A softer Medicaid ‘block grant’

by Bill Hammond |  | NY Torch

296-12574795088UFRThe Medicaid “block grant” being proposed by House Republicans would be less costly to New York and other states than previously projected under a draft Obamacare replacement bill that became public on Friday.

The bill, a copy of which was obtained by Politico, would impose a first-ever cap on federal Medicaid funding for states. But it sets the initial cap high enough, and allows it to rise fast enough, that long-term spending trends in most states, including New York, could likely continue unimpeded.

The bill does eliminate the enhanced matching funds that states have received since 2014, a change that would cost New York billions. In the longer term, however, the bill imposes relatively little constraint on spending growth.

This is because the cap would be calculated on a per-recipient basis using 2016 as the base year, then increased annually by slightly more than the medical inflation rate, which would outpace the recent trend in Medicaid.

Per-recipient Medicaid spending has generally risen more slowly than medical inflation since 1999, and has even declined in recent years as enrollment spiked under the Affordable Care Act. Thus, the proposed cap would leave considerable room for future growth.

As expected, the draft bill partially repeals the ACA’s Medicaid expansion. States could continue covering people who became eligible under the expansion but would lose enhanced federal aid for that population. When that change take effect in 2019, New York’s federal aid would drop by about $4 billion.

The draft also eliminates funding for the Essential Plan, an optional program under the ACA that only New York and Minnesota adopted. It offers low- or no-cost coverage to people from 138 percent to 200 percent of the federal poverty level, which is above the eligibility limit for Medicaid. That would cost New York another $3.7 billion a year in federal aid.

In both cases, the state would face the choice of finding money somewhere else, cutting payments to providers, or taking away coverage from some of the hundreds of thousands of people who became insured under the law.

On top of those short-term hits, many analysts had projected further long-term cuts as a result of block-grant financing. Those analyses reflected earlier GOP proposals that called for states to receive Medicaid funding as a lump sum as opposed to a per-recipient amount, or assumed a slower-growing trend factor.

Last year, in fact, the House GOP’s “Better Way” health plan specified that its proposed per-recipient allotment “would grow at a rate slower than current law.” However, that language did not appear in an outline distributed by House leaders this month.

The trend factor used in the draft bill, the Consumer Price Index for medical care, has recently run about one-and-a-half to two times higher than the overall CPI, enough to make a big difference when applied to Medicaid budgets.

For example, had the proposed cap taken effect in 2012, using 2008 as the base year, New York’s Medicaid program would have been eligible to draw $5 billion more in federal aid for that year than it actually did.

The looseness of the proposed cap will come as some relief to state budget officials. States would also be granted considerably more flexibility to manage Medicaid without interference from Washington. But the cap’s design would seem to undermine a key goal of block-grant financing, which has been touted as a way of removing perverse incentives of the Medicaid program.

Under existing rules, the federal government pays a fixed share of each state’s Medicaid costs, which varies according to per capita income. For New York, the matching rate is 50 percent.

Thus, every $1 that the state puts toward Medicaid results in $2 being pumped into its healthcare system and broader economy, giving Albany lawmakers an incentive to spend more. Conversely, the state has to cut overall Medicaid spending by $2 in order to save $1 for itself, which reduces the incentive for cost control.

Under traditional block grants, the state would receive a predetermined amount of aid – either as a lump sum or as a per-person allotment – regardless of how much it spends of its own money. Thus, the state would have to pay the full cost any additional spending, but it would also reap the full benefit of any efficiencies.

The draft bill, by contrast, would have states continue to draw matching aid up to the capped amount – which, for reasons explained above, most states are unlikely to hit. As such, the perverse incentives would remain in force.

The Medicaid provisions of the draft proposal differs from last year’s “Better Way” outline in at least two other respects:

  • The outline spoke of giving states a choice between a lump-sum block grant and a per capita allotment. The draft bill does not appear to include a lump-sum option.
  • The outline said enhanced aid under the Medicaid expansion “would be slowly phased down.” Under the draft bill, it ends immediately after 2019.

Beyond the changes to Medicaid, the bill makes other significant changes, including:

  • It abolishes the tax penalty for people who fail to buy health insurance, known as the individual mandate. In its place, it establishes a temporary premium penalty for people buying insurance after allowing their coverage to lapse.
  • It abolishes the tax penalty for large employers that fail to provide adequate health benefits.
  • It ends income-based tax credits for individuals buying insurance, and replaces them with age-based tax credits, ranging from $2,000 a year for those under 30 to $4,000 a year for people 60 and up.
  • It scales back the minimum benefits that insurers must offer.
  • It expands tax breaks for health savings accounts, which are used to cover out-of-pocket costs.
  • It eliminates ACA-related taxes, but caps the tax protection for employer-provided health benefits.
  • It provides $100 billion over 10 years to help states establish high-risk insurance pools for people with costly pre-existing conditions.

The draft, dated February 10, is of course subject to change and incomplete in some respects. It leaves unaddressed, for example, the question of how to make up for lost revenue from abolished ACA taxes.

 

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