How the House, Senate GOP health bills would change Medicaid

Perhaps the biggest change in both the House and Senate versions of the Affordable Care Act (ACA) repeal and replace bill is not something that repeals or replaces anything that was in the ACA.  Although both the House’s American Health Care Act (AHCA) and the Senate’s Better Care Reconciliation Act (BCRA) do repeal certain ACA aspects of the Medicaid program, the Medicaid changes represented by the proposed per capita cap and block grant provisions in both AHCA and BCRA are even more fundamental, in effect changing the original underpinnings of the program.

In fact, some Republican leaders have gone so far as to indicate that the Medicaid reforms are the most important provisions in the ACA repeal bills.  This past weekend, Sen. Ben Sasse of Nebraska told a group that “this is largely a Medicaid reform package.”  Earlier this spring, Speaker Paul Ryan noted that he has wanted to make fundamental changes like these to the Medicaid program since 1997.  Even if Congress doesn’t eventually pass an ACA repeal bill, it is not inconceivable that a similar Medicaid reform bill could move separately.

Medicaid Background

In order to understand the fundamental nature of the change that would be imposed by per capita caps and block grants, it is important to understand Medicaid.  Medicaid, like Medicare, was created in the Social Security Amendments of 1965.  However, while Medicare has always been as a federal program that was largely uniform across the country, Medicaid has always been a state-federal hybrid.  Although the federal government provided rules that the states had to follow, the states are responsible for operationalizing and operating the program within those rules. States have much discretion in the operation and administration of the program, and thus the program differs substantially from state to state in terms of systems for the delivery of care, scope of eligibility, and coverage.

Medicaid has been described as having two separate entitlements.  The first is that eligible individuals have rights to payment for medically necessary health care services defined in statute.  The second is that the state is entitled to payment by the federal government for its share of the expenses incurred.  The financing of the program is shared, and the federal government always pays at least half of the cost, according to the federal medical assistance percentage (“FMAP”).  As an entitlement, the federal obligation is not limited.  If an individual is eligible and the state program provides care, the federal government must provide its share.

Medicaid has changed substantially since its inception.  While eligibility for Medicaid was originally tied to eligibility for certain welfare programs, eligibility in many states (as a result of the ACA) now basically includes most all persons under age 65 with income at or below 138 percent of the federal poverty level.  (The ACA would have made this expansion mandatory, but the U.S. Supreme Court made it an option, which 31 states have now taken.)  Even before passage of the ACA, many states had dramatically expanded Medicaid eligibility.  For over a decade, Medicaid has been the largest governmental source of coverage in the United States, covering over 64 million individuals in 2015 (over 20 percent of the US population).  Medicaid also fills gaps not filled by other sources of health insurance. For example,  Medicaid is the primary provider of long term care, which is not covered by Medicare.

Federal expenditures on Medicaid have risen substantially.  Medicaid grew from 1.4 percent of federal expenditures in FY 1970 to 9.5 percent in FY 2015. Since 2000, federal expenditures on Medicaid have jumped annually an average of 7.5%, totaling greater than $349 billion in 2015.  Although much of this is attributable to enrollment increases, there have also been increases on a per enrollee basis.

Although states do have substantial discretion in administering the Medicaid program, many state officials have felt hamstrung by federal rules.

The per capita caps and block grant provisions in the AHCA and BCRA attempt to address recent concerns regarding the Medicaid program, in particular the concerns about increasing growth in federal expenditures and, to a lesser extent, the need for greater state flexibility.  In doing so, AHCA and BCRA would fundamentally change the open ended financing relationship between the states and the federal government that has characterized the program since 1965.  This is not the first time that fundamental changes to Medicaid have been proposed — a block grant proposal passed Congress in 1995 only to be vetoed by President Bill Clinton — but this is the first time since then that such fundamental changes seem likely.

Per capita caps

Per capita caps would not change the current eligibility and financing requirements.  However, financing from the federal government would no longer be open-ended.  Per capita cap limits would impose reductions on future federal payments if states do not comply with limits beginning in federal fiscal year 2020.

Per capita-cap limits would be set for five Medicaid Enrollee Categories, excluding some minor categories:

  • elderly (over 65)
  • blind and disabled
  • children
  • expansion enrollees, and
  • other nonelderly, nondisabled, nonexpansion adults.

CMS would calculate provisional targets for each Enrollee Category for the initial fiscal year 2019.  Targets would exclude Medicaid DSH payments, Medicare cost-sharing, and new safety net provider payment adjustments for non-expansion states (created in the legislation).  Provisional targets would be based on average per capita expenditures in a base period, inflated based on inflation, multiplied by the number of enrollees in each Enrollee Category.  Under the Senate bill, the base period would be based on a period of 8 consecutive fiscal quarters between the first quarter of fiscal year 2014 and the third quarter of 2017 chosen by the state.  (Under the House bill the base period is 2016.)  Non-DSH supplemental payments and waiver payments would be excluded from the category-specific calculation and applied as a percentage adjustment to category-specific calculations.

The targets would increase annually using simple inflation, not actual increases in expenses.  Through fiscal year 2024, inflation would be the medical component of the consumer price index for urban consumers (“CPI”) plus an additional 1 percent for the elderly and disabled categories only .  After 2024, inflation would be the CPI for all urban consumers.  Since Medicaid has generally grown by a significant percentage above either the medical component of the CPI or the CPI, these limits generate substantial future savings.  CBO estimated that the Medicaid coverage changes save $772 billion against the budgetary baseline, the largest category of the savings in AHCA.

In addition, in the Senate bill, beginning in fiscal year 2020, targets would be adjusted annually to promote program equity.  (These adjustments also do not apply to any state with a population density of less than 15 individuals per square mile.)  States where a certain category’s per capita amount exceeds the mean per capita categorical amount by at least 25 percent would have their per capita amount reduced by between 0.5 and 2 percent.  States where a certain category’s per capita amount is less than the mean per capita categorical amount by at least 25 percent would have their per capita amount increased by between 0.5 and 2 percent.  These adjustments cannot cause an increase in federal payments.

Medicaid Flexibility Program/Block Grants

The per capita caps provide tremendous incentives to reduce expenditures to avoid going over the caps (and incurring federal payment reductions).  However, the per capita caps do not provide much additional flexibility for states.  Flexibility is provided by the Medicaid Flexibility Program option included in BRCA.  (Although similar and in some ways broader flexibility is provided by the block grant option in AHCA, only the Senate option is described below.)

Beginning in FY2020, a State would be able to apply for a block grant to provide “targeted health assistance” to program enrollees in order to implement a Medicaid Flexibility Program.  Program enrollees are defined as individuals in the per capita cap “other nonelderly, nondisabled, nonexpansion adult” Enrollee Category.  The block grant period would be five years, although a state could request additional periods.  Although the application may make some states nervous, the flexibility to be gained is substantial.

A State participating in the Medicaid Flexibility Program receives a block grant equal to the federal share of the per capita cap target amount (FMAP * per capita cap target amount * number of enrollees in the category).  Amounts for subsequent years would be increased by the CPI-U.  States can generally rollover funds to a subsequent Medicaid Flexibility Program year.  CMS will publish the potential block grant amount for each state no later than June of each year.

Certain mandatory populations must be covered by the Medicaid Flexibility Program.  The following services must be covered (although others can be):

  • hospital services
  • lab and x-ray services
  • nursing home services
  • physician services
  • home health services
  • rural health clinic services
  • FQHC services
  • Family planning services
  • Nurse midwife services
  • Pediatric and family nurse practitioner services
  • Freestanding birth center services
  • Emergency medical transportation
  • Dental services
  • Pregnancy-related services
  • Mental health and substance abuse disorder services.

The value of the package to be provided by the state must be at least 95 percent of the aggregate actuarial value of benchmark coverage (as it existed prior to the ACA).  Cost-sharing, premiums and deductibles are acceptable so long as they do not exceed 5 percent of family income.

Once received, the state can use Medicaid Flexibility Program funds for any purpose consistent with certain quality standards to be established by the Secretary (including use for other state health programs and even roads and bridges).  States are required to spend at least the Children’s Health Insurance Program FMAP’s share of the block grant each year or else the amount of the block grant is reduced in the immediately following year.

The Medicaid Flexibility Program would provide a State with substantial additional flexibility, particularly  with the “other nonelderly, nondisabled, nonexpansion adult” category.

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Charles Luband

About Charles Luband

Charles Luband is a partner and former co-chair of Dentons' Health Care practice. He advises a diverse group of health care clients on a variety of federal and state regulatory issues and Medicare and Medicaid issues.

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