To Block Grant Medicaid—A Potentially Heavy Burden for States

Medicaid, the federal health insurance program that largely serves low-income children, seniors and certain disabled adults, has been a vital component of the public safety net since its inception in 1965. Because children under Medicaid tend to be in poorer health than children in private insurance (they have a higher prevalence of asthma, autism, dental and vision problems, ADHD, developmental delays, depression, and seizure disorders), Medicaid’s benefits package was designed to meet the complex needs of low-income children. Early and Periodic Screening, Diagnosis and Treatment (EPSDT) has been essential to ensuring that children continue to have a routine source of care and preventive screening for oral health, vision, mental health, developmental issues, and physical health.

In the last four years, people have enrolled into Medicaid at a higher rate than previous years as a direct result of the recession. With more people out of work, they lose access to their employer-based health insurance, their families become impoverished and they then become income-eligible for Medicaid. Furthermore, Medicaid’s enrollment has increased because of the aging population and because of the steady decrease in the number of employers who offer health plans to employees.

Since the federal government pays for the majority of the share of Medicaid spending, this increase in enrollment has led to an increase in the proportion of federal spending that goes to Medicaid. Although Medicaid costs less for the federal government than Medicare and Social Security, it often becomes the target of cuts because people with low-income are an easy target. Therefore, to control for the rising costs of Medicaid and to reduce the federal deficit, there are two very different opinions on the direction that Medicaid should now take: (A) expand Medicaid eligibility while creating cost-savings elsewhere or (B) block grant Medicaid.

Under the Affordable Care Act, Medicaid’s eligibility rules are set to expand in 2014 so that childless, non-disabled adults would be able to enroll if their income was up to 133% of the federal poverty level. The costs of this expansion are offset by revenues from the excise tax on high-premium insurance plans and net savings from other coverage-related effects, such that the Affordable Care Act produces a net reduction to the federal deficit of $124 billion.

On the opposite end of the spectrum is a proposal to change Medicaid from a defined entitlement program to a block grant. With a set amount of dollars and no mandates on coverage, states would have more autonomy and flexibility to design their Medicaid program to meet the specific needs of the state. Under this proposal, to encourage more enrollment into private insurance, premium supports or a refundable tax credit would help non-disabled adults and children to enter the private insurance market. States would be encouraged to use block grant dollars to pay for home-based care for the aged and disabled, rather than more costly institutional care.

As noted by First Focus in their analysis of the US House of Representative’s Budget Committee bill (which would block grant Medicaid), a Medicaid block grant would result in a loss of $810 billion over 10 years of federal investment in the program. About $162 billion of the total would come from investment in children’s services. While it would save money for the federal government, it would also shift the burden of costs to states, which would face a difficult decision in how to respond.

According to the non-partisan Congressional Budget Office, which also analyzed the bill, “states would face significant challenges in achieving sufficient cost savings through efficiencies to mitigate the loss of federal funding.” States could: (A) maintain current service levels, in which case they would need to reduce spending in other areas or raise revenues, or (B) reduce the size of their Medicaid program.

To adjust to the decrease in contribution from the federal government, states would likely have to tighten eligibility restrictions, ration care that children receive and lower payments to providers. Considering that Medicaid reimbursement rates are already lower than the reimbursement rates under Medicare and private insurance, this might discourage doctors from accepting Medicaid patients.

Whether Medicaid expands as an entitlement or is reduced via a block grant, states will have flexibility to design innovative programming to get services to their populations; it will be critical that state policymakers carefully consider their options (through state plans, waivers, demonstration programs, etc.) to provide quality, cost-effective care to children.For more on strategies to ensure that children are healthy, please visit PolicyForResults.org.