As Congress works through the challenge of changing Obamacare, how the federal government pays its share of Medicaid dollars will be part of the debate.
At first, Medicaid was designed primarily to offer to people with chronic conditions the long-term care benefits that Medicare did not. It pays much of our nation’s nursing home bill. It was later expanded to provide safety net insurance to low income families, especially for women and children.
Medicaid is a federal/state partnership program. The states design their own programs within federally-established rules, and the federal government reimburses half (or more) of the state’s cost.
The Affordable Care Act added a new wrinkle to the cost-sharing formula. For those states that expanded the Medicaid program to serve even more people, including uninsured single adults, it offered 90+ percent reimbursement for the new populations. To date, 32 states have expanded.
What’s wrong with Medicaid?
Medicaid costs the federal government a lot (more than $500 billion), and it is one of the biggest cost drivers of state budgets.
Also, with a few exceptions, it pays less to providers than Medicare and private insurance. This limits access for beneficiaries, and drives up the cost of private insurance.
In addition, as our population ages, the projected growth rate in Medicaid is high – up to 7.5% per year. It could become a trillion-dollar program over the next decade.
In reforming Medicaid, members of Congress have two goals – to improve access and to lower costs.
It is hard to do both at once.
Some have argued that we should create a Medicaid “block grant.” The federal government would give states a fixed amount of money, adjusted annually for inflation, along with greater flexibility in benefit design to improve access.
But this isn’t sensitive to all the factors that influence a state’s Medicaid costs, such as the differences in case mix across states. Should a state be penalized for having an older or sicker population?
It also has the potential to shift costs to states, if the states can’t figure out how to design sets of services that are relatively cheap.
So, Congress will consider a “per capita” grant approach.
The federal Medicaid share would be based on a per capita amount for everyone who is covered by Medicaid. This “per capita” amount could be adjusted for case mix severity. In other words, if the state’s Medicaid population mix changed, the amount could change, too.
States could still get flexibility within the per capita allotment to cover different services, but the allotment would carry a lower inflation factor to bend the cost curve over time. The chart illustrates how this might work.
The gray line represents the costs of the program in the states that did not expand, the blue line the costs in those that did. The numbers aren’t intended to be exact or translated directly to dollars – just to reflect that in the base year, the federal costs in the expansion states are higher because of the added population. In both cases, we apply a 7.5% inflation factor for ten years and see that the disparity remains, while the federal cost roughly doubles.
The orange line represents the intended consequence of a per capita approach. In both expansion and non-expansion states, the federal share becomes the orange line. Expansion states might get a little less per person at the start, and non-expansion states might get a little more – but neither would necessarily be cut from their base year level.
But if – and this is a big “if” – you could use the promise of flexibility to limit the annual increase in the per capita grant to, say, 6%, then the orange line flattens just a little bit.
After ten years, that little bit would amount to a lot.
You are still spending far more than what you were spending ten years earlier. But the difference between the orange line and the others represents billions of dollars in a projected trillion dollar Medicaid budget.
How could the orange line be flattened, while still improving access?
Whenever you reform, you create new incentives.
One incentive the per capita approach would create would be for states to enroll everyone who is eligible for the Medicaid program. More enrollees mean more money.
And the only way to keep a lid on your cost per capita is to enroll people before they get too sick. So, there is a huge incentive to do more in prevention, early identification, and early intervention – and to cover more non-medical services with lower inflation rates.
Would the per capita approach work?
No one knows for sure. It depends on finding the right balance among base year spending, case mix adjustments, service flexibility, and inflation factors, and all that involves a lot of guess work.
At first, Medicaid was designed primarily to offer to people with chronic conditions the long-term care benefits that Medicare did not. It pays much of our nation’s nursing home bill. It was later expanded to provide safety net insurance to low income families, especially for women and children.
The Affordable Care Act added a new wrinkle to the cost-sharing formula. For those states that expanded the Medicaid program to serve even more people, including uninsured single adults, it offered 90+ percent reimbursement for the new populations. To date, 32 states have expanded.
What’s wrong with Medicaid?
Medicaid costs the federal government a lot (more than $500 billion), and it is one of the biggest cost drivers of state budgets.
Also, with a few exceptions, it pays less to providers than Medicare and private insurance. This limits access for beneficiaries, and drives up the cost of private insurance.
In addition, as our population ages, the projected growth rate in Medicaid is high – up to 7.5% per year. It could become a trillion-dollar program over the next decade.
In reforming Medicaid, members of Congress have two goals – to improve access and to lower costs.
It is hard to do both at once.
Some have argued that we should create a Medicaid “block grant.” The federal government would give states a fixed amount of money, adjusted annually for inflation, along with greater flexibility in benefit design to improve access.
But this isn’t sensitive to all the factors that influence a state’s Medicaid costs, such as the differences in case mix across states. Should a state be penalized for having an older or sicker population?
It also has the potential to shift costs to states, if the states can’t figure out how to design sets of services that are relatively cheap.
So, Congress will consider a “per capita” grant approach.
The federal Medicaid share would be based on a per capita amount for everyone who is covered by Medicaid. This “per capita” amount could be adjusted for case mix severity. In other words, if the state’s Medicaid population mix changed, the amount could change, too.
States could still get flexibility within the per capita allotment to cover different services, but the allotment would carry a lower inflation factor to bend the cost curve over time. The chart illustrates how this might work.
The gray line represents the costs of the program in the states that did not expand, the blue line the costs in those that did. The numbers aren’t intended to be exact or translated directly to dollars – just to reflect that in the base year, the federal costs in the expansion states are higher because of the added population. In both cases, we apply a 7.5% inflation factor for ten years and see that the disparity remains, while the federal cost roughly doubles.
The orange line represents the intended consequence of a per capita approach. In both expansion and non-expansion states, the federal share becomes the orange line. Expansion states might get a little less per person at the start, and non-expansion states might get a little more – but neither would necessarily be cut from their base year level.
But if – and this is a big “if” – you could use the promise of flexibility to limit the annual increase in the per capita grant to, say, 6%, then the orange line flattens just a little bit.
After ten years, that little bit would amount to a lot.
You are still spending far more than what you were spending ten years earlier. But the difference between the orange line and the others represents billions of dollars in a projected trillion dollar Medicaid budget.
How could the orange line be flattened, while still improving access?
Whenever you reform, you create new incentives.
One incentive the per capita approach would create would be for states to enroll everyone who is eligible for the Medicaid program. More enrollees mean more money.
And the only way to keep a lid on your cost per capita is to enroll people before they get too sick. So, there is a huge incentive to do more in prevention, early identification, and early intervention – and to cover more non-medical services with lower inflation rates.
Would the per capita approach work?
No one knows for sure. It depends on finding the right balance among base year spending, case mix adjustments, service flexibility, and inflation factors, and all that involves a lot of guess work.
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