Deficit-Reduction Proposal Would Shift Cost to States

The Center released a report today on one of the proposals that budget negotiators are considering to reduce federal deficits:

An Obama Administration proposal that’s on the table for budget negotiators would reduce federal Medicaid expenditures by reducing the federal share of Medicaid and CHIP costs, shifting costs to states and likely prompting states to cut payments to health care providers and to scale back the health services that Medicaid covers for low-income children, parents, people with disabilities, and/or senior citizens (including those in nursing homes).  Reductions in provider payments would likely exacerbate the problem that Medicaid beneficiaries already face regarding access to physician care, particularly from specialists.

The proposal would replace the various matching rates at which the federal government reimburses states for their costs in insuring people through Medicaid and CHIP with a single “blended rate” for each state.  A state’s blended rate would be set at a level that provided the state with less federal funding than under current law, thereby saving the federal government money.

The blended-rate concept has two significant weaknesses.

• First, it would essentially shift costs to states, rather than constrain them.  The proposal produces little administrative-cost or other efficiency savings, as explained below.  States, which face their own budget problems, likely would compensate for the reduction in federal funding by scaling back the services that Medicaid and CHIP (the Children’s Health Insurance Program) cover, cutting payment rates to health care providers, or both.  Some Medicaid beneficiaries already have limited access to physician care, particularly from specialists, due largely to Medicaid’s already-low reimbursement rates.  The shift in costs to states under the blended-rate proposal would make that problem worse.
• Second, the federal government would find it extremely difficult to calculate each state’s blended rate fairly and accurately.  Under last year’s health reform law, the federal government will pay a substantially higher matching rate (i.e., cover a much larger share of the costs) for covering the large numbers of low-income people whom that law makes newly eligible for Medicaid starting in 2014.  To compute a blended rate for each state, federal officials would have to make a number of assumptions about each state’s future Medicaid and CHIP enrollment and expenditures, including how many people in each state who become newly eligible for Medicaid under health reform will actually enroll in the program and how healthy or sick they will be (since that will affect the health services that they use and, hence, their average health care costs).  Federal officials also would have to estimate how many people in each state who are now eligible for Medicaid but not enrolled will enroll after health reform’s coverage expansion and insurance mandate take effect, as well as what their health status will be.  These assumptions would be rife with uncertainty, because they would not be based on actual state experience.  As explained below, federal officials would be making other estimates as well, for which hard data are not available, that would affect the blended rate a state is assigned.

Thus, the blended rates almost inevitably would produce intense controversy, with many states likely challenging the federal estimates and contending that their blended rate has been set too low.

The budget framework that the Administration issued in April envisions at least $100 billion in federal Medicaid savings over ten years.  The savings would apparently come from three places:  1) a series of small but significant measures outlined in the President’s fiscal 2012 budget to increase Medicaid efficiency and reduce Medicaid’s costs in providing medical equipment, prescription drugs, and certain other items, which would save somewhere around $10 billion to $15 billion; 2) a proposal to sharply restrict or bar states from raising part of their matching contributions for Medicaid by taxing health care providers, which would save about $25 billion to $45 billion depending on how sweeping the proposal is; and 3) the blended-rate proposal.

By limiting how states can raise funds to help pay their Medicaid costs, the “provider-tax” proposals — like the blended-rate proposal — represents a cost-shift to states.  The Congressional Budget Office and the Office of Management and Budget estimate these proposals would reduce federal Medicaid costs because many states would not find other revenues to replace the provider tax revenues — and would have to cut back their Medicaid programs as a consequence, which in turn would lower federal costs.

Depending on the specifics of the provider-tax proposal that is adopted, the blended-rate proposal could well be the principal Medicaid cut in a deficit-reduction package and account for the majority of the federal Medicaid savings in the package.

Click here for the full report.