March 18, 2018

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Medicaid Financing Reform: Per Capita Caps vs. Block Grants

In the coming weeks, it is highly likely that House Republicans will come forward with Medicaid financing reform proposals, such as block grant or a per capita cap proposal, or some combination of both. How should these proposals be evaluated? The best way to understand these proposals is through the equation A x B = C.  A is spending per person, B is the number of people, and C is total spending.  This equation helps explain the difference between per capita cap proposals and block grant proposals.  Essentially, A x B is per capita caps, while C is block grants. Both per capita caps and blocks grants have been touted by Republicans as mechanisms to rein in costs of the Medicaid program. However, the devil is in the details. Republicans will need to not only address these details head on in their Medicaid financing reform proposals, but also understand how these details will affect beneficiaries, states, and providers.

Block grants provide a set amount of federal Medicaid funding for states, which can be trended forward overtime. A block grant is a set allotment for a given year. The intention of a block grant is to account for inflation properly to provide adequate resources to a state.  Additionally, a block grant allotment can change from year to year to adjust for population growth. However, the challenge is that within a given year the Medicaid population ebbs and flows and block grants do not account for the counter-cyclical nature of the Medicaid program, in which Medicaid spending and enrollment growth follows economic cycles.

Per capita caps provide states federal Medicaid funding by number of enrollees. Unlike block grants, this design allows states to receive more funding within a given year if the Medicaid population grows. However, when designing a per capita cap there are multiple challenges in determining what A x B actually is. The first challenge is determining if funding levels should vary based on population. Meaning should disabled and elderly populations receive a higher funding level? Second, spending per person in the Medicaid program varies by state. Per capita cap proposals need to identify if all states will have the same baseline rates, and if not, why do some states get higher rates than others. Finally, Medicaid data is limited and it is unclear what the cost per person actually is. This makes it extremely difficult to determine a baseline.

On top of all of this, there is the inclusion of Medicaid administrative spending and supplemental payments, such as upper payment limits and disproportionate share hospital payments. Republicans also will need to determine if these payments are in or out of any Medicaid financing reform proposals. Including Medicaid administrative spending and supplemental payments in Medicaid financing reform will significantly affect states budgets, providers, and beneficiaries.

Although A x B = C is a simple equation there is much that lies beneath the surface when applying it to Medicaid financing reform. The rigid structure of block grants could make it difficult for state Medicaid programs to continue to provide their full set of services which can limit providers’ ability to provide services and beneficiaries’ ability to access services. On the other hand, the design of per capita caps can vary widely based on policy decisions. Without clues to the structure of the design it is impossible to determine how either per capita caps or block grants will affect state budgets, beneficiaries, and providers. Only when details of Medicaid financing reform are revealed, will we be able to determine how Republicans weighed these variables.

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About this Author

Director of Health Policy

Katie is Director of Health Policy at ML Strategies and provides advice and guidance on issues relating to Medicaid, Medicare, and dually eligible beneficiaries.

Prior to joining the firm, Katie was a senior analyst with the Medicaid and CHIP Payment and Access Commission (MACPAC), a nonpartisan agency that provides Congress, the Secretary of the US Department of Health and Human Services, and states with analysis and recommendations on issues affecting Medicaid and the State Children’s Health Insurance Program (CHIP). There Katie researched,...

Rodney L. Whitlock, Mintz Levin, ML Startegies, Vice President, Health policy Advisor, Lawyer, Attorney
ML Strategies - Vice President

Rodney is a veteran health care policy professional with more than 20 years of experience working with the US Congress, where he served as health policy advisor and as Acting Health Policy Director for Finance Committee Chairman Chuck Grassley of Iowa and, earlier, on the staff of former US Representative Charlie Norwood of Georgia.

During his years with Representative Norwood, Rodney managed the Patients’ Bill of Rights, which passed the House in 1999 and 2001. In February 2005, Rodney left the office of Congressman Norwood to join the Finance Committee Staff as a health policy advisor to Chairman Grassley.  In that capacity, he was lead Senate staffer for the Medicaid provisions of the Deficit Reduction Act of 2005 and the Tax Relief and Health Care Act of 2006.