Medicaid Per Capita Caps: A Terrible Twist on a Bad Idea

Health

For 35 years now, Medicaid has had to fend off repeated efforts to slash its funding by utttinonverting it into a block grant. This year is no exception, as both the House Budget Committee Chairman Tom Price and Republican presidential candidate Donald Trump proposed transforming Medicaid into a block grant.

By definition, a block grant structure is a capped amount of federal dollars that the federal government arbitrary sets in order to achieve budget savings and gives to states, regardless of their increasing or declining needs.

It is akin to a business deciding today what it will spend on health care for its many different office locations a decade from now, regardless of: the numerous changes in how many people each and every office actually employs; changes in the benefits the company offers; whether or not an epidemic has hit the nation or a certain region; or, whether there has been changes in the costs of health care during the decade.

This, of course, makes absolutely no sense.

If two of the organization’s offices have 100 employees with the same health care costs today, the budget officer might predict they would both spend the same in the future. But, a decade later, it would be ludicrous to give them the same amount of money if one office shrunk in size to just 25 people and the other had grown to 250 employees.

Likewise, during an economic recession or a natural disaster when states are undergoing the dual challenges of declining revenues and increased health care needs as people lose their jobs and health coverage, the federal government would provide no additional assistance to either states or low-income families with increasing needs under a block grant.

The problems facing Puerto Rico and the Zika health care crisis provide a current-day example of problems with Medicaid block grants. Since Puerto Rico relies on a block grant to support its Medicaid program (“Mi Salud”) and it fails to adjust for need, the Government Accountability Office (GAO) found that, prior to the receipt of additional federal support through the enactment of the Affordable Care Act (ACA):

. . .federal Medicaid funds covered only 16 percent of their planned annual expenditures and were expended during the first quarter of the federal fiscal year, after which time the territory had to rely entirely on local funding to cover program spending.

The lack of support that Puerto Rico receives through the block grant is highlighted by David Thomsen of the National Council of La Raza. As he points out, Puerto Rico has nearly the same population as Oklahoma and far greater poverty, but only receives one-tenth of the support from Medicaid that Oklahoma does.

In February 2016, First Focus wrote a letter to the House Energy and Commerce Committee in February 2016 about the perils of the Medicaid block grant on Puerto Rico. We wrote:

The effects on Puerto Rico’s children have been devastating. Doctors are fleeing to the mainland or refusing to accept patients on Medicaid, leaving children without access to pediatric and preventive care. Consequently, children are more likely to have preventable hospitalizations and use overwhelmed hospital emergency departments for illnesses that should be treated by primary care physicians. Furthermore, the lack of access to specialists leaves children at risk of developing preventable chronic diseases.

The Medicaid block grant is a major factor contributing to Puerto Rico’s fiscal debt crisis. According to Dr. Johnny Rullán, Puerto Rico’s former Secretary of Health and Secretary of the Puerto Rico Healthcare Crisis Coalition:

. . .more than 40 percent of the island’s debt is due to health care and the lack of funding from Medicaid in particular. This chronic underfunding has caused cutbacks in services, a major physician exodus, life-threatening delays in getting appointments and huge delays in payments to hospitals and other medical providers. Patients are suffering and the system is crumbling.

The chronic underfunding of Puerto Rico’s healthcare system by the block grant is compounded by the problem that, as the Kaiser Family Foundation explains, the number of Zika cases in the Commonwealth has increased from 159 in March to nearly 6,500 in August.

Again, block grants do not adjust for need. This is why First Focus Campaign for Children urged Congress to:

. . .recognize the role the Medicaid block grant funding cap has played in both Puerto Rico’s health and fiscal crises and eliminate the block grant for the Commonwealth.

While we were urging Congress to end the block grant for Puerto Rico and the other territories, we added:

Just as the block grant has been a disaster for Puerto Rico, it would be for the rest of our nation as well.

Unfortunately, rather than learning the lesson from Puerto Rico and the other territories about why Medicaid block grants are a bad idea, politicians just keep on proposing them again and again and again and again and again.

The problems inherent in all the proposals to block grant Medicaid have been so numerous that opposition has always been strong. The cuts inherent in these proposals would lead to health care rationing for low-income children, people with disabilities, adults, and senior citizens.

 

In 1995, former Republican Senator John Chafee (R.I.) opposed House Speaker Newt Gingrich’s proposal to block grant Medicaid and said:

As states are forced to ration finite resources under a block grant, governors and legislators would be forced to choose among three very compelling groups of beneficiaries.

Who are they? Children, the elderly, and the disabled. They are the groups that primarily they would have to choose amongst. Unfortunately, I suspect that children would be the ones that would lose out.

Just as a block grant is bad for children, the idea is a bad one for states as well. In a recent analysis by the Urban Institute of Medicaid block grant proposals, like that of the Republican presidential nominee Donald Trump, Bruce Japsen explains in Forbes that such a change “would create huge disparities in spending from state to state.” As the Urban shows, Medicaid block grants would shortchange all states and lock-in inequities among them permanently.

 

In fact, when Aid for Families with Dependent Children (AFDC) was converted to a block grant and renamed Temporary Assistance to Needy Families (TANF) in 1996, inequities between the states were not only locked in but exacerbated over the last two decades.

Another Bad Idea: Medicaid Per Capita Caps

To address some of the valid and unworkable problems that a block grant would create for states and the millions of low-income people who rely on Medicaid, an alternative idea has been proposed and referred to as per capita caps. Since block grants fail to adjust for increasing need caused by population growth, economic downturns, natural disasters, or health care epidemics, it would be absolutely brilliant for policymakers and their staff to attempt to fix this fatal flaw.

I say this because Senator Chafee and my former boss, Senator Bob Graham, tried to do exactly that. They worked with opponents of Gingrich’s proposed Medicaid block grant in the Senate, the House of Representatives, and the Clinton Administration back in 1995 to craft an alternative that could find some Medicaid savings without the awful consequences that a Medicaid block grant would create.

In theory, the idea would be to make Medicaid payments to states based on a per-person basis. If needs increase because of population growth, economic recessions, natural disasters, or public health emergencies and more people become eligible for coverage, the federal contribution would increase on a capped per-person basis. This stands in sharp contrast to a block grant where an arbitrarily fixed sum of dollars is allocated regardless of changing circumstances. As Senator Graham said, “This approach would cut costs, not people.” Or at least, that was the initial thought.

Unfortunately, as we worked on the proposal, we discovered that per capita caps were a perfect example of the “law of unintentional consequences.” What we discovered is that per capita caps would be administratively complex, exceedingly bureaucratic, and completely unworkable. One Senate staff person put it, “Medicaid per capita caps are nothing more than a terrible twist on a bad idea.”

As a result, I had flashbacks reading the recent GAO report entitled “Medicaid: Key Policy and Data Considerations for Designing a Per Capita Cap on Federal Funding.” The 40-page report cites a number of the challenges we discovered back in 1995, but I would warn Hill staff thinking of embarking on this endeavor that the GAO report merely scratches the surface.

To spare anyone from having to actually read through the morass of problems that per capita caps would create, here are just a few examples of the “lowlights” from the GAO report:

Populations Covered: Most per capita cap proposals would seek to establish different caps on for children, adults, people with disabilities, and senior citizens because of wide variation in spending between the found broad categories. Moreover, says the GAO, “there are multiple subcategories for which spending also varies; for example, among seniors, the chances of needing long term care services — some of the most costly services covered by Medicaid — are higher for older enrollees, and among children, those in foster care have higher average expenses than others.”

Consequently, enormous problems arise with establishing such caps. As Lisa Shapiro at First Focus writes, “For example, if the state has a cap of $1,000 per child but the cost of an individual child with cancer or in need of heart surgery is hundreds of thousands of dollars, the incentives to ration care for these children would be very high and could potentially be life-threatening.”

Groups like the American Cancer Society, the American Heart Association, the Cystic Fibrosis Foundation, and the American College of Obstetricians and Gynecologists, who worried about the harm a per capita cap might cause specifically to high-risk pregnant women and infants, brought these issues to our attention. This led us to try and create carve outs to protect vulnerable populations, but as the GAO points out, “if a certain category of individuals — such as those with disabilities — were excluded from the cap, there could be incentives for states to maximize the number of enrollees who are classified as disabled to potentially increase the population not subject to the cap and thus increase federal matching funds.”

That is the definition of a lose-lose proposition.

Setting the Cap Levels: Per capita cap proposals envision setting baseline funding levels based on historical levels of spending in each state for each population category. Thus, the federal government would have to set or impose hundreds of caps upon the states.

Consequently, “winners and losers” are created in every single one of the population categories in which caps are set. The Urban Institute estimates, for example, that Vermont, the District of Columbia, Rhode Island, and Kentucky would receive more than $3,150 per child from the federal government under a per capita cap while Colorado, Michigan, New Hampshire, and Wisconsin would each receive less than $1,400 per child.

This creates enormous disparities in funding to states that would be locked into place well into the future.

We also know that health care costs vary geographically within a state. As an example, let’s say that the per capita costs of care to senior citizens in Florida are $7,000 on average, but $12,000 in Miami and $5,000 in Pensacola. If 10,000 additional low-income senior citizens were to move to Miami, the federal government’s per capita cap would shortchange Florida by $50 million. Florida would be unfairly penalized, as they would be forced to absorb 100 percent of the costs established by arbitrary caps established by the federal government.

With per capita caps, for every problem that one seeks to address, a half-dozen new problems are created.

Bureaucracy and Oversight: To even try to impose a per capita cap, the GAO points out that “[p]olicymakers would also need reliable information on Medicaid expenditures per enrollee in order to design a per capita cap.” The GAO adds that current data does “not include enrollment or claims information that can be used to link spending to particular Medicaid enrollees.”

This would be complex and potentially quite expensive. But even if this could be addressed, the calculations could be gamed by states so the federal government would need to dramatically create a rather massive compliance and audit system and force federal and state bureaucracies to work at odds with one another.

Thus, rather than working together to improve quality and access to care for Medicaid beneficiaries, as they should, the relationship between the federal government and states would become far more adversarial and divert resources from health coverage and care to a growing bureaucracy.

This raises numerous questions. As Shaprio asks:

. . .if a per capita reimbursement amount for a child in a state is $1,200 per year, do states get $100 per month for that child? If so, what if a child enrolls into the program near the end of the month or disenrolls before the end of another month? Do the states and the federal government have to calculate a prorated amount for every single Medicaid beneficiary across the country? What constitutes enrollment for purposes of the per capita cap allotment? Is it at the time of application, eligibility approval, or assignment to a health plan? If a healthy child becomes disabled, do they move into that new category or is that risk assumed in the child subpopulation? How is the population of people with disabilities defined? Is a child with a mild form of hearing loss or severe asthma considered disabled and how do you define “mild” and “severe”? These are just a few of the issues that make per capita caps complicated to devise and implement.

Frankly, imposing per capita caps on the Medicaid program is simply a terrible twist on a bad block grant idea.

Others have equally choice words. For example, President George W. Bush, while Governor of Texas, argued that block grants were better than per capita caps. At a press conference of the Republican Governors’ Association back in December 1995, Bush said, “Per capita caps entitlements is a disaster, particularly when you are cutting the budget.”

With a block grant or per capita caps. . . , states would lose the flexibility they now have to expand coverage, improve benefits, or increase participation. These policies can create other problems that have been well documented, such as forcing states to make undesirable cuts in spending (reducing benefits or enrollment) and placing greater financing burdens on states, households, and providers.

With the Census Bureau reporting that the uninsured rate for the country has dropped to a record low 9.1 percent (below 5 percent for children), now is not the time to backtrack on those gains and to ration or reduce health coverage, particularly for the most vulnerable citizens in our country.



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