Here We Go Again: The Return of Medicaid Block Grants

            Last month, the Trump Administration unveiled a new demonstration program that has the potential to dramatically overhaul the way Medicaid operates.  Currently, Medicaid is designed as a federal-state partnership in which the federal government matches the money a state spends to cover its Medicaid population. The new program, Healthy Adult Opportunity (HAO), would provide a route for states to receive a capped amount of federal dollars (i.e., a block grant) in exchange for fewer restrictions on determining who qualifies and what services are available to them. Seema Verma, the Administrator of the Centers for Medicare and Medicaid Services (CMS), celebrated this plan as an innovative approach to ensure the long-term financial sustainability of Medicaid. While Medicaid’s financial maintenance is an ever-present concern, HAO may reduce access to important healthcare services, create greater financial risk for states, and present significant legal barriers.

            Changing Medicaid’s financing scheme creates greater financial risks for states that pursue HAO. Medicaid’s current open-ended financing structure was designed to broaden states’ ability to provide healthcare coverage to their low-income residents by adjusting federal funding depending on the state’s level of need. For example, if a recession hits and Medicaid enrollment grows, federal funding would increase to cover most of the additional costs. However, states adopting the new approach must accept responsibility for costs higher than the caps. This change would shift financial risk to states, with federal funding cuts likely to occur when states have the least ability to accommodate them— such as during recessions, public health emergencies, and other instances when states must balance high demand for coverage and budgetary strain. The risk of hitting the funding caps would put pressure on states to control spending by cutting coverage.

            States that adopt HAO will likely face litigation. By offering funding through a capped fund scheme, the Trump Administration claims expansive authority to overturn explicit statutory requirements for Medicaid eligibility, cost sharing, and financing. The legal basis of HAO lies in the “expenditure authority” outlined in section 1115 of the Social Security Act. This section authorizes federal matching funds for expenditures not typically allowed under Medicaid, if these expenditures are needed to implement an experimental project likely to assist in promoting Medicaid’s objectives. However, two legal problems exist for this framework. First, the ability of block grants to promote the objectives of Medicaid, the legal standard for the authorization of these waivers, is unclear. The U.S. Court of Appeals for the D.C. Circuit recently affirmed that Medicaid’s main objective is to provide health coverage to low-income people, but block grants would incentivize coverage of fewer people. Second, the part of the Medicaid statute that governs its open-ended financing structure is not listed as a provision that is alterable through waiver.

            The heightened discretion offered by the demonstration program may reduce access to services and impact millions of people. To receive federal matching funds, states must provide core benefits (e.g. hospital services) to mandatory populations (e.g. low-income pregnant women) without imposing waitlists or enrollment caps. States may also receive matching funds to cover “optional” benefits, such as prescription drugs. Conversely, states that adopt HAO would receive broad, and in some instances unprecedented, authority to change benefits. The demonstration project encourages states to include the millions of low-income adults without children who obtained coverage through the Affordable Care Act’s Medicaid expansion under capped funds, which would likely negatively impact their ability to access health care. Moreover, states would also gain the ability to deny coverage for costly but necessary prescription drugs, including those for diabetes and cardiovascular conditions. Finally, states may impose new out-of-pocket costs for physician visits and prescription drugs on low-income enrollees. Cost sharing in Medicaid, even in the amount of a $1 copay, has been shown to deter people from accessing care.   

            The idea of capped funds to meet Medicaid’s financing challenges is far from new. Policymakers have discussed block grants for Medicaid since the Nixon Administration and as recently as the 2017 repeal-and-replace. In light of this history, the Trump Administration should consider why prior administrations and congresses have chosen not to take up this policy, as well as its potential to create financial risks, lead to litigation, and reduce access to healthcare for millions of low-income people.