The American Health Care Act (AHCA), passed by the House of Representatives by a margin of one vote (217-213) on May 4th, overhauls the way in which the federal government and states cover the costs of state Medicaid programs. Most notably, it converts Medicaid from an open-ended entitlement into a ‘per-capita cap’ program.
Medicaid provides coverage for over 70 million individuals and relies on both federal and state funding to continue growing. Under current law, the federal government covers, on average, 57 percent of each state’s total Medicaid costs, no matter the amount. The states pay for the remainder.
In contrast, under the AHCA’s per capita cap Medicaid program, starting in 2020, the federal government would provide states with a flat, capped dollar amount of funding for each person they enroll. The dollar amount is based on states’ 2016-level per-enrollee spending. Following the first year of the program, the cap would be adjusted based on two factors:
- Changes in the ratio of the ‘enrollment groups’ of Medicaid enrollees for each state, including children, those with disabilities, eligible adults, and seniors.
- The Consumer Price Index for Medical Care (CPI-M), which measures consumer spending for health care premiums, deductibles, coinsurance, and similar purchases. Importantly, the CPI-M is a slower growth metric than the projected annual growth rate for federal Medicaid spending. As a result, federal funding cuts to Medicaid would increase year-over-year relative to current law, a cut of approximately $116 billion over 10 years.
States will have to pay for any additional Medicaid coverage costs over that capped sum themselves.
Many Representatives and Senators argue that per capita caps will cut out waste, fraud, and abuse that drive unsustainable Medicaid cost growth. However, annual audits required by the Improper Payments Act show that the Medicaid eligibility error rate, that is, recipients who are enrolled in Medicaid but not eligible for coverage, is only 3 percent. While important to address, this alone is not a significant contributor to Medicaid costs.
On a per capita basis, Medicaid operates quite efficiently, costing less than other forms of insurance. State Medicaid expenditures are currently below those made by Medicare or private insurance for comparable services. States already have a strong interest in controlling Medicaid spending since they are liable for a significant portion of the cost of their programs.
The most prominent argument in favor of per capita caps is that it will give states the flexibility to design innovative Medicaid programs that suit their unique populations. History points out that federal spending cuts under a capped program are likely to result in the exact opposite. Health economists at Harvard and MIT found that states that chose to expand Medicaid were able to cover more people with higher quality care and saw no significant increases in their spending levels due to increased financial support from the federal government.
The American Health Care Act, in contrast, reduces federal Medicaid funding by $880 billion over 10 years. To compensate for severe federal funding cuts, state governors have readily admitted that they would have no choice but to constrict their Medicaid programs, including:
- Restricting eligibility and capping enrollment – Arizona infamously restricted coverage in 2008, which led to many citizens thrown off the program and left others delaying surgeries, foregoing medications, or traveling to Mexico to seek affordable care.
- Reducing payments to providers – Physicians and dentists are already hesitant to accept Medicaid patients due to low reimbursement rates, making it notoriously difficult for patients to find doctors that can treat them. Reducing reimbursement rates will further exacerbate that problem and make it more difficult for Medicaid patients to find providers.
- Cutting health benefits, including mental health, dental care, and reproductive health – Reduced benefits will decrease the quality of care that enrollees can receive and potentially lock them into a cycle of poverty. Both mental and dental health are particularly important for social mobility, and failure to cover reproductive health is functionally discrimination against half of the U.S. population.
Additionally, the ever-present risk of a major public health threat hitting the U.S., such as another Zika or Katrina, merits significant financial flexibility in offering Medicaid coverage.
Finally, Medicaid was designed to be countercyclical to economic performance. If, during a recession, more people became eligible for Medicaid due to layoffs or reductions in income, states would receive more federal funding. Under a capped program, states will have no choice in a recession but to further restrict Medicaid eligibility and benefits just as more people’s incomes drop and would have otherwise become eligible for the program.
While federalism may enable experimentation and allow states to tailor their laws to better suit the preferences of their citizens, in the case of Medicaid, the federal government is better suited to finance coverage expansion, as is well articulated by University of Michigan Law professor Nicholas Bagley in the Yale Law Review. Notably, Bagley argues that while Medicaid should be funded primarily by the federal government, states should retain substantial authority to structure and operate their health care markets as they see fit. Herein lies the delicate distinction between financial federalism and regulatory federalism, one often missed by members of Congress that may leave the very lives of their constituents hanging in the balance.
