Per Capita Caps in Medicaid: Shifting Health Care Costs to the States

Changing Medicaid to a per capita cap payment system would radically change the way the program has been funded since 1965. It’s a change that would shift costs and risks to states and children, seniors, people with disabilities, and working families who rely on Medicaid for their health insurance and long-term care.

Per capita caps are not a compromise. They are just a way to cut Medicaid.

They cap federal Medicaid support, radically ending the long-standing guarantee that federal funding will match state health care spending.

A Medicaid per capita cap is just that—a cap on what the federal government will pay each state for its Medicaid enrollees. It would end the 50-plus year federal guarantee of matching each states’ actual Medicaid spending and replace it with a capped, pre-set amount and pre-set growth rate. It’s a real Washington one-size-fits-all approach.

That structural change passes risk and costs on to states—it takes away states’ freedom to design a Medicaid program that truly responds to their residents’ needs.

Right now, federal support automatically changes to match a state’s spending, and needs. Federal support increases if a state’s costs go up, like with an opioid epidemic, natural disaster, or in the event a state decides to cover new medical treatments for its residents. Capping federal payments per enrollee puts states in a bind. Anything that raises immediate per-person costs above the cap is on the state—even if it would reduce costs in the long run. If the cap rates don’t work out, everybody loses.

A primary goal of changing Medicaid’s structure is to drastically cut federal funding to states.

A key motive for moving to per capita caps is to cut federal Medicaid spending—if not immediately, then soon and significantly. That guarantees that states’ Medicaid costs will increase. That will leave states with no choice but to cut coverage and benefits for children, seniors, people with disabilities, and working families; cut other funding priorities; or raise taxes.

Experience shows that federal funding for capped programs declines over time—Medicaid will be no exception.

For more than 50 years, there’s been a guarantee that the federal government will match states’ Medicaid costs. Capping payments will end that guarantee. A study of 13 low-income programs with caps found that funding, in real terms, declined significantly. It will be the same for Medicaid. Once the federal guarantee is replaced with a cap, you can plan on things happening like freezing federal payment levels or reducing the inflation adjustment. States may well find themselves fighting for funding year after year.

Per capita caps don’t really protect states if enrollment increases.

Getting an added payment for each new enrollee doesn’t help if the payments don’t keep up with costs. More enrollees just means a deeper financial hole that states have to fill.

The promise of flexibility is an illusion.

In exchange for ending guaranteed support, states are looking for flexibility and fewer federal requirements. With less federal funding, the real flexibility that states will have is to decide which services, which groups of people, or which provider or long-term care payments to cut. That’s not a recipe for healthier, more financially secure citizens, or a stronger health system. The current structure of Medicaid help’s states meet their residents’ health care needs better than any proposal the Republicans have put forward.

States won’t be able to innovate out of this fiscal hole.

States will not be able to innovate their way past the lost federal funding. Innovation can save money, but it often requires an upfront investment. For example, Oregon is undertaking an innovative restructure of its Medicaid program—something only possible because of a $1.9 billion federal investment.  The per capita cap proposals on the table are nothing like that. They will give states less money, not more. With less federal funding, states will be hard pressed to invest in real innovations.

The cost shift could hurt state economies.

In a release discussing per capita caps and block grant proposals, Fitch Rating—one of three nationally recognized credit rating organizations—expressed concern about the impact that a shift to per capita caps would have on state budgets, noting possible implications for state credit ratings. The report doubted that any added flexibility would offset federal funding cuts. It also predicted that states could be required to raise taxes or cut spending in Medicaid and other areas, like education, or both.

The bottom line is that changing Medicaid to a capped structure—whether per capita caps or a block grant—passes costs and risks onto states. It puts state finances and the people who rely on Medicaid and their families at risk.