Medicaid Block Grant Would Leave States Holding the Bag

In a previous post, I explained why block-granting Medicaid or otherwise capping its funding is no solution to rising costs.  It’s also a really bad deal for states, as a report we released yesterday explains.  A block grant would shift significant financial risks and costs from the federal government to the states, especially during recessions.

The federal government now pays a fixed percentage of each state’s Medicaid costs, so when state costs go up, federal costs go up too, automatically.  Under a block grant, the federal government would pay only a fixed dollar amount of state costs, leaving the state responsible for the rest.

Most block grant proposals — and any proposal Congress will likely consider this year — are designed to generate large federal savings by giving states much less funding than they would receive under the current system.  For example, a recent proposal by House Budget Committee Chairman Paul Ryan (R-WI) and Alice Rivlin of the Brookings Institution would increase federal funding by up to 2 percentage points less each year than projected cost growth, with the difference compounding over time.  This plan would reduce federal funding by $180 billion just through 2020, compared to current law, according to the Congressional Budget Office.  The cuts in funding would grow substantially larger over time.

If federal funding proved inadequate under a block grant, states would have to contribute more of their own funds or cut back Medicaid eligibility, benefits, and provider payments.  Federal funding would no longer rise automatically in response to a recession or unanticipated costs resulting from epidemics or medical breakthroughs that improve health or save lives but increase costs.  States facing these cost increases would have to bear the entire burden themselves (once they exhausted their annual block grant allocation).

Block grant proposals typically combine a cut in federal funding with increased flexibility for states to override federal requirements related to eligibility and benefits.  Some states may believe they can use that flexibility to make up for the loss of federal funding by making their programs more cost-effective — without unduly cutting eligibility, benefits, or provider payments.  Such hopes would likely prove unrealistic:

• States already have considerable flexibility over Medicaid spending and have used it to make significant cuts in response to the state budget crisis.

• The funding reductions under a block grant — like the $180 billion cut through 2020 under the Ryan-Rivlin proposal — would be impossible to achieve without deep cuts both to beneficiaries and to doctors, hospitals, and other health care providers.

• The ensuing cuts could harm tens of millions of low-income children, parents, pregnant women, seniors, and people with disabilities, putting many at risk of being uninsured or going without needed care.

Block-granting may be attractive to some federal policymakers as a way to cut costs.  But states would be left holding the bag when federal funding proved inadequate; they’d be the ones who would have to increase their own funding or make the tough decisions about which people to drop from coverage or which medical services to curtail.