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Published by Jamie Sanderson

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Published by: Jamie Sanderson on Oct 04, 2012
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October 4, 2012
by Edwin Park and Matt BroaddusSome policymakers have recently proposed placing a “per capita cap” on federal Medicaidfunding, under which the federal government would no longer cover a fixed share of each state’soverall Medicaid costs but instead would limit each state to a fixed dollar amount per beneficiary.
Aper capita cap would represent a fundamental change in Medicaid’s financing structure that wouldshift significant fiscal risks and costs to states and would likely lead states to impose substantial cutsover time on low-income beneficiaries and health care providers. A per capita cap also could jeopardize successful implementation of the health reform law. It would lock states that adopt the law’s Medicaid expansion into per capita limits that would apply tothe new Medicaid beneficiaries they would serve
the states had any experience or dataregarding the actual per-beneficiary costs of this population. As a result, it likely would deter many states from taking up the expansion, leaving millions of poor Americans uninsured. The capped amounts of federal funding per beneficiary that states would receive would besignificantly below the level of Medicaid funding the federal government would otherwise provide tostates; this has
to be the case if the per capita cap is to produce substantial federal budgetary savings, which is the primary goal of Medicaid per capita cap proposals. Such proposals usually achievesavings for the federal government by having the cap grow more slowly over time than the projectedgrowth in federal Medicaid spending per beneficiary. With each passing year, states would receiveless federal funding for each Medicaid beneficiary, relative to current law. A related issue is that if Medicaid costs per beneficiary rose faster than is currently projected, thenstates would face even larger federal funding shortfalls and would have to bear all costs above theinadequate cap amounts. History shows that advances in medical technology — such as thedevelopment of new treatments and medications that significantly improve health and save lives butincrease costs — as well as changes in health care utilization patterns and the onset of epidemics ornew illnesses (such as HIV/AIDS) can produce unanticipated increases in health care costs.Demographic changes, especially the aging of the population and, eventually, the movement of thebaby-boom generation into “old-old” age (the time when per-beneficiary health costs are highest)also will push up per capita Medicaid costs.
See, for example, H.R. 5979 (the Medicaid Accountability and Care Act of 2012), introduced by Representative BillCassidy (R-LA).
820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080Fax: 202-408-1056center@cbpp.org www.cbpp.org
2 To compensate for both the explicit funding cut reflected in a per capita cap and the higher coststhat state Medicaid programs could face as a result of unforeseen increases in health care costscaused by factors beyond their control, states would almost certainly have to contribute substantially more of their own funds to Medicaid or cut their Medicaid spending significantly on a per-beneficiary basis (or both). Cutting per-beneficiary spending without limiting access to needed care would be difficult because Medicaid costs per beneficiary already are well below those of privateinsurance, and states have already cut both benefits and provider payments in recent years to helpclose state budget shortfalls.Millions of low-income individuals and families who rely on Medicaid could be at risk of losing access to needed care. And states likely would have to impose the largest cuts on their highest-cost,most vulnerable beneficiaries — seniors and people with disabilities, who account for nearly 
two- thirds 
of Medicaid costs. While all states would face substantial reductions in federal funding under a per capita cap, somestates likely would be hit particularly hard. Per capita cap proposals typically base each state’s initialfunding level on the state’s current per-beneficiary spending level, so states with relatively low Medicaid spending per beneficiary — because they provide relatively narrow benefits, pay healthcare providers less, have already implemented successful cost-containment measures, or haveinstituted substantial Medicaid cuts in recent years, for example — would receive less initial funding per beneficiary than other states. States whose future Medicaid costs per beneficiary grow morequickly than other states’ — due to factors such as greater-than-average increases in the incidence of  various diseases or in the share of a state’s population that is very old — could also be hurtdisproportionately, since per capita cap proposals typically adjust the caps each year in all states by asingle national percentage. The main argument for a per capita cap — the claim that Medicaid costs are growing out of control due to problems in Medicaid itself — does not bear up well under scrutiny. As noted,Medicaid costs per beneficiary are well below those of private insurance. Moreover, Medicaid costgrowth largely mirrors cost growth throughout the U.S. health care system, both public and private.In fact, Medicaid costs per beneficiary have been rising less rapidly than private insurance premiumsin recent years and are expected to continue doing so over the coming decade. Trying to addressMedicaid in isolation from the rest of the health care system, such as through a per capita cap, wouldshift costs and risks to states, beneficiaries, and health care providers and be likely to make the U.S.system more of a two-tier health care system based on income.
Per Capita Cap Would Fundamentally Change Medicaid’s Financing Structure
 The federal government generally picks up between 50 percent and 75 percent of each state’sMedicaid costs (57 percent, on average); the state is responsible for the remainder.
If state Medicaidexpenditures increase, the federal government shares in the increased costs. If state Medicaidexpenditures decline, the federal government shares in the savings.
These figures represent the regular Medicaid matching rates. As noted below, the federal government will apply asubstantially higher matching rate for the Affordable Care Act’s Medicaid expansion.
3 A per capita cap would operate differently. The federal government would pay only up to a fixedamount per beneficiary. If actual state Medicaid costs per beneficiary exceeded the cap, states wouldbe responsible for all remaining costs. Typically, per capita cap proposals call for setting the cap amount on a state-specific basis, basedon the state’s historical Medicaid spending per beneficiary. Some proposals set a single cap for allbeneficiaries, while others set separate caps for different beneficiary groups (like children, seniors,people with disabilities, and non-disabled adults). The cap amount is typically adjusted each year by the same percentage for all states.Like block grants, per capita cap proposalstypically give states more sweeping flexibility todesign their Medicaid programs, such as by allowing them to override federal requirements related tobenefits and premiums or cost-sharing. Unlikeblock grants, per capita cap proposals may preservesome of Medicaid’s existing eligibility requirements,including the individual entitlement, which allows allindividuals who meet their state’s requirements toenroll and enables caseloads to rise in recessions(although such proposals could be designed topermit states to cap enrollment and eliminateeligibility for some populations that federal law now requires states to cover, as block grant proposalstypically do).
Medicaid Costs Growing More SlowlyThan Private Insurance
Critics often claim Medicaid costs are growing outof control and that the current federal financing structure is a prime cause, because the federal government picks up a percentage of states’ allowableMedicaid costs whatever those costs are. They argue that the way to control federal Medicaidspending growth is to convert the program into a block grant (as under the House-passed budgetplan) or to impose a cap on federal funding per beneficiary. This portrayal of the use of Medicaid’s financing challenges is at odds with basic data and researchin the field. Over the past 30 years, average annual Medicaid cost growth per beneficiary hasessentially tracked health care cost growth systemwide.
In fact, Medicaid costs per beneficiary have
See, for example, Richard Kogan, Kris Cox, and Jim Horney, “The Long-Term Fiscal Outlook Is Bleak,” Center onBudget and Policy Priorities, December 16, 2008.
Figure 1
Medicaid Costs Grow More SlowlyThan Private Insurance
Source: CBPP calculations using historical and projecteddata from CMS’ National Health Expenditure Accounts.

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