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JAMA Forum: JAMA Forum: Politics, Policy, and Medicaid Reform

BY  ON March 1, 2017

Gail Wilensky, PhD

In a recent JAMA Forum, the authors discuss the Republican rationale for Medicaid reform, 2 specific Republican proposals, and some policy implications that result from these proposals. Although I agree with much of the analysis, it ignores a key difference between how Medicaid is nominally structured versus how it has actually been operating over the past several decades. An awareness of this difference may provide a more complete understanding of why Republicans seek to reform Medicaid through block grants.

Specifically, many states have adopted financing strategies that substantially lower the state’s effective match rate (the proportion of costs paid by the state). This has raised questions about the fiscal integrity of future matching grants and has fed into Republican concerns about program integrity.

The base Medicaid program is funded using a match rate that varies inversely with a state’s income, with a minimum federal match rate of 50% and a maximum of 73%. There is also the Children’s Health Insurance Program (CHIP), which has an enhanced federal matching rate about 15 percentage points higher than the Medicaid match, averaging 71% nationally. The Affordable Care Act (ACA) expanded Medicaid to cover all individuals below 138% of the poverty line. In the 31 states (and the District of Columbia) that have taken advantage of the expansion option, the federal government paid 100% of costs for state residents who became newly insured under the law for the first 3 years. Starting this year, the federal match rate is reduced, covering 95% of costs in 2017, and it will gradually decrease to 90% in 2020 and beyond.

“Creative” Financing by States

The rationale for requiring states to match federal dollars is that states, by providing a portion of Medicaid’s funding, would be motivated to use the money efficiently—although questions have been raised about whether this would apply to states with the highest match rates. But during the 1990s, it became clear that many states were engaging in practices that sharply reduced their share of the match. The result was that much of the additional money being spent on Medicaid (and in some states nearly all of it) was federal money.

The first such strategies involved “voluntary donations” from hospitals to the state that the state would put up as its share of the match. After the federal matching money was received, the state would return the “donation” to the hospitals, along with the additional federal money. In the later 1990’s, some states began to pay some clinicians or hospitals more than they normally would and have the clinicians or hospitals return most of the extra money to the state. This would provide funding for future matches. It was most easily done with local government-owned institutions, such as county hospitals and nursing homes. By 2000, when only a portion of the states that were planning to use such strategies had put them in place, the GAO estimated that the federal share of the Medicaid match in some states had already risen by 12 percentage points over what it should have been.

Another GAO report issued in 2014—after the ACA’s passage but before the Medicaid expansion became effective—again raised concerns about state funding activities. The GAO focused on the use of taxes on clinicians or health care facilities and intergovernmental revenue (such as city or county taxes) to finance the state share of the Medicaid match. The agency estimated that 26% of the match funds from the states were from these sources, up from 21% in 2008, and raised the concern that this was shifting the costs from the states to the federal government.

The use of these creative financing strategies by the states means that what was supposed to be the driver for the efficient use of funds by states—their share of the match—has been largely ineffective since the early 1990’s, raising questions about whether matching grants remain a rational design structure. It has also fed into the increased interest in the federal government providing block grants to the states, creating a situation in which financing strategies used by the states to decrease their share of Medicaid costs would have little relevance. Equally important from the federal perspective, block grants place limits on the federal government’s liability, which is not true in an open-ended matching program.

How Might Medicaid Block Grants Play Out?

As was discussed in the JAMA Forum, block grants are usually considered in 1 of 2 forms: as an annual lump sum payment or as a fixed payment per person covered by the block grant. The only type of block grant that would make any sense from the states’ vantage point is one that uses a per capita distribution. Otherwise, states would have to absorb any increases in the number of people covered by Medicaid resulting from recessions or from other changes.

Switching to a Medicaid per capita block grant program would have major effects on federal funding for the states. The most important one is that Medicaid would no longer be an open-ended entitlement program. The specific effects of switching to a per capita block grant would depend on the initial distribution of Medicaid funds and also on the indexing used to increase block grants.

It is unlikely a Republican-controlled Congress would be satisfied with the current distribution of Medicaid funds to states. Under the ACA, the 31 states that expanded their Medicaid programs are predominantly blue states and the 19 that did not are predominantly red states. A 2016 proposal  from House Speaker Paul Ryan (R, Wisconsin) calling for per capita grants suggests giving states that have already accepted Medicaid expansion the same amount of dollars they receive today, but gradually reducing it to levels defined by the pre-ACA Medicaid match rate. Alternatively, the current federal Medicaid funds could be redistributed among the 50 states on the basis of their per capita poverty populations—a proposal not likely to be popular with blue states.

How funds are increased over time is equally important. The 2016 House Republican plan suggests using a general inflation measure to index changes in Medicaid funding. As others have pointed out, historically, this is considerably less than the medical inflation index, but even the ACA subsidies reverted to a general inflation index as of 2020. Perhaps there would be a willingness to consider a weighted average of the 2 types of inflation—general and medical.

A plan that required states to report on a small set of outcome metrics, such as percentage of children receiving proper immunizations at age 2 years or 6 years or the percentage of births performed vaginally, could be a readily supportable transformation of the Medicaid program. For example, states that perform well might be rewarded with a small bonus payment and those that perform poorly might be required to put in place a remedial program to help them improve.

The politics of changing Medicaid will be challenging. It’s hard for me to imagine a Republican-controlled Congress going against the wishes of a majority of the 31 Republican governors; there may be significant pushback from governors who might not want to lose the entitlement aspect of Medicaid or the additional money that came from the expansion. But there have been a lot of unlikely political outcomes happening as of late.

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About the author: Gail Wilensky, PhD, is an economist and Senior Fellow at Project HOPE, an international health foundation. She directed the Medicare and Medicaid programs, served as a senior adviser on health and welfare issues to President George H. W. Bush, and was the first chair of the Medicare Payment Advisory Commission.  She is an elected member of the Institute of Medicine.

About The JAMA Forum:  JAMA has assembled a team of leading scholars, including health economists, health policy experts, and legal scholars, to provide expert commentary and insight into news that involves the intersection of health policy and politics, economics, and the law. Each JAMA Forum entry expresses the opinions of the author but does not necessarily reflect the views or opinions of JAMA, the editorial staff, or the American Medical Association. More information is available here and here.