Be Careful What You Ask For… Considerations for State Policymakers Regarding Medicaid Block Grants

13th Feb 2017

Be Careful What You Ask For… Considerations for State Policymakers Regarding Medicaid Block Grants

Obamacare isn’t the only health care program being targeted by President Trump and congressional Republicans.  Medicaid, the health care financing program for low-income Americans – jointly funded by the federal government and the states – has been identified as a program in need of dramatic reform.  Although proposed Republican reforms to the program differ, common key features include limiting federal outlays and devolving decision-making to the states.  State policymakers, including those in my home state of Texas, have called on the federal government to transform federal Medicaid funding into a block grant, an idea that appears to have the support of Trump administration and congressional Republicans.  Although there are aspects of shifting federal Medicaid funding to state block grants that could be very attractive to state policymakers, there are also significant potential negative ramifications depending on the details of the funding structure.

Excellent analyses have recently been published by the Commonwealth Fund, Kaiser Family Foundation, and Robert Wood Johnson Foundation regarding the potential policy characteristics of Medicaid block grants and their implications.  The purpose of this article isn’t to recapitulate these issues, but rather to call out several policy characteristics that should be of particular concern to state policymakers.  Changing the federal funding associated with Medicaid to a block grant could have profound implications on state finances and program operations, but the important details have not yet been part of the public dialogue.

Before further review of the potential implications of shifting the federal funding of Medicaid to state block grants, it is important to review some key characteristics of the of the current program.  The Medicaid program is structured at the federal level, jointly funded by the federal government and the states, and administered by the individual states with the oversight of the federal government.  Federal statutes and regulations stipulate who is eligible, which services are covered, and other program characteristics.  In general, eligibility is based on financial (e.g., low income), categorical (e.g., foster care, social security disability determination), demographic (e.g., pregnant women and children), or functional (e.g., requiring assistance with multiple activities of daily living) characteristics, either in isolation or combination.  For eligible groups, the covered benefits generally include acute health care services (e.g., physician and hospital services, and prescription drugs), and long-term services and supports (e.g., nursing facilities).

As currently structured, Medicaid is an open-ended entitlement.  Individuals who meet the eligibility criteria can be enrolled, and all enrolled individuals can receive as many services as are permitted under the program.  A consequence of this structure is that costs, on average, have increased at a rate greater than the growth rate of federal spending or the growth of the economy, leading fiscally conservative policymakers and budget writers to identify it as a program in need of reform.  One of the more popular proposed reform concepts is restructuring Medicaid from an open-ended entitlement to a block grant or other capped finance structure, in order to ensure greater budget certainty.

There are two main goals in shifting Medicaid to a block grant – reducing federal outlays, and increasing state flexibility in program administration.  From the perspective of state policymakers, some of the most important questions include the following:

  • What is the formula for the block grant?
  • How much flexibility does the state have for determining eligibility and benefits?
  • What level of state match will be required, and what funding sources will be permitted for that match?

Each of these issues has multiple components.  In order to shift the federal financing to a block grant, there will need to be some mechanism for calculating the size of the block grant for each state.  The federal Medicaid structure has historically permitted states to include certain optional eligibility categories in addition to the required eligibility categories.  With the additional Medicaid expansion opportunity under the Affordable Care Act, another large, optional expansion group was also established.

If the president and/or Congress attempt to shift federal funding of Medicaid to state block grants, the big fight will be over how to establish the state funding formula.  One way to establish the funding level per state (i.e., the funding formula) would be to base funding on each state’s historical federal funding level.  This mechanism would significantly advantage those states that had opted to cover optional populations and expand Medicaid under the Affordable Care Act.  An alternate approach would be to establish a formula based on population, or low-income population.  If done in a way that was budget neutral in terms of federal funding, this approach would significantly advantage states that have opted not to cover optional populations or expand Medicaid under the Affordable Care Act.   Another key aspect of a funding formula will be the degree to which it accounts for population growth in general, growth in the low-income population specifically, economic growth, and medical inflation.  One variation on the block grant concept that may address some of its challenges would be a federal funding level based on a fixed per-capita cost, such that for each enrolled Medicaid beneficiary, a fixed amount of federal funding is made available.

In addition to the issue of how to allocate federal Medicaid funding among the states, there is the issue of total federal Medicaid spending.  Since one goal of shifting to a block grant is to create greater federal budget certainty and, implicitly, lower federal outlays, states should expect the overall level of federal participation under a block grant structure to be lower than would have been the case under the entitlement structure.  Analysis by the Center for Budget and Policy Priorities shows that federal spending on other block grants has tended to decrease over time.  Therefore, over time, even if a given state initially sees no change in the federal contribution, it is likely that the rate of growth of the federal contribution will be less than it otherwise would have been, creating a deficit that must be addressed either by additional non-federal funds, reduced program spending, or both.

Other key issues for consideration by state policymakers include program flexibility and state match requirements.  When other federal entitlement programs have undergone reforms, such as the transformation of the Assistance to Families with Dependent Children (AFDC) into the Temporary Assistance for Needy Families (TANF) program, some of the key changes included the imposition of work requirements and lifetime caps.  A shift in the federal Medicaid finance structure toward block grants could conceivably include similar features.

One tricky aspect of Medicaid financing is the nature of the non-federal match.  Historically, the Medicaid program has required a level of state spending based on the relative ability of the state to raise revenue and the relative proportion of the population potentially eligible for the program.  Traditionally, the bulk of the funding for the state match has been state general revenue funds (i.e., general tax revenue).  However, in many states, non-trivial amounts of the state component of Medicaid funding are comprised of transfer payments from local governments or taxes on certain providers that were initially established based on the willingness of those providers to help fund specific aspects of the Medicaid program.  Under a block grant structure, the local funds and provider taxes will be disconnected from the particular aspects of the Medicaid program that they had historically funded, which may make local governments and groups of providers less willing to continue with transfer payments or dedicated taxes.

So, what issues should be the focus for state policymakers?

  • For a state like Texas that does not include optional Medicaid populations, and did not expand Medicaid under the Affordable Care Act, the most beneficial funding formula would probably be one based on general population or the number of low-income residents; or a capped per-beneficiary federal allotment. Additionally, it will be important to ensure the size of the block grant or individual cap amount increases at an appropriate rate over time, unless a state is prepared to increase its state general revenue spending for the Medicaid population, reduce enrollment in the program, reduce provider rates, or decrease benefits.  Even in the case of per-beneficiary federal spending caps, unless the cap level is set to rise with medical inflation, then a gap would appear in the funding structure that states would need to address.
  • In general, states should favor flexible eligibility and benefit structures. There may be political interest in decreasing program enrollment or increasing eligibility criteria.  This could be achieved by adding cost-sharing or work requirements to the program.  However, state policymakers should keep in mind that the health care needs and costs of populations shifted out of the Medicaid program will not simply go away.  Costs associated with individuals previously enrolled in Medicaid will likely shift to uncompensated care through hospitals, with the concomitant shifting of those costs around the system.  In a state like Texas, with significant local government spending on uncompensated care, decreasing Medicaid eligibility could lead to a higher burden on local taxpayers and the safety net more generally.
  • There is no easy solution to the non-federal match situation. Under a block grant program, states relying on local government transfers or provider taxes for significant amounts of the state match will need to develop new marketing approaches to keep such arrangements in place, find additional state revenue to offset their loss, or be prepared to reduce the size of their Medicaid programs.

In considering alternate federal Medicaid funding approaches, getting more program flexibility in exchange for the use of block grants or per-capita funding caps may seem like a good deal from the state perspective.  However, there are certain structural characteristics of block grants and per-capita funding caps for Medicaid that are likely to decrease federal funding, both in the near-term and with respect to the growth rate over time.  This decrease in federal contribution may shift costs to the states or require program reductions.  If Medicaid reform begins to gain momentum at the federal level, state policymakers should pay careful attention and understand the potential implications of different federal choices in funding and program structure.

This article originally appeared on  Stephen Palmer, PhD is the Founder and Principal of Waterloo Research and Consulting, an Austin-based consulting firm that helps organizations navigate the intersections of health care, technology, and government.  Dr. Palmer can be reached at