Overview of Medicaid Per Capita Cap Proposals

The House Republican Plan (“A Better Way”) released on June 22, 2016, includes a proposal to convert federal Medicaid financing from an open-ended entitlement to a per capita allotment or a block grant (based on a state choice).¹  This proposal is part of a larger package designed to replace the Affordable Care Act (ACA) and reduce federal spending for health care.  Often tied to deficit reduction, proposals to convert Medicaid’s financing structure to a per capita cap or block grant have been proposed before.  Such changes represent a fundamental change in the financing structure of the program with major implications for beneficiaries, providers, states and localities. Key things to understand about a per capita cap include the following:

How a per capita cap works.  Under a Medicaid per capita cap, the federal government would set a limit on how much to reimburse states per enrollee.  Unlike a block grant approach, which provides a set amount of federal spending regardless of enrollment, payments to states would reflect changes in enrollment.  A per capita cap model would not account for changes in the costs per enrollee beyond the growth limit.  To achieve federal savings, the per capita growth amounts would be set below the projected rates of growth under current law.

Key design challenges.  Key challenges in designing a per capita cap proposal include determining the base per enrollee amounts, setting the annual growth rates, and making decisions about new state flexibility versus maintaining federal core requirements and state accountability.

Implications of a per capita cap.  A per capita cap could control federal outlays while giving states additional flexibility and budget predictability.  Implementing a per capita cap could be administratively difficult and could maintain current inequities in per enrollee costs across states.  Pre-set growth rates cannot easily account for changes in costs of medical services, patient acuity or epidemics.  If costs are above per enrollee amounts, costs could be shifted to states, providers and beneficiaries.  States may have incentives to reduce Medicaid payment rates and restrict benefits; with changes in federal law, states could also restrict eligibility for high-cost enrollees and shift costs to beneficiaries through premiums or cost sharing.

Looking ahead, per capita cap proposals are likely to be debated in Congress and as part of the elections in the context of broader health care changes as well as deficit reduction.