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Medicaid Financing Reform: Per Capita Caps vs. Block Grants

In the coming weeks, it is highly likely that House Republicans will come forward with Medicaid financing reform proposals, such as block grant or a per capita cap proposal, or some combination of both. How should these proposals be evaluated? The best way to understand these proposals is through the equation A x B = C.  A is spending per person, B is the number of people, and C is total spending.  This equation helps explain the difference between per capita cap proposals and block grant proposals.  Essentially, A x B is per capita caps, while C is block grants. Both per capita caps and blocks grants have been touted by Republicans as mechanisms to rein in costs of the Medicaid program. However, the devil is in the details. Republicans will need to not only address these details head on in their Medicaid financing reform proposals, but also understand how these details will affect beneficiaries, states, and providers.

Block grants provide a set amount of federal Medicaid funding for states, which can be trended forward overtime. A block grant is a set allotment for a given year. The intention of a block grant is to account for inflation properly to provide adequate resources to a state.  Additionally, a block grant allotment can change from year to year to adjust for population growth. However, the challenge is that within a given year the Medicaid population ebbs and flows and block grants do not account for the counter-cyclical nature of the Medicaid program, in which Medicaid spending and enrollment growth follows economic cycles.

Per capita caps provide states federal Medicaid funding by number of enrollees. Unlike block grants, this design allows states to receive more funding within a given year if the Medicaid population grows. However, when designing a per capita cap there are multiple challenges in determining what A x B actually is. The first challenge is determining if funding levels should vary based on population. Meaning should disabled and elderly populations receive a higher funding level? Second, spending per person in the Medicaid program varies by state. Per capita cap proposals need to identify if all states will have the same baseline rates, and if not, why do some states get higher rates than others. Finally, Medicaid data is limited and it is unclear what the cost per person actually is. This makes it extremely difficult to determine a baseline.

On top of all of this, there is the inclusion of Medicaid administrative spending and supplemental payments, such as upper payment limits and disproportionate share hospital payments. Republicans also will need to determine if these payments are in or out of any Medicaid financing reform proposals. Including Medicaid administrative spending and supplemental payments in Medicaid financing reform will significantly affect states budgets, providers, and beneficiaries.

Although A x B = C is a simple equation there is much that lies beneath the surface when applying it to Medicaid financing reform. The rigid structure of block grants could make it difficult for state Medicaid programs to continue to provide their full set of services which can limit providers’ ability to provide services and beneficiaries’ ability to access services. On the other hand, the design of per capita caps can vary widely based on policy decisions. Without clues to the structure of the design it is impossible to determine how either per capita caps or block grants will affect state budgets, beneficiaries, and providers. Only when details of Medicaid financing reform are revealed, will we be able to determine how Republicans weighed these variables.

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