FEBRUARY 2017 Capped Federal Funding: Implications for Prepared by Manatt Health for the Texas Alliance for

Deborah Bachrach, Partner Cindy Mann, Partner Anne Karl, Partner This paper was commissioned by the Texas Alliance for Health Care. The Texas Alliance for Health Care was created as a resource to lawmakers in anticipation of changes in the . The Alliance is a diversifi ed group of stakeholders from private and public sectors representing hospitals, health plans, community clinics, other providers, business and public health. Its goal is to provide well thought out research that will inform and offer guidance as to the impact of proposed changes in the fi nance and delivery of healthcare in Texas. To learn more about the Alliance contact Jon Comola at [email protected] or 512.695.8806. About Manatt Health

Manatt Health, a division of Manatt, Phelps & Phillips, LLP, is an integrated, multidisciplinary legal, regulatory, advocacy and strategic business advisory healthcare practice. Manatt Health’s experience spans the major issues re-inventing healthcare, including payment and delivery system transformation; Medicaid coverage, redesign and innovation; health IT strategy; health reform implementation; healthcare mergers and acquisitions; regulatory compliance; privacy and security; corporate governance and restructuring; pharmaceutical market access, coverage and reimbursement; and game-changing litigation shaping emerging law. With 90 professionals dedicated to healthcare—including attorneys, consultants, analysts and policy advisors—Manatt Health has offi ces on both coasts and projects in more than 30 states.

For more information, contact:

Deborah Bachrach Partner 212.790.4594 [email protected]

Cindy Mann Partner 202.585.6572 [email protected]

Anne Karl Partner 212.790.4578 [email protected] Capped Federal Medicaid Funding: Implications for Texas

Executive Summary Executive Summary

Since its inception, Medicaid congressional leadership and to each state in a capped funding has been fi nanced jointly by the President Trump are seeking to model and considers how they federal and state governments. replace the current matching might play out for the State of There are no caps on the system with a fi xed allocation Texas. Because capped funding federal government’s fi nancial of federal dollars paid through proposals generally provide obligations; federal funding is block grants or per capita caps. states with greater fl exibility guaranteed as a share (known Drawing on proposals advanced than the current Medicaid as a “match”) of all state in recent years, this paper funding model, the paper also expenditures that follow federal examines the factors that go into reviews the type of fl exibilities rules. Today, this open-ended calculating the amount of federal that might be available to Texas funding model is being called dollars that would be allocated under such proposals. into question. Republican I. Medicaid Financing Models

Under the current system, the The base funding amount is • Per capita caps limit federal federal government matches trended annually generally using funds on a per enrollee basis. state spending on Medicaid so a national trend rate set below Unlike a block grant, federal long as the state follows federal the rate of medical infl ation. payments would rise with Medicaid rules, including terms And, at least to date, all such enrollment (that is, the state and conditions authorized by proposals both cap and reduce is paid per enrollee up to the section 1115 waivers. Texas’s the amount of federal dollars cap), but like a block grant, federal matching rate for 2017 available to states. federal payments would not is 56%—meaning that the Two types of capped models vary based on healthcare federal government generally have been advanced: costs. Notably, a per capita pays 56% of all allowable cap could also include a • Block grants impose an Medicaid expenditures. state or national spending aggregate cap on federal By contrast, under capped cap, placing states at risk for funding for each state. If costs increasing enrollment and funding, the amount of federal are above the federal caps— dollars is set in advance and rising healthcare costs in much due to enrollment or rising the same way as a block grant. does not increase when the healthcare costs—states would state’s healthcare costs increase bear all of those costs. beyond the preset amount.

3 II. Key Features of Capped Funding Models and Considerations for Texas

To evaluate the potential impact Texas will likely have additional • Benefits and payment rates. of capped funding, Texas will programmatic flexibility to State decisions on covered want to review key elements change some or all of its earlier benefits and plan and that affect the amount of federal programmatic decisions, but provider rates likewise drive Medicaid dollars it will receive— the state’s previous decisions, its Medicaid expenditures the base funding, trend rate, and which are reflected in its base and therefore the historical the treatment of supplemental payments, will largely determine base on which the capped payments and waivers—and the funding available to make funding is calculated. While consider how Texas fares relative any future changes. eligibility levels affect base to current law and other states. • Eligibility. In a block grant funding decisions with respect In some cases, the implications context, relatively low to block grants, benefit and for Texas depend on whether eligibility levels will translate rate decisions affect the base capped funding is structured as into relatively low base amount with respect to both a block grant or a per capita cap. payments. The eligibility block grants and per capita The financial impact of capped issue that has garnered the caps because they drive both funding will also be affected by most attention in connection total state spending as well as the flexibility provided, which is with proposals to cap federal per enrollee spending. considered below. Medicaid funding relates Texas’s relatively low eligibility Base Funding. The proposals to whether a state has levels will mean that it has a typically set initial state elected to expand Medicaid smaller base upon which block allotments based on each state’s under the Affordable Care grant payments will be set; historic federal payments. Block Act. The 31 states plus the those eligibility levels are less grants are generally based on District of Columbia that informative in the context of a a state’s total federal Medicaid expanded Medicaid received per capita cap. A comparison of payments during a base year, an additional $72.6 billion Medicaid spending per enrollee while per capita caps would in federal funding in 2016— provides further insight into be based on historic spending funding that did not flow to how Texas would fare under during a base year for specific the 19 non-expansion states, both types of capped funding populations, such as children, including Texas. (Texas models as compared to other adults, the elderly, or people would have received about states and whether it would with disabilities. In doing $10 billion in 2016 had it have a relatively robust base so, capped funding models expanded Medicaid.) A critical payment available to underwrite essentially lock in prior state question for Texas is whether future costs. The most recent decisions with respect to in setting the caps Congress data available for all states eligibility levels, covered will address the disparities is 2011; in that year Texas benefits, and payment rates. between expansion and non- spent more per enrollee than expansion states. most states on children, but

Manatt, Phelps & Phillips, LLP manatt.com 4 Capped Federal Medicaid Funding: Implications for Texas

considerably less on elderly and it was 5.6%; and, for disabled • State spending requirement. disabled beneficiaries, ranking individuals it was 4.7%. During Many of the proposals are 40th and 26th in the nation, that same period of time, GDP unclear as to whether states respectively. With the elderly grew at 2.9% and the CPI grew would have to spend their population (and particularly the at 2.5%. In a block grant context, own funds as a condition 85 plus population) expected the trend rate implications for of receiving capped federal to grow in every state, this will Texas are especially concerning, funds. If a state-matching disadvantage Texas under most as Texas is projected to be one requirement remains and capped funding proposals. of the fastest growing states in the federal funds that Ironically, Texas may also be the nation, but the trend rate is states can draw down are disadvantaged by having made also a concern to Texas in a per themselves reduced, Texas’s greater strides than many other capita cap context particularly state-spending requirement states on lowering its spending when considered in combination will also be reduced given on long-term services and with the low base rate for elderly that Texas law limits state supports, by prioritizing less enrollees and the expected rise spending for Medicaid to costly home and community- in the elderly population. those expenditures that will based services. Supplemental Payments qualify for federal matching Trend Rate. As important as the and Waivers. Virtually every payments. This would mean base payment is in determining state relies on some form of that total reductions in the amount of federal dollars supplemental payment or waiver program spending would be that a state will receive, the funding, but it is not clear from much higher than the federal trend rate is likewise important— most of the proposals whether spending reductions—unless particularly over time. The trend these funds would be built into Texas law was changed so that rates in recent proposals are the base payment or continue it would absorb program costs tied to a national, not a state- to be available to states as a above the federal caps with specific, indicator—usually the separate stream of funding. state-only funds. Consumer Price Index (CPI) or These issues are of particular • Matching rate. Assuming Gross Domestic Product (GDP) importance to Texas which state spending is required, plus one. These trend rates receives a greater percentage of the capped funding proposals are projected to grow more total Medicaid dollars through generally do not address slowly than overall healthcare supplemental payments and the federal match rates costs or Medicaid spending waiver funds than any other that would be applied, nor (this is one of the ways federal state in the nation. whether higher matching savings are achieved). States State Share. While the federal rates currently available might be able to lower program government, on average, for certain populations and costs, but to the extent these covers 62 percent of the cost services would continue. Texas trend rates do not keep up with of Medicaid nationally and 56 currently receives enhanced actual costs, states will bear percent in Texas, state spending matching funds for its IT and these added costs. From 2000 in the program is significant. eligibility systems and certain to 2011, Texas’s average annual Texas will want to look closely at program integrity initiatives. growth in spending for children a number of features relating to Texas also was the 5th state in was 8.4%; for elderly adults state share: the nation to take advantage

5 of the Community First Choice • Changes in how states can silent on this question but a federal option, which provides raise their nonfederal share. few would limit state reliance enhanced federal matching State spending (and therefore on intergovernmental transfers payments (a six percentage total program spending) could (IGTs) or provider taxes. Texas point increase) for the home also be affected if the rules currently relies heavily on both and community-based services relating to how states can raise IGTs and provider taxes to provided through the program. their nonfederal share are fund the nonfederal share of changed. Some proposals are Medicaid costs. III. Flexibility

Capped funding is typically Texas’s eligibility rules are Similar questions arise with coupled with additional state set at the federal minimums respect to benefits—which flexibility. While states generally today; it is unclear if Texas benefits would Texas choose welcome more flexibility, when would have the flexibility to set to drop if it had the flexibility to that flexibility is linked to a lower eligibility levels or if it do so? Notably, certain mental reduction of and cap on federal did, whether it would choose health services as well as Medicaid funding, states will to take up that flexibility. Texas substance abuse and pharmacy want to consider the flexibility might gain additional flexibility are optional benefits today, and they are looking for and the to condition coverage on work Texas has determined to cover extent to which it will help them or job training requirements or them. Finally, while Texas has manage program costs with payment of a monthly premium, considerable flexibility to set less federal funding. In addition, but the majority of program plan and provider payment rates states will want to consider enrollees are children and the today, it might be able to reduce whether that flexibility is majority of program spending rates even further and with available today through waivers is for low-income elderly and fewer constraints in a capped or administrative changes people with disabilities. Given funding model. Again, Texas will as well as the downstream the population Texas Medicaid want to consider the impact both implications for new flexibility covers today, Texas will want on access to care as well as the on local governments, providers, to consider whether it would sustainability of its providers, health plans and consumers. impose such requirements, how most particularly rural providers. The three big drivers of spending much savings it would achieve, in Medicaid are eligibility, and whether it could secure the benefits, and provider payment authority to do so through a rates. With the exception of waiver today. children and pregnant women,

Manatt, Phelps & Phillips, LLP manatt.com 6 Capped Federal Medicaid Funding: Implications for Texas

IV. Conclusion

By design, capped funding priorities; accommodating all funding. New flexibility could proposals shift the risks of any of them would be complicated help Texas structure its program Medicaid costs above the federal and not likely given Congress’s in less costly ways, but given caps to states. States will seek to interest in reducing federal its spending levels and the fact ensure that any capped funding Medicaid expenditures. that most of the spending is program that is considered by Texas comes to the capped driven by the needs of high Congress protects them to the funding discussion with a cost, high-needs disabled and greatest extent possible; that number of fiscal challenges— elderly enrollees, it is unclear is, that decisions on base year most notably its historically low how much Texas can save costs, out-year trend rates, investment in Medicaid relative through any new flexibility. state share obligations, and to other states, its relatively Texas will want to carefully the treatment of supplemental low spending per enrollee consider all these factors as it and waiver payments are fair for the elderly, its growing evaluates the potential impact to the state, its residents, and population, and its high reliance of capped funding on its its healthcare providers. And on supplemental and waiver budget, its residents, and its each state will have different healthcare providers.

7 Capped Federal ExecutiveMedicaid Summary Funding: Implications for Texas

Republican congressional Under a capped fi nancing This brief looks at capped leadership and President system, Congress predetermines funding proposals drawn from Donald Trump have called for a the maximum amount each federal capped programs restructuring of how the federal state receives typically based already in place as well as recent government funds Medicaid— on historic state enrollment proposals relating to Medicaid. going well beyond repealing and spending and adjusted It focuses on how the caps and replacing the Affordable yearly by a national trend rate. and trend rates are designed, Care Act. Since its inception While additional adjustments and the implications for Texas. in 1965, Medicaid has been could be added (for example, Details do matter; since many fi nanced jointly by the federal an adjustment for population important details are missing and state governments with the growth), under all of the capped from the recently advanced federal government providing funding proposals federal proposals, this brief does not funds to match all state payments to states are divorced purport to calculate the impact expenditures made pursuant from actual costs. At the same of capped funding on Texas or to federal Medicaid law. There time, the proposals offer states anticipate with precision how are no caps or limits on the new programmatic fl exibility, new programmatic fl exibility federal government’s fi nancial although the proposals provide might impact the Texas Medicaid obligations for the program, little detail on the new fl exibility program under a capped funding as long as state expenditures that would be permitted. States structure. Instead, this brief follow federal law.1 Replacing will want to evaluate whether offers a preliminary framing of this matching system with a the additional fl exibility is a the key issues related to setting fi xed allocation of federal good trade-off for the risk they funding caps and expanding dollars, likely coupled with must assume under a capped state fl exibility. Further fewer federal requirements, fi nancing system.2 discussion will be needed as has major implications for new details on capped funding states, healthcare providers, proposals emerge. and consumers.

Manatt, Phelps & Phillips, LLP manatt.com 8 Capped Federal Medicaid Funding: Implications for Texas

I. Overview of Models for Funding Medicaid

Financing Medicaid Today engaging in population health States and the federal and valued-based payment Texas Medicaid government share responsibility arrangements. However, states Today for funding the Medicaid operate under certain federal program, with each covering constraints, including minimum • 4.3 M enrollees a share of all permitted standards relating to benefits • $36.1 B total spending Medicaid expenditures. Federal and requirements that payments ($14.7 B state, $21.4 contributions match state to plans be “actuarially sound.” B federal) expenditures with no upper And like all healthcare payers, • 56% federal match rate 3 states face costs that are often limit on the total Medicaid Sources: Robert Wood Johnson expenditures.4 As a result, as beyond their control. The current Foundation, “Data Points to Consider financing model helps states When Assessing Proposals to Cap state Medicaid spending rises, Federal Medicaid Funding: A Toolkit so do federal expenditures. State absorb these unanticipated or for States”; MACStats decisions about the populations hard-to-control costs. States and benefits to cover and the receive more federal dollars Capped Funding Proposals amount they pay for services when Medicaid enrollment are the principal drivers of the rises, as often occurs when the Two different types of capped level of federal funding a economy falters. Federal support funding models are under state receives. also automatically adjusts when consideration: block grants and state costs rise due to a public per capita caps. The models The current model affords states health crisis such as the opioid differ in several key respects, significant but not unfettered epidemic or Zika or emerging but in both states are no longer flexibility to tailor their Medicaid new technologies and cures. The guaranteed federal funding programs to address shifting added federal support generally for the actual costs of their social, economic, and clinical does not relieve the state of Medicaid programs. In addition imperatives. States can manage its share of rising costs,5 but it and significantly, to date all spending—and consequently does assure that added costs such proposals contemplate their share of the costs— are fully shared by both levels of reducing federal funding to through a number of levers, government (in Texas at a 56/44 states, through the way base most significantly through split). Since federal spending payments are set or by imposing the choices they make on rises and falls based on state a national—rather than state- covering optional populations spending, some proponents of specific—year-to-year growth and benefits, designing their capped federal funding cite the rate that is below the rate delivery system (e.g., managed fact that the federal government of medical inflation and the care versus fee-for-service), lacks year-to-year certainty on projected growth in Medicaid setting plan/provider payment Medicaid costs as an important program costs. rates, ensuring appropriate reason for implementing caps.6 utilization of services, as well as

9 by design, capped federal 1115 Waiver Caps funding shifts all costs above the caps to the states. States States operating 1115 waivers are subject to per capita caps might have greater flexibility on federal spending to enforce the federal policy that waivers to reduce costs, but if capped be budget neutral to the federal government. The caps in 1115 federal funding ultimately falls waivers differ from the proposed per capita caps in several key short of actual costs, states respects. Budget neutrality caps apply only to the population must either invest additional and services that are subject to the waiver, and they are state dollars or make further negotiated based on expected growth in the state’s Medicaid changes to eligibility, benefits, program to ensure that the growth under the waiver is no or payment rates. greater than it would have been without the waiver. In contrast, Per capita caps impose a cap on current capped funding proposals are designed to reduce federal funds on a per enrollee federal spending, and they would be imposed by federal law basis. Base payments are set program wide. Additionally, waiver caps apply over the life for each group of enrollees (e.g., of the waiver, allowing savings in one year to offset overages children, people with disabilities) in another. Finally, waivers are voluntary and the caps are and, like a block grant, these negotiated by states. base payments would likely rise each year by a national trend rate. In contrast to a block Block grants impose an the states’ obligation to match grant, under a per capita cap, aggregate cap on federal federal expenditures, and most total federal payments would Medicaid funding for each state. include some additional state rise with enrollment (that is, the Funding under block grants is flexibility in designing and state is paid for each enrollee fixed and does not increase in administering their Medicaid up to the cap), but like a block response to a state’s growth programs.7 The details will grant, federal payments would in enrollment or healthcare matter—there might be not vary based on states’ expenditures. Block grant population or other adjusters in decisions regarding covered proposals differ with respect to the block grant formula —but, Figure A: Percent Cut in Federal Medicaid and CHIP Funds House FY 2017 Plan Relative to Current Law

‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 0% -5% -10% -15% -20% -25% -30% -35%

Manatt, Phelps & Phillips, LLP manatt.com 10 Capped Federal Medicaid Funding: Implications for Texas

benefits, provider payments, in much the same way as a Medicaid spending; this is or healthcare costs. In other block grant. Like block grants, largely accomplished by setting words, states are at cost risk, but state matching requirements a national trend rate for the not at enrollment risk. Because vary under different per capita capped payments below the total funding fluctuates with cap proposals, though most level of growth that is projected enrollment, states operating proposals appear to assume under current law. For example, under a per capita can be more states would continue to have a the House Budget Committee’s certain that their Medicaid state match requirement. proposal for the FY 2017 Budget programs will be able to respond Recent capped funding (“House Budget proposal”) to financial downturns or proposals split on whether would reduce federal Medicaid population changes. Notably, they propose block grants or spending by almost one trillion however, some per capita cap per capita caps (or, in some dollars over ten years as proposals also include a national cases, give states the option). compared to projected 8 9 aggregate cap, placing states However, they all are explicitly spending under current law. 10 at risk for increasing enrollment designed to reduce federal See Figure A. and rising healthcare costs II. Key Features of Capped Funding Models and Considerations for Texas

Any change to federal Medicaid education—is just under 12 and waivers—and describe financing and program percent. Proposals to cap federal how different factors work to rules would have significant Medicaid funding alter this advantage or disadvantage implications for Texas. Figure source of federal funding for Texas relative to other states.13 B shows the role that state and the State. In some cases, the implications federal Medicaid funds play in All capped funding models shift for Texas depend on whether the 11 Texas’s budget. risk to the states. The magnitude capped funding is structured as Medicaid accounts for a large of risk shifted depends on a block grant or a per capita cap. share of spending of State the funding levels: the lower In the final section, the paper funds—20 percent in State fiscal the base funding levels and compares the flexibility that year 2015.12 applicable trend rates, the might be coupled with capped greater the level of risk shifted federal financing to the flexibility But it is also the single largest available under current law. source of federal funding for to the states. We therefore begin Texas, representing just over this section of the paper by 1. Base Funding 50 percent of all of the federal reviewing four key elements that In setting initial allotments for funds available to the State. By affect the amount of the cap— any capped funding model, comparison, the next largest the base funding, trend rate, proposals typically use each source of federal funds— state spending requirements, state’s historic Medicaid for primary and secondary and supplemental payments spending. Block grants are

11 Figure B: Medicaid’s Figure C: Comparison of Current Eligibility Levels in Role in Texas’s Budget Texas to Eligibility Levels under Expansion

200% Medicaid and Other Spending as a Share of State Funds in Texas, SFY 2015 180% 160% 20% 20% 140% 120% 9% 100% 4% 31% 80% .02% 15% 60% 40% Sources of Federal Funds in Texas State Budget, SFY 2015 20% Income as a percentage of the federal poverty line poverty of the federal Income as a percentage 0% Most Childless Parents Disabled Pregnant Breast and 20.2% Adults Women Cervical Cancer

Expansion Eligibility, if Texas covered Current Eligibility 8% the new adult group .04% .1% 9.4% important question for Texas rate, and states will likely have 50.6% 11.7% is whether the base payments the programmatic flexibility to incorporate spending on change those decisions (both supplemental payments and issues are discussed below). Medicaid waiver spending; that issue is But their previous decisions, Elementary and Secondary discussed in section 4 below.) which are reflected in their base Education Higher Education In doing so, all capped funding payments, will largely determine Public Assistance models essentially lock in prior the funding available to make Corrections state decisions with respect any future changes. States with Transportation to eligibility levels, covered higher base payments will have All Other Expenditures benefits and payment rates. In more federal dollars available, addition, the greater a state’s affording them a relatively matching rate, the greater the broader array of options for generally based on a state’s cap will be for a given state’s running their Medicaid programs total federal Medicaid payments spending level. At any given in the future. during a base year, while spending level, a state with a per capita caps would be Eligibility Levels 70% match will have a higher based on historic spending The eligibility issue that has federal cap than a state with a during a base year for specific garnered the most attention in 50% match. populations, such as children, the current block grant debates adults, the elderly, or people The base payments will likely relates to whether a state has with disabilities. (Note that an be subject to a national trend elected to expand Medicaid

Manatt, Phelps & Phillips, LLP manatt.com 12 Capped Federal Medicaid Funding: Implications for Texas

under the Affordable Care eligibility levels for parents than payment in a block grant Act. Thirty-one states (plus Texas.16 Figure D17 compares structure as compared to other Washington DC) have expanded parent eligibility levels in Texas states with higher eligibility Medicaid; nineteen states, relative to eligibility levels for the levels. A lower base payment, including Texas, have not. Figure other non-expansion states. in turn, will put greater fiscal 14 C compares Texas’s current States with lower eligibility pressure on Texas, making it eligibility levels to eligibility levels have lower aggregate difficult to make future changes levels under expansion. spending relative to the size of in the program, whether those The 31 expansion states plus their low-income populations, changes might involve covering D.C. received $72.6 billion resulting in a lower base more people, addressing additional federal dollars in Figure D: Comparison of Eligibility Levels for Parents 2016.15 (For Texas, this would Among Non-Expansion States represent an additional 10 billion federal dollars.) It is unclear whether these funds will survive Rank State Parent/Caretaker Eligibility Level an ACA repeal effort. Assuming 1 Tennessee 103% they do, the expansion states will want them folded into their 2 Maine 100% capped payments as these 3 Wisconsin 95% dollars are now “baked” into 4 62% those states’ budgets. Resolving the disparity between the 5 Nebraska 58% expansion and non-expansion 6 South Dakota 57% states will be one of the thornier issues Congress will navigate if 7 Wyoming 55% it moves ahead with a block 8 Virginia 49% grant proposal. 9 Utah 44% Texas is further disadvantaged under a block grant structure 10 North Carolina 44% because it has relatively low 11 41% eligibility levels as compared to other non-expansion states. 12 Georgia 34% Today, Texas does not cover 13 Kansas 33% childless adults at any income 14 Florida 29% level (unless disabled, pregnant or elderly) and covers parents 15 Idaho 24% with incomes below 15 percent 16 23% of the federal poverty level. Of the 19 states that have not 17 Missouri 18% expanded Medicaid, most do not 18 Texas 15% cover childless adults but only 19 13% one state—Alabama— has lower

13 Table E: State Ranking of Medicaid Spending per Full Benefit Enrollee, FY 2011

# Aged Adults Children Disabilities

U.S. $17,522 $4,141 $2,492 $18,518

1 WY ($32,199) NM ($6,928) VT ($5,214) NY ($33,808)

2 ND ($31,155) MT ($6,539) AK ($4,682) CT ($31,004)

3 CT ($30,560) AK ($6,471) NM ($4,550) AK ($28,790)

4 NY ($28,336) AZ ($6,471) RI ($4,290) ND ($28,790)

5 DE ($27,666) VT ($6,062) MA ($4,173) DC ($28,604)

6 OH ($27,494) RI ($5,778) MN ($3,461) MN ($26,890)

7 DC ($27,336) OR ($5,631) NH ($3,241) WY ($25,346)

8 MA ($27,205) DE ($5,430) PA ($3,194) MD ($23,798)

9 NH ($26,794) MD ($5,385) CT ($3,158) DE ($22,972)

10 MT ($26,704) NY ($5,339) AZ ($3,052) AZ ($22,040)

11 MN ($25,030) KY ($5,055) TX ($3,010) OH ($21,892)

12 AK ($24,288) ID ($4,878) MO ($2,978) ID ($21,781)

13 OR ($24,253) TN ($4,852) DE ($2,942) NH ($21,545)

14 MD ($23,491) VA ($4,781) MT ($2,919) RI ($21,417)

15 WV ($23,243) WA ($4,756) KY ($2,911) IA ($20,242)

16 PA ($21,372) NJ ($4,648) DC ($2,820) CA ($20,080)

17 IN ($21,269) PA ($4,631) MD ($2,765) NJ ($19,951)

18 IA ($21,163) CT ($4,538) NY ($2,707) UT ($19,718)

19 AR ($20,484) MA ($4,496) VA ($2,696) CO ($19,718)

20 ME ($19,881) SC ($4,449) NJ ($2,616) IN ($19,488)

21 NJ ($19,160) DC ($4,446) ND ($2,531) SD ($19,156)

22 MS ($18,592) TX ($4,371) ME ($2,528) VA ($18,952)

23 CO ($18,478) NC ($4,360) WV ($2,506) NM ($18,500)

24 AL ($18,473) SD ($4,356) SD ($2,503) OR ($18,255)

25 HI ($18,328) WV ($4,284) CA ($2,475) VT ($17,789)

26 KS ($18,328) OH ($4,225) TN ($2,470) TX ($17,709)

Manatt, Phelps & Phillips, LLP manatt.com 14 Capped Federal Medicaid Funding: Implications for Texas

# Aged Adults Children Disabilities

27 MI ($17,599) GA ($4,215) OK ($2,461) MO ($17,481)

28 MO ($17,020) LA ($4,168) AR ($2,458) NE ($17,449)

29 RI ($16,998) MO ($4,122) MS ($2,403) KS ($17,153)

30 SD ($16,374) NE ($4,015) NC ($2,355) HI ($17,035)

31 VA ($16,367) WY ($3,986) UT ($2,260) MA ($16,927)

32 WI ($16,344) MS ($3,983) CO ($2,241) ME ($16,920)

33 WA ($16,183) MI ($3,913) KS ($2,186) IL ($16,689)

34 AZ ($16,145) AL ($3,899) AL ($2,156) WI ($16,599)

35 KY ($15,757) MN ($3,863) IL ($2,123) PA ($16,441)

36 TN ($15,745) HI ($3,765) IA ($2,116) MT ($16,352)

37 ID ($15,558) KS ($3,762) WA ($2,111) WA ($16,208)

38 LA ($15,491) NH ($3,652) OH ($2,110) NV ($15,706)

39 NE ($14,997) ND ($3,652) OR ($2,085) MI ($15,109)

40 TX ($14,739) OK ($3,551) LA ($2,082) LA ($15,099)

41 VT ($14,258) CO ($3,469) HI ($2,062) NC ($15,060)

42 FL ($14,253) UT ($3,326) NE ($2,041) OK ($15,010)

43 GA ($14,142) AR ($3,198) GA ($2,023) FL ($15,005)

44 NV ($13,226) IN ($3,198) ID ($2,023) TN ($14,680)

45 OK ($12,315) IL ($3,184) SC ($2,008) AR ($14,023)

46 SC ($12,256) WI ($3,170) WY ($1,967) WV ($12,993)

47 CA ($12,019) FL ($2,993) NV ($1,940) MS ($12,960)

48 UT ($11,763) CA ($2,855) MI ($1,926) KY ($12,856)

49 IL ($11,431) NV ($2,367) IN ($1,858) SC ($12,830)

50 NC ($10,518) ME ($2,194) FL ($1,707) GA (10,639)

51 NM (N/A) IA ($2,056) WI ($1,656) AL ($10,142)

Source: Manatt analysis of Kaiser Commission on Medicaid and the Uninsured and Urban Institute estimates based on data from FY 2011 MSIS and CMS-64 reports.

15 provider payment rates, or elderly beneficiary, with the than those states that have not just keeping up with costs three highest spending states done so. States with limited not accommodated by the (Wyoming, and use of community-based long- trend rate. Connecticut) spending more term care will have higher caps, Benefits and Provider Rates than twice as much per elderly and they may also be able to beneficiary. With respect to manage spending within caps Eligibility levels are not the other adults and people with more easily by shifting care from only factor that shapes capped disabilities, Texas spending is institutional to community- funding calculations: state about in the middle of states.18 based settings once the caps are decisions on covered benefits These spending figures suggest in effect. and plan and provider rates that Texas will be at a significant likewise drive a state’s Medicaid Texas has made important disadvantage in terms of federal expenditures and therefore the strides with respect to providing funding levels under both a historical base on which the more home and community- block grant and a per capita cap capped funding is calculated. based services. It is ranked 13th with respect to spending for the While eligibility levels affect base in terms of the percentage of elderly, which along with the funding decisions with respect long-term care provided in home disabled, are the two highest to block grants, benefit and rate and community settings, placing cost enrollee groups covered 19 decisions affect the base amount it well ahead of most states. under Medicaid. With the elderly with respect to both block grants Texas’s success in implementing population (and particularly the and per capita caps because they community-based care no 85 plus population) expected drive both total state spending doubt contributes to its lower to grow in every state, this will as well as per enrollee spending. spending on elderly and to a significantly disadvantage States with more comprehensive lesser extent disabled enrollees. Texas under most capped benefit packages or higher While generally this would be funding formulas. payment rates—or both—will considered a good thing, in the tend to have higher per enrollee Ironically, states that have context of a fixed block grant spending and will draw down taken steps to add more cost- or per enrollee cap, Texas may more federal dollars on both an effective benefits to their find that future options with individual and aggregate basis. Medicaid programs may also respect to payment rates and be at a disadvantage under benefits for these populations As Table E shows, Texas’s capped funding formulas. In are constrained. spending per enrollee group particular, given the high cost relative to other states varies All of these factors—eligibility of long-term care and services based on eligibility category, levels, payment rates, and to the program, states that have with the State spending more benefits, as well as whether a successfully shifted more of than most states with respect state has been a good manager their long-term services and to children ($3,010 compared of limited resources—will supports from higher-cost to $2,492 for the US average). determine a state’s base institutional settings to lower- However it spends considerably payment rate under most cost community-based settings less than most states or the capped funding proposals. will have lower caps for elderly US average on the more costly and disabled populations (or elderly beneficiaries, spending lower overall block grant caps) just under $15,000 a year per

Manatt, Phelps & Phillips, LLP manatt.com 16 Capped Federal Medicaid Funding: Implications for Texas

Alternate Approaches disadvantages states that spend All recent proposals to cap Although most capped funding above the national average, Medicaid funding have included proposals allocate dollars making any movement toward a a trend rate that would grow the based on a state’s historic national average disruptive and base payments year to year. This spending, two proposals take difficult to achieve. is critical; a capped proposal alternative approaches—each 2. Trend Rate without a growth rate will lose with implications for Texas. The value relative to the cost of As important as the base healthcare. Two examples of Patient CARE Act, for example, payment is in determining the proposes to allocate national federal block grant proposals amount of federal dollars that where the base amounts do federal Medicaid spending a state will receive, the trend across states based on each not automatically grow are the rate is likewise important— Social Services Block Grant and state’s number of low-income particularly over time. Consider enrollees. Texas has the second the Temporary Assistance for a block grant or a per capita cap Needy Families (TANF). largest number of low-income that sets the base rate at the residents in the nation, behind level of federal payments the While the proposals to cap 20 California, meaning that State received in 2016. The trend federal Medicaid funding have Texas would fare better under rate will determine whether that contemplated that the base this model than if the dollars payment is frozen over time or payments would be adjusted were allocated based on state- whether it grows year-by-year annually, the trend rates in historic Medicaid spending. This and, if so, by how much. Like these proposals would be ranking includes undocumented other states, Texas will want tied to a national, not a state- immigrants, but it is unclear to consider whether there is a specific indicator, and one whether the Patient CARE prescribed trend rate and if so that is projected to grow more Act’s proposed allocation of what that growth rate will be. slowly than overall healthcare federal dollars would count undocumented immigrants in Figure F: Comparison of Growth Rates by Eligibility calculating a state’s number of Category, FY 2000-2011 low-income residents since such individuals are not currently 15.5% (HI) 14.4% (NM) Medicaid eligible. Last year’s 13.3% (TN) House Budget proposal takes 11.6% (NM) an entirely different approach, basing the initial cap on national average spending per Medicaid TX: 8.4% enrollee, rather than state- historic spending. Texas would TX: 5.6% TX: 4.7% 7.1% (DE) have higher caps for the elderly, 5.5% (PA) 4.2% (NV) 4.5% (OK) but lower caps for children, TX: 6.3% if national rather than state- specific average expenditures 0.3% (IA) were used. Using a national 0.5% (NH) 0.4% (ME) -1.4% (WA) average advantages states that have lower spending and Aged Individuals with Adults Children Disabilities

17 costs or Medicaid spending. The trend rates identified in the expected rise in the elderly For example, the Patient the Medicaid capped funding population—Texas’s growth in CARE Act uses CPI + 1 proposals address, to a limited terms of population age sixty- percentage point,21 while the degree, the issue of rising five or older is projected to HAEL Act would use GDP + 1 healthcare costs, but they do grow 45% between 2015–2025, percentage point.22 not address enrollment growth. compared to 36% for the 26 None of the recent Medicaid None of the Medicaid block grant nation —Texas is at risk under proposals to cap funding trend proposals or any of the existing a per capita cap, too. If Texas the initial capped payments federal block grant programs is unable to keep costs under based on state, or even the adjusts for enrollment, or even its per capita cap for elderly national, growth in healthcare population growth. By contrast, enrollees, the losses will mount costs. Medical inflation has a per capita cap model would with each new elderly enrollee. outstripped general inflation accommodate enrollment One issue with applying factors, like changes in CPI or growth (subject of course to multiple adjusters is that the GDP, in recent years, with overall the limits of the base payment), more meaningful they are to medical inflation averaging so long as the model does not a larger number of states the 3.21% over the past ten years, also include a national spending more they will add federal nearly twice as high as general cap. Because Texas is the third costs, unless there would also inflation, which averaged 1.82% fastest growing state in the be an allowance for downward 25 over the same period. And nation, it will be particularly adjustment (e.g., to reflect an growth rates vary considerably disadvantaged by any capped increase in the average health across eligibility groups. Figure funding approach that does not of an enrollee population in a F23 shows the different average adjust for enrollment. Because state that scales back eligibility trend rates across eligibility of the combination of a low base for long-term care or makes groups, underscoring that a rate for elderly enrollees and other changes that substantially single national trend factor might not account for variation Figure G: Cumulative Growth in Texas Medicaid Spending in spending growth across per Full-Benefit Enrollee Relative to Benchmarks, 2000-2011 different eligibility categories. 144% Caps based on general inflation factors are therefore likely to fall short of Medicaid spending over 96% time, at least in the absence of 82% significant reductions in program 66% costs. Figure G24 illustrates the 52% gap between the cumulative 45% change in Texas’s Medicaid spending compared to the trend factors proposed in the HAEL Act and the Patient CARE Act over the time period between Texas aged Texas Texas Texas GDP + 1 CPI + 1 2000-2011. disabled adults children percentage percentage point point

Manatt, Phelps & Phillips, LLP manatt.com 18 Capped Federal Medicaid Funding: Implications for Texas

change its enrollee mix). In under per capita caps but not In addition, capped funding addition, while improvements for states opting for a block proposals generally do not are being made, the federal grant. (The Ryan proposal address whether the enhanced government currently lacks would give states a choice of a federal match rates that are reliable, timely data for all states block grant or a per capita cap.) currently available for certain that can ensure an adjustment is Eliminating or reducing state- populations and certain services applied appropriately and in real match requirements could add for everything ranging from time. The HAEL Act would adjust state-spending reductions to health homes (for which states per capita caps to account for the projected federal funding receive a 90 percent federal “new instances of communicable reductions, further reducing match for two years) to the diseases or other public health the overall funding available cost of new IT investments (90 hazards,” but the proposal calls for the program. Or, the percent match) to the operation for the adjustments to be budget elimination or reduction of a of eligibility systems (75 neutral in the aggregate. In other federal requirement for states to percent match) will remain in words, caps could be adjusted spend their own funds could be place. Texas currently receives to account for a regional health illusory. Even without a federal enhanced matching funds for its crisis, but other states’ caps obligation, states may determine IT systems (claims and eligibility would need to be reduced to that they have to continue to systems and staffing relating account for the increased federal spend their own dollars—and to those systems) and certain spending. The Patient CARE Act perhaps more of their own program integrity initiatives.29 would be adjusted to “reflect dollars— if federal Medicaid Texas also was the 5th state in demographic and population funds were reduced and capped. the nation to take advantage changes,” though the proposal Even if a state-matching of the Community First Choice provides few details on how requirement remains in place, federal option, which provides those adjustments would if the federal funds that Texas enhanced federal matching be made. can draw down are themselves payments (a six percentage 3. State Share reduced then its state-spending point increase) for the home and community-based services While the federal government, requirement will also be provided through the program. on average, covers 62 percent of reduced. Currently, Texas the cost of Medicaid nationally law limits state spending for State spending could also be and 56 percent in Texas,27 state Medicaid to those expenditures affected if the rules are changed spending in the program is that will qualify for federal with respect to how states can 28 significant. Several proposals matching payments. If that raise their nonfederal share. to cap federal Medicaid funding law (common to many states) Proposals also vary on whether appear to modify or eliminate remains in place and Texas they would make changes to the requirement that states was to see a 10 or 20 percent how a state is permitted to raise spend their own funds as a reduction in available federal its nonfederal share. The HAEL condition of receiving capped payments due to federal caps, Act, for example, would end federal payments. Speaker the program would experience a state reliance on funding from Ryan’s Better Way proposal, for commensurate reduction in state intergovernmental transfers example, appears to require a payments for Medicaid coverage (IGTs). The House Budget state match for states operating and services. Proposal, by contrast, would

19 reduce the effective cap on First, how will Congress treat payments, most of which have provider taxes to 5.5 percent of such spending in calculating been converted in Texas to net patient revenues, down from each state’s base payment? waiver payments, account for the current 6 percent cap. Most Second, will such funding be nearly 1 out of 4 dollars spent in other proposals do not speak to permitted outside the cap going the Texas Medicaid program and this issue. forward? Finally, will states for more than half (53 percent) Texas currently relies heavily continue to be permitted to of all Medicaid payments to on both IGTs and provider taxes finance the nonfederal share hospitals participating in the 32 to fund the nonfederal share of of supplemental payments DSH and waiver programs. Medicaid costs, and thus any or waiver funds through the Thus, how these payments changes to how states may use same mechanisms currently are handled under any capped IGTs and provider taxes would deployed—provider and funding proposal will be have significant implications for health plan assessments, especially important to Texas. Texas. In total, IGTs account for intergovernmental transfers, and In addition, because Texas roughly half of the nonfederal with respect to waivers, “costs relies on provider and health share for payments to hospitals. not otherwise matchable.” plan assessments, as well as If IGTs are no longer allowed to Recent proposals, for the most IGTs, to fund the nonfederal be used to fund the nonfederal part, do not have sufficient share of these payments, the share, Texas may struggle to details to answer any of these State will want to track raise the funds required to draw questions. The one exception closely any proposals to down available federal dollars.30 is Speaker Ryan’s Better Way eliminate or constrain these Texas also uses provider tax proposal that explicitly limits financing options. revenue to fund the nonfederal the Secretary of Health and 5. The Tradeoff: Flexibility Human Services’ ability to share. Texas currently has no As noted at the outset, capped taxes above 5.5 percent of net approve certain types of new waiver funds, though it provides funding is generally coupled with patient revenue, meaning that additional flexibility for states in Texas’s provider tax structure few details on how existing waiver funds would be handled administering their programs. would not be affected by More flexibility is almost always current proposals.31 under capped funding. It also provides that DSH and GME appealing to states. However, 4. Supplemental Payments payments would not be included when that flexibility is linked and Waivers in calculating a state’s funding to a reduction of and cap on Virtually every state relies on cap; i.e., a state could maintain federal Medicaid funding, Texas some form of supplemental such funding streams outside will want to evaluate carefully payment (Disproportionate its capped federal funding the added flexibility it seeks and Share Hospital (DSH) payments, allocation. The HAEL Act, by whether that flexibility might be Graduate Medical Education contrast, would include DSH and available today through waivers. (GME) payments and Upper GME payments under caps. Additionally, the State will want to consider how it might Payment Limit payments) or No state spends a greater waiver funding, and many states, exercise that flexibility and any percentage of total Medicaid downstream implications for including Texas, rely on both. dollars on supplemental In moving to a capped funding local governments, providers, payments and waiver funds than health plans and consumers. model, several questions arise. Texas (Figure H). Supplemental

Manatt, Phelps & Phillips, LLP manatt.com 20 Capped Federal Medicaid Funding: Implications for Texas

Figure H: FFY 2015 Supplemental Payments as a Share of Total Medicaid Spending

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

TX Disproportionate Share Hospital (DSH) Payments NC LA Non-DSH Supplemental AL Payments OK CO 1115 Waiver-based Supplemental Payments MS CA SC IL FL U.S. Avg. NV IN MI NJ NY TN WY MO GA ID PA AR WV MT NH OH RI UT KS HI AZ WA MA CT VT NM OR KY ME VA DE NE IA WI MD MN AK SD DC ND

21 The proposals advanced to health services, substance Additionally, States could gain date have little detail on the abuse services, and pharmacy— flexibility in administering scope of flexibility that would Texas has opted to cover these their managed care programs. be permitted relative to current benefits in part because they Federal rules related to network law. Whether Congress adopted tend to reduce spending in adequacy, for example, may no a block grant or a per capita other parts of the program (e.g., longer apply, enabling plans to cap, billions of federal funds emergency room and inpatient contract with fewer hospitals would not flow to states without hospital costs). Texas will need with patients traveling longer some federal oversight and to consider whether there are distances to obtain care. Texas related audit and reporting benefits (or more to the point, will want to consider the impact requirements and perhaps new costly benefits) it would like of such changes on hospitals, quality or outcome measures. to eliminate or reduce that the especially rural hospitals, and In addition, it should be state is constrained from doing the communities they serve. anticipated that any capped under current law. Further, One of the more important funding proposals will include the State will need to evaluate set of federal rules that is less some minimal requirements on the potential impact on other likely to be dropped in a capped eligibility levels and benefits, program costs, like emergency funding environment has to though current proposals have room and inpatient hospital care, do with how states raise their provided few details on what as well as other stakeholders. nonfederal share, assuming a benefits and populations must States could also gain flexibility nonfederal share is still required. be covered. States would have with respect to payments to States have discretion to use flexibility over and above those plans and providers, although intergovernmental transfers and minimums. Today, Texas covers this is an area where states provider taxes to help finance no childless adults and covers already have significant their nonfederal share of costs parents to 15 percent of the FPL flexibility. Federal rules require and Texas, like most other states, and elderly and disabled adults that payments to health plans be rely heavily on these sources to 75 percent of the FPL. These actuarially sound leaving states of funds. Given longstanding are the lowest levels permitted significant discretion to set congressional concern about 33 under current law, and it may those rates. Probably the most these sources of financing, it be unlikely that lower eligibility burdensome part of these rules is not at all certain that new levels would be permitted for for states is the process they flexibility will be permitted with these groups. Texas covers must go through with the federal respect to these rules. In fact, pregnant women to 198 percent government to assure that the some of the capped funding of the FPL. If Texas were to rates are actuarially sound. It proposals would reduce state reduce eligibility, the State must is not clear whether even if the flexibility in this area.34 consider who will bear the costs federal rules no longer required In short, Texas will want to of the additional uninsured: actuarially sound rates that consumers? hospitals? counties? consider whether the additional Texas would change its practice flexibility that may come with the Texas may be able to reduce the in this regard; it is, however, benefits it covers, but notably reduction in federal funds will be likely that some of these process sufficient to enable the state to in three areas where benefits requirements would be ended are optional under current manage coverage and care for or reduced under a capped its lowest income residents— law—namely, certain mental funding structure.

Manatt, Phelps & Phillips, LLP manatt.com 22 Capped Federal Medicaid Funding: Implications for Texas

including children, and elderly in the past, these waivers and With respect to the and disabled adults—with a fixed others could well be granted administrative burden imposed and reduced sum of money. by the new Administration. In on states by the current Texas will also want to consider Texas, however, the majority Medicaid structure, it should whether the additional of program enrollees are be noted that CMS could flexibilities it seeks are available children and the majority of expedite and streamline the already under section 1115 of program spending is for low- review process for both State the Social Security Act. For income elderly and people with Plan Amendments and waivers example, several states have disabilities, likely reducing the without a change in law, or already secured waivers to allow impact of work requirements on with changes in law that are them to collect premiums, apply Medicaid spending. not accompanied by capped higher co-pays, and remove non- Thus, Texas will want to evaluate funding. And, while the reporting emergency transportation and whether the flexibility the State and audit requirements might retroactive coverage from their seeks will permit it to take be somewhat less in connection benefit package, with respect actions it would choose to take with a capped allocation of to expansion adults. Several to manage costs and whether, federal Medicaid dollars, they expansion states have likewise at least in critical respects, such will certainly continue given the sought to condition coverage for flexibility is already available size of even a reduced the expansion adults on work or under existing law and under Medicaid program. job training requirements. While the current open-ended such waivers have been denied financing structure. III. Conclusion

Capped Medicaid financing But in the context of fixed reliance on supplemental and shifts the risk of any costs and reduced federal funding, waiver funding. States with above the federal caps to the resolving issues favorably for higher funding caps will have states. Particularly when capped one set of states inevitably the same flexibility as Texas funding is coupled with the goal creates issues for other states. to modify eligibility, benefits of reducing federal Medicaid As this paper describes, Texas and payments, but that same spending, the risk of a significant comes to the capped funding flexibility will be coupled with cost shift is great. If a proposal discussion with a number of more federal dollars to invest to cap funding—either through fiscal disadvantages—most in their Medicaid programs. a block grant or a per capita notably its historically low Texas will want to consider cap—is proposed in the 115th investments in Medicaid relative all these factors as it evaluates Congress, all states will seek to its low-income population, the potential impact of to ensure that any capped its growing population, its capped funding on its proposals protect their states relatively low spending levels budget, its residents, and its to the greatest extent possible. for the elderly and its high healthcare providers.

23 Appendix A: Overview of Capped Funding Proposals

FY17 House Budget A Better Way Patient CARE Act HAEL Act of 2016 Feature Comm. Budget Resolution (Ryan) (Hatch/Upton/Burr) (Sessions/Cassidy) (Price)

State option for block grant State option for block grant Type Per capita cap Per capita cap or per capita cap or per capita cap

✔ (per capita cap) State Match Required ✔ ✘ ✔ ✘ (block grant)

National aggregate cap ✘ ✔ ✔ ✘

Different caps for ✔ ✔ ? ✔ populations

All, except acute care of Populations covered All All All elderly & disabled

Nat’l Medicaid spend Average Medicaid spend in allocated based on Average Federal Medicaid Base amount Unclear state during base year state population with spend during base year income < 100% FPL

DSH and GME payments excluded from per capita DSH would be excluded Treatment of caps and paid through Included in cap from caps and transitioned Included in cap supplemental payments current match process; to separate pool unclear for other waiver payments

Would prohibit Changes to financing Would reduce maximum intergovernmental None None nonfederal share provider taxes to 5.5% transfers and certified public expenditures

Trend rate Unclear CPI + 1 Unclear GDP +1

24 1 Some streams of funding in the Medicaid program (for example, disproportionate share hospital payments) are subject to caps or limitations. The basic financing of program services, however, is not subject to a cap or overall limit.

2 In a letter to House leadership, the National Governors Association addressed the potential for capped funding to shift risk to the states. The letter urged Congress to “maintain a meaningful federal role in the [Medicaid] partnership and . . . not shift costs to the states . . . [but to] protect states from unforeseen financial risks.” National Governors Association, Letter to Rep. Kevin McCarthy, January 24, 2017, available at https://www.nga.org/cms/home/federal-relations/nga-letters/health--human-services-committee/col2- content/main-content-list/health-care-reform.html.

3 Certain types of payments, such as supplemental payments are subject to limits. See Social Security Act § 1903(i) for examples of limits on what expenditures qualify for federal match. In addition, while different from a cap on federal funding, federal law imposes certain constraints on states’ use of federal funds by defining the services and populations that may be covered with federal funds. With billions of federal dollars at stake, it is likely that even under capped funding some definitional constraints would continue to operate.

4 The federal government’s share of nearly all Medicaid expenditures is determined by each state’s federal medical assistance percentage (FMAP). By statute, states’ FMAPs range from 50-83%, meaning that the federal government pays for between 50% and 83% of the costs of the state’s Medicaid program. States with higher per capita incomes have lower federal matching rates, and states with lower per capita incomes have higher federal matching rates.

5 At times, federal law has been changed to relieve states of some of their financing obligations; most recently during the Great Recession, states were relieved of some of their state financing responsibilities through a temporary increase in the federal matching rate for all states.

6 See, for example, Rep. Paul Ryan’s Better Way proposal available online at: http://abetterway.speaker.gov/_assets/pdf/ABetterWay- HealthCare-PolicyPaper.pdf.

7 Cindy Mann, Deborah Bachrach, et al, Capping Federal Medicaid Funding: Key Financing Issues for States, Robert Wood Johnson Foundation, December 2016, available at: http://statenetwork.org/wp-content/uploads/2016/12/State-Network-Manatt-Capping- Federal-Medicaid-Funding-Key-Financing-Issues-for-States-December-2016.pdf.

8 Both the House Budget Committee, FY 2017 Budget Proposal and the HAEL Act include a national cap.

9 House Budget Committee, FY 2017 Budget Proposal, Appendix IV, Table S-4, Available online at: http://budget.house.gov/ uploadedfiles/fy2017_a_balanced_budget_for_a_stronger_america.pdf.

10 Source for Figure A: House Budget Committee, FY 2017 Budget Proposal, Appendix IV, Table S-4, available at: http://budget.house. gov/uploadedfiles/fy2017_a_balanced_budget_for_a_stronger_america.pdf.

11 Source for Figure B: Manatt analysis of National Association of State Budget Officers (NASBO) State Expenditure Report, 2016.

12 The 20% figure depicts the direct impact of Medicaid spending on the State’s own revenue—it does not include the federal dollars allocated to the Medicaid program through the State budget or other federal revenues received by the state for other purposes.

13 The Texas Hospital Association cited similar issues in its letter to Governor Greg Abbott dated Jan. 9, 2017.

14 Centers for Medicare and Medicaid Services, Medicaid and CHIP Eligibility Levels as of June 1, 2016, available at https://www. medicaid.gov/medicaid/program-information/medicaid-and-chip-eligibility-levels/index.html.

15 Manatt analysis using enrollment estimates from The Urban Institute, What if More States Expanded Medicaid in 2017? Changes in Eligibility, Enrollment, and the Uninsured and the Office of the Actuary’s 2015 Actuarial Report estimate for average newly eligible adult costs of $5,910 for 2016.

16 Centers for Medicare and Medicaid Services, Medicaid and CHIP Eligibility Levels as of June 1, 2016, available at https://www. medicaid.gov/medicaid/program-information/medicaid-and-chip-eligibility-levels/index.html.

17 Centers for Medicare and Medicaid Services, Medicaid and CHIP Eligibility Levels as of June 1, 2016, available at https://www. medicaid.gov/medicaid/program-information/medicaid-and-chip-eligibility-levels/index.html.

18 http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000912-Block-Grants-and-Per-Capita-Caps-the-Problem-of- Funding-Disparities-among-States.pdf.

Manatt, Phelps & Phillips, LLP manatt.com 25 Capped Federal Medicaid Funding: Implications for Texas

19 Truven Health Analytics, Medicaid Expenditures for Long-Term Services and Supports (LTSS) in FY 2014, available at https://www. medicaid.gov/medicaid/ltss/downloads/ltss-expenditures-2014.pdf.

20 United States Census Bureau, Small Area Income and Poverty Estimates, 2014 available at: http://www.census.gov/did/www/saipe/ data/interactive/saipe.html?s_appName=saipe&menu=grid_proxy&s_inclUsTot=n&s_state=56,01,02,04,05,06,08,09,10,11,12,13,15,16, 17,18,19,20,21,22,23,24,25,26,27,28,29,30,31,32,33,34,35,36,37,38,39,40,41,42,44,45,46,47,48,49,50,51,53,54,55&s_inclStTot=y&s_ USStOnly=y&s_year=2014

21 The Patient Choice, Affordability, Responsibility, and Empowerment Act (Senator Orrin Hatch, Senator Richard Burr, Representative Fred Upton), https://murphy.house.gov/uploads/FINAL%20Patient%20CARE%20Act%20Plan.pdf.

22 Healthcare Accessibility, Empowerment, and Liberty Act of 2016 (Representative Pete Sessions and Senator Bill Cassidy), http:// www.goodmaninstitute.org/wp-content/uploads/2016/05/SESSIO_007_xml.pdf.

23 Rudowitz, R., Garfield, R., and Young, K., “Overview of Medicaid Per Capita Cap Proposals,” Kaiser Family Foundation, June 2016. Available at: http://kff.org/report-section/overview-of-medicaid-per-capita-cap-proposals-issue-brief/.

24 Sources for GDP per Capita, Manatt analysis of National Health Expenditure Accounts (https://www.cms.gov/Research-Statistics- Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Tables.zip), for CPI Medical, BLS CPI Medical (https://data.bls.gov/cgi-bin/surveymost?cu), and for Texas Population Groups, Kaiser Family Foundation Data, (http://kff. org/medicaid/issue-brief/medicaid-per-enrollee-spending-variation-across-states/).

25 Census Bureau, Cumulative Estimates of Resident Population Change for the United States, Regions, States, and Puerto Rico, and Region and State Rankings: April 1, 2010 to July 1, 2016.

26 Manatt analysis of U.S.Census Bureau, Population Division, Interim State Population Projections, 2005, Table B1, https://www. census.gov/population/projections/data/state/projectionsagesex.html.

27 MACStats December 2016, Exhibit 6.

28 See Tex. Hum. Res. Code Ann. § 32.024.

29 See State of Texas, Advance Planning Document Updated, March 2014, available at https://assets.documentcloud.org/ documents/1357133/oig-graph-pattern-analysis-apd-uv16.pdf.

30 Texas Health and Human Services Commission, Evaluation of Uncompensated Care and Medicaid Payments in Texas Hospitals and the Role of Texas’s Uncompensated Care Pool, September 13, 2015, available at https://www.medicaid.gov/Medicaid-CHIP- Program-Information/By-Topics/Waivers/1115/downloads/tx/Healthcare-Transformation-and-Quality-Improvement-Program/tx- healthcare-transformation-uncomp-care-eval-rpt-sept-2016-update.pdf.

31 Kaiser Family Foundation, State and Medicaid Provider Taxes or Fees, 2016, available at http://kff.org/medicaid/fact-sheet/states- and-medicaid-provider-taxes-or-fees/.

32 https://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Waivers/1115/downloads/tx/Healthcare- Transformation-and-Quality-Improvement-Program/tx-healthcare-transformation-uncomp-care-eval-rpt-sept-2016-update.pdf. The HMA analysis included the 356 hospitals that participated in the Texas Medicaid DSH/UC Pool program in FY 2015. These hospitals account for more than 98% of Medicaid payments to hospitals.

33 Parents must be covered up to the maximum income to qualify for the state’s Aid to Families with Dependent Children (AFDC) program in 1996. Alabama’s income limits to qualify for AFDC at that time were lower than Texas’s income limits, and thus their eligibility for parents is slightly lower in terms of a percentage of the federal poverty level.

34 The HAEL Act would prohibit the use of intergovernmental transfers. The House Budget Committee FY 2017 proposal would reduce the implicit cap on provider taxes from 6% to 5.5%.

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