per capita cap proposals, the trend rate is likewise important. The fact that potential trend rates have not kept pace with historical Medicaid spending growth is a warning sign that states will face increasing pressure to limit benefits, reduce provider reimbursement rates, cut eligibility or use state funds to fill the gap left by the federal government under capped funding proposals.

5. Demographic trends have implications both for a block grant and a per capita cap.

Current projections indicate that the U.S. population will grow at an average rate of about 1 percent per year between 2015 and 2025, for a cumulative increase of about 8 percent. States, however, vary widely in projected population growth—four states and D.C. are expected to see a decline in their total populations while several others will experience a jump of 20 percent or more. Even more notably, all states are experiencing relatively rapid growth in the size of their senior population (defined as those over 65), which is growing at four times the rate as the U.S. population as a whole.

For those states that are growing quickly or facing a population that is aging relatively rapidly—as nearly all states are—block grants would likely fail to keep up with Medicaid costs due to enrollment growth. Less obviously, the population projections in the data book indicate that even a per capita cap design may not fully account for demographic-driven changes in the need for Medicaid funds. For example, states vary markedly in the projected rate at which their over 85 populations are increasing, ranging from little or no growth to a jump of more than 60 percent in one state. Since serving people over 85 is more expensive on average than serving the “younger” elderly, a per capita cap that sends each state a set amount per senior enrollee may pose more of a burden on states with relatively rapid growth among those over 85.

These and numerous other issues are likely to be discussed in detail in the months ahead as Congress continues its efforts to repeal Obamacare and reduce federal Medicaid expenditures. The tables in the data book, listed below, should prove a useful tool for states looking to assess the potential implications of various capped funding proposals and, just as importantly, may offer a guide to the challenges and issues that Congress will face as it debates the future of Medicaid.

List of Tables

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1Katherine Young, Robin Rudowitz, Saman Rouhani, and Rachel Garfield, Medicaid Per Enrollee Spending: Variation Across States, Kaiser Family Foundation, January 28, 2015; available at http://kff.org/medicaid/issue-brief/medicaid-per-enrollee-spending-variation-across-states/. Even the Medicaid and CHIP Payment and Access Commission (“MACPAC”), which is given special access to Medicaid data to allow it to implement its congressionally mandated obligations, does not have 50-state information on several of the key indicators past FY 2013.

2These data include spending on newly eligible adults as well as the federal dollars invested in helping “leader states” sustain expansions that were in place prior to passage of the ACA.

3These data are based on expenditures for enrollees that receive a full Medicaid benefit package.

4While the spending per enrollee figures provided in this toolkit reflect amounts for full-benefit enrollees, it is important to note that some states have a substantial number of enrollees with more limited coverage—including some dually eligible individuals who only receive assistance with Medicare premiums and cost sharing, and individuals whose benefits are limited to family planning. The inclusion or exclusion of these individuals (for whom, by definition, states spend substantially less) can have a substantial impact on the calculation of spending per enrollee amounts for certain states and eligibility groups.