Restructuring Medicaid Through a Swap: an Alternative to a Block Grant

Restructuring Medicaid through aT Swap:ITLE An Alternative to a Block Grant Authors John Holahan Date April 2011 Medicaid will clearly contribute to the ongoing Introduction federal deficit problem. The United States is now engaged in a major In response to the deficit problem, Congressman policy debate about the future of entitlement Paul Ryan has proposed that Medicaid be turned programs, including the Medicaid program. There into a block grant with fixed allocations of federal is a widespread belief that these programs are funds to states. The block grant would be based contributing to growing federal debt and without on current expenditures in 2012 and grow at the some reform will continue to do so for a long time. rate of the consumer price index plus population. Both the Centers for Medicare and Medicaid This is about 3.0 percentage points each year Services studies (CMS actuaries) and the below the expected rate of increase in Medicaid Congressional Budget Office (CBO) project spending. A block grant would clearly save money Medicaid spending to continue growing faster than at the federal level but would shift a large share of the economy. CMS actuaries project Medicaid the cost of Medicaid programs to states. States spending to increase by about 7 percent per year have generally controlled spending per enrollee at from 2010 to 2019, with the exception of an rates that are favorable in comparison to other 18 percent growth in 2014, when the Medicaid payers. Most Medicaid spending growth has been expansion component of the Affordable Care Act 1 due to enrollment growth, particularly during the (ACA) is implemented. two economic recessions of the past decade and medical care inflation. States will have a difficult The CBO projections are harder to interpret time controlling spending on a per enrollee basis because they assume the Medicaid expansion 2 significantly more than they have, even with the would be phased in between 2014 and 2016. The increased flexibility they ask for. This will likely CBO projects Medicaid spending to increase by mean that states will have to spend more of their 6.9 percent between 2016 and 2020. Spending in own money or that they will reduce coverage. the CBO baseline is virtually unchanged between This will mean a rising number of uninsured; it will 2010 and 2014 as the nation exits the economic also mean more uncompensated care that state downturn. Beginning in 2014 and continuing until and local governments must finance with no 2016, spending increases for all groups but federal matching payments. particularly for adults because of the ACA. After the large increase in enrollment due to the ACA, As part of its many recommendations for deficit Medicaid enrollment is projected to grow at about reduction, the Bipartisan Policy Center Debt 1.3 percent per year. This yields a projected Reduction Task Force in November 2010 growth in spending per enrollee of about 5.5 proposed a major change in federal and state percent. The growth rates in spending projected by responsibilities for Medicaid (a swap), designed to both CMS actuaries and the CBO are faster than address incentives with the current matching rate growth in gross domestic product (GDP) over the structure that have led to state efforts to ―game‖ same period, 4.6 percent. Assuming the CMS and the system, that is, bringing in new federal CBO Medicaid spending projections are accurate, spending with little or no real state matching © 2011,© 2011, The TheUrban Urban Institute Institute Health Health Policy Policy Center Center • www.healthpolicycenter.org • www.healthpolicycenter.org page 1 expenditures. 3 The proposal would greatly reduce matching dollars with little or no state the incentives for gaming and reduce federal expenditures. The President’s Commission spending but has serious distributional effects— argued such activities be reduced and eventually there would be large winners and losers among eliminated.6 The Bipartisan Policy Center states. proposal took a stronger stand against these gaming practices, calling the Medicaid system This paper presents an approach that would dysfunctional.7 It argues that states have restructure Medicaid with a form of a swap that searched for and have found a wide range of would build upon the coverage expansion in the ways of bringing in federal dollars. It also Affordable Care Act, largely eliminate incentives contends that as long as the federal matching for creative financing, mitigate problems that the rates structure is in place, the incentives for recessions cause for the current system, and gaming remain and it will be difficult for the strengthen incentives for cost containment. The federal government to control Medicaid spending proposal would not have the distributional effects levels. The Bipartisan Policy Center argued that that a straightforward swap proposal would have. there should be a complete shift in responsibilities The proposal would provide savings by greatly with some program responsibilities being shifted reducing the ability to use ―creative financing,‖ entirely to states and the remainder to federal and have some effect on reducing spending government. The Center suggests this could be growth. How much would be saved is uncertain done by population groups; for example, one level because, as noted, Medicaid expenditures have of government taking over the care for the elderly not grown significantly over and above enrollment and disabled and the others taking over families. growth and inflation, particularly compared with Alternatively, there could be a swap of acute and other payers. long-term care. Background There is a wide range of ways in which Medicaid gaming has taken place.8 Generally, Two prominent commissions charged with arrangements are variants of the following: If a entitlement reform, the President’s National state wants to increase the money going toward Commission on Fiscal Responsibilities and hospitals, it can raise reimbursement rates by say Reform and the Bipartisan Policy Center Debt $100. Hospitals would pay a tax of $50. Assuming Reduction Task Force, have made proposals to a 50 percent matching rate, the federal curtail Medicaid spending. Both commissions government would contribute a matching recommend placing dual eligibles in Medicaid contribution of $50. The tax payment made by the 4 managed care. The need for coordination and hospitals would be returned to them; hospitals management of the care of these extremely would be better off by the amount of the federal expensive individuals is indisputable, but whether payment and the state would pay nothing. In it should be a federal Medicare initiative or left to some cases, a portion of the federal payment Medicaid is not clear. The Bipartisan Policy would also be returned to the state, in which case Center argues that Medicaid has far more the state has actually gained money in the experience with managed care. This may be true transaction. but not necessarily for such a medically complex population like dual enrollees, and certainly not in States have used these arrangements for many all states. Federal savings may be greater if years. They began with states making responsibility for duals was a federal initiative, for disproportionate share payments to hospitals that example, led by Medicare. Most savings from were funded by provider taxes. Subsequent limits chronic care management programs are in acute on the ability and the amount of money that could care (e.g., reduced hospitalizations, fewer be spent through disproportionate share readmissions, better drug management) and thus payments led to the development of supplemental would be realized by Medicare not Medicaid.5 payment programs. Constraints on the use of Both commissions also addressed the problem of provider taxes led to intergovernmental transfers states’ ―gaming‖ the Medicaid matching rate and certified public expenditures. In supplemental system, that is, state efforts to bring in federal payment programs, reimbursement rates could be © 2011, The Urban Institute Health Policy Center • www.healthpolicycenter.org page 2 increased up to Medicare levels but with the state not real spending but funds essentially making a share financed through, say, intergovernmental round trip from provider (or locality) to state and transfers with local funds sent to the state but back to provider (or locality) without adding to the subsequently returned to the original source. money spent for health care. Since the state These efforts have been carried out in many spending level is overstated, the total amount other ways, particularly when the ultimate spent on Medicaid is also overstated. provider was a state or local entity. These policies are legal and have been approved by the federal The incentives in the ACA will likely exacerbate government under both Democratic and the problem of Medicaid gaming. For example, Republican administrations. While legal, they under reform, the increase in a provider tax certainly undermine the spirit of the matching rate needed to leverage additional federal dollars will structure in Medicaid law and have increased be substantially lower, at least for new eligibles federal spending considerably. According to the for whom the federal matching rate will begin at Government Accountability Office (GAO), these 100 percent and phase down to 90 percent. efforts are continuing to emerge; from 2009 to A relatively small new provider tax will allow a 2010, 38 states reported introducing new provider state to generate federal matching payments of taxes, 35 reported new or increased use of 90 percent. For example, a provider could pay a intergovernmental transfers, and 35 new certified tax of $10; the state could increase provider public expenditure programs.9 payments to $100. The federal government would make matching payments of $90. The provider States have also brought many state-funded gains by $90, the federal government spends $90 services into Medicaid.10 While this is legitimate, and the state pays nothing. If the state wishes, it the states have expanded the reach of the can keep some of the gain by increasing the Medicaid benefit package to allow it to fund many provider tax.

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