Strategies to Reduce Medicaid Spending: Findings from a Literature Review

Congress is considering fundamental changes to Medicaid’s financing structure that seek to make federal funding for Medicaid more predictable and achieve substantial federal budgetary savings. The American Health Care Act (AHCA) as passed by the House of Representatives converts federal Medicaid matching funds, which currently are guaranteed as state spending increases, to a per capita cap that would limit the amount of federal Medicaid funding that states could receive per enrollee. Under the AHCA, states also would have the option to receive a block grant, a set amount of federal Medicaid funding that would not vary based on enrollment, for certain populations.

The Congressional Budget Office (CBO) estimates that the AHCA’s Medicaid financing changes, along with its repeal of enhanced federal matching funds for the Affordable Care Act’s Medicaid expansion, would reduce federal Medicaid spending by $834 billion from 2017 to 2026, resulting in a 24% reduction in federal Medicaid funds in 2026. States are unlikely to be able to replace a loss of federal funds of that magnitude by increasing taxes or reducing spending in other areas, such as education. The three main avenues available to states to achieve Medicaid program savings are reducing provider payment rates, curtailing optional services, and restricting optional eligibility pathways. Implementing delivery system reforms or other programmatic or administrative efficiencies also has been raised as potential means of achieving Medicaid savings.

This issue brief considers the feasibility of realizing substantial Medicaid cost savings through strategies aimed at improving delivery system and administrative efficiency. We review the literature about the potential for Medicaid cost savings from four strategies related to acute care services: (1) premiums, cost-sharing, and enrollee wellness incentives, (2) complex care management, (3) patient-centered medical homes, and (4) alternative payment models, and another four strategies related to long-term services and supports: (5) tightening financial eligibility rules for long-term care services, (6) promoting private long-term care insurance, (7) expanding home and community-based services (HCBS), and (8) increasing use of managed long-term services and supports. We conclude that, while there may be other reasons to pursue these policies, such as improved health outcomes or increased enrollee satisfaction, the literature does not provide strong evidence for achieving large Medicaid savings through adoption of these policies.