Establish Caps on Federal Spending for Medicaid

Background

Medicaid is a joint federal-state program that covers acute and long-term health care for groups of low-income people, 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 and administration of Medicaid. The federal government provides the majority of Medicaid's funding; establishes the statutory, regulatory, and administrative structure of the program; and monitors state compliance with the program's rules. As part of its responsibilities, the federal government determines which groups of people and medical services states must cover if they participate in the program and which can be covered at states' discretion. For their part, the states administer the program's daily operations, reimburse health care providers and health plans, and determine which optional eligibility and service categories to adopt. The result is wide variation among states in levels of enrollment, the scope of services covered, payment rates for providers and health plans, and spending per capita, among other aspects of how the program is implemented.

In 2017, the states received $375 billion in federal funding for Medicaid and spent $230 billion of their own funds for the program. Under current law, 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 62 percent of program costs, with a range among the states of 50 percent to the current high of 85 percent, reflecting the variation in state per capita income and in the share of enrollees (if any) in each state that became eligible for Medicaid as a result of the optional expansion of that program under the Affordable Care Act (ACA). Through 2016, the federal government paid all costs for enrollees who became eligible as a result of the ACA. The federal government is scheduled to cover a slightly declining share of costs for that group from 2017 through 2019, and 90 percent of costs in 2020 and beyond.

Medicaid spending has consumed a rising share of the federal budget over the past several decades, representing a growing percentage of gross domestic product (GDP)—a trend that the Congressional Budget Office projects will continue into the future. Over the past 20 years, federal Medicaid spending has risen at an average rate of slightly more than 7 percent annually as a result of general growth in health care costs, mandatory and optional expansions of program eligibility and covered services, and the increasing amount of state spending that qualifies for federal matching payments.

CBO expects that, under current law, federal spending for Medicaid will grow more slowly in the next decade as the pressure grows on some states to constrain the program's increasing share of their budgets; however, it will continue to increase faster than GDP growth and general inflation, in part because of continued growth in health care costs and in part because more states are expected to expand Medicaid coverage under the ACA. (To date, 32 states and the District of Columbia have done so.) Medicaid spending is projected to rise at an average rate of 6 percent a year, whereas GDP is projected to increase by about 4 percent a year on a nominal basis, and general inflation is expected to average about 2 percent a year. CBO estimates that Medicaid's share of federal noninterest spending will rise from 10 percent in 2017 to 11 percent in 2028.

Lawmakers could make structural changes to Medicaid to decrease federal spending on the program. Among the possibilities are reducing the scope of covered services, eliminating eligibility categories, repealing the expansion of the ACA, reducing the federal government's share of total Medicaid spending, or capping the amount that states receive from the federal government to operate the program. This option focuses on the last approach, although the others could have similar implications for federal and state spending or for individual enrollees, depending on the way states were permitted to, or decided to, respond to such policy changes.

Key Design Choices That Would Affect Savings

As outlined in this option, there are a variety of designs for caps that policymakers could consider that would significantly affect federal Medicaid savings. However, a number of major policy choices, with important implications, would have to be made. Those key design choices include the following:

• Whether to set overall or per-enrollee caps;
• What categories of Medicaid spending and what eligibility categories to include in the spending limits;
• Which year's spending to use to set the base year and what growth factor, or percentage rate, to use to increase the caps over time; and
• Whether optional expansion of coverage under the ACA also would be subject to the caps (thus creating special complexities for states that have not yet expanded coverage but that might do so in the future).

Overall or Per-Enrollee Spending Caps. The first consideration is whether to pursue a cap on federal Medicaid spending across the board or to provide each state with a fixed amount of funding for each enrollee.

Overall Caps. In general, overall caps would consist of a maximum amount of funding that the federal government would give a state to operate Medicaid. Once established, and depending on the way they were scheduled to increase, the federal caps generally would not fluctuate in response to rising or falling enrollment or as a result of changes in the cost of providing services.

Overall caps could be structured in one of two main ways. First, the federal government could provide block grants at amounts that would not change, regardless of fluctuations in costs or enrollment. Alternatively, the federal government could maintain the current financing structure—paying for a specific share of a state's Medicaid spending—but capping the total amount provided to states. In that case, each state would bear all additional costs above the federal caps, but the state and the federal government would share the savings if spending fell below the caps. In CBO's view, however, if caps were set below current projections of federal Medicaid spending, such additional federal savings would be unlikely. Given the incentive to maximize federal funding, CBO expects that states would generally structure their programs to qualify for all available federal funds up to the amount of the caps.

Per-Enrollee Caps. Caps on per-enrollee spending would set an upper limit on the amount a state could spend on care for Medicaid enrollees, on average. Under such a plan, the federal government would provide funds for each person enrolled in the program, but only up to a specified amount per enrollee. As a result, each state's total federal funding would be calculated as the product of the number of enrollees and the capped per-enrollee spending amount. (Individual enrollees whose care proved to be more expensive than the average could still generate additional federal payments, as long as the total per capita average did not exceed the cap.) Unlike an overall spending cap, such an approach would allow for additional funding if enrollment rose (when a state chose to expand eligibility under the ACA, for example, or as a result of an increase in enrollment during an economic downturn). Funding would decline if Medicaid enrollment fell (for example, when a state chose to restrict enrollment or when enrollment fell as a result of an improving economy).

Several structures are possible for per-enrollee caps. Caps could be set on the basis of average federal spending per enrollee for all Medicaid beneficiaries or for people by eligibility category. In those circumstances, the federal government would count the enrollees overall or the number in each category and multiply that sum by the spending limit per enrollee. For caps based on eligibility category, the overall limit on Medicaid spending for each state would be the sum of the groups' limits. A similar but more flexible approach would be to set a total limit consisting of the sum of the limits for the chosen groups, but to allow states to cross-subsidize groups (that is, to spend more than the cap for some groups and less for others) as long as the state's total spending limit was maintained.

Spending Categories. Policy options to cap federal Medicaid spending could target all Medicaid spending or spending for specific categories of services. Most federal Medicaid spending covers acute care ($260 billion in 2017) or long-term care ($88 billion in 2017). Both types of spending could be divided among various subcategories. For example, caps could exclude payments to certain enrollees who are also enrolled in Medicare for their Medicare cost sharing because such payments, which are typically included in acute care spending, are more related to Medicare than Medicaid. Other spending categories include disproportionate share hospital (DSH) payments to inpatient facilities that serve a higher percentage of Medicaid enrollees and uninsured patients; spending under the Vaccines for Children (VFC) program; and administrative spending. (The total in 2017 for those three categories was $27 billion.) In general, the more spending categories that were capped, the greater the potential for federal budgetary savings.

Eligibility Categories. In addition to placing limits on spending for different categories of services, caps could limit spending for different eligibility categories. The main eligibility categories for Medicaid consist of the elderly; people with disabilities; children; nondisabled, nonelderly adults who would have been eligible before enactment of the ACA; and adults made eligible by the ACA. As with service categories, the more eligibility categories that are covered by the caps, the greater the potential for federal savings. For example, caps could limit federal spending (either overall or per enrollee) only for children and certain adults but leave spending unchanged for elderly and disabled enrollees. Because the latter two groups of enrollees currently account for about 47 percent of Medicaid spending—and are projected to account for about 46 percent in 2028—caps that did not apply to them would produce far smaller savings than caps that applied to all groups (assuming that the other characteristics of the two sets of caps were the same).

Per-enrollee caps could establish one average per-person cost limit for all enrollees or establish separate limits for different types of enrollees. If there was more than one per-enrollee cap, separate caps could be established for as many specific categories as could be identified in Medicaid administrative data (see the section on "Other Considerations"). For example, past proposals have considered separate caps for the elderly, people with disabilities, children, and nondisabled, nonelderly adults. Separate caps also could be established for pregnant women, for adults added as a result of the expansion of Medicaid under the ACA, or for other particular groups.

The choice of creating only one or more than one per-enrollee cap—and if so, which groups to select for each cap—could affect whether and to what extent the states would have an incentive to maximize enrollment of some groups over others. A single cap for all enrollees would average the costs of groups without regard to substantial differences in the groups' health status, thus creating financial incentives for states to enroll people whose costs were expected to be below the cap. For example, per-enrollee spending for children and nonelderly, nondisabled adults, on average, is below that for elderly patients and people with disabilities. Therefore, the enrollment of every additional child and nonelderly, nondisabled adult would generate payments from the federal government in excess of their average costs, helping a state to remain below its total spending limit, and the enrollment of every additional elderly or disabled enrollee would make that goal more difficult to achieve because federal payments would be below their average cost. However, the degree to which states could effectively maximize enrollment of people in one category compared with another would depend on the degree of flexibility states were given to keep their costs below the caps.

Base-Year Spending. Establishing caps on federal spending for Medicaid requires selecting a particular year of Medicaid outlays as a "base year" and calculating that year's total spending for the service categories and eligibility groups that are included. The base year is usually not the first year in which the caps take effect, which could be any year in the budget window, but the year from which the future cap amounts are projected (as described in the next section). Thus, for overall and per-enrollee spending caps alike, the selection of the base year is important: A higher base-year amount would lead to higher caps (and lower federal savings) than a lower base-year amount would.

An important consideration in selecting a base year is whether to use a past or future year. Most proposals use a past year because Medicaid expenditures are known and because states cannot increase spending in a past base year to boost their future spending limits. By contrast, a future base year would allow states to increase spending in that year by raising payment rates for providers and health plans, making additional onetime supplemental payments, or moving payments for claims from different periods into the base year, thereby increasing the caps and lowering federal savings.

Choosing a past year as a base also would essentially lock in the spending that resulted from previous choices about the design of a state's Medicaid program, including the choice of whether to expand Medicaid. Once caps were set on the basis of a past year, states would be responsible for the full cost of any expansionary program changes whose costs exceeded the caps, such as raising payment rates or voluntarily adding covered services (which some might consider a desirable outcome if a principal goal of the cap was to constrain state spending). In addition, states that have made efforts to operate their programs efficiently to keep costs low would receive caps that reflected that efficiency and were, all else being equal, lower than the caps of states with inefficient programs. Therefore, those states that maintained efficiency would have less flexibility to reduce spending to comply with the caps, and states that operated inefficiently would have more flexibility. Ways to address that issue would include supplementing base-year spending amounts or assigning higher growth rates to states that spent less to give them more room to change their programs over time. However, that approach would reduce the federal savings generated by the caps.

Growth Factors. The choice of which growth factor to use determines the annual rate of increase in spending subject to the caps from the base year and inflates the spending limits in future years. The growth factor is one of the most important drivers of savings derived from the option to cap Medicaid spending, as the caps are essentially limits on the degree to which the federal government would allow its payments to grow over time. However, the growth factor could be set to meet specific savings targets or to achieve other specific policy purposes. For example, if a growth factor was set roughly equal to the rate of increase projected for Medicaid spending under current law, little or no budgetary savings might be anticipated, but some other policy objective could be met, such as protecting the federal government from unanticipated cost increases in the future. Alternatively, the growth factor could be set to make the increase in federal Medicaid spending—overall or per enrollee—match changing prices in the economy as measured, for example, by the consumer price index for all urban consumers (CPI-U). The growth factor could be set to reflect the growth in health care costs per person, perhaps as measured by the per capita increase in national health expenditures, or at a rate that was consistent with economic growth as measured by the increase in per capita GDP. Growth factors that were tied to price indexes or to overall economic growth, however, would not generally account for increases in the average quantity or intensity of medical services of the sort that have occurred in the past.

For overall spending caps, which would not provide additional funds automatically if Medicaid enrollment rose, the growth factor could include some measure of population growth (such as the Census Bureau's state population estimates) or changes in the unemployment rate to account for increases in enrollment. A growth factor also could be any legislated rate designed to produce a desired amount of savings.

In general, the lower the growth factor relative to CBO's projected growth rate for federal Medicaid spending under current law, the greater the projected federal budgetary savings would be. But the lower the growth factor, the greater the possibility that federal funding would not keep pace with increases in states' costs per Medicaid enrollee or, in the case of overall caps, with increases in Medicaid enrollment, thus raising the likelihood that states would not be able to maintain current services or coverage.

The Optional Expansion of Medicaid. Since January 2014, states have been permitted to extend eligibility for Medicaid to most people whose income is below 138 percent of the federal poverty guidelines. Under the terms of the ACA, the federal government currently covers a much larger share of the cost of providing Medicaid coverage to people made eligible by the expansion than it does for other Medicaid enrollees. That higher federal share was set at 100 percent through 2016 and is scheduled to decline gradually to 90 percent by 2020 and remain at that rate thereafter. The expansion of Medicaid would add complexity to the design of federal spending caps, particularly for states that chose to adopt the expansion after the base year.

For states that have not yet adopted the ACA expansion, data from an earlier base year would reflect spending only for groups of people who were eligible before expansion. Should any of those states subsequently adopt the expansion, the annual limits established by an overall spending cap would fail to account for the spending of expansion enrollees. For per-enrollee caps, the additional enrollment from the coverage expansion would generate additional federal spending, but average per capita spending for adults in the base year would not account for the higher federal payment for newly eligible people. In addition, the average would not reflect any differences in expected costs related to the health status of those new enrollees compared with costs for people who would have been eligible before the expansion.

In designing Medicaid caps, those issues could be addressed in one of several ways. Specifically, policymakers could:

• Select a base year far enough in the future to allow time for states that chose to do so to adopt the expansion and for enrollment to become fairly stable.
• Leave spending uncapped for people who enrolled as a result of the expansion, but cap spending only for nonexpansion enrollees.
• Allow the Secretary of Health and Human Services to add an estimate of future spending attributable to the expansion for states that chose to adopt the expansion after the base year.
• Base the caps on total combined federal and state spending to avoid the complexity of differing matching rates for expansion and pre-expansion adults.
• Make no adjustment to the caps to account for the costs of the expansion.

Another question related to the optional expansion concerns whether capping federal Medicaid spending might cause some states that would otherwise expand coverage to reject the expansion instead. Limits on federal Medicaid payments represent a potential shifting of costs to states, which in turn would affect states' budget processes and program decisions. States could reduce Medicaid costs and lessen financial risk by dropping the optional expansion or deciding to adopt it later. CBO anticipates that the more that caps reduced federal funding below the amounts projected under current law, the greater the likelihood that states would discontinue or reject the optional expansion—unless the cap's structure was designed so that participating in the expansion did not make complying with the cap more difficult.

Option

CBO analyzed two alternatives to limit federal Medicaid spending: establishing overall spending caps and establishing per-enrollee caps. For both alternatives, CBO also analyzed limits on spending for all eligibility groups and limits on adults and children only (excluding the elderly and disabled). Further, to illustrate a range of savings, CBO used a pair of alternative growth factors for each type of cap: either the annual change in the CPI-U or the change in the CPI-U plus 1 percentage point (referred to here as the CPI-U plus 1). Under each alternative—and its variants—states would retain their current-law authority concerning optional benefits, optional enrollees, and payment rates for providers and health plans.

CBO chose 2017 as the base year for all alternatives. Overall caps would take effect in October 2021; per-enrollee caps would take effect one year later. That additional year would be the minimum necessary to allow for the complex gathering of data needed to arrive at state-specific caps for each enrollee group (as discussed below in the section "Availability of Data"). For overall and per-enrollee caps alike, federal matching rates would continue as they are under current law. Medicaid's DSH, VFC, and administrative spending would be excluded, as would Medicaid assistance with Medicare cost sharing and premiums for those dually eligible for both programs.

For the per-enrollee spending caps, CBO assumed that separate spending limits would be set for five Medicaid eligibility groups in each state: the elderly; people with disabilities; children; nondisabled, nonelderly adults who would have been eligible before enactment of the ACA; and adults made eligible by the ACA (in states that have expanded coverage). States would be permitted to cross-subsidize groups. CBO also assumed that the Secretary of Health and Human Services would create a new data source to capture the necessary spending and enrollment information for the five groups. Those same specifications would apply to alternatives that capped spending only for adults and children.

For simplicity, CBO assumed that the Secretary would not adjust the caps to reflect estimated additional spending in any state that adopted the expansion after the base year. Per-enrollee caps would be established on combined federal and state spending (overall caps would not). By that method, if combined federal and state spending exceeded the caps, the percentage of the excess spending above the cap would be cut from the federal payment to states: If a state overspent its per-enrollee cap by 5 percent, for example, the federal payment to the state would be reduced by the same amount.

Effects on the Budget From Caps on Overall Spending

Under the specifications listed here, CBO estimates that the overall caps affecting spending for all eligibility groups would generate gross savings to Medicaid of $700 billion between 2020 and 2028 using the CPI-U growth factor and $454 billion using the CPI-U plus 1 growth factor. That translates into savings of about 15 percent and 10 percent, respectively, from the current-law projection of total federal Medicaid spending for the period. In 2028, gross savings from establishing overall caps on all eligibility groups would represent about 23 percent of projected federal Medicaid spending using the CPI-U growth factor and 16 percent using the CPI-U plus 1 growth factor.

CBO estimates that establishing caps on overall spending for only the adult and children eligibility groups would generate gross savings to Medicaid of $433 billion between 2020 and 2028 using the CPI-U growth factor and $299 billion using the CPI-U plus 1 growth factor. That translates into savings of about 9 percent and 6 percent, respectively, from the current-law projection of total federal Medicaid spending for the period. In 2028, gross savings from establishing caps on overall spending for only the adult and children eligibility groups would represent about 14 percent of projected federal Medicaid spending using the CPI-U growth factor and 10 percent using the CPI-U plus 1 growth factor.

The gross savings from establishing caps on overall spending—regardless of whether those caps applied to spending for all eligibility categories or only to those that consist of adults and children—would be partially offset. Reductions in federal Medicaid spending resulting from the overall caps would represent large reductions in state revenues. Therefore, in CBO's assessment, the states would take a variety of actions to reduce a portion of the additional costs that they would face, including restricting enrollment. CBO anticipates that, in response to the caps on spending, some states would discontinue coverage for enrollees made eligible by the ACA, and all states that would have adopted such coverage in the future would no longer choose to do so. (A reduction in the deficit would occur in 2020 because the caps would become law in 2019, and CBO expects that some of the states that would have opted to expand coverage would have done so in 2020.) For people who lost Medicaid coverage, some would gain access to subsidized health insurance coverage through the marketplaces established by the ACA. Specifically, some people who lost Medicaid eligibility would qualify for subsidies to buy coverage through the marketplaces if other eligibility criteria were met. The rest would enroll in other coverage, principally through an employer, or become uninsured. Overall, CBO and the staff of the Joint Committee on Taxation (JCT) estimate that roughly 60 percent of people who lost Medicaid coverage would become uninsured; that increase in the uninsured would in turn increase Medicare's DSH payments to inpatient facilities that serve a higher percentage of low-income patients.

For the caps on overall spending that affect all eligibility groups, the agencies estimate—using the CPI-U growth factor—that the additional marketplace and employment-based coverage, along with increased Medicare spending related to DSH payments, would increase outlays by $147 billion and decrease revenues by $57 billion from 2020 through 2028. Using the CPI-U plus 1 growth factor, the agencies estimate that the additional coverage and Medicare spending would increase outlays by $108 billion and decrease revenues by $41 billion over the same period. As a result, the net effect on the deficit would be savings of $496 billion between 2020 and 2028 using the CPI-U growth factor and $305 billion using the CPI-U plus 1 growth factor.

For caps affecting overall spending for only the adult and children eligibility groups, the agencies estimate—using the CPI-U growth factor—that the additional marketplace and employment-based coverage along with increased Medicare spending related to DSH payments would increase outlays by $129 billion and decrease revenues by $50 billion from 2020 through 2028. Using the CPI-U plus 1 growth factor, the agencies estimate that the additional coverage and Medicare spending would increase outlays by $100 billion and decrease revenues by $38 billion over the same period. As a result, the net effect on the deficit would be savings of $255 billion between 2020 and 2028 using the CPI-U growth factor and $162 billion using the CPI-U plus 1 growth factor.

Effects on the Budget From Caps on Spending per Enrollee

CBO estimates that per-enrollee caps affecting spending for all eligibility groups would generate gross savings to Medicaid of $805 billion between 2020 and 2028 using the CPI-U growth factor and $522 billion using the CPI-U plus 1 growth factor, yielding savings of about 17 percent and 11 percent, respectively, relative to the current-law projection of total federal Medicaid spending for the period. The gross savings would represent about 29 percent and 19 percent, respectively, of projected federal Medicaid spending in 2028.

CBO estimates that per-enrollee caps affecting spending only for the adult and children eligibility groups would generate gross savings to Medicaid of $554 billion between 2020 and 2028 using the CPI-U growth factor and $403 billion using the CPI-U plus 1 growth factor. That translates into savings of about 12 percent and 8 percent, respectively, from the current-law projection of total federal Medicaid spending for the period. The gross savings would represent about 19 percent and 14 percent, respectively, of projected federal spending for Medicaid in 2028.

Some of the difference in gross savings to Medicaid is attributable to the caps' different implementation dates—specifically, the later implementation of per-enrollee caps. If the caps on overall spending also took effect in 2022, the gross savings from establishing those caps on all eligibility groups would be $678 billion using the CPI-U growth factor and $445 billion using the CPI-U plus 1 growth factor. The gross savings from implementing caps on overall spending for only the adult and children eligibility groups would be $422 billion using the CPI-U growth factor and $295 billion using the CPI-U plus 1 growth factor.

As with the caps on overall spending, the gross savings from per-enrollee caps would be partially offset. Although per-enrollee caps would provide additional federal payments for each enrollee, caps below projections of federal per-enrollee spending would create a loss of revenues to states for each enrollee relative to current law. Therefore, CBO anticipates that some states also would take action to restrict enrollment under per-enrollee caps. In addition, CBO and JCT estimate that roughly 60 percent of enrollees who lost Medicaid coverage would become uninsured, thereby increasing Medicare's DSH payments to inpatient facilities that serve a higher percentage of low-income patients. The remainder would instead either obtain subsidized health insurance through the marketplaces or enroll in an employment-based plan. For per-enrollee caps affecting all eligibility groups, the agencies estimate that the additional coverage and Medicare spending using the CPI-U growth factor would increase outlays by $74 billion and decrease revenues by $28 billion from 2020 through 2028. Using the CPI-U plus 1 growth factor, the agencies estimate that the additional coverage and Medicare spending would increase outlays by $62 billion and decrease revenues by $22 billion over the same period. As a result, the net effect on the deficit would be savings of $703 billion between 2020 and 2028 using the CPI-U growth factor and $438 billion using the CPI-U plus 1 growth factor.

For per-enrollee caps affecting only the adult and children eligibility groups, the agencies estimate—using the CPI-U growth factor—that increases in marketplace and employment-based coverage along with increased Medicare spending related to DSH payments would increase outlays by $66 billion and decrease revenues by $24 billion from 2020 through 2028. Using the CPI-U plus 1 growth factor, the agencies estimate that those coverage changes would increase outlays by $58 billion and decrease revenues by $21 billion over the same period. As a result, the net effect on the deficit would be savings of $464 billion between 2020 and 2028 using the CPI-U growth factor and $324 billion using the CPI-U plus 1 growth factor.

Per-enrollee caps—whether they applied to spending for all eligibility groups or to spending for adults and children only—would save more than the caps on overall spending, using the same growth factor. For example, using the CPI-U growth factor, the net effect on the deficit of the per-enrollee caps would be $703 billion in savings, and the net effect on the deficit of the caps on overall spending would be $496 billion in savings. The per-enrollee caps would have a larger effect on the deficit because of the way federal spending would change in response to state eligibility restrictions. As explained above, CBO expects that states would respond both to the per-enrollee caps and to overall caps on spending by seeking to offset a portion of the additional costs they would face relative to current law, including by taking steps to restrict eligibility. However, the effects on federal spending would be greater under per-enrollee caps. If per-enrollee caps were established, states would respond by restricting eligibility, and enrollment would fall. As a result, states would receive less federal funding (because they would receive the per capita amount for each enrollee on the basis of those enrollees' eligibility category). By contrast, if the overall caps were established, lower enrollment would not change the amount of federal funding that would be available to states because the funding is not tied to enrollment. Were it not for the additional savings created by the way in which enrollment changes affected federal funding under the per-enrollee caps, those caps would have a smaller net effect on the deficit than the caps on overall spending, using the same growth factor.

Uncertainty

There are two principal sources of uncertainty in the estimates of savings arising from this option. First, differences in the actual rate of growth in Medicaid spending under current law between 2019 and 2028, as compared with CBO's baseline projections of that growth, would affect the amount of savings achieved by the caps. If spending growth in the absence of the caps was substantially lower than CBO's projections, the savings realized by the caps on Medicaid spending would be significantly lower. In an extreme case, if spending growth under current law was less than the CPI-U in each year, then capping Medicaid growth by implementing either the overall caps or the per-enrollee caps would produce no savings. By contrast, if spending growth under current law was substantially higher than CBO's projections, then the savings would be significantly higher, as would the pressure on states to make adjustments to their programs. Moreover, small differences in the actual growth under current law as compared with CBO's projections earlier in the 2019-2028 period could significantly affect the savings from the establishment of caps. The significant difference in savings would occur because small differences between growth under current law and CBO's projections early in the period would compound over many years.

The second source of uncertainty pertains to how states would respond to the caps. Although the states' responses would generally have a smaller effect on savings than differences between the actual and estimated growth rate for Medicaid under current law, whether and how states chose to alter their Medicaid program in response to the caps is uncertain. If a state chose to leave its Medicaid programs unchanged and instead found other ways to offset the loss of federal funds, there would be little or no change in Medicaid enrollment or to the offsetting costs and revenue reductions associated with former Medicaid enrollees obtaining subsidized health insurance through the marketplaces or enrolling in an employment-based plan. By contrast, if states made more significant cuts to Medicaid enrollment than expected, more former Medicaid enrollees would obtain subsidized health insurance through the marketplaces, enroll in an employment-based plan, or become uninsured, which would increase the associated offsetting costs.

Other Effects

From the federal government's perspective, capping Medicaid funding to states could confer several advantages relative to current law. For example, setting spending limits by establishing caps would make federal costs for Medicaid more predictable. Federal spending caps also would curtail states' current ability to increase federal Medicaid funds—an ability created by the open-ended nature of federal financing for the program—and could reduce the relatively high proportion of program costs now covered by the federal government. Because the federal government matches states' Medicaid spending, an additional state dollar spent on Medicaid is worth more to a state than an additional state dollar spent outside the program. Therefore, states have considerable incentive to devote more of their budgets to Medicaid than they would otherwise and to shift other unmatched program expenditures into Medicaid. For example, states have sometimes chosen to reconfigure health programs—previously financed entirely with state funds—in order to qualify for federal Medicaid reimbursement. And most states finance a portion of their Medicaid spending through taxes collected from health care providers with the intention of returning the collected taxes to those providers in the form of higher Medicaid payments, thereby boosting federal Medicaid spending without a corresponding increase in state spending. Those incentives would be reduced under a capped program.

Caps on federal Medicaid spending also could present several disadvantages relative to current law. Capped federal spending would create uncertainty for states as they plan future budgets because it could be difficult to predict whether Medicaid spending would exceed the caps and thus require additional state spending. Moreover, depending on the structure of the caps, Medicaid might no longer serve as a countercyclical source of federal funds for states during economic downturns (under overall caps, the states might not automatically receive more federal funds if a downturn caused an increase in Medicaid enrollment). If the limits on federal payments were set low enough, additional costs—perhaps substantial costs—would be shifted to states. States then would need to decide whether to commit more of their own revenues to Medicaid or reduce spending by cutting payments to health care providers and health plans, eliminating optional services, restricting eligibility for enrollment, or (to the extent feasible) arriving at more efficient methods for delivering services. Under proposals that led to significant reductions in federal funding, many states would find it difficult to offset the reduced federal payments solely through improvements in program efficiency. If reductions in federal revenues were large enough, states would probably resort to a combination of all approaches. All of those effects would be magnified in the long run beyond 2028 as the difference between the permissible level of federal spending under the caps and the spending that would have occurred under current law grew wider over time.

Enrollees would be affected in various ways if states reduced providers' payment rates or payments to managed care plans, cut covered services, or curtailed eligibility. If states reduced payment rates, fewer providers might be willing to accept Medicaid patients, especially given that, in many cases, Medicaid's rates are already significantly below those of Medicare or private insurance for some of the same services. If states reduced payments to Medicaid managed care plans, some plans might shrink their provider networks, curtail quality assurance, or drop out of the program altogether. If states reduced covered services, some enrollees might decide either to pay out of pocket or to forgo those services entirely. And if states narrowed their categories of eligibility (including the optional expansion under the ACA), some of those enrollees would lose access to Medicaid coverage, although some would become eligible for subsidies for private coverage or could choose to enroll in employment-based coverage, if available.

Other Considerations

Because caps on federal Medicaid spending would represent a fundamental restructuring of Medicaid financing, several other considerations would need to be addressed. In addition to their consequences for the federal budget, the limits on federal spending would require new administrative mechanisms for full implementation. The Centers for Medicare & Medicaid Services (CMS, the federal agency within the Department of Health and Human Services that administers Medicaid) would need to establish a mechanism for enforcing the caps to account for the delayed availability of the necessary data to calculate the final limits. Administrative data on Medicaid spending and enrollment do not currently provide enough information to establish per-enrollee caps such as those modeled for this option. Such data would need to be developed.

Enforcement. Before overall or per-enrollee caps could take effect, CMS would need to establish mechanisms to ensure state compliance. The nature of that enforcement would depend on legislative direction given to the Secretary for establishing the caps. If the growth factors for either type of cap were based on the value of some specific measure of economic activity, such as the CPI-U (as opposed to a fixed growth factor that consisted of an annual increase of a certain percentage), CMS would not know the final spending limits until after the end of the fiscal year, when the measure would be finalized, unless growth from some earlier period was used instead. Per-enrollee caps would require additional delays because final enrollment data for any year would not be available for at least several months after the fiscal year's end. In addition, states usually make accounting adjustments to a prior year's spending long after the end of the fiscal year. Such delays would prevent CMS from determining the final limits on a current year's spending until well into the next fiscal year. Although states could attempt to forecast the limits and could update those forecasts over the course of a year, it would be difficult to precisely target spending to remain below the caps; states therefore could face reductions in funding triggered by spending above the caps.

Availability of Data. States currently report enough data for CMS to determine per-enrollee spending for only two groups of enrollees: those made eligible by the ACA and all other enrollees combined. To set per-enrollee caps on the basis of currently available data, lawmakers could establish either a single overall per-enrollee cap that represented average spending in all Medicaid eligibility categories or two caps—one for each of the groups of enrollees for which data were available. As stated above, broad categories for per-enrollee caps create incentives to favor the enrollment of people in eligibility categories with lower rather than higher costs. Therefore, to establish caps like those modeled in this option, the Secretary could rely on internal state data regarding enrollment among and spending for the groups considered under these alternatives. However, that might create an incentive for states to submit enrollment and spending data that would maximize the caps. Alternatively, the Secretary could make available a new uniform, state-reported data source for the relevant information, but such a data set would require additional time to design, develop, and implement.