Capping Medicaid Funding—Lessons From Puerto Rico

Medicaid has emerged as a major flash point in the political struggle over the Affordable Care Act (ACA). Republican plans to repeal and replace the law also include proposals to radically restructure Medicaid financing. These bills, including the American Health Care Act, which the US House of Representatives passed on May 4, 2017, as well as the Better Care Reconciliation Act and Graham-Cassidy plan, both of which failed to clear the Senate, would cap federal Medicaid spending, a change with profound implications for the program’s future. The fate of efforts to dismantle the ACA remains uncertain after the Senate failed to enact repeal legislation. Yet the debate over Medicaid, which covers more than 70 million persons and constitutes a significant portion of federal and state budgets, is unlikely to fade. Indeed, this episode is just the latest in a series of attempts by Republicans, dating back to the 1980s, to limit Medicaid spending through block grants and similar mechanisms.¹

HOW MEDICAID FUNDING WORKS

Currently, states receive funding from the federal government for between 50% and 74% of expenditures for Medicaid and up to 85% for the Children’s Health Insurance Program (CHIP). States with higher average per capita incomes receive a lower federal funding “match,” whereas states with lower incomes receive a higher match. Crucially, the amount of federal funds received by each state is unlimited. Funds fluctuate according to changes in enrollment, service use, and the costs of medical care provided to Medicaid enrollees. If a state’s Medicaid bill increases, then federal payments do as well and are not constrained by any preset limit. Under the ACA, states that expand Medicaid eligibility receive enhanced federal funding.

PROPOSALS TO CAP MEDICAID FUNDING

The House and Senate Republican bills would eliminate that enhanced funding, unraveling the ACA’s Medicaid expansion that has extended coverage to millions of persons. Beyond the ACA, these plans also would end unlimited federal payments to states for Medicaid. Instead, states would receive a per-person payment for each Medicaid enrollee, with that payment varying across eligibility groups (e.g., payments would be higher for older Americans than for children). The payments would be capped—that is, they would be predetermined, would not reflect actual costs, and would increase according to a formula based on the consumer price index. Alternatively, states could choose to receive federal Medicaid payments for children and working-age adults as an annual lump sum (block grant) that would not change with the number of enrollees. In either case, the federal government would substantially reduce its commitment to funding health care for the poor as the financing burden shifts to the states.² States would gain more flexibility in spending their Medicaid dollars but would face a difficult set of choices: increase funds substantially to maintain coverage at current levels, reduce eligibility and enroll fewer beneficiaries, decrease benefits, pay medical providers less, or curtail spending on other programs such as education.

MEDICAID IN PUERTO RICO

How would state Medicaid programs fare under such fiscal constraints? The United States already has experience with the consequences of limiting Medicaid funding. The federal government’s contribution to the Medicaid program in Puerto Rico, a US territory with 3.5 million residents, 46% of whom are enrolled in Medicaid or CHIP, is capped and grows with the medical consumer price index.³ When introduced in 1968, the statutory cap was set to cover 50% of the program’s costs. By 2010, it covered only 18% of Puerto Rico’s Medicaid expenditures.⁴ If Puerto Rico’s federal Medicaid payments instead were based on per-person income, as is currently the case in the 50 states, then the federal government would pay 83% of the commonwealth’s Medicaid bill.⁵

ERODING FUNDING, DIFFICULT CHOICES

The erosion of federal funding for Medicaid in Puerto Rico reflects a fundamental problem with block grants and spending caps. Under such arrangements, payments typically are neither sufficiently indexed to account for rising medical costs nor adequately responsive to changing economic circumstances that can increase the number of poor individuals eligible for benefits. Consequently, the share of Medicaid costs paid by the federal government can decline substantially over time, as it has in Puerto Rico. Puerto Rican officials have responded by setting low income-eligibility levels, based on a commonwealth-specific poverty measure, that covers pregnant women and children only up to 50% of the federal poverty level.^4,6 Additionally, Puerto Rico provides only 10 of the 17 federally mandated Medicaid benefits. It does not cover nonemergency medical transportation and lacks the infrastructure to cover and regulate long-term care and nurse midwife services.

Puerto Rico offers only a few optional Medicaid benefits such as dental services, outpatient prescription drug services, and inpatient mental health services. In an effort to reduce costs and coordinate care, it provides all Medicaid services through managed care organizations that receive fixed payments per member per month. These rates are approximately one third ($165 vs $505) of the average payments per member per month rate in the 50 US states and Washington, DC, with physicians receiving lower reimbursements for their services.⁴ In the past five years, an estimated 1400 to 3000 physicians have left Puerto Rico for higher-paying jobs in the continental United States.⁴

PUERTO RICO’S CHALLENGES

In summary, federal limits on Medicaid payments have led Puerto Rico to reduce access to medical services for low-income persons. Even before Hurricane Maria devastated the island in September 2017, Puerto Rico had serious economic problems that worsened its Medicaid financing challenges. The commonwealth, beset by a sustained recession, a growing debt burden, a high poverty rate, a population decline, and dwindling tax revenues, has initiated a bankruptcy-like process.⁶ Moreover, additional federal money for Medicaid that the ACA provided for Puerto Rico will soon expire, creating a funding “cliff” that could lead to widespread cuts in the commonwealth’s Medicaid program.³ Congress approved a plan in May 2017 to provide Puerto Rico with $296 million to help with its Medicaid funding shortfall.³ In the aftermath of Hurricane Maria, Congress is considering providing Puerto Rico with disaster relief, including more Medicaid funds. Yet the massive damage wrought by the hurricane has exacerbated the demands on Puerto Rico’s already strained public health system. Congressional aid is unlikely to meet adequately the urgent health needs of Puerto Ricans or to resolve the structural problems caused by the federal government’s underfunding of Medicaid in Puerto Rico.

THE DANGERS OF CAPPED FUNDING

Puerto Rico’s circumstances are especially dire, but its experiences with capped federal Medicaid funding highlight the quandaries that states would face under Republican proposals to cap spending. Such plans would dramatically curtail the federal government’s role in financing Medicaid. States cannot afford the steep cuts in federal Medicaid financing—about $800 billion over 10 years, amounting to a 24% reduction that would increase to 35% in the following decade—that House and Senate Republicans have proposed.⁷ Capped funding inevitably would force states to make painful decisions about reducing Medicaid eligibility and benefits. Medicaid funding caps would unravel the program in many states, leaving millions of low-income persons without any health insurance.⁷

Although the ACA repeal campaign stalled in the Senate, proposals to cap Medicaid spending are likely to resurface. Efforts to limit the federal government’s role in financing Medicaid will not stop, regardless of the ACA’s future. Medicaid is an inviting ideological and fiscal target. Indeed, pressures to reduce the federal budget deficit and pay for tax cuts could soon lead Congressional Republicans to reconsider block grants. Puerto Rico’s experiences with capped Medicaid funding are a warning of the dangers that such plans hold for the states.