How Proposed Spending Caps to Medicaid Are Calculated

By Jo Craven McGinty Features Dow Jones Newswires

In his first full budget proposal, President Donald Trump advocates changing the way the federal government funds Medicaid.

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The fiscal 2018 budget, released last week, was short on details but endorses a bill passed last month by the U.S. House of Representatives that would restrict Medicaid spending for the first time since the program started in 1965.

Medicaid is a joint federal and state program that provides health insurance for 77 million poor and low-income people. It cost the federal government $368 billion last year, or about 9% of the national budget. Based on spending, it is the third largest domestic program behind Social Security and Medicare.

The president's budget proposal and the American Health Care Act passed by the Republican-controlled House would limit federal spending on Medicaid by implementing per capita caps and offering block grants in fixed amounts.

Caps would allow the federal government to control spending and would provide states, faced with increased financial risk, an incentive to cut costs.

Over the next decade, the limits outlined in the House bill would reduce Medicaid spending by $834 billion, and by 2026, the program would cover 14 million fewer people relative to the existing law, according to estimates by the Congressional Budget Office.

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Those figures include savings from phasing out the higher federal matching funds sent to states that expanded Medicaid under the Affordable Care Act.

The president's proposal may go even further, and, according to some analysts, would reduce the outlays by as much as $1.3 trillion over the same period.

Currently, there is no limit on Medicaid spending. Each quarter, states report how much they have spent on the program, and the federal government reimburses them for a portion of the expense. The reimbursement varies by state, with poorer states receiving a larger percentage.

Last year, the federal government covered 74.17% of Mississippi's Medicaid spending, more than any other state, while a dozen wealthier states, including California and New York, received 50%. The statutory minimum is 50%; the maximum is 83%.

"That's serious capital coming into a state treasury," said Andy Schneider, a national Medicaid expert who works for the Center for Children and Families at Georgetown University.

The percentage is calculated annually based on a formula: 1 minus (the state's per-capita income squared divided by the U.S. per-capita income squared) multiplied by 0.45.

Squaring income provides higher match rates to states with below-average incomes. Multiplying by 0.45 ensures that a state with per-capita income equal to the U.S. average receives a federal match of 55%.

With the per-capita cap, the federal government's contribution would still be determined by this formula, but only up to a certain amount. If the cap "is $100 in a 50% state, you get 50% of Medicaid spending up to $100," Mr. Schneider said.

According to an analysis by the Medicaid and CHIP Payment and Access Commission, the initial per-capita caps would be based on a state's per-person spending for each eligibility group in 2016 and 2019. The commission is a Congressional agency that provides policy and data analysis on Medicaid and the State Children's Health Insurance Program.

The eligibility groups are seniors, the blind and disabled, children and adults who qualify for Medicaid, as well as new adults who were covered under the Medicaid expansion.

When the caps go into effect in 2020, the amounts would be increased based on the medical component of the Consumer Price Index (the adjustment for seniors and the blind and disabled is one percentage point higher) and multiplied by the number enrolled in each eligibility group.

The sum would represent that year's spending cap.

The caps would account for changes in the number of people enrolled but not changes in cost, such as new medical treatments.

As an alternative to the caps, states could opt to accept block grants for adults and children; the option wouldn't be available for the elderly, blind and disabled or Medicaid expansion adults.

"The big difference is the per capita cap adjusts for more people coming on," said Robin Rudowitz, a Medicaid expert with the Kaiser Family Foundation. "A block grant is preset. If there are more people, there is no adjustment for that."

But with a block grant, states would be given more control over how to spend the money and, once the amount of the grant is established, the percentage of the federal match, up to the cap, would be higher.

"You get almost total flexibility as to who you cover, what services you provide, and what you pay providers," Mr. Schneider said.

A state would have the option to choose a block grant any time after 2019. The year it does, the inflation adjusted per capita figures for the covered groups would be multiplied by the 2019 enrollment to arrive at the block grant total. Moving forward, that figure would be adjusted by the Consumer Price Index, a lower rate of inflation than the medical component.

The Senate has yet to vote on the House bill or draft its own version.

But in the coming weeks, it will work out its own prescription for Medicaid spending.

Write to Jo Craven McGinty at Jo.McGinty@wsj.com

(END) Dow Jones Newswires

June 02, 2017 05:44 ET (09:44 GMT)