New Waiver Guidance Giving States Authority to Cap Medicaid Funding Could Put All Medicaid Enrollees at Risk

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The Centers for Medicare & Medicaid Services (CMS) just released new guidance giving states the ability to opt out of the traditional Medicaid funding structure for certain targeted populations, and instead receive a fixed (or capped) amount of federal dollars to operate their programs. Given that Medicaid is designed to adjust to cost needs, the new capped funding arrangements could negatively impact the target populations. Further, the policy has the potential to have negative impacts on all Medicaid beneficiaries in participating states.

Changes to Medicaid Funding Structure

The CMS guidance applies to waivers administered under section 1115 of the Social Security Act, which gives the Secretary of the U.S. Department of Health and Human Services authority to approve experimental, pilot, or demonstration projects deemed likely to assist in promoting the objectives of the Medicaid program. However, there are concerns that the recent guidance runs counter to Medicaid’s objectives.

Under current law, states and the federal government share the costs of financing Medicaid, with Medicaid spending responding to changes in enrollment and the cost of medical care. But under the newly released guidance, CMS allows states to bypass that approach in favor of either of two options that would dramatically alter Medicaid financing: an aggregate cap on spending (i.e., a block grant), or a per enrollee cap (per capita cap).[i] States would continue to receive federal matching funds for allowable expenditures up to the amount of their caps. However, baseline caps would be set below what states would normally receive in Medicaid funding and states would be at risk for expenditures in excess of their allotments.

Under the guidance, coverage groups that can be subjected to capped funding include individuals eligible under the Affordable Care Act’s (ACA) Medicaid expansion—including mid-life adults ages 45 to 64—and individuals in optional non-elderly, non-disabled adult coverage groups.

A Medicaid funding approach that puts states at risk might seem like a bad deal for states—one they wouldn’t choose. Yet in spite of approaches that would limit funding, states might be tempted to elect the block grant option because it comes with a financial incentive. Under the block grant policy, states that spend below their annual caps and meet certain performance requirements, can share some of the savings with the federal government. This arrangement creates an incentive for states to decrease spending on targeted populations so that they can gain funds for other state-funded programs that may not necessarily serve Medicaid beneficiaries.

Meanwhile, although low-income seniors and people with disabilities are not directly subject to these new funding limitations, the chance that they could be negatively impacted will increase over time. That is because funding growth rates—under block grants and per capita caps—are not expected to keep pace with Medicaid spending growth. States will have to find a way to cover any resulting budget shortfalls, which could lead them to restrict access to services or cut optional services — moves that could potentially impact all Medicaid populations. Thus, capped funding threatens to put all Medicaid enrollees in participating states at risk of losing access to needed care and services.

Further, in exchange for accepting a capped-funding approach that will likely increase states’ risk of Medicaid budget shortfalls over time, the guidance loosens requirements in terms of services states must provide. For example, participating states would be required to provide the target populations with only what are considered essential health benefits under the ACA. States could deny them access to critical, otherwise-mandatory Medicaid services like backdated coverage[ii] that helps people avoid crushing medical debt and transportation services that link people with chronic health conditions to needed medical care. In addition, states generally would also be able to impose higher premiums and cost-sharing on the target populations, including people with income below 100 percent of the federal poverty level ($12,760 annually for a single individual).

A Bad Idea Resurrected

Capping Medicaid funding is a bad deal for consumers and for states. Congress, in fact, rejected the idea in 2017. States should not be enticed to enter into funding agreements with the federal government that have the potential to undermine the health and welfare of their most vulnerable citizens and stand in the way of Medicaid’s intended purpose. Instead, states and the federal government should work together to identify constructive ways to make needed health care and long-term services and supports affordable and available to every low-income American who needs them.

[i] Per capita caps would respond to changes in enrollment but not price increases. Block grants (or aggregate caps) would not respond to changes in either circumstance.

[ii]CMS was already allowing states to waive backdated (or retroactive) Medicaid coverage through the section 1115 waiver process prior to the release of the guidance. The guidance reiterates this flexibility.