Current Medicaid financing structure — critical for counties

Key Takeaways

One of the most essential aspects of the Medicaid program is its flexible federal-state financial partnership, which ensures that federal funding is highly responsive to the needs of states and their residents.  Media reports indicate that depending on the outcome of the November elections, Congress may again consider proposals to radically restructure Medicaid’s financing by imposing a “per capita cap.” 

Such a cap poses severe risks to counties because of the considerable roles they now play in delivering Medicaid-financed services, contributing to states’ shares of Medicaid costs and helping administer Medicaid programs. 

Today, the federal government pays a fixed percentage of states’ Medicaid costs, with states and many counties responsible for the remaining share.  The percentage of Medicaid costs borne by the federal government is known as the Federal Medical Assistance Percentage (FMAP) and varies between 50 percent and 76 percent, depending on states’ per capita income relative to the national average.  But for certain costs, the federal share is even greater.  For example, under the Affordable Care Act’s Medicaid expansion, the federal government now pays 94 percent of the cost and will pay no less than 90 percent over the long run.       

This ensures that if state Medicaid costs increase, the federal government shares in those higher costs with federal funding automatically rising in response.  This is especially important in cases where states experience higher-than-expected Medicaid spending due to an economic downturn or recession, a new costly treatment, or a public health emergency or epidemic.  Conversely, if state Medicaid costs fall, the federal government shares in those savings.

Under a per capita cap, however, the federal government would provide only a fixed amount of federal funding per beneficiary, irrespective of states’ actual funding needs.  And in order to produce federal budgetary savings, which is the purpose of the cap, the cap amounts would be set to grow at a rate considerably slower than projected growth in per-beneficiary Medicaid costs. 

For example, under the per capita cap included in last year’s Senate bills repealing the Affordable Care Act, the annual adjustment for the cap amounts for children and non-disabled adults after several years would equal only general inflation (about 2.4 percent), even though Medicaid per-beneficiary costs for those groups were expected to increase by 2.5 percentage points more each year, according to the Congressional Budget Office.  As a result, the cap would lead to large and growing federal Medicaid spending cuts. 

The per capita cap included in the “Graham-Cassidy” repeal bill considered by the Senate in September 2017 would have cut federal Medicaid spending by $164 billion over the next decade and $1.1 trillion through 2036 (on top of the $2.5 trillion in cuts resulting from repeal of the Medicaid expansion), according to the consulting firm Avalere. 

As the federal government shifts costs to states — and in many cases, counties — states would have no choice but to institute sharp cuts to their Medicaid programs, including cuts to eligibility, benefits and provider payment rates.  With the ranks of the uninsured swelling, counties would bear much of the brunt as the uncompensated care burden for their hospital, clinic, health system and public health department services spikes. The actual Medicaid funding cuts are likely to be even greater if state Medicaid programs experience higher-than-expected growth in per-beneficiary costs, such as from a clinical breakthrough or from a new disease like Zika.  For example, when more anti-retroviral drugs became available to combat HIV/AIDS in the mid-1990s or when new drugs to treat Hepatitis C entered the market in 2014, Medicaid programs faced a significant increase in their prescription drug costs. 

In addition, due to the way the per capita cap is structured, it would not account for the impact of the aging of the population, as more seniors from the baby boom generation enter “old-old” age even though seniors aged 85 and older have Medicaid costs that are 2.5 times higher than younger seniors because of their far greater health and long-term care needs.  Lastly, some states would face disproportionately larger cuts if their growth in per-beneficiary costs were higher than average.

Medicaid’s financing structure is the backbone of its ability to provide affordable, comprehensive health coverage and long-term services and supports to tens of millions of low-income children, parents, seniors, people with disabilities and other adults. 

Any renewed effort to cap and cut federal funding poses a fundamental threat to Medicaid by shifting costs to states and inevitably leading to sharp cuts to eligibility, benefits and provider rates.  The likely harm to counties would thus be severe, considering all the roles they now play in financing and administering Medicaid and delivering services to Medicaid beneficiaries.