Medicaid Funding Formula Under Ryan Plan Likely Even Worse than Advertised

House Budget Committee Chairman Paul Ryan’s budget plan calls for cutting Medicaid by $771 billion (over 22 percent) over the next decade by converting it into a block grant.  Ryan’s plan and a CBO analysis outline some of the basics of the block grant proposal.  Based on this information, however, we find that the Ryan block grant would produce “only” about $500 billion in cuts over the next ten years.  This means that states’ block grant amounts each year would have to be even more inadequate than described, in order to produce the required drastic cuts.

Under the Ryan block grant, the federal government would no longer pay a fixed percentage of states’ Medicaid costs.  Instead, according to CBO, starting in 2013 it would provide only a fixed dollar amount, which would be adjusted annually to reflect inflation and U.S. population growth.  We estimate the annual increase would average about 3.5 percentage points less than Medicaid’s projected growth rate over the next ten years (which accounts for factors like rising health care costs and an aging population).

The Ryan plan and CBO’s analysis don’t specify how the block grant amount would be determined in its first year, but Medicaid block grant proposals typically set the initial amount at actual federal Medicaid spending in the prior fiscal year (in this case, 2012) plus the annual adjustment.

Based on these specifications, we find that the Ryan block grant would cut Medicaid by about $500 billion between 2012 and 2021, or roughly $270 billion short of Ryan’s $771 billion target.  We can think of two potential ways (or some combination of the two) that the block grant would produce the additional required cuts:

• Set the initial block grant amount well below the prior year’s spending. To generate the extra $270 billion in cuts while still adjusting funding each year by inflation and population growth, the 2013 block grant would have to be based not on states’ actual 2012 spending but on their 2012 spending cut by 9.3 percent.  In other words, states would face much larger reductions in federal funding in the block grant’s first years.
• Make the annual adjustment much smaller than the adjustment for inflation and population growth that Ryan and CBO describe. To generate the extra $270 billion while still basing the initial block grant amount on actual 2012 spending levels, states’ block grants would have to remain practically frozen, with an annual adjustment of well under 1 percent per year.

Limiting annual growth in Medicaid to inflation and population growth would produce deeper and deeper cuts to federal Medicaid funding over time, significantly shifting costs to states, beneficiaries, and providers.  But Ryan’s block grant would likely prove even worse than advertised, because even such an inadequate annual adjustment could not produce the magnitude of cuts that his plan requires.