Health Reform WK-EDGE Medicaid block grant for states will see less funding
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Wednesday, March 18, 2020

Medicaid block grant for states will see less funding

By Donielle Tigay Stutland, J.D.

The administration’s new Medicaid block grant option will result in significantly less federal funding and greater financial risks for states that opt in.

On March 6, 2020, the Commonwealth Fund published an issue brief looking at the potential impact of the Medicaid block grant program. The report, titled, "The Fiscal Impact of the Trump Administration’s Medicaid Block Grant Initiative," reviews the recent block grant funding model proposal for Medicaid, and looks at the potential impact this initiative will have on states which chose to opt in to the program. The analysis by the Commonwealth Fund examined historical data and projections of costs and enrollment growth to provide estimates of the proposed Medicaid block grant program on states.

On January 30, 2020, the Centers for Medicare and Medicaid Services (CMS) announced a new Medicaid initiative that would allow states to opt in to a block grant funding model for a portion of Medicaid enrollees and in return the states would have fewer federal rules to follow. The Healthy Adult Opportunity block grant plan would place a cap on states’ federal Medicaid funding in exchange for less federal oversight and the ability to impose reductions in coverage, benefits, payment rates, and access to care to keep costs below the cap. The program would allow states that have expanded Medicaid under the Affordable Care Act (ACA) to transition state Medicaid programs into a block grant program.

Findings. The research gathered by the think tank revealed that states that elect to take the block grant would see substantial reductions in Medicaid funding. The issue brief notes that the median state would face a significant reduction in Medicaid funding between 2021 and 2025 compared with current national projections of Medicaid spending. Noting that the block grant cap is set below current projections of Medicaid spending, the issue brief suggests that states would need to make substantial cuts to avoid violating their caps.

The analysis also posits that the magnitude of cuts will also increase over time, and will increase steeply if healthcare costs or enrollment grow more rapidly than projected—due, for example, to an economic downturn or the availability of new cancer therapies. Looking at the median state, Washington, the report concludes that it would face a reduction in Medicare expenditures of 5.7 percent in fiscal year (FY) 2021; 14.6 percent in FY 2025; and 10.5 percent over the 2021 to 2025 period. The five-year median reduction in funding would be significantly larger if per enrollee spending growth is 1 percentage point above projections (13.9 percent), if enrollment grows at recent historical levels rather than projections (19.7 percent), or if a state reduces expenditures to capture "shared savings" (27.6 percent).

The report also notes that some states, such as Tennessee and Vermont, would need to make even deeper cuts than the median state. The brief suggests that states would be required to reduce benefits for enrollees, impose higher cost sharing with enrollees, and reduce payments to health care providers in order to stay under spending caps.

Additionally, the issue brief suggests that the majority of Medicaid savings resulting from the funding reductions would actually accrue to the federal government, not to states.

Policy Implications. The issue brief also discusses certain policy implications. The brief notes that CMS is seeking to make the block grant option more appealing by allowing states to divert federal Medicaid funds into other state priorities, if they underspend the block grant. The Commonwealth Fund suggests that such a policy, however, would "further deepen the Medicaid cuts, add to the access issues beneficiaries face under a block grant, and squeeze already thin Medicaid margins for providers and managed care plans."

The issue brief also discusses potential implications for a state which choses to leave the program. The guidance indicates that a state can choose to terminate participation in the program, however, there are significant concerns for a policy that would allow this. It would be expected that watchdog groups oppose a policy that, "allows states to divert a share of federal Medicaid dollars to other priorities when all is going well, but then lets them drop out of the block grant when their spending exceeds the cap."

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