Establish Caps on Federal Spending for Medicaid

Medicaid is a joint federal-state program that pays for health care services for low-income people in various demographic groups, chiefly families with dependent children, elderly people (people over the age of 65), nonelderly people with disabilities, and—at the discretion of individual states—other nonelderly adults whose family income is up to 138 percent of the federal poverty guidelines. Under current law, the federal and state governments share in the financing of Medicaid, and almost all federal funding is open-ended: If a state spends more because enrollment increases or costs per enrollee rise, larger federal payments are generated automatically. On average, the federal government pays about 65 percent of program costs, with the federal share ranging among states from 53 percent to 79 percent, reflecting variations in each state’s per capita income and its share of enrollees (if any) that became eligible for Medicaid as a result of the optional expansion under the Affordable Care Act (ACA).

This option includes two approaches to limit federal Medicaid spending. The first approach would establish overall caps that set a maximum amount of funding that the federal government would provide a state to operate Medicaid. The second approach would establish per-­enrollee caps with an upper limit on the amount a state could spend on care for each Medicaid enrollee with different limits set for different eligibility groups. For each approach, the Congressional Budget Office analyzed two alternatives to implement those caps: The first alternative would limit spending for all eligibility groups, and the second would limit spending for adults and children only (spending for elderly and disabled people would not be limited). Using 2019 as the base year, CBO then applied two different growth factors to the alternatives in each approach: the annual change in the consumer price index for all urban consumers (CPI-U) and the annual change in the CPI-U plus 1 percentage point. Both approaches would exclude Medicaid’s disproportionate share hospital payments to inpatient facilities that serve a higher percentage of Medicaid enrollees and uninsured patients, spending under the Vaccines for Children program, administrative spending, and assistance with Medicare cost sharing and premiums for those dually eligible for Medicaid and Medicare.

This option would affect more than just outlays for Medicaid. CBO estimates that the option would result in lower Medicaid enrollment; consequently, the option would also affect other types of mandatory spending and revenues as some of the people losing coverage would qualify for subsidies to buy coverage through the marketplaces established by the ACA, others would enroll in coverage through an employer, and others would become uninsured. Those effects are incorporated in the estimates for this option.