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Issue Brief
January 2015

How Per Capita Caps in Medicaid Would Hurt States

In recent years, we’ve seen policymakers at the state and federal level propose the establishment of a per capita cap in Medicaid as an alternative financing structure. With the convening of the Republican-led Congress, we anticipate a renewed interest in this proposal.

What’s wrong with per capita caps? 

Medicaid per capita caps would replace Medicaid’s current financing structure. How the federal government sets the caps could severely reduce state funding. As our issue brief explains, precisely how the federal government would set these caps is an important detail that would need to be worked out. Caps could be set based on overall national Medicaid spending (a single payment cap). Alternatively, a cap could be set for each state based on that state’s Medicaid costs. Or they could be set for different groups of Medicaid beneficiaries, like one cap for children, one for seniors, one for people with disabilities, and so on.

If the federal government set its per capita payment for seniors based on average national spending, there would be clear winners and losers. States that are below the average, like Oklahoma and Texas, could get much more federal support per beneficiary than they currently do. But states that spend more than the average, like Montana and Ohio, would end up getting much less federal support than they do today. That means they would have to make deep cuts to their Medicaid programs.

On the other hand, the government could decide to set a cap for each beneficiary group based on current state spending for that group. That could produce a system with multiple payment rates per state (and hundreds of payment rates nationwide), which would be complicated for states to administer.

States could get “stuck” with lower caps

Beyond the administrative complexity, states that spend less because they offer fewer benefits could be permanently “stuck” with a lower cap. If a state wanted to change the benefits it offers in a way that might increase spending, even if it’s a short-term spending increase that could improve care and save health care dollars in the long term, the state would have to foot the bill on its own.