Medicaid Reform After Trumpcare Failed to Pass

Will block grants and per capita limits hurt Medicaid?

Everyone agrees that healthcare reform is needed in some form but how to do it remains a partisan issue. Democrats have traditionally aimed to expand Medicaid while Republicans have tried to curb federal spending for the program. Which approach will win out in the end?

Nurse holding an older person's hand
Barabasa / iStockphoto

How the Federal Government Pays for Medicaid

Medicaid is a program managed by both federal and state governments. It provides care for the poor and disabled. The federal government sets the standards for who and what must be covered, and each state decides whether or not to add additional services to its program. They cannot offer less. As for funding, federal and state governments jointly contribute to their respective Medicaid programs.

To understand the potential changes coming our way, we need to understand how the federal government-funded Medicaid currently works.

All states receive federal funding through three sources:

  • Disproportionate Share Hospital (DSH) payments: With reimbursements for Medicaid notoriously low, hospitals that care for a disproportionately high number of people on Medicare or for the uninsured could struggle financially. DSH payments are paid to the states for distribution to hospitals in need.
  • Federal Medical Assistance Percentages (FMAP): The federal government matches state spending on Medicaid dollar for dollar and offers higher rates in states that have lower per capita incomes.
  • Enhanced Medical Assistance Percentages (eFMAP): The federal government pays above and beyond FMAP rates for certain services including but not limited to breast and cervical cancer treatment, family planning, home health services, and preventive screening for adults.

Medicaid Expansion and the Affordable Care Act

The Affordable Care Act (ACA), aka Obamacare, increased healthcare access for millions of Americans, including many that rely on Medicaid. As of February 2021, 39 states and the District of Columbia have expanded their Medicaid programs under the law.

President Trump tried to replace the ACA with the American Health Care Act (ACHA)/Better Care Reconciliation Act, aka Trumpcare, but it failed to pass in 2017. That was when the GOP changed its focus from replacing the ACA to repealing it.

In February 2018, 18 state attorney generals led by Texas filed a law suit to strike down the ACA, claiming it to be unconstitutional based on the fact that the individual mandate, a tax for those who did not sign up for health care, was eliminated by the GOP in 2017. A district court judge in Texas ruled in favor of the plaintiffs in December 2018 but the ruling was stayed until it could be reviewed by a higher court. A Fifth District court agreed in December 2019 that the individual mandate was unconstitutional but did not say which, if any, parts of the ACA could continue. The case has since been advanced to the Supreme Court.

The Department of Justice became a plaintiff at that time. Under President Biden, the DOJ has since withdrawn itself as a plaintiff and now supports the ACA.

The Supreme Court heard the first arguments for California v. Texas in November 2020. A decision is expected in the spring or summer of 2021.

It is unclear what kind of health care would replace the ACA if it falls. Hopefully, that plan would include a contingency for Medicaid.

Federal Funding for Medicaid Expansion

Medicare expansion under the ACA took effect in 2014. The law changed the income limits that would qualify people for Medicaid and allowed single people without children to be eligible if they met those income limits. It also required expansion states to cover substance abuse treatments.

The federal poverty level (FPL), defined every year, depends on whether you are an individual or in a family, and also on the size of your family. States set Medicaid eligibility based on percentages of the FPL. Obamacare increases the income eligibility criteria for Medicaid to 133% of FPL for states that chose to participate, while states that deferred Medicaid expansion could keep eligibility criteria at the previous rate, 44% of FPL. Non-participating states could continue to exclude childless adults from coverage.

Naturally, this affected federal funding for the program. States with Medicaid expansion received additional federal dollars to assist them, up to 100% of expansion costs through 2016 and then 90% of those costs through 2022.

Proposed Funding Changes for Medicaid

Trumpcare included many provisions that cut funding for Medicaid. The plans favored by Republicans grossly undercut Medicaid expansion.

According to the most recent statistics, Medicaid spending exceeded $597 billion in 2018, a rise from $571 billion in 2017. With that number on the rise, Republicans are looking for a way to cut down on that spending. The two main proposals for Medicaid reform are a transition to per capita limits or block grants. They were included as part of the proposed FY 2020 budget. Although the budget did not pass, it is important to understand how the proposal would work.

Per capita limits are a fixed amount of money that would be paid to a state each year. The value is based on how many people are in the Medicaid program. This would allow the federal dollar amount to increase in subsequent years if more people qualified for and were enrolled in the program. Per capita limits on Medicaid were proposed with the initial draft of the American Health Care Act.

Many Republicans, the Freedom Caucus in particular, believed per capita limits did not go far enough to decrease federal spending on Medicaid. That is why Trumpcare transitioned from offering per capita limits to recommending block grants for Medicaid. Unlike per capita limits, block grants do not take into account the number of people on Medicaid. Federal payments are dispersed in a fixed amount that would increase marginally each year to account for inflation. The problem is that inflation may rise slower than the cost of medical care.

An analysis performed by Avalere, a healthcare consulting firm, estimates that over five years the federal government would save as much as $110 billion if they used per capita limits or $150 million if they utilized block grants for Medicaid.

The Healthy Adult Opportunity

In January 2020, the Centers for Medicare and Medicaid Services announced an initiative that would allow states to consider use of block grants and per capita limits. It is known as the Healthy Adult Opportunity.

The initiative will allow states to apply for a Medicaid waiver that will change coverage requirements for adults under 65 years old who do not qualify for Medicaid based on a disability or their need for long-term care placement. Adults that access care through Medicaid expansion would be most affected. Children, pregnant women, the elderly, and people with disabilities would not be included as part of this initiative.

States that participate in the Healthy Adult Opportunity could make it harder for certain people to meet eligibility criteria for Medicaid. They could require asset tests for Medicaid eligibility, propose work requirements, or require cost-sharing (e.g., premiums, deductibles, copays) up to 5% of income.

In terms of coverage, the states still have to provide essential services comparable to those required by the Affordable Care Act. However, this could be less than is currently covered by some Medicaid programs. The states could also change their medication formularies. While they may be able to negotiate with pharmaceutical companies to decrease costs, they may be able to limit how many medications they cover when compared to the status quo. That said, similar to Medicare Part D, there is a bare minimum for what they must cover.

Participating states will agree to receive an annual federal spending cap for eligible individuals. This may be an aggregate cap (e.g., block grant) or a per capita cap, depending on the state's preference. If they choose an aggregate cap, states may be able to pocket as much as 25% to 50% of the federal savings if they spend less than that amount while meeting quality measures.

Many professional medical organizations, like the American Medical Association, have opposed the Healthy Adult Opportunity, raising concerns that it will decrease healthcare access to people in need. At this time, it is unknown how many states will choose to participate in the initiative.

A Word From Verywell

Block grants and per capita limits are a way to decrease federal funding for Medicaid. If either approach is enacted, states would lose a significant amount of funding. To counter those losses, they may need to make changes that make their Medicaid programs more efficient. States may have to cap their total Medicaid spending, cut what services are covered by Medicaid, or put limits on how many people they can enroll, even if those people meet eligibility criteria. Block grants would be especially limiting to states because they would curtail both spending and enrollment growth.

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Article Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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  2. Snyder L, Rudowitz R. Medicaid financing: how does it work and what are the implications?. Kaiser Family Foundation. May 20, 2015.

  3. Kaiser Family Foundation. Status of State Medicaid Expansion Decisions: Interactive Map. Updated February 22, 2021.

  4. H.R.1628 - American Health Care Act of 2017. U.S. Congress. Updated March 24, 2017.

  5. California v Texas. No. 19-840, Vide 19-1019.

  6. Olfson M, Wall M, Barry CL, Mauro C, Mojtabai R. Impact Of Medicaid Expansion On Coverage And Treatment Of Low-Income Adults With Substance Use DisordersHealth Aff (Millwood). 2018;37(8):1208-1215. doi:10.1377/hlthaff.2018.0124

  7. Office of the Assistant Secretary for Planning and Evaluation. U.S. Federal Poverty Guidelines Used to Determine Financial Eligibility for Certain Federal Programs. , U.S. Department of Health and Human Services. Updated January 17, 2020.

  8. Center for Medicare & Medicaid Services. NHE Fact Sheet. Updated March 24, 2020. 

  9. Pearson CF. Capped Funding in Medicaid Could Significantly Reduce Federal Spending. Avalere. February 6, 2017.

  10. Centers for Medicare & Medicaid Services. Healthy Adult Opportunity Fact Sheet. January 30, 2020.

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