Medicaid Reform Proposals

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I. Introduction
II. Block Grants
III. Per Capita Caps
IV. Work Requirements




I. Introduction
As of January 2017, the Medicaid program covers over 74 million individuals, including both adults and children. This number includes the additional 16.9 million individuals covered by the program since 2013 when the Affordable Care Act expanded Medicaid to cover more individuals.

Medicaid constitutes a significant portion of federal and state budgets. In 2015, total Medicaid spending nationally was over $552 billion dollars.  According to the Center on Budget and Policy Priorities, it costs Medicaid substantially less to cover people than private health insurance because it has lower payment rates to providers and lower administrative costs.

Because Medicaid constitutes a significant part of the federal budget, politicians looking to cut federal spending often target the program.  In this article we address some of the most common Medicaid reform proposals.

II. Block Grants

One way that some politicians wish to reform Medicaid is through a block grant scheme. Block grants have been a popular idea among certain political groups for many years but have never been successfully enacted on a national scale for Medicaid. Converting Medicaid to a block grant funding scheme would drastically alter the way in which states operate their Medicaid programs.

Under current law, the federal government guarantees that it will match state spending on qualifying Medicaid programs without limitation or cap. If a state needs to spend more on a particular program in a given time period, the federal government matches that increased spending.

Under a block grant system, the federal government would give states a finite, lump sum payment to cover all Medicaid program costs. The grant amount would likely be based on historical state and federal spending.  However, unlike the current funding scheme, block grants do not take into account the number of individuals enrolled in the program. If a state sees an increase in Medicaid enrollment in a given time period, there will be no matching increase in federal monies.

Proponents of block grants assert that this type of funding scheme would benefit states because it would give each state greater autonomy in deciding how to administer its Medicaid program. Those in favor of block grants argue that this would also decrease federal spending. Block grants were one component of the GOP’s American Health Care Act (“AHCA”) which is currently stalled in the House.  The Congressional Budget Office (“CBO”) determined that including the block grant funding scheme into the AHCA would result in less federal spending.

Opponents of block grants assert that the scheme would drastically reduce the quality and amount of coverage for low income and disabled Americans.  According to an issue brief from The Commonwealth Fund, this is because block grants “would disconnect the level of funding from actual needs and costs of providing care.”

If a state’s costs exceed the amount of the Medicaid grant, the state would need to either use its own funds to make up the difference or cut services and benefits to recipients.  The CBO analysis of the AHCA indicated that block grants, while reducing costs, would also result in a significant increase in the number of uninsured Americans.  Block granting Medicaid could also negatively impact the viability of hospitals and healthcare providers because states would likely need to reduce payments to these providers.

III. Per Capita Caps

Per capita caps offer another means of reforming Medicaid spending and were proposed as part of the original language of the AHCA.  As outlined in the first version of the AHCA, under a per capita funding system, the federal government would no longer match state funding for Medicaid programs.  Instead, there would be a ceiling (or cap) on the amount of federal money that can be spent per Medicaid enrollee in that state.  

Unlike a block grant, a per capita cap would take actual enrollment into account. Each state would be given federal payments based on the state’s actual costs in a given starting year; the federal government would then increase its contributions based on the medical care component of the consumer price index and the share of Medicaid enrollees in different beneficiary categories (such as disabled, aged, or children).

Transitioning to a per capita cap funding mechanism would result in states bearing higher Medicaid costs. As a result, states may be forced to cut eligibility, benefits, and reimbursement to providers.

For an excellent summary of block grants and per capita caps, view the Kaiser Family Foundation report here.  Additionally, the Brookings Institution has provided an early analysis of the problems that state Medicaid programs would face under this new funding scheme.

IV. Work Requirements

Another type of Medicaid reform is the concept of tying Medicaid benefits to meeting work requirements.  An amendment to the AHCA authorized states to require that adults ages 19-64 either work or be in an approved job-training program in order to receive Medicaid benefits. Although the AHCA is currently on indefinite hold, its approach to work requirements offers a starting point for analyzing such a plan.

Under a typical work requirements scheme, all able-bodied, non-elderly adults receiving Medicaid would need to meet work requirements unless they fell within an exemption. These exemptions might include those who are permanently disabled, pregnant, the sole parent of a child younger than six or a disabled child, or (in some circumstances) a 19 year old who was still in school.

Notably, although work requirements have remained a popular Medicaid reform idea among conservatives, the vast majority of Medicaid recipients are already working, seeking work, or would be exempt from these requirements.  According to the Kaiser Family Foundation, 8 out of 10 Medicaid adults live in working families and approximately 60% are working themselves.  However, most of these workers are employed in low-paying jobs that do not offer any health benefits. Thus, work requirements would apply to only a very small number of people, and would likely affect those who are most vulnerable.  Interestingly, work requirements would increase the financial and administrative burden on states because the state would be required to track each enrollee’s work status and hours worked.

In one recent analysis, researchers at Health Affairs, concluded that approximately 22 million Americans would likely be subject to this Medicaid work requirement and about 11 million would be at risk of losing coverage if a work requirement were imposed. Those at risk of losing coverage include some of the most vulnerable.  Almost two-thirds of those at risk of losing coverage are women and about 39% of those at risk are middle-aged Americans (who are at greater risk of serious health problems).

In addition, 30% of those at risk lack a high school diploma which creates fewer employment opportunities; labor statistics show that the unemployment rate among high school dropouts is significantly higher than among those who have a high school degree.  Another 30% have a high school degree, but no college degree, and would likely be unable to seek higher education because college attendance does not count towards the work requirement.  Finally, many individuals who receive Medicaid are too ill or disabled to work consistently, but do not qualify as “disabled” for purposes of the program.

Department of Health and Human Services (“HHS”) Secretary Tom Price has already indicated his willingness to work with states that want to add work requirements to Medicaid.  Four states, Indiana, Arizona, Kentucky, and Pennsylvania, have already submitted the necessary waivers that would allow them to create Medicaid work requirements.