The Fiscal Impact of the Trump Administration’s Medicaid Block Grant Initiative

ABSTRACT

• Issue The Trump administration recently invited states to apply for the new Healthy Adult Opportunity Medicaid demonstration initiative, which lets states opt into a block grant funding model in exchange for fewer federal rules. By capping federal funding, the initiative exposes the Medicaid program to unprecedented financial risk.
• Goals To estimate the financial impact of the new block grant model.
• Methods Using historical data and projections of cost and enrollment growth, we estimate Medicaid expenditures under current law on a state-by-state basis and compare these to funding available under a block grant. We also demonstrate the sensitivity of our estimates to fluctuations in costs and enrollment.
• Key Findings States that take up the block grant would see substantial reductions in Medicaid funding. Under our baseline scenario, the median state would face a reduction of 5.7 percent in fiscal year (FY) 2021; 14.6 percent in FY 2025; and 10.5 percent over the 2021–2025 period. The five-year median reduction in funding would be significantly larger if per enrollee spending growth is 1 percentage point above projections (13.9%), if enrollment grows at recent historical levels rather than projections (19.7%), or if a state reduces expenditures to capture “shared savings” (27.6%). Under all scenarios, the vast majority of Medicaid savings resulting from the funding reductions accrue to the federal government.

Introduction

On January 30, the Centers for Medicare and Medicaid Services (CMS) announced a new Medicaid demonstration initiative that places a cap on states’ federal Medicaid funding in exchange for less federal oversight and the ability to impose reductions in coverage, benefits, payment rates, and access to care to keep costs below the cap.¹ Called the Healthy Adult Opportunity, the nearly 60-page guidance advances an optional Medicaid block grant akin to proposals that Congress rejected in the 2017 debate over repeal of the Affordable Care Act (ACA).²

The new policy applies to adults covered under the ACA’s expansion of Medicaid eligibility for people with incomes up to 133 percent of the federal poverty level, which to date has been taken up by 35 states and the District of Columbia. It also applies to a relatively small number of pregnant women and parents covered by Medicaid at state option. States may convert their existing eligible populations to the demonstration or they may use the demonstration to newly cover those populations.

The funding caps may take the form of either a per person cap or an aggregate cap, also known as a block grant. In return for accepting a cap on federal funding, the federal government would take a hands-off approach to overseeing expenditures under the demonstration and permit states to jettison many of the beneficiary protections that would otherwise apply. An additional feature, referred to as “shared savings,” allows states to divert some of the capped federal dollars into other state priorities, resulting in additional cuts to Medicaid.³ States using the block grant to cover new populations (for example, states that use the demonstration to newly expand Medicaid) must rely on the per capita cap model for at least two years, deferring their access to shared savings. (For more detail on the block grant option as described in the administration’s guidance, see box.)

Key Elements of the Block Grant Policy

The Healthy Adult Opportunity demonstration allows states to choose between a per capita cap or an aggregate cap (block grant) in exchange for fewer federal rules and less federal oversight. These are the key elements applicable to the block grant:

• Eligible population: People covered under the ACA’s Medicaid expansion, as well as pregnant women and parents or caretaker relatives covered at states’ option, can be covered under the demonstration. These populations represent approximately 28 percent of Medicaid beneficiaries and 20 percent of Medicaid expenditures (FY 2019).⁴
• Setting the cap: CMS will compute an aggregate cap based on a state’s historical spending for the target group in a base period; aggregate total expenditures for the group are then trended forward by the lesser of the Consumer Price Index for Medical Care plus 0.5 percentage points or the state’s historical growth rate. Annual caps, which do not adjust for either health costs or enrollment, are established when the waiver is approved.
• Continued state spending requirement: States still must spend state funds to draw down federal funds. The applicable match rate applies (including the 90 percent match rate, if the block grant covers the ACA expansion group). If spending exceeds the cap in any year, CMS will recoup the overage the next year (unless the state has available shared savings rolled over from a previous year).
• Flexibility: States would have discretion to make changes for the demonstration population that would lower costs and restrict beneficiary access to care; to keep costs below the cap they could limit coverage (for example, by eliminating retroactive eligibility), drop or reduce benefits (for example, by adopting a closed drug formulary), increase premiums and cost-sharing, and impose work requirements. Most of these policies have been approved by the administration under Section 1115 waivers that do not include funding caps (see box, “Flexibility Under the Block Grant”). Notably, CMS will not allow states to implement a partial Medicaid expansion or cap enrollment and still receive the enhanced federal match rate for expansions.
• 80 percent requirement: CMS will rebase or reduce a state’s caps if the state does not spend at least 80 percent of its capped allocations.
• Diversion of federal funds (shared savings): States that spend less than their cap in a given year will be able to divert up to 50 percent of unused federal funds to state-funded health-related programs outside the Medicaid program. States must provide matching dollars at the state’s applicable matching rate to draw down these funds. Diverted funds can replace state spending in these health-related programs, as long as there is enough spending to serve as the state match for the diverted federal funds.⁵
• Special policies for newly expanding states: States that newly expand through a demonstration must adhere to a per capita cap for at least two years before converting to a block grant. This defers access to shared savings until the fourth year of implementation.
• Adjustments to the base: States may see their caps reduced if they implement policies that significantly reduce enrollment. In the event of a public health crisis or major economic event, they may seek an upward cap adjustment. Neither adjustment is spelled out or guaranteed by the guidance.

The introduction of a block grant option for state Medicaid programs represents a sharp departure from current law. We used the Manatt Medicaid Financing Model to assess how each state would fare under the block grant compared to current law, assuming that Medicaid enrollment and costs grow consistent with projections made by the Congressional Budget Office and CMS Office of the Actuary.

Because most states that have not expanded Medicaid cover only very small numbers of people who could be covered through the demonstration, we compare how these states would fare if they were to expand as currently allowed under the ACA versus under the new initiative. In addition, since block grants would expose states and the Medicaid program to new risks when costs grow faster than anticipated, we estimate the fiscal impact under alternate scenarios. These estimates provide data-driven insight into the level of risk and the associated reduction in funding for states that take up the demonstration. The actual impact in any given state will depend on factors that are not accounted for in this analysis, including when a state might opt into the block grant model and what the historical spending and trend rates are at that time. The appendix provides a full description of the study’s methods.

Many states are unlikely to pursue the new block grant option given that the cap is designed to cut federal support for the program and, by definition, will shift additional financial risks onto states. As described below, the flexibility offered, while vast, has mostly been permitted by the administration in waivers that do not cap Medicaid funding. In addition, any state that pursues the policy can expect a time-consuming and costly legal fight.⁶ Nevertheless, at least one governor has expressed an intention to apply.⁷ Careful review and analysis are warranted in light of the potentially sweeping implications for Medicaid beneficiaries, providers, and other stakeholders.

Findings

Exhibit 1 below provides a summary of our key findings.

Beneficiaries Potentially Impacted

Our estimates show that, in FY 2019, adult Medicaid beneficiaries who could be subject to the block grant represented a little more than a quarter (28%) of all beneficiaries and 20 percent of expenditures.⁸ In states that have fully implemented their Medicaid expansion, the share of current beneficiaries subject to the block grant ranges from 25 percent (North Dakota) to 57 percent (District of Columbia).⁹ By contrast, almost all states that have not expanded Medicaid cover very small numbers of potentially eligible individuals. In Alabama and Mississippi, for example, less than 1 percent of current beneficiaries could be subject to the block grant. It is therefore unlikely that a state would take up the block grant option unless it has implemented the Medicaid expansion or decides to use this demonstration to do so (Table 1).

All States Opting for a Block Grant Would Need to Make Significant Cuts to Medicaid

Given that the block grant cap is set below current projections of Medicaid spending, states would need to make substantial cuts to avoid violating their caps. To illustrate: if all states expand Medicaid, implement a block grant, and spend their full capped allocations, the reduction in Medicaid expenditures would be $110.4 billion relative to projected spending without the block grant for FYs 2021 to 2025 — a 10.5 percent cut.¹⁰ The magnitude of cuts increases steadily over time as the capped allotments fail to keep up with enrollment growth and health care cost increases. In 2021, when the block grant first goes into effect, the median state (Washington) would need to reduce its Medicaid expenditures by 5.7 percent ($210 million) to remain below its caps.¹¹ By 2025, it would need to reduce expenditures by 14.6 percent to remain below the $675 million cap (Exhibit 2).

Some states would need to make deeper cuts than others. As shown in Table 2, states such as Tennessee and Vermont would need to reduce expenditures by 25.0 percent and 33.6 percent, respectively — much deeper cuts than for the median state. This wide variation is driven in large part by CMS’s use of each state’s recent Medicaid growth rate as a key factor in establishing and trending forward the state’s capped allocation.¹² Some states have had extremely low or even negative growth in Medicaid in recent years. While likely not sustainable over time, this drives down their caps under the CMS formula. Even if, in an attempt to induce block grant take-up, CMS were to selectively ignore state growth rates and calculate the annual caps strictly based on the Consumer Price Index for Medical Care (medical CPI) plus 0.5 percentage points (a substantial divergence from the guidance), it would not change the fundamental picture. All states would still face sizable and growing cuts, with the median state facing a reduction of 10.2 percent in FYs 2021 to 2025 (Table 3).

Most of the Savings Accrue to the Federal Government

The federal government would be the primary beneficiary of the reductions in Medicaid spending that would follow implementation of a block grant. The simple reason is that the federal government finances 90 percent of the cost of covering expansion adults. If a state’s block grant includes only the expansion population, fully 90 percent of all savings from the cuts accrue to the federal government. Even after considering that a block grant may include other populations covered at a lower federal Medicaid matching rate (optional pregnant women and low-income parents), the federal government would still realize 83 percent of the savings associated with states taking up the block grant. This share represents $92.0 billion of the $110.4 billion in total Medicaid cuts (Table 2).

Shared-Savings Policy Deepens Cuts, and Still Leaves the Federal Government as Primary Beneficiary

Since the administration points to the shared-savings component of its policy as generating financial opportunities for states, it is important to evaluate the policy in the context of the total Medicaid spending reductions and the federal savings generated by capped funding. For states to access any federal “savings,” they must reduce their total Medicaid expenditures for the block grant population beyond what is required to simply live within the caps while meeting CMS’s performance standards. If states reduce spending to 80 percent of their caps to take advantage of the shared-savings option, the size of the cuts in the median state for FYs 2021 to 2025 would balloon from 10.5 percent to 27.6 percent.¹³ In that state, 89 percent of the reductions in Medicaid expenditures would represent savings to the federal government.

States could divert a share of the unspent federal Medicaid funds to other state priorities under the shared-savings option (at a lower match rate, assuming they are covering expansion adults in the block grant). Even under this scenario, the federal government retains more than three-quarters of the total savings (Table 4).

Impact on Expansion States

Expansion states already have a significant group of enrollees whose coverage could be converted to the block grant. If such states were to pursue block grant demonstrations, they would see significant reductions in Medicaid expenditures relative to current law. The median expansion state would see total cuts of 10.2 percent from FYs 2021 to 2025, and all expansion states would see cuts of at least 6.5 percent. One state, Vermont, would see a cut of more than 30 percent (Table 2).

Impact on Nonexpansion States

In states that have not yet expanded Medicaid, an expansion implemented via the block grant option could be seen as allowing a state to provide at least some coverage and draw down some federal Medicaid dollars at the enhanced federal match rate. This alternative path to expanding Medicaid, however, would come at a substantial cost to states and coverage.

States that expand through a block grant option are giving up a significant portion of the 90 percent match they would otherwise receive. If all nonexpansion states expanded Medicaid under current law without a cap, they could expect to receive $270.1 billion in federal funds between 2021 and 2025 (and potentially more if costs grow more rapidly than current projections). If, instead, they used the block grant option, they would receive 11.9 percent less, a $32.7 billion reduction across all nonexpansion states (Table 2).¹⁴

The reduction in federal dollars relative to expansion without a cap would be deeper in some states. For example, Oklahoma would receive 17.2 percent less federal funding compared to expansion without a cap ($1.9 billion fewer dollars through 2025). In addition, as noted above, newly expanding states taking up the block grant would not have access to the shared-savings feature for at least two years. Nor could they cap enrollment or implement a partial expansion without giving up the enhanced matching rate, flexibilities that have been sought by some states to reduce their expansion costs.¹⁵

Risk Under the Block Grant

The estimates reviewed above all reflect the size of Medicaid cuts relative to current law based on projections of per enrollee Medicaid expenditures from the CMS Office of the Actuary and enrollment growth from the Congressional Budget Office, adjusted for state-specific population trends. Real-world events, however, could lead to significantly sharper cuts. If any of the projections used in the baseline scenario are off to even a minor degree — a near certainty given the difficulty of predicting the direction of the economy and health care costs — the size of the cuts would be much higher (Exhibit 3).

For example, the baseline projections assume that medical CPI (a key factor in the trend rate for the block grant) will be 3.0 percent, an average of medical CPI over the past four years. Depending on the year, this is approximately 2 percentage points lower than projected growth in per enrollee expenditures. If, however, the gap between growth in medical CPI and actual Medicaid expenditures turns out to be larger than projected, the size of the cuts would grow substantially. If, for example, medical CPI were 2.25 percent instead of 3.0 percent, the reductions in Medicaid expenditures in the median state would jump to 13.0 percent for FYs 2021 to 2025, compared to 10.5 percent under the baseline scenario.¹⁶

Similarly, the reductions are more substantial if health care costs grow faster than projections. If costs increase such that per enrollee spending growth is just 1 percentage point higher than expected, the spending reductions necessary for the median state to stay below the cap would increase to 13.9 percent.¹⁷

States also could face additional cuts if enrollment grows faster than projections but is still in line with historical experience. Though the Congressional Budget Office projects that adult Medicaid enrollment will rise by 0.7 percent per year from 2019 through 2029, which is the growth rate used in the estimates presented above, total Medicaid enrollment rose by an average of 3.6 percent per year from 1998 to 2013 (the years prior to the effective date of the Medicaid expansion) and often varies considerably across states.¹⁸ If this were the rate of enrollment growth across all states between FYs 2021 and 2025, the median state cut would rise to 19.7 percent (Table 5).

States would face the largest cuts if any of these scenarios occurred simultaneously with a state reducing spending to access shared savings. If medical CPI were 2.25 percent instead of 3.0 percent or if per enrollee spending growth were 1 percentage point higher than projected, assuming all states spend 80 percent of their capped allocations, the median state would see cuts of 29.4 percent and 30.4 percent, respectively. Alternatively, if enrollment were to grow faster than expected (3.6 percent across all states), the median state cut would increase to 35.5 percent, with some states seeing reductions of nearly 50 percent (Exhibit 1).

Flexibility Under the Block Grant: What’s New? What’s Not? And What’s Still Off the Table?

CMS has already used its Section 1115 demonstration authority to allow states to impose new conditions of Medicaid eligibility and undo beneficiary protections in waivers without funding caps. States taking up these same policies as part of the Healthy Adult Opportunity block grant option would be required to accept reduced and capped federal funding. Many of these previously approved demonstrations are now caught up in litigation, and states considering the new block grant option also should anticipate legal challenges.

Already Available Under Waivers That Do Not Cap Federal Funding

• Work requirements (subject of litigation)
• Discretion to reduce or eliminate benefits, such as nonemergency medical transportation and EPSDT services for people ages 19 or 20 (subject of litigation)
• Higher premiums (subject of litigation)
• Elimination of retroactive eligibility (subject of litigation)
• Use of Medicaid funds to connect people to and provide health-related social services¹⁹

Newly Offered in Block Grant Guidance (likely to prompt litigation)

• Ability to divert share of unused federal dollars to other health-related initiatives
• Limits on payments to federally qualified health centers
• Use of closed drug formulary while retaining access to federal rebates
• Ability to implement Medicaid managed care capitation rates and establish network adequacy standards without advance federal review
• Ability to make changes to benefits, premiums, and other policies with limited federal review²⁰
• Charge copayments above statutory limits and without regard to Section 1916(f) of the Social Security Act, which specifically restricts federal waiver authority in this area
• Elimination of hospital presumptive eligibility

Not Allowed Under Guidance If State Claims Enhanced Matching Rate

• Partial expansion of Medicaid, such as to 100 percent of federal poverty level
• Enrollment caps
• Asset tests

Discussion and Policy Implications

Consistent with the fundamental “bargain” of all block grant proposals, our estimates show that states would receive significantly less federal funding and be subject to increased financial risks if they take up the block grant option. The magnitude of the cuts would vary based largely on each state’s recent expenditure growth, but the basic picture is the same across the country: the caps would require states to cut coverage, reduce benefits, increase cost-sharing, lower provider payment rates, or otherwise reduce Medicaid expenditures as compared to current law spending levels or expected spending levels for states implementing new expansions.

The cuts grow over time, and they deepen still further if states pursue shared savings or if health care costs or enrollment grow at rates that, while higher than projected, are well within recent historical experience. And under all scenarios, the financial benefits of spending cuts accrue overwhelmingly to the federal government, not states.

Once they take a close look, most states are likely to decide that the block grant is not an appealing option. It requires them to give up the financial partnership under which the federal government shares the risk for all Medicaid expenditures, including those driven by rising prices, breakthrough technologies, economic downturns, and other health care factors.²¹ Meanwhile, much of the “flexibility” that CMS offers under the guidance is already available through waivers that do not cap funding while strategies that some states have sought to limit their financial exposure — partial expansion and enrollment caps — are off the table for the expansion population unless states give up the enhanced matching rate. And if enrollment drops too steeply with the flexibility permitted (for example, as a result of implementing work requirements or higher premiums), the state’s cap could be adjusted downward to reflect reduced enrollment.

CMS is seeking to make the block grant option more appealing by allowing states to divert federal Medicaid funds into other state priorities if they underspend the block grant. This policy, however, would further deepen the Medicaid cuts, add to the access issues beneficiaries face under a block grant, and squeeze already thin Medicaid margins for providers and managed care plans. Our analysis also suggests that the diversion option is not likely to be as fiscally attractive to states as it might initially sound. Shared savings are not available to newly expanding states until the fourth year of the demonstration; even then, they are available only if a state somehow manages to keep expenditures well below its capped allotment. And, in the end, the federal government still retains more than three-quarters of all of the savings resulting from the cuts that states will need to make to stay within the caps.

Finally, a Medicaid block grant established through administrative action rather than legislation, with sweeping fiscal and programmatic implications, is certain to be the subject of extensive litigation.

What If a State Wants to Leave the Block Grant?

The guidance notes that states can terminate their participation in the block grant demonstration, but it is important to be aware of potential constraints on early exits. CMS likely will face significant pressure not to allow states to opt in/opt out of the block grant at will. Budget officials and watchdog groups will likely express concern if CMS allows states to divert a share of federal Medicaid dollars to other priorities when all is going well, but then lets them drop out of the block grant when their spending exceeds the cap. Even if CMS permits states to opt out, it would take months to effectuate an exit. Standard CMS waiver terms require states to provide beneficiaries with at least six months of notice before a waiver is terminated.

Conclusion

The concept of turning the Medicaid program into a block grant has been debated for decades, most recently during the unsuccessful effort in 2017 to repeal and replace the Affordable Care Act. The Trump administration’s Healthy Adult Opportunity initiative — advanced through Section 1115 demonstrations instead of legislation — offers the same fundamental “bargain”: less federal funding and more risk in exchange for flexibility.

Our estimates of the policy’s impact highlight that the administration’s block grant model requires significant cuts in Medicaid under the best of scenarios, and that still deeper cuts are necessary if a state experiences an economic slowdown or continues to see the introduction of new treatments and medications that increase Medicaid cost pressures beyond current projections. Blunt instruments such as enrollment caps, which can help keep spending below the caps, are off the table if states want to retain the 90 percent enhanced match. Many expansion states are likely to take a pass, because the cuts are steep, the financial risks are great, and the promise of shared savings is likely to be less appealing than it may sound at first blush. Although proponents of Medicaid expansion may wonder whether expansion through a block grant is better than nothing, it is important to consider the significant federal dollars lost and the likely diminution of coverage and care under this option.